Pure Economic Loss

Question 1

Why are courts reluctant to allow pure economic loss actions?

Answer 1

Policy concerns such as floodgates, crushing liability and the possibility of fraudulent claims
Reluctant to interfere with the rules of contract

Question 2

4 categories for losses in negligence

Answer 2

1) Personal injury/property damage
2) Consequential economic loss
3) Pure economic loss
4) Psychiatric damage

Question 3

Definitions of pure economic loss

Answer 3

1. Economic loss not flowing from damage to person or property (e.g. where the claimant has made a bad investment, missed a contractual opportunity or lost an inheritance)
2. Loss arising from damage to property of another (if a claimant suffers losses as a result of damage to property in which they have no proprietary interest)
3. Defective items

Question 4

Example of pure economic loss for loss arising from damage to property of another

Answer 4

Weller & Co v Foot and Mouth Disease Research Institute: claimant was an agricultural auction house that brought a claim for loss of profits. 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. The claim was unsuccessful as it was for pure economic loss (the claimant had suffered no damage to their own property).

Question 5

Defective items

Answer 5

While it is possible to bring a claim where property has been damaged by the negligent act of another, it is not possible to claim for the cost of repairing an inherently defective item. Such loss has been categorised as pure economic loss.

Question 6

Key case for defective products

Answer 6

Murphy v Brentwood District Council: the cost of repairing inherently defective products or property is classified as pure economic loss. The claimant bought a house which developed structural defects because of inadequate foundations. No liability on the part of the defendant where a dangerous defect manifests before any actual damage occurs. For this reason, it was a claim for pure economic loss and not recoverable.

Question 7

General rule for pure economic loss

Answer 7

The general rule is that no duty of care is owed in respect of pure economic loss.

Question 8

Spartan Steel & Alloys Ltd v Martin & Co

Answer 8

• illustrates the difference between physical damage, consequential economic loss and pure economic loss
• defendant’s employee negligently damaged the cable that supplied electricity to the claimant’s factor, which required power to be shut off for 14 hours
• claimant was unable to sell the ruined metal and consequently suffered a loss of profit
• the claimant claimed they would have made further profit from processing four further melts if it had not been for the shut-down period
• Damaged metal = property damage, duty of care owed for property damage and was recoverable
• Loss of profit on damaged metal = consequential economic loss, duty of care owed and so recoverable
• Loss on four further melts that could have been made = pure economic loss, so not recoverable

Question 9

Two main ways pure economic loss can be caused

Answer 9

• By a negligent act (e.g. damaging the electricity cable in Spartan Steel) = no duty of care
• By a negligent statement = may be a duty of care

Question 10

Exceptions to the general rule in pure economic loss

Answer 10

1. Pure economic loss caused by negligent misstatement (Hedley Byrne v Heller)
2. Wills - duty of care owed by solicitor to the beneficiary in order to achieve practical justice
3. References - duty of care to the subject of the reference to provide an accurate reference

Question 11

Hedley Byrne v Heller

Answer 11

Found obiter that a duty of care could arise in some situations where negligent advice resulted in pure economic loss.

Question 12

Hedley Byrne v Heller: three key concepts when establishing a duty of care in negligent misstatement

Answer 12

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

Question 13

Are all three Hedley Byrne v Heller concepts required to establish a duty?

Answer 13

No; a duty of care has been found on either reasonable reliance or an assumption responsibility or some special relationship independent of these, or in some cases, a combination.

Question 14

Reasonable reliance test

Answer 14

(1) The claimant relied on the defendant’s advice.
(2) It was reasonable of the claimant to rely on the claimant’s advice
(3) The defendant knew/ought to have known that the claimant was relying on his advice

Question 15

Reasonable reliance test - (2) It was reasonable for the claimant to rely on the defendant’s advice - Factors

Answer 15

(a) Special skill or knowledge held by the defendant (the defendant needs to be in a better position than the claimant to know the facts)
(b) Special skill or knowledge held by the claimant (If the claimant has relevant skill/knowledge then the courts may find that it is not fair, just and reasonable for the claimant to have relied on the defendant’s advice)
(c) General context in which advice was given - Chaudhry v Prabhaker, the defendant gave advice to the claimant who was a friend but held himself out as giving considered advice in a business-like situation
(d) Other relevant general factors - the nature of the advice, the potential risk, the availability and practicality of a second opinion

Question 16

Can a duty of care for pure economic loss be found in the absence of any reliance by the claimant on the defendant’s advice?

Answer 16

Yes, the courts may find a duty of care for economic loss in the absence of any reliance by the claimant on the defendant’s advice. (White v Jones)

Question 17

Voluntary assumption of responsibility

Answer 17

relationships that are ‘equivalent to contract’, circumstances in which, but for the absence of consideration, there would be a contract.

Question 18

Examples for voluntary assumption of responsibility

Answer 18

Williams v Natural Life Health Foods: no duty because they had no direct or indirect contract with the claimant
Customs and Excise v Barclays Bank: Barclays had not voluntarily assumed responsibility, they had been obliged by law to do something
Henderson v Merrett Syndicates: the defendant had assumed responsibility to perform professional services for the claimants
Lejonvarn v Burgess: the defendant supplied professional services (gardening) free of charge to friends and neighbours, owed a duty as they were clients in a professional sense, if not in a contractual sense

Question 19

Assumption of responsibility not intended to be a test

Answer 19

• questions of fairness and policy will enter into the decision
• courts are prepared to find a duty of care in the absence of voluntary assumption of responsibility (Yianni v Edwin Edwards)

Question 20

Special relationship of trust and confidence

Answer 20

‘the party seeking information or advice was trusting the other to exercise such a degree of care as the circumstances required, where it was reasonable for him to do that, and where the other…knew or ought to have known that the enquirer was relying on him.’

Question 21

Special relationship summarised in White v Jones

Answer 21

1) Where there is a fiduciary relationship
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

Question 22

Special relationship in Caparo v Dickman

Answer 22

If specific advice was given for a specific purpose, there might be a special relationship

Question 23

The position where a third party relies on the advice (i.e. the person who relies on the defendant’s statement is not the person to whom the advice was given or intended)

Answer 23

(Caparo v Dickman)

(1) Rules in Hedley Byrne apply but in addition:
(2) The defendant must comunicate 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 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

Question 24

Disclaimers

Answer 24

• where the defendant may have taken positive steps against assuming responsibility for their words. If this is the case, the validity of such steps must be considered
• in Hedley Byrne, the words ‘without responsibility’ were used so the court felt that the defendants could not be said to be assuming responsibility when at the same time as giving advice they were making it clear they did not accept responsibility
• however this pre-dated UCTA and CRA, under which a disclaimer purporting to exclude liability for economic loss or property damage is only valid if fair i.e. reasonable in all the circumstances