Chapter 4: Negligence: Pure Economic Loss

what is the general rule to pure economic loss (PEL)?

a defendant does not owe a duty of care to a claimant not to cause PEL, and such loss is not recoverable.

why does this limitation exist?

because, in such cases, there is typically a lack of a sufficiently proximate relationship between the claimant and the defendant, which could otherwise lead to boundless liability to an indeterminate number of claimants.

what is pure economic loss?

Financial loss that is unconnected to physical injury to the claimant or physical damage to the claimant's property.

what is the recoverability of PEL?

Generally not recoverable.

what is consequential economic loss?

Financial loss that follows and is caused by physical injury to the claimant or physical damage to the claimant's property.

what is the recoverability of CEL?

Recoverable. No special rules apply; the defendant owes a duty of care not only for the physical harm but also for the consequential economic loss.

is Economic Loss Caused by Acquiring a Defective Item of Property (The Defective Product/Premises Rule) classified as PEL?

yes - The cost of repairing the defect, replacing the item, or the reduction in its value is classified as PEL.

when does Economic Loss Caused by Acquiring a Defective Item of Property (The Defective Product/Premises Rule) occur?

This occurs when a claimant acquires something that is less valuable than they paid for, and the defect has not yet caused physical damage to any person or property other than the defective item itself.

what is the exception to Economic Loss Caused by Acquiring a Defective Item of Property (The Defective Product/Premises Rule)?

If the defective item causes personal injury to the claimant or physical damage to other property owned by the claimant, that injury/damage and its consequential losses are recoverable (e.g., a defective hairdryer burning a hand or a defective CD player burning a hole in a bag).

is Economic Loss Unconnected to Physical Damage to the Claimant's Person or Property classified as PEL?

yes

Economic Loss Unconnected to Physical Damage to the Claimant's Person or Property is divided into 2 categories, what are the 2 categories?

A. Loss Caused by Damage to the Property of a Third Party

B. Loss Caused Where There is No Physical Damage (Actions)

Economic Loss Unconnected to Physical Damage to the Claimant's Person or Property: what is A. Loss Caused by Damage to the Property of a Third Party?

The claimant suffers financial loss because something belonging to someone else (a third party) was damaged.

Economic Loss Unconnected to Physical Damage to the Claimant's Person or Property: what is B. Loss Caused Where There is No Physical Damage (Actions)?

Where economic loss results from a negligent action but there is no physical damage at all.

- example: Case Law: In Weller & Co v Foot and Mouth Disease Research Institute 1 QB 569, auctioneers lost business because a virus escape forced the cattle market to close. This was classified as PEL because the loss was caused by the closure, not physical damage.

what is the exception of Economic Loss Caused by Negligent Statements?

Where economic loss is caused by a negligent statement (rather than a negligent action), there is an important exception to the general rule of non-recoverability, provided a "special relationship" can be established.

how is duty of care in the context of the Exception: Economic Loss Caused by Negligent Statements?

through the principles established in Hedley Byrne v Heller & Partners Ltd AC 465, and refined by the three-part test in Caparo Industries plc v Dickman 1 All ER 568.

what is the special relationship test (Hedley Byrne/Caparo)?

A duty of care is owed if there is a special relationship, determined by

1. whether the defendant assumed responsibility towards the claimant, and

2. whether there was reasonable reliance by the claimant

how is the Assumption of Responsibility by the Defendant Determined? (4 criteria set out in Caparo)

- The defendant knew the purpose for which the advice was required.

- The defendant knew the advice would be communicated to the claimant (specifically or as a member of an ascertainable class).

- The defendant knew the claimant was likely to act on the advice without independent inquiry.

- The advice was acted on by the claimant to its detriment.

explain the 2nd criteria of the Caparo test: Reasonable Reliance by the Claimant?

It must be reasonable for the claimant to have relied on the defendant for the advice.

explain the Caparo Industries plc v Dickman case

The auditors preparing accounts for a statutory audit did not owe a duty to the claimant who relied on the valuation to buy additional shares, as the relationship was not sufficiently close/proximate. The accounts were not prepared for the specific purpose of the claimant buying shares, breaking the chain of proximity.

what is the extension of the special relationship principle?

The Hedley Byrne principle has been extended beyond negligent statements to include negligent provision of professional services where there is an assumption of responsibility

will an employer be held to have assumed a responsibility to the employee?

yes - Spring v Guardian Assurance plc 3 WLR 354: An employer owed a duty of care to a former employee regarding a negligently prepared reference sent to a third party (the prospective employer). The employer was held to have assumed a responsibility to the employee.

will a solicitor owe a duty to intended beneficiaries?

yes - White v Jones 1 All ER 691: A solicitor owed a duty to intended beneficiaries under a will who lost their inheritance due to the solicitor's negligent delay. The duty was owed even though the statement was not made to them, based on the solicitor's assumed responsibility to the potential beneficiaries.

can A claimant sue in tort for negligent professional services, even if a contract exists?

yes - provided the duty in tort is consistent with the contractual duties. Henderson v Merrett Syndicates Ltd 3 All ER 506

what is the next step after a duty of care not to cause PEL is established?

the claimant must then prove the subsequent elements of negligence: breach of duty and causation of damage.

explain the breach of duty element

The defendant is judged against the standard of care expected of a reasonable professional in their position (e.g., an accountant).

explain the causation element

The claimant must establish factual causation, usually using the "but for" test (i.e., but for the negligent advice, the loss would not have occurred). This is often clear if the duty criteria requiring detrimental reliance are met.

what must the defendant prove to rely on an exclusion notice?

1. Reasonable steps were taken to bring the notice to the claimant's attention before the tort was committed.

2. The wording of the notice must cover the loss suffered.

The ability to exclude liability is subject to statutory controls: what are these controls?

1. Unfair Contract Terms Act 1977 (UCTA 1977)

2. Consumer Rights Act 2015 (CRA 2015)

when does the Unfair Contract Terms Act 1977 (UCTA 1977) apply?

Applies to claims in negligence where the defendant is acting in the course of business.

Unfair Contract Terms Act 1977 (UCTA 1977): can liability from death or personal injury be excluded or restricted?

Death or Personal Injury (s 2(1)): Liability cannot be excluded or restricted.

Unfair Contract Terms Act 1977 (UCTA 1977): can liability from other losses or damages be excluded?

Other Loss or Damage (s 2(2)): Liability can only be excluded if the exclusion satisfies the requirement of reasonableness.

Other Loss or Damage (s 2(2)): Liability can only be excluded if the exclusion satisfies the requirement of reasonableness. what is the reasonableness test?

Reasonableness Test (s 11(3)): Requires the exclusion notice to be fair and reasonable considering all circumstances at the time liability arose. Factors considered include bargaining power, practicability of obtaining alternative advice, difficulty of the task, and consequences.

when does the Consumer Rights Act 2015 (CRA 2015) apply?

Applies where the defendant acts as a trader and the claimant acts as a consumer.

Consumer Rights Act 2015 (CRA 2015): can liability from death or personal injury be excluded or restricted?

Liability cannot be excluded or restricted.

Consumer Rights Act 2015 (CRA 2015): can liability from other losses or damages be excluded?

Other Loss or Damage (s 62): Liability can only be excluded if the exclusion satisfies the requirement of fairness, which involves good faith and considering any significant imbalance to the detriment of the consumer.