Pure economic loss

Question 1

What is pure economic loss?

Answer 1

Economic loss that arises where there has been no damage to the claimant’s property or injury to their person.

Question 2

Why are courts reluctant to allow pure economic loss actions?

Answer 2

Policy concerns - for example, the courts have concerns about the floodgates opening, imposing crushing liability on the defendant and the possibility of fraudulent claims. In addition, some judges are reluctant to interfere with the rules of contract by imposing liability in tort instead.

Question 3

What’s the general rule for whether pure economic loss is recoverable?

Answer 3

As a general rule, if the loss is in the first two categories, it is recoverable, but if the loss lies in the third category, it will not be recoverable. (see exceptions though…)

Question 4

When can loss can be categorised as pure economic loss?

Answer 4

1. Economic loss not flowing from damage to person or property - no physical damage to their person or property, then their loss will be pure economic loss.
2. Loss arising from damage to property of another
3. Defective items

Question 5

Key case for ‘loss arising from damage to property of another’?

Answer 5

Weller & Co v Foot & Mouth Disease Research Institute [1965]:
- C agricultural auction house - loss of profits. D negligently released disease.
Unsuccessful as pure economic loss.

Question 6

Key case regarding defective products being categorised as pure economic loss?

Answer 6

Murphy v Brentwood District Council [1990]:
C bought a house which subsequently developed structural defects because of inadequate foundations. - foundations approved by council.
‘dangerous defect manifested itself before any actual damage has occurred’. Faulty foundations had caused no loss or damage, other than financial loss (pure economic loss).

Question 7

What’s the general rule for pure economic loss? What’s the case authority?

Answer 7

The general rule is that no duty of care is owed in respect of pure economic loss.
Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973]: manufactured steel alloys; employee damaged cable. There were three loss’:
- Damaged metal - physical damage
- Loss of profit on damaged metal - consequential economic loss
- Loss of profit on the four further melts - pure economic loss
Judgment demonstrated policy concerned.

Question 8

What are the two main ways in which pure economic loss can be caused?

Answer 8

1. negligent act - court will not recognise duty of care

2. negligent statement - exceptions apply…

Question 9

What are the three exceptions that apply to pure economic loss caused by negligent statements?

Answer 9

1. Pure economic loss caused by negligent misstatements
2. Wills
3. References

Question 10

Case examples for pure economic loss caused by negligent misstatements?

Answer 10

Hedley Byrne v Heller [1964]: HoL decided that in certain circumstances concerning two party relationships there could be liability for careless statements.

Question 11

Case examples for pure economic loss re. wills?

Answer 11

Y Ross v Caunters [1980]: solicitor had given negligent information about the witnessing of X’s will. X relied on this and, as a result, the claimant beneficiary was unable to inherit under the will.
Y White v Jones [1995]: alteration to father’s will was not made before he died. The daughters sued the solicitors and the court found in their favour.

Question 12

Case examples for pure economic loss re. references?

Answer 12

Spring v Guardian Assurance plc & Others [1995]: Ds gave a very disparaging job reference about the C. Although there was no doubt that a referee owed a duty of care to the person requesting a reference (Hedley Byrne), it was previously questionable whether a duty of care was also owed to the subject of the reference - held duty to provide accurate reference.

Question 13

Facts of key case Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964]?

Answer 13

Facts: C advertising agency was asked to buy advertising space for Easipower Ltd. D bank assured the claimant in writing that Easipower was creditworthy. Relying on this advice, the claimant bought advertising space worth £17,000 for Easipower. It transpired that Easipower was not creditworthy.
Held: Had it not been for the disclaimer, the bank would have owed a duty of care and would have been liable.

Question 14

Three key concepts discussed in Hedley Byrne re. duty?

Answer 14

1. Reasonable Reliance
2. Assumption of responsibility
3. Special relationship of trust and confidence between the parties
   (these all OVERLAP)

Question 15

What’s the process for 1. Reasonable Reliance?

Answer 15

1. The claimant relied on the defendant’s advice - question of fact
2. It was reasonable for the claimant to rely on the defendant’s advice. - proximity
3. Defendant knew/ought to have known the claimant was relying on his advice. - question of fact; F,J&R.

Question 16

What are the various factors judges consider when looking at whether it was ‘reasonable for the C to rely on the D’s advice’ (4)?

Answer 16

a. Special skill or knowledge held by the defendant
b. Special skill or knowledge held by the claimant
c. General context in which advice is given
d. Other relevant general factors

Question 17

1. Special skill or knowledge held by the defendant: case and context?

Answer 17

Y Esso Petroleum Co Ltd v Mardon [1976]: employee of Esso misadvised C re. value of petrol station. C relied on this advice and entered into lease.

Question 18

2. Special skill or knowledge held by the claimant: case and context?

Answer 18

N Stevenson v Nationwide Building Society [1984]: C estate agent and insurance broker: negligent survey re. value of property. Should have been aware of disclaimer - should have used independent survey.
N James McNaughton Paper Group Ltd v Hicks Anderson [1991]: advice given by auditors in respect of a company take-over - not reasonable for them to have relied solely on the draft accounts prepared by the defendants.
Y Yianni v Edwin Evans [1982]: first-time buyer relied on a building society valuation survey - reasonable for the claimant to rely on this.

Question 19

3. General context in which advice is given: case and context?

Answer 19

Y Chaudhry v Prabhakar and Another [1989]: D gave advice to C who was his friend re. finding car. D found car; crumpled bonnet, did not ask questions. Told C good condition. Lied about who the seller was and whether it had been in an accident. Car was unroadworthy. D had duty to inquire.
Lejonvarn v Burgess [2017]: duty of care to exercise reasonable skill and care owing between friends for professional services provided free of charge, on the basis of assumption of responsibility.

Question 20

4. Other relevant general factors: case and context?

Answer 20

“Nature of the advice, the potential risk, and the availability and practicality of a second opinion.”

However - courts may find a duty of care for pure economic loss in the absence of any reliance by the claimant on the defendant’s advice. See White v Jones [1995].

Question 21

What’s meant by the second concept re. duty of care in Hedley Byrne, voluntary assumption of responsibility by D?

Answer 21

The defendant may be found liable because they assumed responsibility for the correctness of their statement.
Courts may look at some of the factors already discussed under reasonable reliance, for example did the defendant hold himself out as having the relevant expertise, were the consequences serious if the advice was incorrect and did the defendant know that the claimant was relying on the advice?

Question 22

Case law for voluntary assumption of responsibility? (4)

Answer 22

N Williams v Natural Life Health Foods Ltd [1998]: C took franchise set up by 2nd D: no duty.
N Customs and Excise Commissioners v Barclays Bank [2007]: Barclays notified of freezing injunction for customer. Authorised payments negligently. Court held no voluntarily assumed responsibility: obliged by law.
Y Henderson v Merrett Syndicates Ltd [1995]: D assumed responsibility for C’s financial affairs - duty found.
Y Lejonvarn v Burgess [2017]: D supplied landscaping services to neighbours (friends) free of charge. No contract, but assumed professional responsibility.

Question 23

Have the courts been clear re. what’s needed to show assumption of responsibility?

Answer 23

No - see Caparo: and Customs and Excise Commissioners (Lord Hoffman made it clear that ‘assumption of responsibility’ is not a test).

Question 24

What’s the concept of the 3rd limb of the Hedley Byrne test; special relationship?

Answer 24

Essentially, the three tests overlap. Reliance and assumption of responsibility form part of what makes a special relationship.

Question 25

Although not noted precisely, what did Lord Browne-Wilkinson say in White v Jones re. special relationship?

Answer 25

Although the categories of cases in which such special relationship can exist…are not closed, as yet only two categories have been identified
(1) where there is a fiduciary relationship and
(2) where the defendant has voluntarily answered a question or tenders skilled advice or services in circumstances where he knows or ought to know that an identified plaintiff will rely on his answers or advice.
This illustrates the cross over…
See also Caparo: special advice might constitute special relationship.

Question 26

What case demonstrates the approach of the courts re. situations where the person who relies on the defendant’s statement is not the person to whom the advice was given or intended?

Answer 26

Caparo v Dickman:
Inaccurate reports re. company made by auditors. C bought shares in company based on these. Question was whether auditors owed duty.
HELD: HoL failed to find duty - reason? Not reasonable to for Caparo to have relied on the accounts - if duty owed, would include class of persons of an indeterminate size. Caparo could therefore rely on the accounts in their capacity as
a shareholder to exercise their rights of control, but not as an investor or as a shareholder increasing their shareholding.

Question 27

What are the guidelines from the HoL in Caparo re. claims made by a third party who relies on advice prepared for a different person/purpose?

Answer 27

The rules in Hedley Byrne still apply but in addition:

1. The defendant must communicate the advice to the third-party claimant (as an identifiable individual or as a member of an identifiable class) or know that it will be communicated to him;
2. The defendant must know the purpose (whether specifically or generally described) for which the claimant will use this advice;
3. The defendant must know, or reasonably believe, that the claimant will rely on this advice without independent enquiry; and
4. The claimant has acted upon that advice to his detriment, such that it must be reasonable to expect the defendant to protect the claimant from that loss.

Question 28

What’s the relevance of Banca Nazionale del Lavoro v Playboy Club & Others [2018]?

Answer 28

Demonstrates the cross-over/overlap: foundation of the additional requirements (HoL in Caparo) regarded as essentially the defendant’s voluntary assumption of responsibility.

Question 29

What was the situation with Hedley Byrne and disclaimers?

Answer 29

The words ‘without responsibility’ were used in the statement made by the defendant. HoL felt that the defendant could not be said to be assuming responsibility when at the same time as giving the advice they were making it clear that they did not accept responsibility. NOTE pre-dated UCTA 1977 and CRA 2015.

Question 30

Relevance of Smith v Eric S. Bush [1989]?

Answer 30

Made it clear that any attempt to rely on a disclaimer of responsibility in the course of business will be subject to UCTA 1977.
C was first time buyer - used survey. Included disclaimer but under s2(2) UCTA 1977 disclaimer invalid.