Economic Loss Lecture

What is a ‘Pure’ Economic Loss?

Not all foreseeable losses stemming from negligence are recoverable. Economic losses are treated in a significantly different manner than damages for injury or property damage. This is largely because of the self-limiting manner of injury and property damage. For example, a negligent driver who creates an accident will only cause so much physical harm - eventually the cars involved will come to a stop, no further harm will stem from the driver’s negligence.

Economic damage however, is far less easy to quantify, can grow out of proportion very quickly. Consider a situation in which a driver takes out an electricity pylon supplying a small village. If foreseeable economic harm alone were enough for recovery, then the driver could be liable for the loss of business of every shop and business run from that village. Perhaps one of those businesses failed to make a sale, which in turn would have given it the ability to invest in a stock which consequently took off, meaning that even a relatively small economic loss could be linked to a huge loss in potential profits. In combination with various economic phenomena like compound interest, our negligent driver has the potential for almost infinite liability. Whilst this might satisfy a desire for absolute justice (indeed, those business owners affected by the power outage are not at fault), this is clearly an untenable situation. Such open-ended liability would be difficult to insure. As such the law places significant limits on the recovery of pure economic losses.

The presiding rule is therefore that pure economic loss is not recoverable - that is, economic losses which cannot be directly traced back to physical injury to the claimant or damage to property in which the claimant had a proprietary or possessory interest when it was damaged. The general rule in negligence is that pure economic loss is not recoverable, subject to a number of well-recognised exceptions, most importantly where the defendant has assumed responsibility for a negligent misstatement or for the performance of services in circumstances recognised by the law. In addition, economic loss may be recoverable where it is consequential upon physical damage to the claimant’s person or property. It should be noted that the ‘usual’ rules of negligence still apply here, so there must still be a duty of care, a breach of duty, and that breach must have caused the loss. Following Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4, the orthodox approach is that a duty of care is identified by reference to established categories, by analogy with decided cases, and (in many economic loss cases) through the defendant’s assumption of responsibility (Henderson v Merrett Syndicates Ltd [1995] 2 AC 145); the three-stage Caparo framework remains relevant principally where the situation is genuinely novel.

Economic Loss Due to Physical Damage

Where an economic loss stems from physical damage to a product or equipment in which the claimant has a proprietary or possessory interest, it may be recoverable. This principle is best understood by looking at the leading precedent of Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] 1 QB 27.

The Supreme Court has recently reinforced the breadth of consequential loss recoverable following physical damage. In Armstead v Royal & Sun Alliance Insurance Co Ltd [2024] UKSC 6, the claimant’s hire car was damaged in an accident caused by an insured of the defendant. Under the hire contract, the claimant was contractually liable to the hire company for a sum representing the loss of use of the vehicle during the period of repair. The Supreme Court held that the claimant’s contractual liability to the hire company was loss consequential on physical damage to property in her possession, and not pure economic loss. There is no rule preventing the recovery of a loss merely because it takes the form of a liability to a third party, provided that the loss is consequential on the damage and not too remote. Here the contractual sum had to be a reasonable pre-estimate of the hire company’s loss of use. The Court also clarified that the burden lies on the defendant to prove that an item of loss is too remote to be recoverable.

Economic Loss Due to Negligence Causing a Claimant to Acquire Defective Goods or Property

As a general rule, tort will not compensate for the economic loss of receiving a defective product. There have been some cases which, at one time, appeared to soften this rule, however. These should be treated cautiously as historically important, rather than as evidence of any ongoing general rule or legal principle, particularly since they have since been limited or overruled. Nonetheless, they remain important in the development of the law.

Before describing the law in this area, it is worth noting the position of tort law on defective products. As a rule, it is not possible to recover the cost of the defect itself in negligence. So, if someone sells you a new car which you expect to have a fuel consumption of 40 miles per gallon, but due to a fault it only gets 20 miles per gallon, that is not recoverable in tort. A helpful distinction between property damage and property defect can be that damage involves hurting the quality of a product, whereas defect involves a product being created in a defective form. For example, if someone damages your new car in an accident, the quality can be described as going from 10/10 to 8/10. However, if someone sells you a new car and it is defective, you receive an 8/10 car in the first place. There’s no direct damage by the seller, the car doesn’t ‘lose’ anything: it has just always been of a sub-par quality. Its resale value will be harmed however, meaning you lose money down the line - an economic loss. Tort is prepared to deal with damage and harm, but a claim for the quality promised will generally lie in contract. However, contract law will often fail to cover all eventualities. In particular, it is not always the parties to a contract who will be harmed by a breach, and so the rule of privity of contract may prevent the injured party from bringing a claim in contract law, although an identified third party may enforce a term in the circumstances set out in the Contracts (Rights of Third Parties) Act 1999, s.1. This somewhat explains law’s position on defective property - the desire to fill in a gap left by contract law.

An important historical case in this area is Anns v Merton London Borough Council [1978] AC 728.

An exceptional claim was allowed to proceed in the Scottish appeal Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520. The defendants were the nominated specialist subcontractors alleged to have negligently laid the flooring of a newly constructed factory. Cracks appeared after the factory came into use. The claimants therefore sued for the cost of replacing the floor, and the profits expected to be lost whilst the floor was re-laid. The House of Lords held that the claim could go to proof, given the unusually close relationship and reliance alleged. It did not award lost profits.

The reasoning in Anns can be thought of as a type of ‘preventative compensation’ - rather than waiting for someone to be injured by a faulty building and then suing, the House of Lords was prepared to make the cost of repair recoverable, before anyone suffered injury or other property was damaged.

However, Anns was overruled in Murphy v Brentwood District Council [1991] 1 AC 398 - making Murphy the leading case. Again, a council approved a faulty foundation design. The claimant’s house developed cracks and he sold it for less than its value in sound condition. The House of Lords held that this was not recoverable in negligence - it was purely an economic loss, no other property was damaged and nobody was hurt, and so the only harm was receiving a building with a lesser value.

Usefully, in Murphy, Lord Bridge suggested a narrow qualification concerning danger to third parties:

"[I]f a building stands so close to the boundary of the building owner’s land that after discovery of the dangerous defect it remains a potential source of injury to persons or property on neighbouring land or on the highway, the building owner ought, in principle, to be entitled to recover in tort from the negligent builder the cost of obviating the danger, whether by repair or by demolition, so far as that cost is necessarily incurred in order to protect himself from potential liability to third parties."
- Lord Bridge, [1990] 2 All ER 908, at 926

Lord Bridge was considering expenditure to protect a building owner against liability to third parties. In Thomas v Taylor Wimpey Developments Ltd [2019] EWHC 1134 (TCC), the court held that this passage did not establish an exception to the rule in Murphy.

Although Murphy remains the common-law starting point, pure economic loss in the form of the cost of remedying a defective building may still be recoverable where the defendant has voluntarily assumed responsibility to the claimant, typically through the provision of professional services. This was confirmed by the Supreme Court in URS Corporation Ltd v BDW Trading Ltd [2025] UKSC 21. URS, a firm of structural engineers, had been engaged to provide design services in respect of high-rise residential developments built by BDW. After the Grenfell Tower fire, BDW carried out remedial works at its own cost (despite by then having parted with its proprietary interest in the buildings) and sought to recover those costs from URS in negligence. The Supreme Court treated the repair costs as pure economic loss but held that URS had assumed responsibility to BDW under the engagement contracts to take reasonable care in the provision of structural designs, with the result that the cost of remediation was, in principle, recoverable; there was no ‘voluntariness’ rule barring recovery merely because BDW had chosen to carry out the works. The case is now an important illustration that, on appropriate facts (particularly where there is a professional relationship between the parties), Murphy does not preclude recovery of pure economic loss flowing from defective construction.

In practical situations (i.e. problem questions) it will largely be sufficient to note that whilst Anns and Junior explain the historical debate, Murphy takes precedence, and so it is unlikely that recovery for the defect itself will be possible in negligence unless the claimant can establish an assumption of responsibility of the kind seen in URS. This should not be regarded as a complete oversight - never forget that contract law exists to deal with products and transactions. In addition, where the defect causes damage to other property or personal injury, tortious recovery may still be available. At the same time, privity of contract leaves some claimants without contractual recourse, demonstrating the reasoning behind the law’s distinction in this area.

A number of statutory routes should also be borne in mind alongside the common law:

• The Consumer Protection Act 1987 may assist where a defective product causes death, personal injury, or damage exceeding £275 to other property ordinarily intended for private use and intended mainly for the claimant’s own private use, but it does not generally allow recovery for pure economic loss or for damage to the defective product itself.
• The Defective Premises Act 1972 imposes a statutory duty on those taking on work for or in connection with the provision of a dwelling to see that the work is done in a workmanlike or professional manner, with proper materials, so that the dwelling will be fit for habitation when completed. This duty is owed both to the person for whom the dwelling is provided (who may be a developer) and to anyone who later acquires an interest in the dwelling, and provides a key route around the common-law restriction on recovering pure economic loss in respect of defective dwellings.
• The Building Safety Act 2022 made significant amendments to this regime. Section 135 retrospectively extended the limitation period for claims under section 1 of the DPA 1972 (which deals with new dwellings) from six years to 30 years where the right of action accrued before 28 June 2022. A 15-year period applies to claims accruing from that date under section 1 and the new section 2A DPA (covering business work on existing dwellings). The Supreme Court in URS v BDW [2025] UKSC 21 confirmed that the retrospective change must also be taken into account where a negligence or contribution claim depends on whether a section 1 claim was time-barred. It does not give those other claims a 30-year limitation period of their own. Sections 148 and 149 of the BSA also provide claims for qualifying losses where a construction product or, for historic claims, a cladding product makes a dwelling unfit for habitation.

Economic Loss Due to Negligent Misstatement

Finally, there exist a category of cases involving economic loss due to negligent misstatement. An assumption of responsibility can also attach to the performance of a service. In White v Jones [1995] 2 AC 207, intended beneficiaries could recover the value of legacies lost when a solicitor failed to act on instructions to make a will before the testator died.

Four conditions must be met before it is possible to recover economic losses due to negligent misstatement.

1. A special relationship must exist between the parties. This will usually involve one party assuming responsibility as an expert advisor. Thus, in Cornish v Midland Bank plc [1985] 3 All ER 513, a bank officer undertook to explain a mortgage but failed to tell the client that it secured her husband’s future borrowings as well as the original loan. As a result, she lost a lot of money when the house was sold following their divorce. This relationship needn’t be particularly professional. In Chaudhry v Prabhakar [1989] 1 WLR 29, the claimant was advised by a friend (who had a self-proclaimed knowledge of cars) that a car she was looking to buy had not been in any accidents. The opposite was true, and the car was in fact not road-worthy. Thus, the relationship of trust does not need to be professional-to-client. What mattered was that the friend had undertaken to help select the car and knew the claimant was relying on him.
2. The advising party (or expert) needs to have assumed responsibility for the advice, or otherwise come within a recognised special relationship. In Cornish v Midland Bank for example, the bank officer undertook to explain the mortgage and had to take reasonable care in doing so. As seen in Hedley Byrne, it is also possible to use a disclaimer to avoid liability. In other words, someone who says ‘here is my advice but you should not rely on it’ is effectively saying ‘I do not assume responsibility for the advice’. Where applicable, a disclaimer must satisfy the reasonableness test in the Unfair Contract Terms Act 1977, s.2(2), or the fairness test for consumer terms and notices in the Consumer Rights Act 2015, s.62.
3. There must be reliance on the advice by the claimant. So, in the Hedley Byrne scenario, if it could be shown that the claimant would have contracted with the third-party regardless of the bank’s advice, it would have no claim - there was no reliance on the advice given. 
   
   Notably, just because both parties are ‘experts’ does not mean that reliance does not exist. A party negotiating a contract can reasonably rely on the other party’s special knowledge. Thus, in Esso Petroleum v Mardon [1976] QB 801, Esso was liable for negligently overstating the business prospects of one of its petrol stations. Mr Mardon took a tenancy of the petrol station, made large losses and successfully counterclaimed against Esso.
4. The reliance on the advice must be reasonable and foreseeable, and must be for a purpose for which the defendant undertook responsibility. This is illustrated in Law Society v KPMG Peat Marwick [2000] 4 All ER 540 - the defendant accountants prepared reports for submission to the Law Society on a solicitors’ firm’s compliance with the accounts rules. After two partners defrauded clients, the compensation fund paid out nearly £9 million. On a preliminary issue the court held that the accountants owed the Law Society, as trustee of the fund, a duty of care. The reports enabled it to intervene to protect clients and the fund.

Even where duty, breach and reliance are all established, the recoverable loss is limited by the scope or purpose of the defendant’s duty. In Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 and the companion appeal Khan v Meadows [2021] UKSC 21, the Supreme Court reworked the approach previously taken under South Australia Asset Management Corp v York Montague Ltd ("SAAMCO") and moved away from the rigid ‘advice/information’ dichotomy. The governing question is now the purpose for which the defendant’s advice or information was provided, judged objectively: a claimant may only recover for the consequences of the matters in respect of which the defendant assumed responsibility, and not for losses which fall outside the scope of the duty even though they would not have occurred ‘but for’ the negligence. Asking what loss would have occurred if the advice had been correct can be a useful cross-check, but is not a substitute for identifying the purpose of the duty.

There are a number of other specific situations which can arise with regard to negligent misstatement. Firstly, the claimant does not have to be the individual who has commissioned the advice in the first place - although the claimant must still be within the scope of the defendant’s assumption of responsibility. Thus, in Smith v Eric S Bush [1990] 1 AC 831 the claimant sought a mortgage on a house, and the mortgage company employed a surveyor to value the house. The surveyor acted negligently in failing to identify a structural defect. The claim was upheld. Although the claimant was not the primary recipient of the report (the mortgage company was), she was held to still have a viable claim - it would take no great stretch of the imagination for a surveyor to realise that mortgage companies do not survey houses for fun, but rather in order to work out the viability of a house as security on a mortgage. For a house of modest value, the surveyor knew that the purchaser was likely to rely on the mortgage valuation without commissioning a separate survey. The disclaimer was unreasonable under the Unfair Contract Terms Act 1977.

The limits of third-party reliance were tightened by the Supreme Court in Banca Nazionale del Lavoro SPA v Playboy Club London Ltd [2018] UKSC 43. The Playboy Club, wishing to keep its identity confidential, asked its own associated company to obtain a credit reference from BNL about a customer on its behalf. BNL gave a positive reference but did not know that the request was in fact being made for the benefit of the Club. The Supreme Court held that no duty of care was owed to the Club, because an assumption of responsibility under Hedley Byrne can only be made to an identified person or an identifiable class of persons, and a defendant cannot assume responsibility to an undisclosed principal of whose existence and identity it is unaware. The case is now the leading authority on the limits of negligent misstatement liability to third parties.

Secondly, it is rare that a widely disseminated statement will meet the threshold for negligent misstatement, especially where the claimant is using the misstatement for a purpose other than that which it is designed for. This can be seen in Caparo (discussed in detail in the Duty of Care chapter) - the defendant’s evaluation of the company was for the purposes of enabling shareholders as a body to supervise management, rather than enabling individual shareholders or third parties to make investment decisions. Thus, because the claimant used the report in a non-ordinary manner, the claim failed. The same principle can be seen at work in Mariola Marine Corporation v Lloyd’s Register of Shipping [1990] 1 Lloyd’s Rep 547 - the claimant relied on the yacht’s classification when buying it. In actual fact, the yacht had severe corrosion, devaluing it. The survey was made for classification purposes. The defendant had not undertaken responsibility to the purchaser for its buying decision, and the claim failed.

It should be noted that this point is not entirely intuitive - third parties often use audits of the nature used in Caparo to work out whether a company is a viable purchase, and it is arguably foreseeable that a third party will use a yacht safety report in order to work out whether a yacht is a good purchase or not. Thus, this rule should be regarded as somewhat of a legal fiction. A statement may, however, be directed at a known claimant for a particular purpose even though others also receive it. Thus, in Morgan Crucible Co v Hill Samuel & Co [1991] Ch 295 the target company circulated financial statements and a favourable profit forecast while resisting a takeover bid. The bidder alleged that misleading statements were directed at it to influence its bid. The Court of Appeal allowed the amended claim to proceed on that basis. It did not determine liability at trial.

Thirdly, there exists a legal oddity in the form of cases regarding ‘negligent silence’. Such situations are not beyond imagination - if you always received advice from someone before you made a bad decision, it would not be unreasonable for you to assume that silence from that person would imply that the decision you are making is good. However, the law has stopped short of imposing a duty to avoid silence in such situations. See Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1991] 2 AC 249, in which the Court of Appeal accepted in principle that silence might give rise to liability where responsibility to disclose had been assumed. The insurers had not assumed such responsibility on the facts; the claim for damages failed in the House of Lords.

Fourthly, negligent misstatement can occur where the defendant is a public authority. However, as noted in the chapter on duty of care, the ordinary principles of negligence apply to public authorities, subject to the statutory scheme under which they act. An example of where it will be however is seen in Welton v North Cornwall District Council [1997] 1 WLR 570. A food health inspector inspected the claimant’s guest house, and noted a number of changes that the guest house must make to avoid being shut down. After making these changes (at significant expense), the claimant discovered that many of them were not actually required. The claimant sued for negligent misstatement and won.

This can be contrasted with Harris v Evans [1998] 3 All ER 522, in which a safety inspector advised local authorities that a crane used for bungee jumping had to be certified for that purpose. A council issued a prohibition notice, preventing the claimant from operating. The claimant alleged that the advice was negligent. The Court of Appeal held that the inspector owed the operator no duty of care for economic loss caused by advice to the enforcing authorities, and so the claim failed. Notably, however, the court indicated that liability might arise should an inspector give bad advice which resulted in a new danger being created.

Consider the difference between the two cases - in the former, the claimant unnecessarily spent money because the defendant advised that it was compulsory to do so. The inspector gave the advice directly to the claimant, imposed detailed requirements outside the legislation and supervised the work under threat of closure. In Harris, the local authorities acted on the inspector’s advice and the relevant statute included its own appeals process for prohibition notices. Imposing a duty to protect the operator’s profits could interfere with the statutory enforcement function. These matters affected whether there was a remedy in tort.

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