Duty of Care: Pure Economic Loss Introduction

Duty of Care: Pure Economic Loss Introduction

There are special duty in law restrictions for recovery in negligence where the claimant has suffered pure economic loss. The general rule is that pure economic loss is not recoverable. The most important exception to this general rule is the case of Hedley Byrne v Heller. There is also an exception flowing from White v Jones. There are two fundamentally different views as to why pure economic loss is generally not actionable in negligence. These two views broadly align with the rights view and compensation for loss/policy view.

If the claimant suffers a financial loss resulting from damage caused by the defendant's negligence, this is a consequential loss. Like a consequential psychiatric injury, this is recoverable in a claim for the personal injury or property damage itself.

What is pure economic loss?

Financial loss which does not result from damage to the person or property of the claimant caused by the defendant.

The following cases are illustrative of the pure economic loss concept.

          Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] QB 27

In this case, the defendant building contractors cut through an electrical cable leading to the claimant's metal processing plant. This cut off the plant's power for several hours, so the claimant could not process metal for that period. This loss of profit was purely financial because the cable belonged to the electricity company. This was a pure economic loss case because the loss did not flow from damage to the claimant's person or property.

One of the other results of the cable cutting is that some of the metal being processed was damaged. The loss of profit on the damaged metal was consequential economic loss and so was recoverable. Loss of earnings from personal injury and hiring a car after an accident are also examples of consequential economic loss.

          Murphy v Brentwood DC [1991] AC 398

Murphy bought a house with defective foundations so had to spend money on repairs. Murphy sought these costs from the district council which had negligently failed to inspect the foundations when the house was under construction. This was a pure economic loss case because the loss did not flow from damage to the claimant's property — to fail to stop something defective from being made is not to damage that thing.

The general no-recovery rule

The general rule in English law is that you cannot recover in negligence for pure economic loss. This general rule can be illustrated by two types of case:

  1. pure economic loss suffered by the acquisition of defective products or premises.

  2. pure economic loss suffered as a result of damage to a third party.

(i) Pure economic loss suffered as a result of the acquisition of defective products or premises

You cannot recover in negligence for the loss you suffer when you buy something worth less than you thought or hoped it would be. So, you cannot recover if someone's negligence caused you to think something is worth more than it turned out to be. For example, if you buy a microwave oven which simply doesn't work. There might be contractual claims against the salesperson or a contractual guarantee against the manufacturer. But, you cannot sue the manufacturer in tort on the grounds that the defect in the oven is the result of the manufacturer's negligence.

Murphy v Brentwood DC is the leading case in this area. The House of Lords made it clear that the purchaser of a house with defective foundations could not recover the loss resulting from that defect. The purchaser cannot recover the loss from either the builder or the inspecting local authority. The first person to buy would have a contractual claim against the builder almost certainly, but subsequent purchasers cannot sue in tort.

The buyer of a defective chattel will usually have a remedy against the seller in contract law. They will also benefit from implied terms in the Sale of Goods Act 1979 and the Consumer Rights Act 2015. Sale of land or real property is governed by the caveat emptor rule, so purchasers are unlikely to have a contractual claim because this liability is limited to active misrepresentations. So, there is much more pressure for a remedy in tort in the context of the defective premises than in the defective chattel context.

In Australia, Canada, and New Zealand, the courts have not followed Murphy v Brentwood DC and allowed some claims for pure economic loss in the case of premises. In England, the only remedy would be against your own insurance company or possibly a surveyor.

          Winnipeg Condominium No 36 v Bird Construction Co (1995) 121 DLR 4th 193

          Bryan v Maloney (1995) 182 CLR 609

(ii) Pure economic loss suffered as a result of damage to the person or property of a third party ('relational economic loss')

[I]n an uninterrupted line of cases since 1875, it has consistently been held that a third party cannot successfully sue in tort for the interference with his economic expectations or advantage resulting from injury to the person or property of another person...

          Murphy v Brentwood DC [1991] AC 398, 485 (Lord Oliver)

          Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] QB 27

The Court of Appeal held that the claimant factory owner could not recover for the loss of profit on the metal that was not processed as a result of the power cut. This was economic loss suffered as a result of damage to a third party. This is a paradigm case of the application of the rule of no recover for relational economic loss. If the factory owner had owned the cable, they could have recovered for the loss.

There are no noteworthy exceptions to the rule in English law. Some other jurisdictions take a more flexible approach where the courts have allowed recovery for relational economic loss where there is a particularly close relationship between the claimant and the property or person damaged.

          CNR v Norsk Pacific Steamship (1992) 91 DLR (4th) 289 CANADA

          Barclay v Penberthy [2012] HCA 40, 246 CLR 258 AUSTRALIA

So the pattern is that of a very clear rule against liability in English law but a more flexible approach in other jurisdictions.

The main exception to the no-recovery rule: assumption of responsibility

          Hedley Byrne v Heller [1964] AC 465

Pure economic loss is recoverable in negligence, where the defendant has assumed a relevant responsibility towards the claimant. After Hedley Byrne, the assumption was that the exception was limited to situations like Hedley Byrne itself. Those situations where a claimant had relied on a negligent misstatement by the defendant. But, then came the decision in the following case.

          Henderson v Merrett Syndicates Ltd [1995] 2 AC 465

The defendant could also be liable under Hedley Byrne for his negligent performance of a service for the claimant where there was a prior assumption of responsibility. This extension followed from an earlier reformulation of the Hedley Byrne principle by Lord Goff in Spring v Guardian Assurance.

[W]here the plaintiff entrusts the defendant with the conduct of his affairs, in general or in particular, the defendant may be held to have assumed responsibility to the plaintiff, and the plaintiff to have relied on the defendant to exercise due care and skill, in respect of such conduct.

          Spring v Guardian Assurance [1995] 2 AC 296, 318 (Lord Goff)

Apart from Lord Lowry, the House of Lords did not expressly agree with Lord Goff. But, in Henderson v Merrett Syndicates Ltd, the reformulation was unanimously accepted by the House of Lords.

This reformulation entails a different concept of reliance than the misstatement case. In the misstatement case, reliance is playing an active role because only if the claimant relies on the misstatement will the misstatement cause him a loss. In the reformulated Hedley Byrne principle, reliance plays a weaker, more passive role, meaning no more than the claimant hopes and expects the defendant to carefully manage the claimant's affairs. It is questionable whether reliance in this weaker passive meaning is a useful concept to employ in this context at all. Reliance plays a causal role in the misrepresentation; in the context of the services cases, the weaker passive concept seems to be far less useful.

A simple way to find in general terms whether there has been an assumption of responsibility is to ask whether the defendant has undertaken a task for the claimant or is managing some aspect of the claimant's affairs. This seems to be the core idea of assumption of responsibility in this context.

It's been held that the defendant can exclude liability for a task's negligent performance just as a party can exclude their liability for breach of contract. Generally speaking, you cannot just go around excluding your liability to other people in negligence; but, once in the realm of voluntarily assumed responsibilities, you can exclude your liability. Exclusion of liability of this kind will be subject to statutory regulation in the usual way under the Unfair Contract Terms Act or, if you are a consumer, under the Consumer Rights Act.

Going back to Hedley Bryne itself, a disclaimer in the credit reference that the defendant bank gave to the claimant meant that the bank was not liable for any negligence in the reference's drawing up. So the House of Lords accepted the existence of a duty of care, but the disclaimer meant that there was no liability.

The defendant must be acting in the course of his business for a duty of care to arise in this context. For example, advice which is given informally on a social occasion will not give rise to liability. There used to be an emphasis in the early case law on the idea that the Hedley Bryne principle only applies where the defendant has some special skill or knowledge. This idea has morphed into the narrower focus of whether the defendant was acting in the course of business. Esso Petroleum v Mardon is a case to cite as authority for the proposition that if the defendant was not acting in the course of business when they provide the service, there is no liability under Hedley Byrne.

          Esso Petroleum v Mardon [1976] QB 801

In Caparo, the House of Lords laid down some important remoteness type limits on the new assumed responsibility scope falling within the Hedley-Byrne principle. Don't forget the Caparo limits on Hedley-Byrne. The assumption of responsibility cases are the main and by far the most important exceptions to the no recovery for pure economic loss cases.

[T]he necessary relationship between the maker of a statement or giver of advice (the adviser) and the recipient who acts in reliance on it (the advisee) may typically be held to exist where (1) the advice is required for a purpose, whether particularly specified or generally described, which is made known ... to the adviser at the time when the advice is given, (2) the adviser knows ... that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose, (3) it is known ... that the advice so communicated is likely to be acted on by the advisee for that purpose without independent inquiry and (4) it is so acted on by the advisee to his detriment.

          Caparo Industries v Dickman [1990] 2 AC 605, 638 (Lord Oliver)

          Banca Nazionale del Lavoro v Playboy Club London [2018] UKSC 43, [2018] 1 WLR 4041

Playboy Club London were deciding whether to extend credit to a customer in their casino. The club practice was to ask for another company to get the credit reference from the customer's bank. This was so they did not have to disclose the purpose of the credit facility. So, Banca Nazionale del Lavoro provided a credit reference for one of its customers to Burlington Street Services who were acting on behalf of the Playboy Club. The court found that the bank did not owe a duty because the bank had not known that the purpose of the inquiry was to pass the information to the Playboy Club.

If the bank knew that the information was destined for the Playboy Club, but the club had used it for a different purpose, the court would also have found no duty of care. Say if the information had been used to invest in the customer's business rather than extending credit in the casino.

There is another exception to the general no liability for pure economic loss deriving from White v Jones.

The White v Jones exception to the no-recovery rule

          White v Jones [1995] 2 AC 207

Majority of House of Lords held that an intended beneficiary under a will was entitled to recover damages from the testator's solicitors if because of their negligence the testator's intention to benefit the claimant had not been carried into effect.

In White v Jones, the testator had an argument with his daughters and cut them out of his will. The testator then repented of this decision and decided to put them back in his will. He instructed his solicitors to make a new will including the daughters, but the solicitors negligently did not make a new will before the testator died. After the testator died, the will could not be changed, so the claimants did not get the legacy that the testator intended them to get. So, the claimants bought a claim in negligence against the solicitors and were successful in White v Jones.

The most important thing to mention about White v Jones is that it is not a Hedley Byrne case because there is no assumption of responsibility by the solicitor towards the beneficiary. The essence of assumption of responsibility is that the defendant has undertaken a task for the claimant or managed some aspect of the claimant's affairs.

Lord Goff's opinion in White v Jones is the most impressive, the rest are of varying quality. Lord Goff says that the assumption of responsibility to the testator should be held in law to extend to the intended beneficiaries. This is not helpful because it makes people think that White v Jones is a Hedley Byrne case when in a strict view of Hedley Byrne, it is not. So people think the Hedley Byrne case doesn't make sense because this concept doesn't extend to White v Jones, but it does make sense because it is separate. Lord Mustill's dissent lucidly shows how White is not a Hedley Byrne case. This is the other judgment worth reading.

The worry in White was that not having an exception to the no recovery rule would create a lacuna in the law. If the beneficiaries don't have a tort remedy, then there is no one to hold the solicitors to account. Lots of legal systems have come across this problem. English law gives a negligence claim, some provide a contractual remedy, some offer a substantive claim in contract law which is passed on to the beneficiaries.

In 1999 Parliament passed the Contracts (Rights of Third Parties) Act but it is clear that if White v Jones occurred today, the beneficiaries would not fall under the Act. So the tort remedy from White remains essential.