#4658 - Pure Economic Loss - GDL Tort Law

Three categories of loss:

1. Physical damage: actual economic loss

2. Economic loss consequent on physical damage: consequential economic loss

3. Pure economic loss

• Generally pure economic loss is not recoverable

Physical damage

• Quantum – ‘how much’ –liability hearing decides if liable and then the quantum hearing decides how much

• Loss of earnings / medical care + costs

• Issues:

  • Remoteness - are they too remote? Where does it stop?

  • Speculative economic loss - claiming for speculative future losses – can claim but high evidential burden

Economic loss consequent on physical damage

• Lost profit on the thing that has been physically damaged – cost of repairing/replacing etc.

• Spartan Steel & Alloys Ltd v Martin & Co (Contractors Ltd): D negligently cut off power to plaintiff’s factory ruining melts that were being processed – damaged metal was physical damage and so loss was recoverable – additionally the metal would have been sold at a profit – so loss of profit on damaged metal was also recoverable

Pure economic loss: Not recoverable

• Loss that arises where there has been no damage to the claimant’s property

• Policy reason: crushing liability – indeterminate number of claims from indeterminate number of people

• People are expected to take measures to protect themselves – insurance etc. (Spartan)

Purely financial loss

• If the claimant has suffered no physical damage to his person/property then his loss will be pure economic loss e.g. where they have made a bad investment, missed a contractual opportunity etc.

Spartan Steel: as a result of the electricity being cut off, the factory was not able to operate for some time – C claimed that during the period of shutdown they could have made further profit from processing further ‘melts’: this was held to be irrecoverable – purely financial and did not result from any damage to the plaintiff’s property.

Heads of Damage:

• Claimed for damaged melt: actual economic loss

• Profit on the melt: consequential economic loss

• Four potential melts that would have been made had the power not been turned off: NO – pure economic loss – potential melts have no relationship to the original damage – separate – one isn’t reliant upon the other

• Policy reasons – Lord Denning said he had to draw a line to avoid crushing material

  • Duty to mitigate losses: should have had a furnace, back-up generator, could have worked harder etc.

Loss arising from damage to property of another

• If suffers loss as a result of damage to property which the claimant has no proprietary interest then it will be classed as pure economic loss

• Weller & CO v Foot & Mouth Disease Research Institute: C was an agricultural auction house that brought a claim of profits vs. the institute: D had negligently released the foot and mouth virus and infected local cattle resulting in cattle movement ban and cancellation of local auctions – claim was unsuccessful - no damage to their own property

• Cattle v Stockton Waterworks : same ratio – you have to have a proprietary interest in the damaged property

Defective items – generally dealt with in contract law – not tort

• Can’t claim for the cost of repairing an inherently defective item – because pure economic loss – contract law deals with defective goods per se

• C’s claim that his property is not up to the standard he hoped or expected then his claim will not succeed in tort – unless defective good causes damage – you can sue for the damage but not for the defect

• Donnoghue v Stevenson – if she had discovered the snail before drinking the ginger beer or hadn’t suffered any ‘injury’ from drinking it – then she would not have been able to recover tort from the manufacturer for the simple defect

Expansion of liability

• At one point – courts seemed to blur distinction btw property defects – confusion btw contract claims and tort claims

• Anns – example of one of these cases – defects in the house – cracks in the wall – should be dealt with in contract – but HL allowed it – DOC of local authorities to make sure that the foundations are adequate- suing for a pure economic loss

• Dutton v Bognor Regis: House built on a rubbish tip – court allowed claim even though it is a defective product

• Negligent misstatement cases - Batty v Metropolitan Property Realisations and Dennis v Charnwood Borough Council – courts became more willing to allow pure economic loss claims

• High water mark – Junior Books v Veitchi Co. Ltd. – C contracted with main contractors but asked to use sub-contracted floorers – so wanted the defendants to do the flooring – but it was defective - action vs. flooring sub-contractors for faulty flooring – HL allowed the claim –defendants knew they were being relied upon – reliance and special relationship – situation analogous to a contract - duty of care because there had been ‘assumed responsibility’ – Lord Roskill – relationship was ‘almost as close a commercial relationship...as it is possible to envisage short of privity of contract’

  • Very difficult to justify case

  • Has never been overruled but distinguished – now regarded as relying on its own facts

Contraction of Liability

• Muirhead v Industrial Tank Specialities Ltd: claim for damage to property (ie dead lobsters) was allowed but not for a defect in product ( faulty pumps) – did the right thing and sued the tank company in contract law and won– but they went bust so he didn’t get any money – so sued the pump manufacturers in tort law (no contract with them) – tried to use Junior Books – but courts distinguished it – there was no reliance in this situation (pump managers didn’t know who the plaintiff was) so the claim failed

• Simaan General Contracting Co.v Pilkington Glass Ltd: defect in the supplying of glass for the defendants for a building in Abu Dhabi, court refused a claim for pure economic loss in the absence of a contractual relationship btw the parties – no proximity so the claim failed

• In both D & F Estates v Church Commisssioners for England and in Murphy – suggested that Junior Books should really be seen as an example of the Headley Byrne principle(see below)

  • D & F Estates – C claimed for defective plastering failed - you can only claim if the defective item causes damage – can’t claim for the defective plastering on its own – also introduced the complex structure theory – if one part is defected and damages another – you can’t claim for the plaster but you can claim for another part which becomes damaged

  • Murphy v Brentwood District Council: HL confirmed that cost of repairing inherently defective products or property was rightly classified as pure economic loss:

    • Claimant bought a house which subsequently developed structural defects because of inadequate foundations: was forced to sell it for 35,000 less than it would have been worth

    • HL – there would be no liability where the dangerous defect manifests itself before any actual damage has occurred

    • Cost of repair wouldn’t be recoverable

    • No damage to other property because of the defect – in which case the ‘complex structure’ theory may have applied (see below)

Exceptions to the general rule

1. Headley Byrne v Heller

• Incorrect financial statement

• Negligent misstatements

2. Junior Books

• Highly unlikely to be applied again

3. Ministry of Housing v Sharp

• Where a breach of statutory duty gave rise to foreseeable pure economic loss

4. Ross v Caunters

• Where a breach of fiduciary duty by a solicitor gave rise to foreseeable pure economic loss – involving solicitors negligently drafting wills – see also White v Jones

5. Murphy v Brentwood

• Two more possible situations where pure economic loss might be recovered – these are obiter comments

1. Adjoining Occupiers – if the latent defect in the claimant’s property, then the costs of repairs may be recoverable – but usually in nuisance rather than negligence

2. Complex Structure Theory - see above – application also discussed in Jacobs v Moreton

6. References

• A person can make a claim if they suffer pure economic loss as a result of a negligently produced reference – e.g. an academic reference – DOC and the use of reference - authority = Spring v Guardian Assurance plc

Pure economic loss and third parties

• In cases where there is a ‘special relationship’ – courts may allow claim by third party for economic loss – most involve solicitors incorrectly drafting wills so as to deny potential beneficiaries receiving inheritance – e.g. Ross v Caunters, White v Jones

Negligent misstatement

Headley Byrne: 2 requirements for negligent misstatement: (1) Special relationship (2) Reasonable reliance

Special Relationship

1. Special skill or knowledge

• No all-encompassing definition of this phrase

• Lord Morris in Headley Byrne: D needed to be in a better position than the claimant to know the facts

• Esso Petroleum Co Ltd v Mardon : don’t need to be in the business of giving advice on the matter

  • Confirmed in Chaudhry v Prabhakar - special relationship even though it was not a professional consultation

2. Formal, considered advice

• Lord Devlyn in Headley Byrne – awareness that legal implications could arise from the giving of advice – special relationship unlikely to arise in social or domestic situations – although it could do - Chaudhry v Prabhakar (although weak authority)

3. Purpose for which the advice is given

• Caparo industries plc. V Dickman – Lord Bridge – if specific advice was given for a specific purpose then it could constitute a special relationship

• James Mcaughton Paper Group Ltd v Hicks Anderson : CA stressed that special relationship depended on the plaintiff relying on a...