Pure Economic Loss

Name three key types of loss with examples.

Physical injury (e.g. broken arm)

Property damage (e.g. to car), and

Consequential economic loss (resulting from personal injury or property damage - e.g. loss of wages due to being unable to attend work or loss of revenue from shop closure due to property damage).

Define pure economic loss.

Economic loss without physical damage - financial loss not caused by damage to claimant’s person or property.

What is the general rule for pure economic loss?

No duty of care is owed so the loss is not recoverable.

What is the case precedent for the general rule for pure economic loss?

Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd 1973 - negligent cable damage caused factory to shut down:

• Damaged metal = physical damage (recoverable)

• Loss of profit on damaged metal = consequential economic loss (recoverable)

• Loss of profit on future melts = pure economic loss (not recoverable)

Give an example of pure economic loss from which you cannot recover.

Bad investment or lost inheritance - where there has been no damage to the claimant’s property or injury to their person.

Can you recover from loss caused by damage to the property or person of another? Name the case precedent.

No you cannot. Weller & Co v Foot & Mouth Disease Research Institute 1965:

• Defendant negligently released a virus

• Caused cattle movement ban

• Auctioneer lost profits - the loss flowed from damage to another’s property

What example of pure economic loss was established in Murphy v Brentwood District Council 1990?

Cost of repair for defective items. Reduction in resale value of a house due to defective foundations constituted pure economic loss and could not be claimed for. Though contractual claim may be available it is not recoverable under tort.

When do exceptions to pure economic loss recoverability apply?

Exceptions apply when pure economic loss results from a negligent statement, as established in Hedley Byrne v Heller (1964).

Name the three tests under Hedley Byrne v Heller whereby pure economic loss caused by a negligent statement can be recovered.

• Reasonable reliance

• Voluntary assumption of responsibility

• Special relationship of trust and confidence between parties

Only one need be satisfied.

Explain the precedent set in Hedley Byrne v Heller 1964.

A bank gave a credit reference with disclaimer absolving responsibility. The client relied on the reference and lost money. Court found no duty existed due to the disclaimer - without the disclaimer the duty would have existed due to proximity.

What are the three steps to the test for establishing reasonable reliance under Hedley Byrne?

1. The claimant relied on the defendant’s advice (question of fact).

2. It was reasonable for the claimant to rely on the defendant’s advice.

3. The defendant knew or ought to have known the that the claimant was relying on their advice (question of fact).

Explain factors (with case authorities) to consider whether it was reasonable for the claimant to rely on the defendant’s advice in the Hedley Byrne reasonable reliance test for pure economic loss.

1. Special skills or knowledge held by the defendant

   • Esso Petroleum Co Ltd v Mardon - expert forecast petrol sales = duty

2. Special skill or knowledge held by the claimant

   • Stevenson v Nationwide Building Society - estate agent relied on valuation survey = no duty as had own expertise

   • Yianni v Edwin Evans - first time buyer relied on lender’s survey = duty

3. General context in which advice is given

   • Social situation Chaudhry v Prabhakar and Another - duty due to reliance and assumed responsibility, despite being a friend

   • Between friends for professional services free of charge Lejonvarn v Burgess - architect gave free professional advice to friend = duty

4. Other general factors: nature of advice, potential risk to claimant, availability and practicality of second opinion

What must the defendant know about the claimant’s reliance?

The defendant must know or ought reasonably to know that the claimant will rely on the advice for the relevant purpose.

What is meant by voluntary assumption of responsibility?

The defendant has undertaken, expressly or implicitly, to exercise reasonable care in providing advice or services for the claimant.

What relationship may strongly indicate an assumption of responsibility?

A relationship resembling a contract but lacking consideration or another requirement for contractual liability.

What factors suggest that responsibility has been assumed?

• The defendant claims relevant expertise

• The consequences are potentially serious

• The claimant is expected to rely

• The defendant knows of that reliance

Can an assumption of responsibility arise from conduct rather than express words?

Yes. It may be inferred from the services undertaken and the surrounding relationship.

Which case concerned financial managers controlling the claimant’s affairs?

Henderson v Merrett Syndicates Ltd - the managers’ control of the claimants’ financial affairs supported an assumption of responsibility.

What principle is illustrated by Lejonvarn v Burgess?

A professional who gratuitously undertakes particular services may owe a duty to perform those services with reasonable care, although they may not be obliged to complete the entire project.

What is the relationship between reliance and assumption of responsibility?

They are closely connected: reasonable reliance may provide evidence that the defendant assumed responsibility.

How may a defendant negate an assumption of responsibility?

Through a clear and effective disclaimer communicated before the claimant relies on the advice.

Why must the purpose of the advice be identified?

The defendant is liable only for losses falling within the purpose and scope of the duty undertaken.

What question should be asked when determining the scope of a professional adviser’s duty?

What risk or potential harm was the adviser’s duty intended to protect the claimant against?

What did Manchester Building Society v Grant Thornton establish about scope of duty?

The court must identify the purpose of the adviser’s duty and determine whether the loss represents the fruition of the risk against which that duty was intended to protect.

Is a professional liable for every loss that would not have occurred ‘but for’ negligent advice?

No. The loss must also fall within the scope and purpose of the duty.

Why are courts cautious about negligent-statement claims brought by third parties?

The defendant may not know who will receive the statement, how it will be used or the extent of the resulting liability.

What four matters are particularly important under Caparo in third-party advice cases?

• Communication to the claimant or a known class

• Knowledge of the purpose

• Anticipated reliance without independent enquiry

• Detrimental action in reliance

What is the first Caparo requirement for a third-party negligent-statement claim?

The defendant communicated the advice to the claimant or knew that it would be communicated to them or to a sufficiently identifiable class.

What is the second Caparo requirement?

The defendant knew the particular purpose for which the claimant would use the advice.

What is the third Caparo requirement?

The defendant knew or reasonably believed that the claimant would rely on the advice without obtaining independent advice.

What is the fourth Caparo requirement?

The claimant relied on the advice and acted upon it to their detriment.

Why was no duty owed to the investors in Caparo v Dickman?

The audited accounts were not prepared for the purpose of advising potential investors about purchasing shares, so the necessary proximity and purpose were absent.

What is the central distinction in third-party cases for negligent-statement claims?

The difference between foreseeing that someone might rely and undertaking responsibility towards a known person or class for a known purpose.

What is a special relationship of trust and confidence?

A relationship in which it is reasonable for the claimant to trust the defendant to exercise the degree of care required by the circumstances.

Does the ‘trust and confidence’ formulation add a wholly separate test?

Usually not. It substantially overlaps with reasonable reliance and assumption of responsibility.

What rules apply where a negligent statement causes physical injury rather than pure economic loss.

The ordinary rules of duty of care apply - restrictive rule concerning pure economic loss does not control the claim.

Which case illustrates liability where the negligent professional conduct connected with a statement caused physical injury?

Perrett v Collins - negligent inspection and certification of an aircraft supported liability for resulting physical injury.

What exception applies to solicitors preparing Wills in terms of pure economic loss?

A solicitor may owe a duty to an intended beneficiary who loses an intended benefit because the solicitor negligently fails to carry out the testator’s instructions.

Which case established the solicitor’s duty to an intended beneficiary?

White v Jones

Why was a duty imposed in White v Jones despite the absence of a contract with the beneficiary?

Without a tortious duty, the solicitor’s negligence could leave the loss without an effective claimant because the testator had died and the beneficiary had no contract.

Does the will-making duty extend beyond the mechanical drafting of a will?

Yes. It may extend to related professional will-making and estate-planning services, as illustrated by Esterhuizen v Allied Dunbar Assurance plc.

To whom may a person providing a reference owe a duty?

Potentially both the person requesting or relying on the reference and the person who is the subject of it.

What duty may be owed to the subject of an employment reference?

A duty to exercise reasonable care and skill in preparing an accurate reference.

Which case recognised a duty to the subject of a negligent employment reference?

Spring v Guardian Assurance plc - the claimant could recover for damage to employment prospects caused by a negligently prepared reference.

What is the general rule concerning disclaimers and duties of care for negligent statements?

A disclaimer may negate the defendant’s duty of care unless the disclaimer is invalid or unreasonable.

How may a defendant avoid assuming responsibility for a statement?

By taking positive steps to disclaim responsibility for their words, subject to the validity of the disclaimer.

Which case establishes that a disclaimer may prevent an assumption of responsibility?

Hedley Byrne v Heller

What must be considered before a disclaimer can negate a duty?

Whether the disclaimer is legally valid and, where relevant, whether it satisfies the applicable reasonableness or fairness test.

Which legislation regulates exclusion clauses concerning business liability?

The Unfair Contract Terms Act 1977 (UCTA)

What does UCTA 1977 s 2(2) provide?

A person cannot exclude or restrict liability for loss or damage caused by negligence unless the exclusion or restriction satisfies the requirement of reasonableness.

Which provisions identify factors relevant to the reasonableness of a disclaimer under UCTA?

Section 11 and Schedule 2.

What is the first factor relevant to the reasonableness of a disclaimer?

Whether the parties were of equal bargaining power.

How does unequal bargaining power affect the reasonableness of a disclaimer?

It makes the disclaimer more likely to be considered unreasonable.

What is the second factor relevant to the reasonableness of a disclaimer?

Whether it was reasonably practicable for the claimant to obtain advice from an alternative source.

How does the availability of an alternative source of advice affect reasonableness?

A disclaimer may be more reasonable where the claimant could practically obtain advice elsewhere, and less reasonable where there was no real alternative.

What is the third factor relevant to the reasonableness of a disclaimer?

The difficulty of the task undertaken by the defendant.

How does the difficulty of the defendant’s task affect the reasonableness of a disclaimer?

The easier the task, the less reasonable it may be for the defendant to disclaim responsibility for performing it negligently.

What is the fourth factor relevant to the reasonableness of a disclaimer?

The practical consequences of the disclaimer, including the potential loss and the availability of insurance.

Why is insurance relevant to the reasonableness of a disclaimer?

The court may consider which party is better placed to insure against the potential loss.

Which case concerned an unreasonable disclaimer attached to a negligent property valuation?

Smith v Eric S Bush

What happened in Smith v Eric S Bush?

A surveyor negligently valued a property and attempted to rely on a disclaimer, but the disclaimer was unreasonable and a duty was owed.

What factors made the disclaimer unreasonable in Smith v Eric S Bush?

The parties had unequal bargaining power, the claimant had no real alternative source of advice and the defendant was better able to insure against the loss.

What does UCTA 1977, s 1(3)(a) provide?

Sections 2-7 apply to things done in the course of a business.

How is ‘negligence’ defined for the purposes of UCTA?

It includes a breach of a common-law duty to take reasonable care or exercise reasonable skill.

Which legislation regulates contract terms and consumer notices seeking to exclude a trader’s liability to a consumer?

The Consumer Rights Act 2015

What test does the CRA 2015 apply to terms and notices restricting a trader’s liability to consumers?

A fairness test.

What is the main distinction between UCTA 1977 and the CRA 2015 in the context of PEL disclaimers?

UCTA regulates exclusions of business liability and applies a reasonableness test, while the CRA regulates terms and consumer notices used by traders against consumers and applies a fairness test.