#14683 - Pure Economic Loss - GDL Tort Law

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General Rule against Liability for PEL

There is generally no liability for pure economic loss.

• M. Lunney and K. Oliphant: ‘in English law the tort of negligence contents itself with a restrictive approach to liability for interference with trade and other purely economic interests. It adopts a general exclusionary rule towards pure economic loss’.

Murphy v Brentwood District Council

• Lord Oliver: generally a duty not to injure an individual but there isn’t a duty to avoid causing pure economic loss for an individual

Spartan Steel and Alloys Ltd v Martin & Co Ltd

Someone negligently cut power to a factory which processed metal, and was then sold there were three different types of damage:

• Property damage to metal

• Consequential economic loss: 400 profit on the metal lost

• Pure economic loss: 1300 lost profit of metal that would’ve been processed if the power had been on

Held: (CA) could only sue for the 1st two types of damage, because these were the only heads of loss that were in a direct nexus with the damaged property

• Lord Denning: “there would be no end of claims” if PEL were a permissible head of loss - suggested it was a policy issue. For example when there is a power cut, people don’t sue for any loss of profit or run to their solicitor, and he saw this as a healthy attitude. He suggested that people should deal with loss and work harder the next morning. Also gave a slippery slope argument, and the capacity for fraud to occur

HOWEVER: it is not always within the scope of the person who suffered loss to rectify it. Is it not the Court’s role to sort fraudulent claims from genuine?

• Steele: ‘Economic losses suffered by the claimant will be regarded as “pure” if they do not flow from any personal injury to the claimant nor from any physical damage to his or her property’.

General rule: fairness

• Matthews, Morgan & O’Cinneide: “the concern exists that permitting wide-ranging recovery for economic loss might expose defendants to liability of an uncertain, fluctuating, and uncontainable scope. The reluctance to permit recovery for economic loss has also been justified as necessary to maintain the doctrinal integrity of private law (e.g. the view that negligence law should not circumvent the rule in contract law that third party beneficiaries may not sue on a contract). The argument has also been made that economic loss is intrinsically less serious than other forms of damage, and therefore there is less pressing need to permit recovery for this form of loss.”

The Hedley Byrne Exception

Cattle v Stockton Waterworks Co

C was digging a tunnel on someone else’s land with whom he had a contract. The tunnel that was being dug became flooded caused by D’s negligence. As a result, there was no profit made on C’s contract which was time sensitive, and the negligence had affected the finish date.

Held: general rule applied – no recovery for PEL

Candler v Crane, Christmas & Co

Candler were a firm of accountants, and they prepared accounts for a company. C saw the accounts and off the back of them invested in the company. C sued D, the accountants, for a negligent misstatement.

Held: a careless, as opposed to a fraudulent, misstatement won’t give rise to liability in the absence of a fiduciary relationship

• Lord Denning (minority): who felt that where someone relies on an expert’s statement, there should be liability

Hedley Byrne v Heller

Advertising agents, C, were thinking of drawing up a contract with their clients who would pay for some advertising, with pay-back later. They asked their bank to find out from their clients’ bank that they would be able to pay. The defendant bank issued a statement saying it looked like they had enough money, but that they were doing so without responsibility. They placed the ads and tried to get money back, but it turned out the clients didn’t have enough money.

C tried to sue the bank on grounds that the bank has issued a negligent misstatement

Held: overruling Candler v Crane, they stated that, if someone has made a negligent statement and caused PEL, there could in principle beclaim under and exception to the general rule. However on these facts the statement ‘without responsibility’ excluded liability

• Lord Morris, “...in my judgment, the bank in the present case, by the words which they employed, effectively disclaimed any assumption of a duty of care. They stated that they only responded to the inquiry on the basis that their reply was without responsibility. If the inquirers chose to receive and act upon the reply they cannot disregard the definite terms upon which it was given. They cannot accept a reply given with a stipulation and then reject the stipulation. Furthermore, within accepted principles... the words employed were apt to exclude any liability for negligence.”

• Lord Peace, “Economic protection has lagged behind protection in physical matters where there is injury to person and property. It may be that the size and the width of the range of possible claims has acted as a deterrent to extension of economic protection”

The Hedley Byrne principle has extended beyond cases involving negligent misstatement & now includes negligent provision of services.

• M. Lunney and K. Oliphant, “There exists one major … exception to the common law’s general exclusion of liability in negligence for pure economic loss. A duty of care may arise in respect of such loss where the defendant voluntarily assumes responsibility towards the plaintiff. The foundations for this liability – which seems in some respects closer to liability in contract (also based on an assumption of responsibility) than liability in tort – were laid by the House of Lords in the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd. “

• K. Stanton: “The law governing this area remains difficult because it uses tests which are of little practical utility as a result of their vagueness. The inadequacies of tests such as proximity and the currently fashionable assumption of responsibility have been well exposed by commentators, if not always accepted by the courts … The overall result is scarcely satisfactory. The courts may be giving themselves considerable freedom as to the results that they can reach, but the parties involved in such cases and their advisers are left having to make decisions against a background of considerable uncertainty.”

Establishing a duty of care

Often a mixture of the following factors:

Assumption of Responsibility

This factor is mentioned in most, if not all, cases in this area

Lennon v Commissioner of Police of the Metropolis

Lennon was a police officer and thinking of moving forces; he had some kind of housing benefit as an officer and wanted to take a holiday between jobs. He was concerned about losing his housing benefit during this period so he went to Mrs. Buley who worked in his force and asked her for advice on the issue. She expressly assumed responsibility and said ‘don’t worry I’ll handle this and make sure you won’t lose your benefit’.

He sued the police force because Mrs Buley committed a tort (vicarious liability). So did Mrs. Buley owe a duty of care to Lennon?

Held: duty of care established because she went out of her way to assume responsibility - her special knowledge by virtue of her managerial job in HR was considered sufficiently close to an ‘expert’ relationship

What if D expressly disclaims legal responsibility?

• P. Giliker and S. Beckwith: “While the question of ‘assumption of responsibility’ is decided by reference to things said or done by the defendant, it is clear, of course, that the term does not imply that the defendant has expressly indicated acceptance of legal responsibility. Liability is imposed on the basis of an objective test, to which the expressed intentions of the defendant are only partly relevant. It follows that although a disclaimer will normally work to absolve the defendant from liability (as in Hedley Byrne), there may be exceptional circumstances in which liability will be imposed in spite of an assertion that the defendant accepts no legal responsibility for the advice in question.”

Smith v Bush

D was a surveyor for the property C was buying. The mortgagor contracted with a surveyor, and so was paid by the bank. D had failed to spot that the chimney was going to fall down. The purchaser bought the property. In the contract the surveyor’s firm included an exclusion clause.

C sued in negligence because he didn’t have a contract with the surveyor, and said there was no special relationship

Held: (HL) negligent liability found

• Exclusion clause had no effect in this situation because it was not reasonable (this now has statutory footing in the Unfair Contract Terms)

• They brought in the reliance point - ordinary purchasers would rely on these valuations

• To get away from the argument that this undermines the voluntary assumption, they said that surveyors know that the purchaser will rely on their reports. In this way, it imposes an objective standard about reliance - D doesn’t have to know that he being relied on in fact, but that a reasonable person would think they would be relied on.

• Special nature of the house, and paid attention to the fact...