Pure Economic Loss Summarised Notes for the Tort Law module, LLB, at City, University of London - can of course be used for other universities as well! Should be used with the full bundle of notes!
PURE ECONOMIC LOSS
‘Pure’ if not flow from any personal injury to claimant nor from any physical damage to property
Not always appropriate to impose duty of care to avoid causing foreseeable economic loss
through negligence economic loss may not always get a remedy
Economic loss features: often caused ‘indirectly’; relationship between claimant and D remote
and number of potential parties is sometimes large
Categories of economic loss
Economic loss caused by damage to property of another party (‘relational’), not recoverable in
English law with 1 exception + needs qualification (Shell UK v Total UK) if physical harm is done
to property (or person) of one party, can have ‘ripple effect’ on financial interests of many others
Economic loss caused by acquiring a product that turns out to be defective not recoverable in
English law Murphy v Brentwood cannot generally sue in negligence for economic loss
involves no injury to person or property other than defective product itself ‘bad bargain’
Economic loss caused by reliance on negligent statements: Hedley Byrne v Heller criteria
recognising duty of care where claimant relied on statement made by D used extensively in
English law relationship with ‘three-stage test’ of Caparo v Dickman causes issues
‘Extended’ Hedley Byrne liability: extended to cases that involve more than one party (including
some where claimant does not rely on statement at all), professional services
Relational Economic Loss (Category A): A causes damage to property of B, causing C to lose money
C can lose money for many reasons e.g. contractual link between C and damaged property
Cattle v Stockton Waterworks [1875]: plaintiff engaged by K (landowner) to carry out work on Ks
land, a leak in Ds pipe delayed work causing plaintiff to lose money under terms of contract failed,
need proximity, but also reluctance to open floodgates to other claims rule against recovery of
relational loss is fear of ‘ripple effect’ where damage to one party is multiplied to others
Weller v Foot and Mouth Disease Research [1966]: plaintiffs (cattle auctioneers) claimed D research
institute imported an African virus and allowed it to escape, caused financial harm to plaintiff as
caused cattle markets to be closed held not duty owed to auctioneers
Spartan Steel v Martin [1973]: negligence in digging up a road, D contractors severed power supply,
plaintiffs factory engaged in smelting, loss of power 14hrs, several losses, £368 for metal being
processed, £400 profit of processing + selling metal, and £1767 for profit of processing other metal
COA held can recover physical damage of £368 and loss of profit of £400, but not £1767 as economic
loss independent of physical damage , COA held cannot if allow claims for loss of profit would be
floodgate of claimsowed duty of physical damage, but ‘pure economic losses unrecoverable as
remote or out of scope of duty of care, not due to damage to plaintiff’s property
Pure economic loss is not recoverable, needs to be consequential upon damage of property
Exclusionary rule to prevent floodgate of claims onto one party too much burden
But there is an exception to this rule Morrison Steamship v Greystoke Castle
Morrison Steamship v Greystoke Castle [1947]: Ship damaged in collision, had to put into port,
discharging and reloading cargo, cargo owners became liable to ship owners for ‘general average
contribution’ that have to pay a percentage of costs of loading and reloading HOL held cargo
owners could claim against D, whose negligence partly to blame for collision even though own
property was not damaged
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,Leigh and Sillivan v Aliakmon Shipping [1986]: HOL refused to recognise a limited exception to rule
against recovery for relational economic loss give a defence to exclusionary rule for relational
economic loss goods damaged during shipment through negligence of charterers, after unusual
negotiations final contractual agreements not standard, risk of damage already passed to plaintiffs
on shipment, but interests in goods merely contractual, sellers not suffer any loss, property damage
but neither buyer or seller could bring action –argued buyers prospectively legal owners of damaged
goods for ‘transferred loss’ held not sufficient merely contractual, need legal or possessory title
But despite rejecting it before, HOL later used ‘transferred loss’ White v Jones
White v Jones [1995]: negligent service – claimant intended to benefit under a will, claimant had
family row with person making will so was cut out of will, claimant reconciled with person making
the will, testator told D solicitor to change the will back to how it originally was, but D solicitor did
not change it back, testator died, did not allow claimant to inherit, HOL stated there was duty of care
owed by solicitors to claimant, held would not be fair if there was no duty
Canadian National Railway v Norsk Steamship [1992]: D damaged railway bridge over Fraser river,
bridge owned by Public Works Canada and plaintiff railway company was its principle user
accounting for 85% of its traffic, plaintiff suffered economic loss while bridge was being repaired,
action to recover loss held successful proximity between negligence + loss compensable
Despite it not being a joint venture nor transferred loss, plaintiff aware of risk of bridge being
damaged, so ought to have taken reasonable steps to protect itself against losses
See exclusionary rule in other common law jurisdictions and their treatment of relational loss
Shell UK v Total UK [2010]: Fuel pipelines damaged in an enormous explosion, pipelines held on
trust for Shell and others issue was negligent party liable to compensate to Shell for economic loss
suffered Shell not legal owners, but COA still held claim successful treats beneficial owner same
as legal, provided legal was also joined in proceedings
Network Rail Infrastructure v Conarken [2011]: shows how policy issues can make ‘relational’
exclusion to be extended outside boundaries of the category claimant company owned railway
infrastructure enters into contract with various companies that operate train services, track
damaged + service unable to operate, train operators are subject to penalties so Network Rail
contractually bound to compensate train operators for penalties due to damage to its own property
by negligence of motorists held loss was ‘consequential’ so recoverable
Economic losses caused by acquiring defective products or premises (category B)
D and F Estates v Church Commissioners [1989]: D employed in construction of block of flats,
plasterwork by subcontractors, plaintiffs were lessees of a flat, some plaster loose, action in
negligence for cost of stripping + replacing plaster + loss of rent held irrecoverable economic loss
outside of Donoghue v Stevenson, tort duties only owed in respect of damage done by item that is
manufactured by D, so to hold D for repair costs would impose for contractor benefit who had no
contractual relationship
Where it leaves Anns v Merton
D and F Estates not appropriate to depart from Anns as no issue of damage to structure itself
Murphy v Brentwood [1991]: two houses, constructed on landfill needed a concrete raft foundation,
plans submitting to Brentwood Council for approval (duty under Public Health Act 1936), referred
plans to engineers and plans passed, but there were errors in design of foundations not spotted by
engineers foundations faulty cracked and damage to walls and pipes of the house, plaintiff could
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, not raise entire £45k from insurer, so sold house for £35k less than market value (as he got £35k
from insurer) held plaintiff got £38,777 for diminution of value of house + expenses
Departed from Anns v Merton nature of duty in Anns to take reasonable care to prevent injury
to safety or health needs to be a duty to take reasonable care to avoid putting owner of house
threatened by a reason of defect, with avoidable physical injury or health to continue to occupy
house without suffering such injury, expend money for purpose to rectify defect
If such duty on local authority, should be also on builder of house
‘Complex structure’ theory: one part of same structure or chattel causes damage, regard having
caused damage to ‘other property’ (to apply Donoghue v Stevenson principles) defect is a
defect in whole, weakens structure, dangerous defect liable to cause damage to ‘other property’
E.g. defective central heating boiler damages house + sets house on fire, if owner can establish
damage was due to negligence of boiler, can recover damages under Donoghue v Stevenson
Inadequate foundations to support weight, cracking, whole structure taken as defective thus
‘complex structure’ theory for defect in foundation not recoverable under tort in Donoghue v
Stevenson it is purely economic loss only recoverable in tort or contract by reason of some
special relationship of proximity imposes tortfeasor duty of care protect against economic loss
Clear that if defect causes actual damage to a separate structure or a person, there will be liability
only if damage is caused by a defect that remains ‘latent’, once defect becomes known it ‘no longer
poses a danger’ but does not remove danger, make responsibility of occupier
Although purchaser of defective premises are not owed tort duty, can avoid or recover losses:
1. Through first party insurance – like in Murphy v Brentwood
2. Through obtaining advice as time of purchase, if advice is proved to be negligent, can be action
in contract or tort (Smith v Bush)
3. In case of dwellings, a builder, architect or other party involved in provision of dwelling may be
liable under DPA 1972 but subject to 6yr limitation period when work is completed, but in
negligence 6yrs begins to run at time damage occurs, for latent damage 3yr when claimant
could discover damage (Limitation Act 1980, s.14A) override period of 15yrs from time of
negligence (Limitation Act 1980, s.14B)
4. If builder of premises is member of National House Building Council (NHBC) purchaser can
benefit from the warranty protects purchasers of property
s.1 DPA 1972 + NHBC give ‘transmissible warranties’ for properties for periods they are effective
Surveyors liability: where instructed directly by purchaser, surveyor owes duty to take reasomable
care in inspection and report, in contract and tort
Summary of Category A + B
Not too generous to claimants + policy reasons to explain rules against recovery of economic losses
like ‘ripple effect’ + protection for plaintiff via contractual negotiation , for defectiveness in product
or premises that cause economic losses policy reasons concern maintenance of contractual rules but
claimants have alternative protection
Economic loss caused by Reliance of negligent statements (Category C)
Hedley Byrne v Heller [1964]: advertising agents planned orders for a company, asked bank to check
financial stability of company, stated company stable+ statements ‘without responsibility’, no fees,
suffered loss, action in negligence against bankers HOL held a negligent misrepresentation can be
without contract or fiduciary relationship, but as disclaimer no duty can be implied
Where the skill of one is used “for assistance of another person who relies on skill= duty
If advice passed on to another+ advisor knows information will be relied upon= duty of care
If there is a special relationship (not only contractual+ fiduciary) + reasonable reliance= duty
‘Voluntary assumption of responsibility’ in making of statement (but disclaimer so no duty of care)
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