Economic Loss Lecture - Hands on Examples
Question:
Footly Chill is the owner of a large food production factory, specialising in baked goods. They operate out of a large factory, which runs 24/7, producing cakes for supermarkets across the country. They rent their factory from RightGo Facilities, who are in charge of maintaining the Footly Chill Co’s factory, and supplying it with electricity and water.
One day, due to a failure to maintain the power supply running to Footly Chill’s factory, the entire building is left without power for three hours whilst the supply is repaired. This causes the factory’s ovens to shutdown, ruining all of the cakes currently being baked (which are left as half-solidified batter, and are thus inedible.) The factory is also unable to proceed with baking its next two batches of cakes.
The following week, in acknowledgement of the costs associated with the shutdown, Footly Chill’s board of directors decide to diversify their business interests, seeking to acquire two new companies. They identify two different food production businesses they wish to buy - Tea Corp and Coffee Co.
The board of directors decide to check the stock prices for Tea Corp, and see in the Financial Times that Tea Corp has been selling at a good price, indicating that it is a healthy business. At the bottom of the stock prices, there is a printing disclaimer - “Warning: these figures are subject to correction, and should not be used for business acquisition purposes.”
Ignoring this disclaimer, Footly Chill make a successful takeover bid based on this information. It later emerges that the price listed for Tea Corp is in fact a misprint, and that the organisation has been losing value for months. As a result, Footly Chill have to sell Tea Corp at a significant loss.
The board decide to employ a private auditor to check out Coffee Co - the auditor reports to them that Coffee Co would be a good investment. Unfortunately the auditor has failed to notice that Coffee Co has a large number of unpaid invoices outstanding, and is therefore in significant debt. This is only discovered by Footly Chill after it has acquired the organisation. Again, it has to sell the organisation shortly after acquisition, at a significant loss.
You are asked to provide advice on the following possible claims:
1) Footly Chill’s claim against RightGo Facilities for negligently failing to maintain the power line.
They note that a large batch of cakes was ruined during the time the factory was without power, and that the power outage stopped them from baking two more large batches of cakes in the meantime, throwing their production schedule off.
2) Footly Chill wishes to sue the Financial Times for negligent misstatement.
3) Footly Chill wishes to sue the auditor it has employed, again, for negligent misstatement.
Answer:
1. Footly Chill’s first claim is a matter of economic loss due to physical damage - negligence has caused damage to occur to Footly Chill’s property, causing an economic loss.
As per Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd[1973] 1 QB 27 it is necessary to split the harms suffered into those directly related to physical damage, and those which are not. RightGo Facilities had a duty to maintain the power line, breached this duty, and this caused the power loss to Footly Chill’s factory. Much like the half-melted steel in Spartan, Footly Chill will likely have a claim for the costs involved in producing the cakes which were rendered inedible - raw ingredients, staffing costs etc.
Footly Chill will also have a claim for the loss of profit on the half-baked cakes - although this is an economic loss (nothing physical is damage, only the ability to sell the cakes), this harm is itself caused by physical damage to the claimant’s property, and so is covered under Spartan.
However, Footly Chill will not have a claim for the profit lost on the cakes which were unable to be baked whilst the power was out - this is a purely economic harm, as no damage has occurred to either these cakes or their ingredients.
2. Footly Chill has not suffered any direct harm, and so the loss is only economic in nature. It can be argued to be caused by the misprint in the Financial Times, and so is a matter of negligent misstatement.
Footly Chill is not likely to have a claim against the Financial Times. Whilst Hedley Byrne & Co Ltd v Heller and Partners Ltd[1964] AC 265 lays out the situations in which negligent misstatement is actionable, the facts of this case distinguish it.
There is hardly proximity between Footly Chill and the Financial Times, meaning that a special relationship between the parties can be said to have arisen - the information is simply too widely disseminated. It is also neither foreseeable nor reasonable for a large organisation to rely solely on stock listings of the Financial Times as an indicator of an organisation’s health. Furthermore, much like Hedley Byrne, the Financial Times’ disclaimer means that it cannot be said to have voluntarily assumed the position of an advisor. This means that this claim is likely to fail.
There also exists a policy argument here - significant chaos would ensue if a simple numerical misprint in a newspaper could give rise to a claim for negligent misstatement.
3. Footly Chill’s claim against the auditor is likely to succeed. Under Hedley Byrne, the auditor has taken up an advisory position, creating a special relationship between himself and Footly Chill. He voluntarily assumes this role. It is clear that Footly Chill rely on his (mis)advice, since the entire purpose of taking on the auditor was to advise them on the viability of Coffee Co as a takeover prospect. Although Footly Chill might be expected to have the expertise to judge fellow food production organisations, this does not necessarily indicate a lack of reliance. Indeed, a claimant’s own expertise does not always mean it is not relying on another’s expertise, as in Esso Petroleum v Mardon[1976] QB 801.
It is also arguably reasonable and foreseeable that Footly Chill would rely on the auditor’s advice - after all, this is why it has employed him.
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