Pure economic loss

Question 1

What is pure economic loss? How is it different to consequential economic loss?

Answer 1

• Pure economic loss = loss arising where there has been no damage to C’s property or injury to their person
• Consequential economic loss arises for loss consequent on physical damage e.g. lost salary because of broken leg, lost production because of damaged machine

Spartan Steel - D negligently damaged cable that supplied electricity to C’s steel alloy factory meaniung metal being processed at time was ruined and could not be sold causing loss in ptofit, C also claimed they could have made profit from processing further melts…

• Damaged metal = physical damage (DOC owed)
• Loss of profit on damaged metal = consequential economic loss; direct result of damaged metal (DOC owed)
• Loss of profit on further melts = pure economic loss resulting from damage to cable that C did not own rather than any existing metal they owned (no DOC) - if they owned the cable, consequential economic loss would have been available

Question 2

What are the 3 situations in which pure economic loss can occur?

Answer 2

1. Economic loss not flowing from damage to person or property e.g. bad investment, missed contractual opportunty
2. Loss arising from damage to property of another - Weller - D negligently released foot and mouth virus on inefcted local cattle causing cancellation of local auctions - C agricultural auction house unsuccessfully claimed damages for lost profits (pure economic loss) (would have been consequential economic loss for those who lost profits for not being able to sell infected cow!)
3. Defective terms e.g. cost of replacing/repairing item, structural defects in house; they have not suffered physical damage, they have always had property subjec to defect (leave to contractual claims) - Murphy - C bought a house which developed structural defects because of inadequate foundations approved by Council, sold house for £35k less than what would have without defect; loss suffered was pure economic loss and so not recoverable, only thing suffering damage was house itself which was always inherently defective

Question 3

What is the general rule for pure economic loss?

Answer 3

No duty of care is owed in respect of pure economic loss

Question 4

Why is the distinction between pure economic loss caused by a negligent act and a negligent statement important?

Answer 4

• PEL caused by negligent act = general rule remains courts will not recognise DOC (e.g. damage to electricity cable in Spartan Steel)
• The exceptions to the general rule stem from negligent statements

Question 5

What are the three exceptions to the general rule for pure economic loss?

Answer 5

1. Pure economic loss caused by negligent (mis)statements
2. Wills
3. References

Case law used as clear precedent in wills and references

Question 6

Will pure economic loss result where statements cause physical harm?

Answer 6

No, here the usual duty of care rules apply

Question 7

In the case of a will, who will suffer pure economic loss?

Answer 7

The B; solicitor owes duty to B to achieve practical justice

White - 2 sisters rekindled with father and instructed solicitors to redraft his will including inheritance of £9k each, but alteration not made prior to death despite undertaking a responsibility to Bs

Question 8

When will pure economic loss arise in the case of references?

Answer 8

By giving a reference, a company assumes a responsibility to the subject of the reference to exercise reasonable care and skill in its preparation

Spring - D gave disappointing reference about C who could not gain other employment in life assurance industry as a result of reference - no doubt that referee owed DOC to person who requested reference, but HOL held there was a DOC owed to subject of reference to provide an accurate reference

Question 9

What are the three key tests for establishing a duty of care for pure economic loss caused by a negligent statement?

From Hedley Byrne

Answer 9

1. Reasonable reliance
2. Assumption of responsibility
3. Special relationship of trust and confidence

Hedley Byrne - advertising agency C relied on bank D to check client was creditworthy - D said it was, but in this advice gave disclaimer saying advice prepared ‘without responsibility’ - client not creditworthy but C relied on advice to buy £17,000 advertising space for client before it transpired client was not creditworthy - if not for disclaimer, D would have held DOC to C for pure economic loss

Question 10

Do the three tests from Hedley Byrne all have to be satisfied?

Re pure economic loss from negligent statement

Answer 10

No - can be found on one or all. Will often overlap and all trying to establish a proximate relationship between the parties to establish it is fair, just and reasonable to impose a duty

Question 11

What is the 3-part test for reasonable reliance?

FIRST TEST FOR ESTABLISHING DOC FOR PURE ECONOMIC LOSS

Three R’s

Answer 11

1. C relied on D’s advice (Q of fact)
2. It was reasonable for C to rely on D’s advice
3. D knew or ought to have known C was relying on their advice (Q of fact)

1 and 3 are Qs of fact and straightforward - 2 needs more consideration

Question 12

What 4 factors are considered when deciding whether it was reasonable for C to rely on D’s advice?

S/K, C, OR

Answer 12

1. Special skill/knowledge held by D
2. Special skill/knowledge held by C
3. General context in which advice is given
4. Other relevant factorse.g. nature of advice, potential risk to C, availability/practicality of second opinion

Question 13

How is the special skill/knowledge of D relevant in determining if it was reasonable for C to rely on their advice?

Answer 13

D needs some special expertise/knowledge for there to be special relationship - unlikely to be one if parties on equal footing

Question 14

Does it matter if D not in the business of giving advice which is relied on?

Answer 14

No - so long as they assume responsibility based on expertise

Esso - Esso employee’s job to assess potential output of petrol stations - advised C petrol station would sell around 200k gallons per year, C relied on advise and entered lease - only sold 75k in first 15 months - held that Esso owed C DOC bc employee assumed responsibility based on expertise

Question 15

How is the special skill/knowledge of C relevant in determining if it was reasonable for C to rely on D’s advice?

Answer 15

If C has relevant skill/knowledge re advice, courts may find it is not fair, just or reasonable for C to have relied on D’s advice

If they do not have the same knowledge = more likely to be reasonable

Stevenson - C estate agent and insurance broker relied on negligent survey from D re valuation of property - court held he should have been aware of need to obtain independent structural survey rather than relying on lender’s

Yianni - first-time buyer told expressly not to rely on building society valuation, but court held it was reasonable as the C was a first-time buyer purchasing house for modest value (so building society reasonably could have expected C to rely on survey as C unlikely to afford structural survey)

Question 16

How is the context in which the advise is given relevant to determining if it was reasonable for C to rely on D’s advice?

Answer 16

If given in social situation, there is unlikely to be an assumption of responsibility

Question 17

When could there be an assumption of responsibility in a social setting?

Answer 17

• Where D has more knowledge than C, held themselves out as giving considered advice, taking time over advice, C making it expressly clear they are relying on advice, and it is of great importance to them
• Where professional services are provided free of charge to friends

Chaudhry - D advised close friend on what car to buy knowing more about cars than her - car was unroadworthy and worthless, court gave obiter above

Question 18

What does a voluntary assumption of responsibility mean?

SECOND TEST FOR ESTABLISHING DOC FOR PURE ECONOMIC LOSS

Would be ______ but for _______

Answer 18

Relationships ‘equivalent to contract’; where there is an assumption of responsibility in circumstances in which there would be a contract but for consideration

Lejonvarn - D architect owed duty of reasonable skill and care to Cs who were not clients in a contractual sense (no contract/payment) but were in a professional sense; D possessed special skill and had asumed responsibility for the work on which Cs relied

Question 19

How might a court establish a voluntary assumption of responsibility?

Not decisive test

Answer 19

May look at same factors as when establishing reasonable reliance i.e. D held themselves out as having relevant expertise, consequences serious if advice incorrect, D knew C was relying on advice

Question 20

What are the four criteria to be satisfied for a D to have assumed responsibility towards a C?

Communicate, purpose, rely, detriment

Answer 20

1. D must communicate advice to (identifiable) C or know it will be communicated to them
2. D must know the purpose for which C will use advice
3. D must know, or reasonably believe, C will rely on this advice
4. C must have acted upon that advice to their detriment

E.g. Caparo - inaccurate reports from D on company’s annual accounts led to a successful takeover bid that resulted in pure economic loss - D did not owe DOC to Cs: purpose of audit was to assist shareholders in exercising rights of control over company, not potential investors (who would have been an indetrminate, unidentifiable, class of people)

Manchester Building Society - D auditors asked to advise C building society on whether it could use hedge accounting to implement business model within constraints of regulatory environment, C did on D’s incorrect advise exposing C to regulatory capital demands which it was meant to avoid = pure economic loss - D owed DOC as purpose of advice was to do with issue of hedge accounting within context of implications for building society’s regulator y capital

Question 21

When will there be a special relationship of trust and confidence?

THIRD TEST FOR ESTABLISHING DOC FOR PURE ECONOMIC LOSS

Answer 21

• Where party seeking advice was trusting other to exercise such a degree of care as circumstances required;
• Where it was reasonable for them to; and
• Where other gave advice when they knew or ought to have known enquirer was relying on them

Will be found if there was reasonable reliance/assumption of responsib

Question 22

Can a disclaimer be used to avoid assumption of responsibility?

Hedley Byrne - words ‘without responsibility’ were used in statements made by D - HOL held it was clear that D’s did not accept responsibility

Answer 22

Yes - but attempt to rely on disclaimer of responsibility in course of business is subject to UCTA/CRA

Question 23

What is considered when deciding whether disclaimer (re assumption of responsibility) is (in)valid under UCTA/CRA?

Answer 23

• Equal bargaining power of parties?
• Would it have been reasonably practicable to obtain advice from alternative source considering cost and time?
• How difficult was task being undertaken by D?
• What are the practical conserquences considering money at stake and ability of parties to bear loss involved, particularly in light of insurance?

Smith - D surveyor provided survey to C’s lender - D owed C duty for pure economic loss caused by negligent survey because C was first time buyer and was purchasing house for modest value - disclaimer held to be unreasonable: parties not of equal bargaining power and not reasonably practicable for C to obtain expensive independent structural survey (C was of modest means making most expensive investment of her life and D in better position to bear financial loss)

Question 24

Summary of pure economic loss

Answer 24