Workshop 7 - Pure Economic Loss
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13 Terms
What is pure economic loss in negligence, and why do courts restrict recovery for it?
Pure economic loss is financial loss suffered by a claimant where there has been no damage to their property and no personal injury.
The courts are reluctant to allow recovery for pure economic loss because of policy concerns, including:
Floodgates
Allowing claims could create a large number of potential claimants.
Crushing liability
Defendants could face liability far beyond what is proportionate to their actions.
Fraudulent claims
There is concern that purely financial losses may be easier to exaggerate or fabricate.
Interference with contract law
Some judges are reluctant to use tort law to impose liability where the issue is better dealt with through contract.
Key principle:
The law in this area is complex because courts try to balance restricting liability with allowing flexibility for future development.
What are the four main categories of loss in negligence?
Loss in negligence can be divided into four categories:
1. Personal injury/property damage (physical damage)
Damage to the claimant’s person or property.
Examples:
Broken arm;
Damaged car.
Generally recoverable and usually causes no difficulty at the duty of care stage.
2. Consequential economic loss
Financial loss that results from physical injury or property damage.
Example:
Lost salary because a broken leg prevents the claimant from working.
Generally recoverable.
3. Pure economic loss
Financial loss where there is no personal injury or property damage.
General rule: not recoverable in negligence.
Exceptions exist, such as negligent misstatements.
4. Psychiatric damage
Psychiatric harm suffered by the claimant.
Subject to separate rules not covered in this topic.
Key rule:
Physical injury/property damage + consequential economic loss → usually recoverable.
Pure economic loss → generally not recoverable unless an exception applies.
What is the definition of pure economic loss in negligence?
Pure economic loss occurs where the claimant suffers financial loss without any damage to their property or injury to their person.
Examples of pure economic loss include:
1. Economic loss not flowing from damage to person or property
Financial loss that occurs independently of any physical damage.
Example:
Loss of profits due to a business interruption where no property is damaged.
2. Loss arising from damage to another person’s property
The claimant suffers financial loss because property belonging to someone else is damaged.
Example:
A business loses income because a supplier’s property is damaged, preventing them from providing goods.
3. Defective items
Financial loss caused by a defective product where the defect does not cause damage to other property or personal injury.
Example:
A defective machine that is worth less or requires repair/replacement.
Key principle:
Pure economic loss is financial loss that exists separately from physical injury or property damage and is generally not recoverable in negligence unless an exception applies.
What are the three main categories of pure economic loss?
Pure economic loss can arise in three main situations:
1. Economic loss not flowing from damage to person or property
Where the claimant suffers financial loss but has suffered no physical injury or property damage.
Examples:
Bad investment;
Lost contractual opportunity;
Lost inheritance.
Key principle:
Financial loss on its own is generally classed as pure economic loss.
2. Loss arising from damage to another person’s property
Where the claimant suffers financial loss because someone else’s property has been damaged.
The claimant must have no proprietary interest in the damaged property.
Key case: Weller & Co v Foot and Mouth Disease Research Institute [1965]
Facts:
The defendant negligently released the foot and mouth virus.
Local cattle became infected, causing a cattle movement ban.
A farming auction house lost profits because auctions were cancelled.
Held:
The claim failed because it was pure economic loss.
The claimant’s own property was not damaged; the losses resulted from damage to farmers’ cattle.
Contrast:
If a farmer had claimed lost profits from being unable to sell infected cattle, this would have been consequential economic loss because the farmer’s own property was damaged.
3. Defective items
A claimant cannot generally recover the cost of repairing or replacing an inherently defective product in negligence.
The claimant has not suffered damage because the item was defective from the beginning.
The issue is that the product is not as good as expected, rather than something good being made worse.
A contractual claim may be available instead.
Example:
A defective vacuum cleaner explodes, causing:
Burns to the claimant’s hand (personal injury → recoverable);
Damage to carpet (property damage → recoverable);
Cost of repairing/replacing the defective vacuum (pure economic loss → not recoverable).
Key case: Murphy v Brentwood District Council [1990]
Facts:
The claimant bought a house with defective foundations.
The foundations had been approved by the council.
The claimant sold the house for £35,000 less than its value due to the defect.
Held:
The loss was pure economic loss and was not recoverable.
The house was defective from the beginning.
No separate physical damage had occurred to the claimant or other property.
Key principle:
The cost of repairing an inherently defective product or property, or the reduction in its value, is generally pure economic loss and not recoverable in negligence.
What is the general rule regarding recovery for pure economic loss in negligence?
The general rule is that no duty of care is owed for pure economic loss.
Key case: Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973]
This case demonstrates the difference between:
Physical damage;
Consequential economic loss; and
Pure economic loss.
Facts:
The claimant manufactured steel alloys and needed continuous electricity to operate its furnace.
The defendant’s employee negligently damaged an electricity cable supplying power to the claimant’s factory.
The power was shut off for 14 hours.
As a result:
Metal already being processed was ruined;
The claimant lost profits from the ruined metal;
The claimant also lost profits from four additional melts that could not be produced during the shutdown.
The damaged electricity cable belonged to a third party.
Held:1. Damaged metal → Physical/property damage
✅ Recoverable
The claimant’s own property (the metal) was physically damaged.
A duty of care was owed.
2. Lost profit from damaged metal → Consequential economic loss
✅ Recoverable
The lost profit flowed directly from damage to the claimant’s property.
This was consequential economic loss.
3. Lost profit from four future melts → Pure economic loss
❌ Not recoverable
The loss did not result from damage to the claimant’s property or person.
It resulted from damage to a third party’s electricity cable.
No duty of care was owed.
Key principle:
Damage to claimant’s property → recoverable.
Economic loss flowing from that damage → recoverable.
Economic loss without damage to claimant’s property/person → generally not recoverable.
Important distinction:
If the claimant had owned the electricity cable, the lost profits would have been consequential economic loss and therefore recoverable.
What are the exceptions to the general rule that pure economic loss is not recoverable in negligence?
The general rule from Spartan Steel is that no duty of care is owed for pure economic loss. However, there are limited exceptions, mainly involving negligent statements.
The courts distinguish between:
Pure economic loss caused by a negligent act
General rule applies → no duty of care.
Example: Spartan Steel (damage to electricity cable).
Pure economic loss caused by a negligent statement (negligent misstatement)
A duty of care may arise in certain circumstances.
Three exceptions:1. Pure economic loss caused by negligent statements
Key case: Hedley Byrne v Heller [1964]
The House of Lords recognised that, in certain relationships, a person may be liable for careless statements causing financial loss.
This area is based on the idea of assumption of responsibility.
Key point:
Negligent statements usually cause pure economic loss.
If a negligent statement causes physical harm, normal negligence duty of care rules apply.
Case: Perrett v Collins [1998]
Where a negligent statement causes physical injury, the ordinary duty of care principles apply.
2. Wills
A solicitor may owe a duty of care to intended beneficiaries where negligence causes them to lose an inheritance.
Key case: White v Jones [1995]
Facts:
A father instructed solicitors to change his will to leave £9,000 to each of his two daughters.
The solicitors failed to complete the changes before the father died.
The daughters lost their intended inheritance.
Held:
The solicitors owed a duty of care to the beneficiaries.
The solicitor had assumed responsibility to ensure the intended beneficiaries received their inheritance.
Principle:
Beneficiaries can recover for financial loss caused by negligent will preparation.
Extension:
This duty can also apply to professional will-writing services (Esterhuizen v Allied Dunbar Assurance plc).
3. References
A person providing a reference may owe a duty of care to ensure it is accurate.
Key case: Spring v Guardian Assurance plc [1995]
Facts:
The defendant provided a negative reference about the claimant.
As a result, the claimant struggled to obtain employment in the life assurance industry.
He sued for negligence.
Held:
The employer owed a duty of care to the subject of the reference.
By providing the reference, the employer assumed responsibility to exercise reasonable skill and care.
Principle:
A referee owes a duty to provide an accurate reference because a person’s employment prospects may depend on it.
Key principle:
Pure economic loss from negligent acts → generally not recoverable.
Pure economic loss from negligent statements → may be recoverable where there is an assumption of responsibility.
Wills and references are separate exceptions because clear case law provides when a duty exists, so there is no need to apply the full Hedley Byrne test.
What is the significance of Hedley Byrne v Heller [1964] AC 465 in relation to pure economic loss caused by negligent statements?
Hedley Byrne established that a defendant may owe a duty of care for pure economic loss caused by a negligent statement where certain conditions are satisfied.
This created an exception to the general rule that pure economic loss is not recoverable in negligence.
Key case: Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964]
Facts:
The claimant advertising agency wanted to purchase advertising space for Easipower Ltd.
Before agreeing, the claimant asked Easipower’s bank (the defendant) for a credit reference.
The bank stated that Easipower was financially reliable.
Relying on this statement, the claimant provided £17,000 worth of advertising services.
Easipower was unable to pay, causing the claimant financial loss.
The bank’s statement included a disclaimer stating it was provided “without responsibility.”
Issue:
Did the bank owe a duty of care for the claimant’s pure economic loss caused by the negligent statement?
Held:
The bank would have owed a duty of care for the pure economic loss caused by the negligent statement if the disclaimer had not existed.
The disclaimer prevented liability.
Key principle:
A person who provides information or advice may assume responsibility for its accuracy and owe a duty of care where another person reasonably relies on it.
Why are courts cautious about negligent statement claims?
Because allowing recovery could lead to:
Floodgates of claims from anyone relying on advice;
Crushing liability for people providing information;
Increased uncertainty about who can claim for financial losses.
Important note on disclaimers
A disclaimer may prevent liability for negligent statements.
However, disclaimers must comply with:
Unfair Contract Terms Act 1977; and
Consumer Rights Act 2015.
Key distinction:
Negligent act causing pure economic loss → generally no duty of care.
Negligent statement causing pure economic loss → duty may arise where responsibility and reliance exist.
What are the three tests from Hedley Byrne v Heller for establishing a duty of care for pure economic loss caused by a negligent statement?
In Hedley Byrne v Heller [1964], the House of Lords identified three key concepts that may establish a duty of care where negligent advice causes pure economic loss:
1. Reasonable reliance
The claimant must have reasonably relied on the defendant’s statement or advice.
The reliance must be justified given the circumstances.
2. Assumption of responsibility
The defendant must have assumed responsibility for the accuracy of the statement or advice.
By providing information or advice, the defendant may take responsibility for the consequences of the claimant relying on it.
3. Special relationship of trust and confidence
There must be a relationship between the parties where it is appropriate to impose responsibility.
This may arise where one party has specialist knowledge or expertise and the other relies on them.
Key principle:
It is not necessary for all three tests to be satisfied.
A duty of care may arise from:
Reasonable reliance alone;
An assumption of responsibility alone;
A special relationship of trust and confidence; or
A combination of these factors.
Overall purpose of the tests:
They help determine whether there is sufficient proximity between the parties and whether it is fair, just and reasonable to impose a duty of care for pure economic loss.
What is the reasonable reliance test for establishing a duty of care for pure economic loss caused by a negligent statement?
The reasonable reliance test from Hedley Byrne v Heller considers whether the claimant’s reliance on the defendant’s advice was sufficient to create a duty of care.
The test has three requirements:
1. Did the claimant rely on the defendant’s advice?
This is a question of fact.
The claimant must show that they actually relied on the statement or advice.
2. Was it reasonable for the claimant to rely on the advice?
The courts consider several factors:
(a) Special skill or knowledge of the defendant
The defendant should have expertise or knowledge that puts them in a better position than the claimant.
If both parties have equal knowledge, a duty is less likely.
Case: Esso Petroleum Co Ltd v Mardon [1976]
Esso’s employee advised that a petrol station would sell 200,000 gallons per year.
The claimant relied on this advice but sales were much lower.
Held: Esso owed a duty of care because the employee had specialist expertise and had assumed responsibility.
Principle:
A defendant does not need to be in the business of giving advice; specialist knowledge and assumption of responsibility are enough.
(b) Special skill or knowledge of the claimant
If the claimant has similar expertise, reliance may not be reasonable.
Case: Stevenson v Nationwide Building Society [1984]
The claimant was an estate agent and insurance broker.
He relied on a negligent valuation report instead of obtaining an independent survey.
Held: His claim failed because his own expertise meant he should have obtained further advice.
Contrast:
Case: Yianni v Edwin Evans [1982]
A first-time buyer relied on a building society valuation survey.
Held: Reliance was reasonable because the claimant lacked expertise and was unlikely to afford a full structural survey.
Key principle:
Equal knowledge between parties → reliance less likely to be reasonable.
Disparity in knowledge → reliance more likely to be reasonable.
(c) General context in which advice was given
Advice given casually or socially is less likely to create a duty of care.
However, a duty may exist where the defendant has assumed responsibility.
Case: Chaudhry v Prabhakar [1989]
Defendant advised a friend on buying a second-hand car.
He knew the claimant relied heavily on his opinion and presented himself as knowledgeable.
The car was defective and had previously been in an accident.
Held (obiter): A duty of care would have existed because the defendant assumed responsibility despite the social setting.
Case: Lejonvarn v Burgess [2017]
A duty of care existed between friends where one provided professional services free of charge.
The duty arose from assumption of responsibility.
(d) Other relevant factors
Courts may consider:
The nature of the advice;
The potential risk of loss;
Whether obtaining a second opinion was practical.
3. Did the defendant know or ought to have known the claimant was relying on the advice?
This is a question of fact.
If the defendant knew the claimant was relying on the advice, they could foresee financial loss if the advice was careless.
Key principle:
The reasonable reliance test asks whether:
The claimant actually relied on the advice;
That reliance was reasonable; and
The defendant knew or should have known of that reliance.
Important:
Reasonable reliance is only one way of establishing a duty of care for negligent statements. A duty may also arise through assumption of responsibility or a special relationship of trust and confidence.
What is the voluntary assumption of responsibility test for establishing a duty of care for pure economic loss caused by a negligent statement?
The voluntary assumption of responsibility test from Hedley Byrne v Heller asks whether the defendant has taken responsibility for the accuracy of their statement or advice in circumstances similar to a contractual relationship.
A duty may arise where the relationship is “equivalent to contract” — meaning that, although there is no contract, the defendant has assumed responsibility in a way that would normally exist if there had been consideration.
Factors indicating assumption of responsibility
The courts may consider:
Whether the defendant held themselves out as having special expertise;
Whether the consequences of incorrect advice were serious;
Whether the defendant knew the claimant would rely on the advice.
Key cases1. Henderson v Merrett Syndicates Ltd [1995]
Facts:
The defendant managed the claimants’ financial affairs.
The claimants suffered economic loss due to negligent management.
Held:
The defendant had assumed responsibility for providing professional services.
The defendant had specialist knowledge and expertise.
The claimants reasonably relied on that expertise.
Principle:
A professional who takes over responsibility for another’s affairs may owe a duty of care for economic loss caused by negligent performance.
2. Lejonvarn v Burgess [2017]
Facts:
The defendant architect provided professional landscaping services to friends free of charge.
There was no contract or payment.
The claimants relied on her expertise.
Held:
A duty of care existed.
Although there was no contractual relationship, the defendant was acting in a professional capacity and had assumed responsibility.
Principle:
A person can assume responsibility even where services are provided voluntarily and without payment.
Caparo criteria for assumption of responsibility
Q: What four criteria from Caparo v Dickman [1990] help determine whether a defendant has assumed responsibility?
A:
1. Communication
The defendant must:
Communicate the advice directly to the claimant; or
Know that it will be communicated to an identifiable claimant or class of claimants.
2. Purpose
The defendant must know the purpose for which the claimant will use the advice.
3. Reliance
The defendant must know, or reasonably believe, that the claimant will rely on the advice without carrying out an independent investigation.
4. Detrimental action
The claimant must have relied on the advice and suffered loss as a result.
Key case: Caparo Industries plc v Dickman [1990]
Facts:
Auditors prepared inaccurate accounts for Fidelity.
Caparo bought shares based on the accounts and suffered economic loss.
Caparo was a third party because the accounts were prepared for Fidelity, not Caparo.
Held:
No duty of care was owed to Caparo as an investor.
The purpose of the accounts was to help existing shareholders exercise control over the company, not to advise potential investors.
Allowing liability would create an unlimited class of claimants.
Principle:
Advice given for one purpose cannot automatically be relied upon for another purpose.
Further cases applying the Caparo principlesBanca Nazionale del Lavoro v Playboy Club [2018]
Principle:
A claimant cannot rely on negligent advice unless they are identifiable and the defendant knows the purpose for which the advice is required.
Manchester Building Society v Grant Thornton [2021]
Facts:
Auditors incorrectly advised that the claimant could use hedge accounting.
The claimant relied on this advice and suffered financial loss.
Held:
The auditors owed a duty of care.
The advice was given for a specific purpose, and the loss fell within the risk the advice was intended to protect against.
Key principle:
The scope of a professional adviser’s duty depends on the purpose of the advice:
What was the advice intended to achieve?
What risk was the duty intended to protect against?
Does the claimant’s loss fall within that risk?
Overall principle:
A voluntary assumption of responsibility exists where the defendant has taken responsibility for providing advice for a known purpose, to an identifiable claimant, who reasonably relies on that advice and suffers loss as a result.
What is the special relationship of trust and confidence test for establishing a duty of care for pure economic loss caused by a negligent statement?
The third test from Hedley Byrne v Heller is whether there is a special relationship of trust and confidence between the claimant and defendant.
A special relationship exists where:
The claimant trusts the defendant to exercise an appropriate degree of care when giving advice;
It is reasonable for the claimant to rely on the defendant; and
The defendant knew or ought to have known that the claimant was relying on their advice.
Key principle:
The three Hedley Byrne tests overlap:
Reasonable reliance;
Voluntary assumption of responsibility;
Special relationship of trust and confidence.
The courts are likely to find a special relationship where:
The claimant has reasonably relied on the defendant’s advice; and/or
The defendant has assumed responsibility for the accuracy of that advice.
Important:
A claimant does not need to satisfy all three tests.
A duty of care may be established through one test alone or through a combination of factors.
What is the structure for analysing a negligent misstatement claim involving pure economic loss?
A negligent misstatement claim should be structured as follows:
1. Identify the parties and tort
Identify:
Claimant v Defendant
Tort: Negligence
2. Identify the loss
Identify the type of loss suffered.
Usually:
Pure economic loss (financial loss without personal injury or property damage).
3. Duty of care
Start with the general rule from Spartan Steel:
No duty of care is generally owed for pure economic loss.
Then explain the exception:
A duty may arise where the loss is caused by a negligent statement.
Apply the Hedley Byrne v Heller principles.
4. Apply the Hedley Byrne testsA. Reasonable reliance
Consider:
(1) Did the claimant rely on the defendant’s advice?
This is a question of fact.
(2) Was it reasonable for the claimant to rely on the advice?
Consider:
Special skill/knowledge of the defendant;
Special skill/knowledge of the claimant;
General context in which advice was given;
Other relevant factors.
(3) Did the defendant know or ought to have known the claimant was relying on the advice?
If yes, the defendant could foresee financial loss if the advice was careless.
B. Voluntary assumption of responsibility
Consider whether the defendant assumed responsibility for the accuracy of the advice.
Use relevant case law, for example:
Henderson v Merrett Syndicates;
Lejonvarn v Burgess;
Caparo v Dickman.
C. Special relationship of trust and confidence
Consider whether there was a relationship where:
The claimant reasonably trusted the defendant’s advice; and
The defendant knew or should have known the claimant relied on it.
Use relevant case law.
Key principle:
A negligent misstatement claim succeeds where the claimant can show sufficient proximity through reasonable reliance, assumption of responsibility, and/or a special relationship of trust and confidence. Not all three tests need to be satisfied.
What is the role of disclaimers in negligent misstatement claims for pure economic loss?
A disclaimer is a statement where the defendant attempts to avoid responsibility for their advice or information.
Where a defendant uses a disclaimer, the court must consider whether it is valid and effective.
Effect of disclaimers: Hedley Byrne v Heller [1964]
Facts:
The defendant bank provided a credit reference stating that a company was financially reliable.
The advice included the words “without responsibility.”
Held:
The disclaimer prevented the bank from assuming responsibility.
Without the disclaimer, the bank would have owed a duty of care for the negligent statement.
Key principle:
A defendant cannot both give advice and clearly state that they accept no responsibility for it.
Regulation of disclaimers
Hedley Byrne was decided before:
Unfair Contract Terms Act 1977 (UCTA); and
Consumer Rights Act 2015 (CRA).
These laws regulate attempts to exclude or limit liability.
UCTA 1977
Q: When can a disclaimer excluding negligence liability be valid under UCTA 1977?
A: Under s2(2) UCTA 1977, a person cannot exclude or restrict liability for negligence causing:
Property damage; or
Economic loss,
unless the disclaimer satisfies the reasonableness test.
Reasonableness factors under UCTA
The court considers all circumstances at the time liability arose, including:
1. Bargaining power
Were the parties in equal positions?
Did the claimant have alternatives?
Example:
A disclaimer imposed by a powerful business may be less reasonable.
2. Inducements
Was the claimant offered any benefit or incentive to agree to the disclaimer?
3. Knowledge of the disclaimer
Did the claimant know, or should they reasonably have known, about the disclaimer?
Key case: Smith v Eric S Bush [1989]
Facts:
The defendant surveyor provided a survey to the claimant’s lender.
The claimant was a first-time buyer purchasing a modestly priced house.
She relied on the survey and later discovered defects.
The survey contained a disclaimer.
Held:
The surveyor owed the claimant a duty of care.
The disclaimer was invalid because it was unreasonable under UCTA 1977.
Factors considered by the House of Lords in Smith v Eric S Bush:1. Were the parties of equal bargaining power?
No.
The disclaimer was imposed on the claimant without negotiation.
2. Was it practical to obtain alternative advice?
No.
A first-time buyer purchasing a modest home may not be able to afford an independent structural survey.
3. How difficult was the task?
The survey was a relatively straightforward professional task.
It was unreasonable to exclude liability for failing to exercise reasonable skill and care.
4. Practical consequences and insurance
The surveyor was better placed to bear the loss and likely had professional insurance.
The claimant could suffer severe financial hardship if left with a defective house.
Key principle from Smith v Eric S Bush:
A professional cannot avoid liability through a disclaimer where it is unreasonable, particularly where:
The claimant has limited bargaining power;
The claimant reasonably relies on the professional’s expertise; and
The professional is better able to bear the risk.
Consumer Rights Act 2015
Q: How does the CRA 2015 affect disclaimers?
A: Where the defendant is a trader and the claimant is a consumer, the CRA 2015 applies.
A disclaimer attempting to exclude liability for economic loss or property damage is only valid if it is fair and reasonable in all the circumstances.
Overall principle:
A disclaimer may prevent a duty of care by showing no assumption of responsibility.
However, where UCTA 1977 or CRA 2015 applies, the disclaimer must satisfy the reasonableness/fairness requirement.
A professional cannot automatically escape liability for negligent advice simply by including a disclaimer.