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Obligations in Negligence (3) Pure Economic Loss & Negligent Misstatement
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Detailed explanation of the obligations in negligence.
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Obligations in Negligence (3): PureEconomic Loss & Negligent Misstatement
Consequential and Pure Economic Loss
• Economic loss is recoverable if it is caused by physical damage e.g., loss of earnings if you are
physically injured
• Pure economic loss is economic loss NOT arising as a direct result of physical damage and is
NOT recoverable
Why the Law Aims to Contain the Extent for Which the Defendant can be Found Liable
for Economic Loss
A single incident could make a defendant liable to a far larger class of claimants, for example:
• Lorry crashes into electrical substation as a result of its negligent driver
• Electricity supply to residential estate, industrial estate and shopping mall cut off for 8 hours
• Loss of business, damage to e.g., food in the homes’ freezers, products being made at the
industrial estate = considerable!
• Would become impossible to get insurance to cover such an event if the law made liability
limitless
• Would the defendant even have the money to cover such losses!
Example of the pragmatism of the law i.e., why consequential loss and pure economic loss are
distinguished, and why the latter is not recoverable (unless the case concerns negligent
misstatement – explained further down).
Note: the following three cases relate to duty of care for economic losses suffered by the claimant.
Similar to psychiatric, if the victim has suffered both physical and economic loss, you don’t need to
go over breach and causation again – assuming you’ve covered this last after addressing the physical
harm side of the question. Based on seminar, questions of this nature will likely include both
consequential and pure economic losses to the claimant, meaning that you’ll need to outline which
losses the claimant can recover and which they can’t.
Spartan Steel v Martin [1973]
Case Facts
The defendants were responsible for digging up a road outside the claimants’ smelting factory. As a
result of their negligence when carrying out this task, they inadvertently severed a power supply
under the road resulting in a loss of power to the claimants’ factory.
The claimants brought a claim of negligence and argued that they suffered three types of losses:
• Physical damage to furnaces and alloy being smelted at time of the power loss, as could not
be kept at correct temperature and were subsequently damaged.
• Damage to the metal meant it depreciated in value.
• Loss of profit from being unable to start smelting on new orders.
Note: evolved from special relationship to proximate relationship. The reason Spring refers to
Hedley is because Caparo was four years later. Spring adds that there can be an assumption of
responsibility (with Henderson further developing this). You have to mention Hedley as it started the
law, but Caparo, Spring, and Henderson are the up-to-date case law.
, Case Decision
The court allowed the first two claims as the first claim was for a loss which arose due to physical
damage to property, and the second claim was allowed because it was a consequence of the
physical damage to the property. The court, however, did not allow the third claim in which the
claimant argued for loss of profit from being unable to start smelting on new orders. The court
classed the third claim as a pure economic loss, and thus unrecoverable.
Point to Take Away
• Loss arising due to physical damage = recoverable.
• Loss arising as a consequence of physical damage (consequential loss) = recoverable.
• Pure economic loss = unrecoverable.
Muirhead v Industrial Tank Specialities Ltd [1986]
Case Facts
The claimant reared (i.e., raised) lobsters in tanks; with the purpose of selling them during the
Christmas period when they were more expansive than when they purchased them (during the
summer). The tank needed an electric pump to circulate the seawater for the purpose of
oxygenation. The defendants supplied the claimant with incompatible oxygen pumps (could not
work with English electricity system). This resulted in the death of the whole stock of lobsters due to
the lack of oxygen. Moreover, the claimant was unable to restock until they had identified the cause
of the problem.
Case Decision
The court ruled that the cost of restocking the lobsters and loss of profits from those
that died (consequential losses of the physical damage) were recoverable. But the loss of profits
while lobster production was suspended and the cost of replacing pumps was unrecoverable as
these were pure economic losses.
Point to Take Away
Similar to previous case, consequential economic loss is recoverable, but pure economic loss is not.
Note how cases (this and Spartan Steel v Martin) differ in terms of the type of property that was
physically damaged. May be best to use most relatable case in terms of facts when applying to
problem questions.
Murphy v Brentwood Council (1990)
Case Facts
The claimant’s newly-built house subsided (i.e., sunk) when the foundations turned out to be
defective. As a result, they had to sell it for £35,000 less than its proper market value. They claimed
the local authority inspection department had been negligent on its check of the foundations.
Case Decision
The House of Lords held that there had been no physical damage to the property or personal
injuries, and therefore the claimant’s loss was purely economic. Thus, the local authority did not
owe a duty of care and were subsequently not liable.
Point to Take Away
Example of the claimant only facing pure economic loss, differing from the previous two cases in that
the claimant here was unable to recover any damages. Use as an intro to negligent misstatement.
Note: evolved from special relationship to proximate relationship. The reason Spring refers to
Hedley is because Caparo was four years later. Spring adds that there can be an assumption of
responsibility (with Henderson further developing this). You have to mention Hedley as it started the
law, but Caparo, Spring, and Henderson are the up-to-date case law.
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