#3551 - Pure Economic Loss - Tort Law

Pure Economic Loss

• PEL – loss which isn’t consequential to any personal injury to C or property damage to C’s property

• Exclusionary rule– economic loss isn’t actionable w/out more, whether deliberately or carelessly inflicted (but no blanket rule denying liability altogether) NB: no problem if C can frame is action in contract – most claims for breach of contract are claims of EL

• Rationale

1. Carries the risk of floodgates

5. Don’t always need a remedy- the object of economic activity is mostly to succeed while others fail &so EL is caused intentionally. Only where unlawful means are used can begin imposing liability. By definition, it’s not always appropriate to impose a duty to avoid causing foreseeable economic loss through negligence – even proximity won’t provide necessary additional factors. Limitations rooted in morality of market economy + would deter competition which is beneficial in capitalist economy.

2. The fact that EL, whether inflicted intentionally or not, isn’t actionable w/out more, is hard to explain on the “loss based” model of tort law(Stevens)

1. loss based model – overall object of tort law is to define cases in which law may justly hold one party liable to compensate another & role of duty of care here is as control device, so that damage is the gist of the law of negligence – primarily concerned w/ diverse reasons why particular D has immunity from being liable for carelessly causing loss.

2. rights based model – tort is a species of wrong which in turn is a breach of duty owed to someone, which is an infringement of a right they have against tortfeasor. Before D is characterised as tortfeasor, the anterior question of whether C had a right against him must be answered. Law of torts is thus concerned w/secondary obligations generated by infringement of primary rights, so that infringement of rights, not the infliction of loss, is the gist of the law of torts (distinguish right of C and liberty of D in this context).

3. EL generally gives rise to a problem of indeterminate liability which justifies a “bright line” exclusionary rule (F. James)

• Stevens: on its own, this is unsatisfactory

  1. it’s not always the case that recovery of EL would give rise to indeterminate number of Cs. E.g. Murphy - the only possible C is the purchaser whose EL is determined by value of what he bough

  2. there may be indeterminacy problems in other contexts but that isn’t normally seen as sufficient reason to exclude liability

• Stapleton– principal advantages of complete rule of “no recovery” would be:

1. certainty - it would provide a much sharper edged approach than a regime which allows recovery in some circs defined in terms of “soft” concepts, such as skill, reliance, proximity, on application of which reasonable minds may disagree

2. clear message to Parl. & Law Commission that victims couldn’t look towards common law & its future developments for redress in such cases & that it would require action on their part instead

Recognition of Hedley Byrne meant little attention was paid to “no recovery” option. Current orthodoxy accepts that to draw a line b/w physical & economic damage can’t be justified on any intelligible principle. It concedes to existence of floodgates problem but recognises it as a controllable threat by recognizing recovery in carefully defined cases. But the outcome of litigation is complex, uncertain & anomalous pattern of decisions – “pockets of case law” to which analysis by courts has been confined.

6. Central flaw of HL approach to EL is the assumption that difficult issues of duty should be analysed by analogy to “pockets” of relevant case law – this can preclude consideration of factors capable of providing a more coherent overall process of analysis, guided but not dictated by such “pockets”-consider factors such as:(Stapleton)

   1. Floodgates – it should be a necessary but not sufficient precondition of imposition of duty that case doesn’t raise the prospect of indeterminate volume of claims or a quantum of indeterminable loss

   2. Adequate alternative means of protection shouldn’t have been available elsewhere – the height of hurdle would depend on the level of protectionism court thinks appropriate but it should be consistent e.g. contrast b/w Smith v Eric Bush and D&F Estates is too big (just as buyers of modest dwellings rely on surveys so they do on competence of subcontractors in carrying out repairs of their home!)

   3. Imposition of duty shouldn’t invade an area which Parl. has dealt w/as exhaustive – approach w/caution (necessary, not sufficient!)

   4. Shouldn’t permit C to circumvent either a contractual bargain b/w C&D or even a non contr. but clear understanding b/w parties as to where the risk should lie

• Overall priority should be an attempt @ consistency in factorsto consider & resultant overall level of protection adopted by courts, be it in the form of obl. in tort or implied terms. Not a question completely for common law; e.g. UCTA 1977

7. EL is less important than other forms of loss – we have a hierarchy of interests to protect: at the summit is life and bodily safety, below is tangible property and only then economic interests

• Stevens: don’t have to look for a single reason why we don’t have a right good against the rest of the world not to have EL inflicted upon us: could instead start w/assumption that we each have a right not to have loss inflicted upon us and it would then be necessary to carve out wide ranging exceptions. But this isn’t common law’s starting position & there is no exclusionary rule for EL: it is that infliction of EL doesn’t per se infringe any rights of C. Thus, on a rights based model, it is not the ocean of no liability which requires mapping but the isolated island of rights.

8. Potential of conflict w/contract law – certain subclasses of economic loss are traditionally & appropriately the subclasses of contract though note Cartwright on remoteness

• Categories of EL cases (sets artificial barriers– Stapleton)

1. PEL caused by damage to another person’sproperty or person (relational EL) not recoverable b/c of indeterminate no of Cs + reluctance of courts to interfere w/contr. allocation of risks (but financial/economic loss resulting from physical damage/PI to one’s self is generally recoverable)

• C can sue for damage to property/consequent loss if his property was damaged (doesn’t have to be owner – legal or beneficial - possession sufficient). It’s not enough for him to have contractual rights in the property which are rendered less valuable b/c of damage or become more onerous.

• Weller Foot & Mouth Disease – Cs, cattle auctioneers, claimed D research institute had imported African virus & allowed it to escape, causing disease to spread & causing financial harm to Cs b/c cattle markets closed. Held no duty owed.

• Spartan v Steel[1973] - contractors negligently dug the road, severed power supply, C’s smelting factory lost power for 14 hours, resulted in physical damage + loss of profit. Could recover for physical damage to one melt + loss of profit on it but not other 4b/c that was PEL, independent of physical damage, caused by interruption to electricity supply.Cs would have succeeded if the cable had been vested in them at the time of being severed. Denning: on facts, losses should be spread across community rather than being concentrated on one party + losing power supply is fairly normal occurrence for which most people take precautions.

• The Aliakmon-instance of property damage where neither buyer nor seller could bring an action, much to the benefit of negligent chare. Lord Goff: this could be treated as a case of ‘transferred loss placing it in special category to which policy argument against recovering for relational EL didn’t apply. Thiswas rejected by HL which refused to recognize even ltd exception to exclusionary rule although no prospect of indeterminate liability.

• D Pride and Partners[2009] – C farmers suffered losses due to outbreak of foot & mouth virus for which they claimed Ds to be responsible. Another group of Cs, whose animals had just been culled, had their claims settled by Ds. Determined there was enough chance of physical loss to proceed to trial b/c some animals developed past the point of slaughter so that lost profits were directly consequential on their over fact condition, rather than ‘pure’. But these elements were minor and other aspects were clearly relational. Tugendhat J: relational loss = brought about indirectly, regardless ofits nature (physical & economic). Case didn’t fall clearly within exclusionary rule but denial of liability justified b/c of very wide liability.

• Shell UK Ltd v Total UK Ltd[2010] - duty of care is owed to beneficial/legal owners of property by D who can reasonably foresee his negligent actions will damage it. Liable for physical loss + foreseeable consequences, such as extra expenditure or loss of profit.

2. EL caused by acquiring a defective product or premises normally not recoverable b/cto recognize a duty would be to make significant inroads into rules of contract (cases involve a ‘bad bargain’ rather than harm to a separate property)

• Ifthe claim involves manufacture of defective goods, use Donoghue (manufacturer/consumer duty)

• If goods simply fail to work, use contractual warranties

• Exclusionary rule appliesbut was relaxed:

• Junior Books Ltd v Veichi (1983) – defenders engaged as subcontractors to lay the floor in C’s factory, no contr. relationship b/w them & C, main contractors not involved. Cs alleged floor was...