#15593 - Negligence Economic Loss - GDL Tort Law

Tort Law : Negligence, Pure Economic Loss

Duty of care – recap

• Duty of care is only one element of a negligence claim (breach, causation, remoteness and defences must always be considered after establishing a duty)

• Whether a duty of care is owed is determined by the type of loss being suffered

• The approach to finding a duty of care, and the test used, has changed over the years depending on whether the courts have wanted to expand or restrict liability

• There is overlap between the three stages of foreseeability, proximity and fair, just and reasonableness.

Economic loss

In tort, all losses within 3 categories: (1) physical/property damage; (2) economic loss consequent on physical damage (i.e. consequential economic loss); (3) pure economic loss.

Two types of economic loss:

• Consequential economic loss – courts have no problem with this. Eg economic loss flowing from damage to person/property.

• Pure economic loss – eg accident involving a car, you get held up in traffic, you lose a day’s pay as you miss work.

• General rule: if loss is physical/property damage; or consequential economic loss, it is recoverable; but if pure economic loss, not recoverable.

• Only pure economic loss is treated as a separate category when establishing a duty of care.

• Weller v Foot & Mouth Disease (1965): if claiming for consequent economic loss, you have to show that yourself/something owned by you is damaged.

Three types of loss in tort:

• (1) Physical/property damage:

  • eg broken arm, damaged car.

  • Such losses do not usually pose any problems at duty of care stage—however, where the loss is ‘nervous shock’, there are special considerations, previous chapter.

• (2) Consequential economic loss (consequent on physical damage)

  • eg lost salary because of broken leg; lost profit on damage goods, or cost of replacing.

  • Spartan Steel v Martin & Co (Contractors (1973): D negligently cut off power to plaintiff’s factory ruining some melts that were being processed. The damaged metal was physical damage, and therefore loss was recoverable. Plus, the metal would have been sold at a profit, and loss of profit on the particular damaged metal was also recoverable as consequential economic loss.

  • Boundary of consequential economic loss, Conarken Group v Network Rail Infrastructure (2011): claimant was owner of a bridge damaged when hit by a lorry, due to D’s negligent driving. Claimant, Network Rail, was obliged to compensate train operating companies who were unable to operate a service until the bridge was repaired, and sough to recover this cost. This was recoverable but lay at outer fringe of recoverability.

• (3) pure economic loss

Policy concerns for pure economic loss (extremely important)

• Floodgates: pure economic loss, hard to know how long people will be affected.

• Fraudulent claims

• Crushing liability: the amount of pure economic loss could be massively out of proportion with the defendant’s breach.

• Danger of interfering with rules of contract (particularly privity rule in the case of three parties)—normally pure economic loss is dealt with under contract law.

• Danger of conflicting duties (where three parties)

• Need for flexibility in future decisions—so they don’t have to keep overruling previous decisions.

Relationship with contract law

• 4 different approaches taken by judges:

  • Hedley Byrne v Heller: in this case, there was no contract. No consideration, so no valid contract. Lord Devlin: if you have a situation ‘akin to contract’, it will be easier to find liability in tort. Easier to find a duty of care in tort if you have a relationship very similar to contract.

  • If there is no contract, role of tort to fill in the gaps and provide justice: Williams v Natural Life: no contract between parties, there’s a gap in the law, we think there should be a remedy. So tort to provide additional lability where contract doesn’t cover it.

  • Opposite view in Tai Hing Cotton v Liu Chong Hing Bank: if there is a contract, should not be up to judges to impose additional liability in tort. Contract is a voluntary obligation/agreement—so court shouldn’t impose additional obligations.

  • Lord Goff, Henderson v Merrett, Lord Goff : whether there’s a contract or not makes no different as to whether there is liability in tort.

Pure economic loss – caused by an Act, or Statement

• Was it caused by negligent act, or negligent statement: crucial distinction as different rules apply.

• Why the distinction: Hedley Byrne v Heller:

  • Lord Reid: the potential losses are different. Eg a negligent act the losses may be contained more easily; but with words/statements, you have no idea who’s going to get hold of them

  • Lord Devlin, dissenting: says no rational reason why it should matter if the pure economic loss is caused by an act or statement. But he’s a minority.

  • Despite disagreement, There is a distinction.

• So if you identify economic loss in a problem statement, you have to work out if caused by negligent act, or negligent statement (easier to claim if the latter).

Types of pure economic loss

Negligent acts

• General rule: no tortious liability for pure economic loss caused by a negligent act (Spartan Steel; Murphy v Brentwood)

(1) Economic loss not flowing from damage to person or property: eg where claimant has made a bad investment, missed a contractual opportunity, or lost an inheritance.

• Eg Spartan Steel v Martin (1973): electricity cut off, power cable severed. Power cut. Thus factory not able to operate for some time. One category of loss was that they could have made further profit during the period of further shutdown from processing further ‘melts’. This loss was held to be irrevocable, was purely financial loss not resulting from any damage to the plaintiff’s property.

• Denning: the plaintiff could have worked harder once the power was restored, or could have had insurance, or their own generator.

• For policy reasons, action failed.

• There were 3 damages in this case, 2 of which were allowed to claim for; 1 of which, pure economic loss, couldn’t claim for:

  • 1. Loss one—physical damage to property, they could claim for.

  • 2. Loss two--They also lost profit that they would have made, on the particular metal that was damaged. That was also held to be consequential economic loss, and could be claimed.

  • 3. Loss three-- the economic loss resulting simply from being unable to produce for 15 hours because of the power cut—this was pure economic loss, couldn’t claim for.

  • Denning: you should have had a back up plan, you should work harder the next day to make up for it; you should have had insurance; he talked about crushing liability of someone just severing a cable.

  • Dissenting judge, Edmund Davis LJ: says no reason we should have this distinction, both losses are foreseeable: he says the reason for the distinction (pure/consequential) was based purely on policy, which he doesn’t think was a good reason to deny it.

(2) Loss arising from damage to property of another

• If C suffers losses as a result of damage to property in which they have no proprietary interest, the loss will be pure economic loss.

• Weller & Co v Foot & Mouth Disease Research Institute (1965): plaintiff was an agricultural auction house, brought a claim for loss of profits against D institute. D had negligently released the foot & mouth virus and infected local cattle, resulting a cattle movement ban and cancellation of local auctions. Claim failed—as was for pure economic loss. Plaintiff had suffered no damage to their own property: their losses flowed from damage to cattle owned by another, by the local formers. [NB: one of the farmers, who owned the cattle, claiming, would have succeed as the loss could have been consequential economic loss, consequent on damage to their own property]].

(3) Defective items [distinction between damage and defect]

• Not possible to claim for the cost of repairing an inherently defective item, which is categorised as pure economic loss.

• If C’s claim is that their property is not up to the standard they hoped or expected, their claim will fail.

• They have not suffered physical damage, which is then something good is made bad; instead, they have always had the property subject to the defect in question. In such instances, damage would be available in a contractual claim, but not in tort. An article made with a defect in, is just an article which is defective, no property damage, that is pure economic loss.

• Distinction between damage and defect:

  • Donoghue v Stevenson: when she had the bottle with the snail in, there was no claim in tort. Only when she drank from it and became ill that she had a claim in tort. She actually couldn’t claim for the defective bottle of ginger beer; only for the injury cased by it.

  • Returned to in Murphy v Brentwood (1990).

• At one point, blurring of distinction by courts between the different types of property defects, courts more willing to allow pure economic loss claims:

  • Dutton v Bognor Regis (1972)

  • Batty v Metropolitan Property (1978)

  • Anns v Merton (1978)

  • Dennis v Charnwood Borough Council (1982).

  • (all these now overturned by Murphy, no longer good law), were decided at time of courts expanding liability, they tried to argue that what looked like economic loss was actually property damage.

• Complex structure argument, originated in D & F Estates (1988), and laid down fully by Lord Bridge in Murphy v Brentwood: tried to get around this damage/defect distinction (i.e. tried to expand liability in 1970s) Said you can separate out the property into different parts (eg roof, door), and if you have a defective part...