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2.2.2 Economic Loss Lecture

What is ‘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. Economic damage however, is far less easy to quantify, can grow out of proportion very quickly. 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 harm to a person or property. However, there exists three primary exceptions to this rule: where the loss is based on physical damage to the claimant’s property, where the negligence act causes a claimant to acquire defective goods or property, or when economic loss stems from negligent misstatement. It should be noted that the ‘usual’ rules of negligence still apply here, so there must still be a duty of care in line with Caparo, a breach of duty, and that breach must have caused the loss.

Economic Loss Due to Physical Damage

Where an economic loss stems from physical damage to a product or equipment, then it is 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. A power outage caused by the defendants caused the claimants factory to shut down. The claimants suffered three harms: Damage to the furnaces and steel in use at the time; economic loss of the profit of selling the steel; and economic loss due to the halting of its manufacturing. The claimants could claim ordinarily for the first type of harm. They could also claim for the economic loss of profit that was a direct result of the physical damage to the steel. However, they could not claim for the third loss, which was of a purely economic nature.

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 appear to ignore this rule, however. These should be treated cautiously as an eccentricity, rather than as evidence of any ongoing rule or legal principle, particularly since they have since been overturned. Nonetheless, they represent an important, if temporary, exception to the rule on pure economic loss.

It is not normally possible to recover damages in tort for a defective product because tort leaves it to contract law to deal with defective products. 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 will prevent the injured party from bringing a claim in contract law. This somewhat explains law’s position on defective property – the desire to fill in a gap left by contract law.

The primary case in this area is Anns v Merton London Borough Council[1978] AC 728, where the courts ruled that negligence had occurred, causing the claimants to acquire faulty property and that the loss was recoverable as a result.This principle was applied similarly in Junior Books Ltd v Veitchi Co Ltd[1983] 1 AC 520. The basis for these exceptions 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 courts appear to have decided to make the cost of repair recoverable, before injury or damage has occurred.

However, Anns was overruled in Murphy v Brentwood District Council[1991] 1 AC 398. The courts ruled that this type of damage was not recoverable – it was purely an economic loss.

Economic Loss Due to Negligent Misstatement

Finally, there exist a category of cases involving economic loss due to negligent misstatement. In Hedley Byrne & Co Ltd v Heller and Partners Ltd[1964] AC 265, the courts ruled that this type of loss was of a recoverable nature. It should be noted, however, that the defendant bank in this case had attached a disclaimer to its negligent advice, and so the courts rejected the claim.

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 acting as an expert advisor. Thus, in Cornish v Midland Bank plc[1985] 3 All ER a mortgage advisor failed to explain to a client that she would be responsible for all of her husband’s debt. As a result, she lost a lot of money when the house was sold following their divorce. This relationship needn’t be particularly professional, Chaudry v Prabhakar[1989] 1 WLR 29. Thus, relationship of trust does not need to be professional-to-client, it simply needs to be expert-to-non-expert.
  1. The advising party (or expert) needs to have voluntarily assumed the risk of misadvising. In Cornish Bank for example, the defendant might have chosen to not sell the mortgage to the claimant. As seen in Hedley Byrne, it is also possible to use a disclaimer to avoid liability.
  1. There must be reliance on the advice by the defendant. 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. Whilst it used to be the case that those negotiating a contract could not be held to be in reliance on one another with regards to expert advice, this has since been overturned. Thus, in Esso Petroleum v Mardon[1976] QB 801, the defendant (Esso) was liable for negligently overstating the business prospects of one of its petrol stations.
  1. The reliance on the advice must be reasonable and foreseeable. This can be thought of as a control measure, letting the courts separate worthy and unworthy cases. This is illustrated in Law Society v KPMG Peat Marwick[2000] 4 All ER 540.

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 in the mind of the defendant, Smith v Eric S Bush[1990] 1 AC 831.

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). same principle can be seen at work in Mariola Marine Corporation v Lloyd’s Register of Shipping[1990] 1 Lloyd’s Rep 547.It should be noted that this point is not entirely intuitive – in both the above cases it was arguably foreseeable that the claimants would use the information in this way. Thus, this rule should be regarded as somewhat of a legal fiction. Notably, this principle will not stand should the defendant know of the claimant’s intentions, Morgan Crucible Co v Hill Samuel & Co[1991] Ch 295.

Thirdly, there exists a legal oddity in the form of cases regarding ‘negligent silence’. The law has stopped short of imposing a duty to avoid silence in such situations. See Banque Keyser Ullman (UK) Insurance Co v Skandia[1991] 2 AC 249, in which (obiter) it was stated that there was nothing, in principle, preventing silence from giving rise to negligent misstatement liability. However, it is important to note that ultimately, liability was not imposed in the case, primarily because such an approach would run contrary to the contract law on silence in negotiations.

Fourthly, negligent misstatement can occur where the defendant is a public authority. However, as noted in the chapter on duty of care, it should be assumed as a starting point that liability will not be conferred. An example of where it will be, however, is seen in Welton v North Cornwall District Council [1997] 1 WLR 570. This can be contrasted with Harris v Evans [1998] 3 All ER 522, where the claim failed. Liability for misstatement can be seen to apply where public bodies are involved but they act in a way which is not commensurate with the purposes of their empowering legislation.


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