Chapter 9: Pure Economic Loss

Question 1

1 Introduction

Answer 1

The courts are reluctant to allow pure economic loss actions because of policy concerns in allowing liability in this area. 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. Overall the courts are careful to create and apply rules in this area that allow for the possibility of flexibility in the future. This has led to a lot of inconsistency in this area with judges applying different tests when trying to establish a duty of care.

Question 2

1.1 Types of loss in negligence, personal injury

Answer 2

Personal injury/property damage (ie physical
damage): This is when the claimant’s person or property
is damaged, eg a broken arm or a damaged
car. Such losses do not usually pose any problems at the duty of care stage.

Question 3

Consequential Economic Loss

Answer 3

Economic loss consequent on physical damage, eg a lost salary because of a broken
leg.

Question 4

Pure Economic Loss

Answer 4

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

Question 5

Psychiatric Damage

Answer 5

When the claimant suffers psychiatric damage.

Question 6

Pure Economic Loss General Rule

Answer 6

As a general rule, if the loss is personal injury, property damage and/or consequential economic loss, it is recoverable, but if the loss is pure economic loss, it will not be recoverable. There are exceptions to this general rule which are considered later. There are special rules for psychiatric
damage, which were explored in the previous chapter.

Question 7

1.2 Definitions of pure economic loss

Answer 7

Pure economic loss: Pure economic loss arises where there has been no damage to the claimant’s property or injury to their person. To define the term further it is best to give examples of situations where loss can be categorised as pure economic loss:
(a) Economic loss not flowing from damage to person or property
(b) Loss arising from damage to the property of another
(c) Defective items

Question 8

1.2.1 Economic loss not flowing from damage to person or property

Answer 8

If the claimant has suffered no physical damage to their person or property then their loss will be pure economic loss. This might arise, for example, where the claimant has made a bad investment, missed a contractual opportunity or lost an inheritance.

Question 9

1.2.2 Loss arising from damage to the property of another

Answer 9

If a claimant suffers economic loss as a result of damage to property in which they have no
proprietary interest, the loss will be categorised as pure economic loss.

Question 10

Key case: Weller & Co v Foot & Mouth Disease Research Institute [1965] 3 All ER
560

Answer 10

Facts: The claimant agricultural auction house claimed for lost profits against the defendant. The defendant had negligently released the foot and mouth virus and infected local cattle, resulting in a cattle movement ban and the cancellation of local auctions.

Held: the claim was unsuccessful as it was for pure economic loss. The claimant had suffered no damage to their own property. Their losses flowed from damage to cattle owned by local farmers.
If a farmer had claimed for lost profits by reason of not being able to sell an infected cow, the
claim would have succeeded as that would have been consequential economic loss (economic loss
flowing from property damage).

Question 11

1.2.3 Defective items

Answer 11

It is not possible to claim for the cost of repairing an inherently defective item which has been categorised as pure economic loss. If the claimant’s claim is that their property is not up to the standard they expected, then their claim will not generally succeed in tort. They have not suffered
physical damage, which is when something good is made bad; instead, they have always had the property subject to the defect. In such an instance, damages might be available in a contractual claim.

Question 12

Example

Answer 12

A consumer purchases a vacuum cleaner from a shop. When the consumer uses it for the first time it explodes, causing the consumer burns to their hand and to their carpet. The shop has gone out of business, but the consumer locates the manufacturer of the vacuum cleaner. The consumer cannot sue the shop in contract because the shop has gone out of business. Neither can they sue the manufacturer in negligence for the cost of repairing the defective vacuum cleaner. This is pure economic loss. However, the consumer would be able to recover
damages from the manufacturer in negligence for their burnt hand (personal injury) and burnt
carpet (property damage) caused by the defective vacuum cleaner

Question 13

Key case: Murphy v Brentwood District Council [1990] 2 All ER 908

Answer 13

A key case regarding defective products being categorised as pure economic loss is Murphy v
Brentwood District Council [1990] 2 All ER 908.

Question 14

Key case: Murphy v Brentwood District Council [1990] 2 All ER 908

Answer 14

Facts: The claimant bought a house which subsequently developed structural defects because of inadequate foundations. The foundations had been approved by the Council. The claimant sold
the house for £35,000 less than it would have fetched without the defect.

Held: the loss suffered was pure economic loss and not recoverable. The only thing suffering damage was the house itself which had always been inherently defective because of the foundations. Therefore, any cost of repairs or reduction in value to the property was pure economic loss. No physical damage had occurred to any person or other property. Thus, the
House of Lords confirmed that the cost of repairing inherently defective products was rightly
classified as pure economic loss.

Question 15

1.3 General rule for pure economic loss

Answer 15

The general rule is that no duty of care is owed in respect of pure economic loss. The case
authority for this is Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] 1 QB 27. This case illustrates the difference between physical damage, consequential economic loss and pure
economic loss.

Question 16

Key case: Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] 1 QB
27

Answer 16

The claimant manufactured steel alloys, a process requiring continuous power to maintain the temperature in the furnace. The defendant’s employee negligently damaged the cable that supplied electricity to the claimant’s factory, which required the power to be shut off for 14 hours. This meant the metal being processed at the time was ruined. The claimant was unable to sell the
ruined metal and consequently suffered a loss of profit. In addition, the claimant claimed that they could have made profit from processing four further melts during the shut-down. The damaged electricity cable did not belong to the claimants.

Question 17

2 Exceptions to the general rule for pure economic loss

Answer 17

The three exceptions to the general rule include the following (and stem from negligent
statements):
(a) Pure economic loss caused by negligent statements
(b) Wills
(c) References

Question 17

1.4 Summary

Answer 17

• The types of loss suffered in general negligence are physical damage, consequential
  economic loss, pure economic loss and psychiatric harm.
• Pure economic loss includes economic loss not flowing from damage to the claimant’s person or property; loss flowing from damage to the property of another; and the costs of repairing/replacing defective items.
• The courts are reluctant to allow claims for pure economic loss for policy reasons, and the
  general rule is that no duty of care will be owed in respect of pure economic loss.

Question 18

2.1 Pure economic loss caused by a negligent statement

Answer 18

This is illustrated by the landmark decision of Hedley Byrne v Heller [1964] AC 465, in which the House of Lords decided that in certain circumstances concerning two party relationships there
could be liability for careless statements. This case and the line of authorities following from it form a complex topic in their own right and are considered below in the section ‘Pure economic loss caused by a negligent statement’.

Note that negligent statements normally result in pure economic loss. However, where the statements cause physical harm, then the usual duty of care rules apply to the question of duty (Perrett v Collins [1998] EWCA Civ 884).

Question 19

Wills

Answer 19

In these cases, there is a relationship between the solicitor and the testator, but if there is negligence in relation to a will it is the beneficiary (not the testator) who suffers a loss. A solicitor therefore owes a duty to the beneficiary in order to achieve practical justice.

Question 20

Key case: White v Jones [1995] 2 AC 207

Answer 20

Solicitors owed a duty of care to beneficiaries who should be allowed to sue the solicitor for the loss of an intended legacy. Two sisters were written out of their father’s will following an argument. Later, the sisters made up with their father and he instructed his solicitors to redraft his will, including an inheritance of £9,000 to each daughter. The alteration to his will was not made before he died. The solicitor could foresee that if the will were not drafted before the testator died, the intended beneficiaries would suffer a loss. The solicitor had undertaken a responsibility towards the beneficiaries.

The duty of care owed to beneficiaries extends beyond solicitors to other companies offering willmaking services (Esterhuizen v Allied Dunbar Assurance plc, The Times, 10 June 1998).

Question 21

2.3 References

Key case: Spring v Guardian Assurance plc & Others [1995] 2 AC 296

Answer 21

The defendants gave a very disparaging job reference about the claimant. The claimant was unable to gain other employment in the life assurance industry as a result of the reference and, therefore, sued the defendant for negligence. There was no doubt that a referee owed a duty of care to the person requesting a reference (Hedley Byrne), but the House of Lords held that in addition there was a duty of care owed to the subject of the reference to provide an accurate
reference. By giving a reference, the company assumed a responsibility to the claimant to exercise reasonable skill and care in the preparation of the reference. It is very difficult to get a job
without a reference.

Question 22

2.4 Summary

Answer 22

• The courts have made a distinction between pure economic loss caused by a negligent act and pure economic loss caused by a negligent statement.
• Where pure economic loss is caused by a negligent act, the general rule remains that the
  courts will not recognise a duty of care.
• There are exceptions to the general rule that no duty of care is owed for pure economic loss. These include pure economic loss caused by:
• A negligent statement;
• A negligently drafted will; or
• A negligently drafted reference.
• The wills and references exceptions are a form of negligent statement, but they are listed as separate exceptions as case law can be used as clear precedent for duty of care in these two
  areas.

Question 23

3 Pure economic loss caused by a negligent statement

Key case: Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465

Answer 23

The claimant advertising agency was asked to buy advertising space for Easipower Ltd. To ensure Easipower could pay for this service, before beginning the work, the claimant approached
Easipower’s bank (the defendant) for a credit reference. The defendant 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.
Easipower could not pay the claimant the £17,000, and so the claimant sued the defendant bank on the grounds that it had provided negligent advice, reasonably relied upon by the claimant, to its financial detriment. Included in the bank’s advice had been a disclaimer saying that the advice was prepared ‘without responsibility’.

Held: had it not been for the disclaimer, the bank would have owed a duty of care to the claimant for their pure economic loss (note: disclaimers must now be viewed in light of the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015, as discussed later in this section).

Question 24

Duty of care could arise in some situations where negligent advice resulted in pure economic loss.

Answer 24

Three key concepts/tests were discussed when establishing a duty of care:
(a) Reasonable reliance
(b) Assumption of responsibility
(c) Special relationship of trust and confidence between the parties

Not all three tests have to be satisfied for a duty of care to be found. A duty can be found based on either reasonable reliance or an assumption of responsibility or some special relationship independent of these or, in some cases, a combination of these. However, these requirements
overlap; they are all trying to establish a proximate relationship between the parties and to establish it is fair, just and reasonable to impose a duty.

Question 25

3.1 Reasonable reliance

Answer 25

This test has the following requirements:
(a) The claimant relied on the defendant’s advice. Question of fact.
(b) It was reasonable for the claimant to rely on the defendant’s advice.
(c) The defendant knew or ought to have known that the claimant was relying on their advice.
Question of fact.

Question 26

Factors of reasonableness of claimant relying on defendant

Answer 26

(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 27

3.1.1 Special skill or knowledge held by the defendant

Esso Petroleum Co Ltd v Mardon [1976] QB 801

Answer 27

The defendant needs some special expertise or knowledge in order for there to be a special relationship ie the defendant needs to be in a better position than the claimant to know the facts. There is unlikely to be a special relationship if the parties are on an equal footing.

An employee of Esso, whose job was to assess the potential output of petrol stations, advised the claimant that the petrol station he wanted to lease would sell around 200,000 gallons per year. The claimant
relied on this advice and entered into the lease.

However, the petrol station sold only 75,000 gallons in the first 15 months. The Court of Appeal held that Esso owed the claimant a duty of
care because their employee had assumed responsibility to the claimant based on his expertise,
and the claimant had reasonably relied on this. It was irrelevant that the defendant was not in the
business of giving advice.

Question 28

3.1.2 Special skill or knowledge held by the claimant

Answer 28

If the claimant has relevant skill or knowledge in relation to the advice then the courts may find that it is not fair, just or reasonable for the claimant to have relied on the defendant’s advice.

A case example for this is Stevenson v Nationwide Building Society [1984] 272 EG 663. The claimant was an estate agent and insurance broker. He suffered pure economic loss by relying on a negligent survey given by the defendant in relation to a valuation of a property. Given his own expertise (he was an estate agent) the court held that he should have been aware of the need to
obtain an independent structural survey, rather than simply relying on his lender’s (the defendant’s) valuation report. The claimant’s action failed.

Question 29

Yianni v Edwin Evans [1982] QB 438

Answer 29

In Yianni v Edwin Evans [1982] QB 438 a first-time buyer relied on a building society valuation
survey, even though expressly told not to. However, it was held that it was reasonable for the claimant to rely on the building society valuation survey rather than a full structural survey as the claimant was a first-time buyer and purchasing a house of modest value. These facts meant the building society could reasonably have expected the claimant to rely on their survey as the claimant was unlikely to be able to afford a full structural survey.

Question 30

3.1.3 General context in which advice is given

Key case: Chaudhry v Prabhakar and Another [1989] 1 WLR 29

Answer 30

In Chaudhry v Prabhakar and Another [1989] 1 WLR 29. The defendant advised his close friend
(the claimant) on what second-hand car she should buy. The claimant had told the defendant that the car must not have been in an accident. The defendant was not a mechanic but was regarded by the claimant as knowing much more about cars than she did. The defendant found her a car. He realised the bonnet had been crumpled and straightened or replaced, but he did not ask the seller if it had been in an accident and told the claimant that it was in very good condition and that he highly recommended it.

The defendant had more knowledge than the claimant about cars, and he held himself out as giving considered advice; he took time over the advice and the claimant made it very clear that she was relying on his advice and that it was of great importance to her. He had assumed responsibility for the claimant.

Question 31

Lejonvarn v Burgess [2017] EWCA Civ 254

Answer 31

In Lejonvarn v Burgess [2017] EWCA Civ 254, the Court of Appeal found
a 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 32

3.2 Voluntary assumption of responsibility by the defendant

Answer 32

The second concept used to establish a duty of care in Hedley Byrne was the voluntary assumption of responsibility by the defendant for the correctness of their statement. This was explained as applying to relationships which are ‘equivalent to contract,’ that is, where there is an
assumption of responsibility in circumstances in which, but for the absence of consideration,
there would be a contract.

To determine this the courts may look at some of the factors already
discussed under reasonable reliance, for example did the defendant hold themselves 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 33

Henderson v Merrett Syndicates Ltd [1995] 2 AC 145

Answer 33

The claimants’ financial affairs were
managed by the defendant. The House of Lords found that the defendant had assumed responsibility to perform professional services for the claimants (they had assumed responsibility for the claimants’ financial affairs) and there was no reason why they should not be liable for damages in respect of economic loss flowing from the negligent performance of those services.

Question 34

Lejonvarn v Burgess [2017] EWCA Civ 254

Answer 34

The same approach was applied, in circumstances where the defendant supplied professional services, free of charge, to friends relating to the
landscaping of their garden. The Court of Appeal found that the defendant architect, who
supplied those professional services, owed a duty to exercise reasonable skill and care for any work done by her. Although the claimants were not her clients in a contractual sense (no contract, no payment), they were clients in a professional sense: she possessed a special skill and had
assumed responsibility for the work, on which the claimants had relied.

Question 35

Criteria to be satisfied for a defendant to have assumed responsibility towards a
claimant

Answer 35

(a) The defendant must communicate the advice to the claimant (as an identifiable individual or
as a member of an identifiable class) or know that it will be communicated to them;
(b) The defendant must know the purpose for which the claimant will use this advice;
(c) The defendant must know, or reasonably believe, that the claimant will rely on this advice
without independent enquiry; and
(d) The claimant must have acted upon that advice to their detriment.

Question 36

Key case: Caparo Industries plc. v Dickman and others [1990] 2 AC 605

Answer 36

The issue was whether the auditors owed a duty of care to the shareholders of Fidelity and/or the potential investors. The main reason for this decision was that it was not reasonable for Caparo to have relied on the accounts for the purpose to invest. The purpose of the audit was to assist the shareholders in exercising their rights of control over the company; the information within the audit was not for potential investors.

If a duty was owed to potential investors this would include a 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. The accounts had the potential of being relied upon by anyone for any purpose and the auditors could not owe a duty to everyone who relied on them

Question 37

Supreme Court decision (Banca Nazionale del Lavoro v Playboy Club & Others [2018] UKSC 43)

Answer 37

The Court confirmed that the four Caparo criteria could be regarded as criteria for establishing the defendant’s voluntary assumption of responsibility. In this case, a wholly
undisclosed principal could not rely on these Caparo principles to recover damages for losses suffered by it in reliance on a negligent credit reference made to its agent by the defendant bank, as it was neither identifiable, nor was the purpose known for which the credit reference was sought.

Question 38

Manchester Building Society v Grant Thornton UK LLP [2021]
UKSC 20,

Answer 38

Reinforced the Caparo principle with a real focus on the purpose of advice. In this case, the defendant auditors were asked to advise the claimant building society on whether the building society could use hedge accounting to implement its business model within the constraints of the
regulatory environment.

The auditors advised that the building society could, and so the building society implemented its business model. The advice was incorrect – the building society were
exposed to regulatory capital demands which the hedge accounting was supposed to avoid. This led to the claimant suffering pure economic loss.

Question 39

The purpose of duty

Answer 39

The scope of the duty of care assumed by a professional adviser
was governed by the purpose of the duty – why was the advice given. What risk was the duty supposed to protect against and did the loss represent fruition of that risk? Applying the facts, the defendant auditors owed the claimants a duty of care.

The loss suffered related to this purpose and so fell within the scope of the defendant’s duty of care (ie the claimant suffered a loss which fell within the scope of the duty
assumed by the defendant when taking into account the purpose for which the advice was given).

Question 40

3.3 Special relationship of trust and confidence

Answer 40

The third and final test is whether there is a special relationship of trust and confidence between the parties. In Hedley Byrne it was said a special relationship would arise where the party seeking advice was trusting the other to exercise such a degree of care as the circumstances required,
where it was reasonable for them to do that, and where the other gave the advice when they knew or ought to have known that the enquirer was relying on them. This illustrates how the three tests overlap and, in reality, the courts will find a special relationship where there has been
reasonable reliance by the claimant and/or an assumption of responsibility by the defendant.

Question 41

3.4 Disclaimers

Answer 41

For example, in Hedley Byrne the words ‘without responsibility’ were used in the statement made
by the defendant. The House of Lords 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.

However, Hedley Byrne pre-dated the enactment of the Unfair Contract Terms Act 1977 (UCTA 1977) and the Consumer Rights Act 2015 (CRA 2015). The case of Smith v Eric S. Bush [1989] 2 WLR 790 made it clear that any attempt to rely on a disclaimer of responsibility in the course of business will be subject to UCTA 1977.

Question 42

Key case: Smith v Eric S. Bush [1989] 2 WLR 790

Answer 42

The defendant surveyor (who provided a survey to the claimant’s lender) owed the claimant a
duty for the pure economic loss caused by the negligent survey because: (1) she was a first-time
buyer (and so did not know she ought to get an independent structural survey); and (2) was
purchasing a house of modest value.

Question 43

Listed factors which should be taken into account when
deciding if a disclaimer is reasonable

Answer 43

(a) Were the parties of equal bargaining power?
(b) Would it have been reasonably practicable to obtain advice from an alternative source
considering cost and time?
(c) How difficult was the task being undertaken by the defendant?
(d) What are the practical consequences, taking into account the sums of money at stake and
the ability of the parties to bear the loss involved, particularly in light of insurance?

Held: Applying the facts, the disclaimer was unreasonable. The parties were not of equal
bargaining power. It was not reasonably practicable for the claimant to obtain an independent
structural survey as these are expensive and she was purchasing a house of modest value. The
claimant was a person of modest means making the most expensive investment of her life. The
defendant was in a better position to bear the financial loss.

Question 44

CRA 2015

Answer 44

The CRA 2015 which regulates disclaimers between traders
and consumers. For example, if a surveyor has contracted to provide a survey to a buyer, it is likely that the surveyor would be classified as a trader and the buyer as a consumer. Hence the CRA 2015 would apply.

However, it would seem this makes no practical difference as the position
under UCTA 1977 and CRA 2015 is essentially the same. A disclaimer purporting to exclude liability
for economic loss or property damage is only valid if fair ie reasonable in all the circumstances

Question 45

3.5 Summary

Answer 45

• The general rule: no duty of care will be owed in respect of pure economic loss.
• There are exceptions to this general rule, including pure economic loss caused by a negligent
  statement.
• In order for the exception to apply, the claimant needs to satisfy the Hedley Byrne v Heller
  criteria.
• The Hedley Byrne v Heller criteria include the following three ‘tests’:
• Reasonable reliance;
• Assumption of responsibility; and
• Special relationship of trust and confidence between the parties.
• These three ‘tests’ often overlap and a claimant need only satisfy one in order for a duty of
  care to be owed.
• Disclaimers included in advice might negate a duty of care. However, disclaimers must be
  viewed in light of UCTA 1977 and CRA 2015 if applicable