Pure Economic Loss

Pure Economic Loss


A)   Concept of pure economic loss

1)    Pure economic loss versus consequential economic loss

  • Pure economic loss= a loss that is solely and purely economic
    • C’s less well off than they otherwise would’ve been if the D had acted carefully. E.g. bad investment advice which makes you lose money.
  • Consequential economic loss=g. losing money because an injury makes you miss days off work= it’s only a financial loss.
    • These kinds of losses can be dealt with through the negligence
    • Key question to ask in terms of consequential economic loss: is it a loss of the kind of which the D ought to have reasonably foreseen. Question of the remoteness of damage.
    • Is the damage too remote to be recoverable, what kind of damage should the D have foreseen, if it’s not foreseeable= not valid.

Spartan Steel v Alloys ltd v Martin & Co 1973

  • Sets out the distinction between consequential and purely economic loss
  • Facts: factory owner owned a smelting worksin which metalwas melted down and poured into mouldsto be made into objects for sale. D had been mending the read close to the C’s factory and accidental tripped the power supply to the factory, as a result C suffers three distinct types of loss.
    • Temperature in the furnaces dropped suddenly and damaged materials that were in there at the time the electricity went out
    • Loss of profit on the material that was in the furnace
    • Lost profits on the other moulds that could have been done in the time the electricity was off.
  • CoA: only the first two recoverable: 1- was a straightforward instance of physical damage and 2- was economic loss which was a consequence of that damage. 3- was an instance of purely economic loss and that wasn’t recoverable in these circumstances.
  • Denning LJ- used statutory limitation from awarding compensation and:
  • It was better attitude to take for people would be they would simply work harder the next day rather than running to lawyers for compensation.
  • Floodgate argument: risk of the courts being confronted with multitude of claims which are difficult to determine/calculate
  • Who should bear the loss? It’s better borne by the community and be spread out rather than it all being brought home on a particular D- it’s better to have the loss shared/distributed/spread out.
  • All the reasons he gives are an appeal to how society should work. Quite instructive. Dissenting judge didn’t see why we should treat purely economic loss any different.

Wagon Mound No1 1961

  • Important principle to understand here: where physical injury leads to consequential economic loss (such as loss of earnings), that consequential loss is recoverable provided that it was reasonably foreseeable that loss of that type would occur.


Conarken Group ltd v Network Rail Infrastructure ltd 2011

  • An application of the general principle: is a kind of particular loss too remote to be recoverable?
  • Facts: Network Rail owned infrastructure that surrounded the railway, a lorry driver negligently damaged one of the rail bridges and the line had to be closed. It was clear lorry driver’s employer had to compensate for the physical damage done to the bridge.
  • Issue: controversial whether the lorry driver’s employer also had to compensate NR for the fees that had to compensate the rail companies. NR had a series of contracts with train operators which said they had to pay the affected train operating company some compensation.
  • CoA: those fees were recoverable. This was a consequential economic loss which wasn’t too remote. Neither the lorry driver nor his employers would have known about the contractual agreements that NR had- so they couldn’t have anticipated precisely the payments which were meant.
  • CoA: that didn’t matter because the lorry driver should have anticipated that if they cause damage to a commercial asset then the owner of that asset would be deprived of the income generated.
  • The real message here: when you are applying the test of whether the damage was reasonable, the courts will take a broad approach, they don’t require D’s to show precisely they anticipated the kind of loss that was suffered.

2)    Pure economic loss in relation to defective products


Donoghue v Stephenson 1932

  • If you buy a defective product that injures you then under this case you are owed a duty.
  • Basic notion: you need the defective thing to cause damage to the person or some other property of theirs- a duty of care arises in respect of physical injury.
  • g. Buying a bottle of ginger beer but it was filled with water instead= product isn’t harmful but it’s defective because it’s not what you bought. However there would be no liability in physical negligence.


Stapleton, ‘The Gist of Negligence’ 1988

  • Article written before murphy and court took the approach she advocates for the category of claims arising from a condition of the property which will produce changes in the property itself.


Murphy v Brentwood District Council 1991

  • Facts: cracks started to appear in the house 10 years after purchase as the foundations hadn’t been set properly. M brought a claim against the local council alleging they had approved the plans on the house being built. If builder hadn’t owed duty of care to M then the council wouldn’t owe a duty of care to M.
  • HoL: no duty of care was owed as it was a purely economic loss claim as M only had a house which wasn’t worth as much as he hoped it would be. The defect hadn’t caused damage to M in person or to any of his property. M: So foundation had caused damage to other pieces of property in the form of the wall- HoL rejected this argument and said you have to regard the house as one single piece of property.
  • It might be possible to split up different parts of the house and the courts gave two examples:
    • Electrical wiring in the house being defective which results in a fire. If the fire damages the structure of the house, in that situation you could separate electrical wiring from the house. You could make similar arguments in relation to hot water facilities etc.
    • Under Donoghue v Stephenson, a D owes a duty to hidden/latent problems i.e. hidden defect. So if you realized there’s a problem with your wall and left it to break down then try and claim compensation, then the D wouldn’t owe a duty of care because you knew and did nothing (dicta)
  • Reasoning used to justify between physical and purely economic damage:
    • Didn’t use same reasoning as Lord Denning in Spartan Steel.
    • No problems of floodgate arguments here nor can we say that the loss is better shared by the people who were unfortunate enough to buy a house built by the incompetent builders
    • Real problem with recognising a duty of care – it would create a transmissible warranty of quality. The law of tort negligence shouldn’t be used to create such a warranty.
    • Opaque reasoning really. Contrastposition between statute and contracts
      • Contractlaw- if you buy a building as a matter of default in English law there’s no warranty of satisfaction of quality.
        • M wouldn’t have had contractual rights against the builder from whom he bought the house, courts didn’t want to provide a remedy in tort which the law of contract refused him
      • Statutory protections, Defective Premises Act 1972– the protection offered to home purchasers is limited here. Only arises when the premises isn’t fit for habitation. In Murphy the house wasn’t inhabitable it just needed some remedial work so no claim available under this act.
    • This case not concerned by problems outlined by Denning but the potential of the law of negligence to undermine existing cautious provisions elsewhere in the common law.
    • Recognizes that too broad duty of care in relation to purely economic losses would undermine contract law.
    • Argument that law of negligence should stick to its own area- where does the law of negligence fit in the existing framework of the common law.


Lord Cooke, ‘An impossible Distinction’ 1991

  • Thought HoL had become hopelessly bogged down in the technicality and triviality of trying to distinguish electrical wiring, plumbing and other parts of the house. The reasoning was too doctrinal and trivial.
  • Question more about the social policy questions outlined by Denning. For Cooke there is a clear policy necessity in making defective premises incur liability on the part of the builders who had provided defective premises, and consumer protection was the appropriate direction for the law of negligence to develop. (I agree)
  • Remedies for negligence would remove significance of statutory claims- the courts should regard the statute as an inspiring example of what they should be doing.


Targett v Torfaen Borough Council 1992

  • Dicta in Murphy too strict.
  • What you should be asking is whether the C had behaved unreasonably in doing what they did. Would it be unreasonable for them to move out of the house?


Winnipeg Condominium Corporation No36 v Bird Construction 1995

  • Floodgate arguments- Canadian Supreme Court said it was socially desirable to encourage people to remedy defects that are likely to incur.
  • When dangerous defects will probably cause damage to the C in the future, a duty of care is owed by the builder.


Bryan v Maloney 1995

  • Australia went even further and said here duty of care owed in relation to any damage
  • Imposed a liability for negligence on builders in favour of subsequent purchasers. The case held that builders of both residential and commercial buildings can be sued for economic loss arising from defective work, not just by the person who contracted with them to construct the building, but also those who buy the property at a later date, even though they have probably never met or had any form of contact with the builder.


Robinson v PE Jones (Contractors) ltd 2011

  • Confirmed what was decided in the murphy decision is still correct despite the negative adverse commentary on the law.

B)   The limited duty of care

1)    Assumption of responsibility test:


Hedley Byrne v Heller 1964

  • Key leading case that developed this test. D should have assumed responsibility towards the C, and you need the C to have relied reasonably on that assumption of responsibility. Two components to creating that duty.
  • Facts: case concerned negligent statements- C negligently given a credit reference, bank assured C that a company that they wanted to do business with was good. But it wasn’t and they lost some money on contracts
  • The court found that the relationship between the parties was “sufficiently proximate” as to create a duty of care. It was reasonable for them to have known that the information that they had given would likelyhave been relied upon for entering into a contract of some sort. This would give rise, the court said, to a “special relationship”, in which the defendant would have to takesufficient care in giving advice to avoid negligence liability. However, on the facts, the disclaimer was foundto be sufficient enough to discharge any duty created by Heller’s actions
    • At the time this case was decided, courts/authors tended to assume this duty would arise only for negligently given statements, but as a result of White v Jones case– it was established that Hedley Byrne could apply also to negligently provided services.
    • The test unlike the Caparo test doesn’t have a section of whether something is fair, just or reasonably to apply. So it seems to exclude those considerations of policy. In White v Jones, we shouldn’t read too much into the fact that this strand of policy questions isn’t formally put into the Hedley test- doesn’t meant the courts won’t think of the same kinds of factors.
    • Factors: → 1. There must be a duty of care based on a “special relationship” between the representor and the representee.
      → 2. The representation in question must be untrue, inaccurate, or misleading.
      → 3. The representor must have acted negligently in making said misrepresentation.
      → 4. The representee must have relied in a reasonable manner, on said negligent misrepresentation.
      → 5. The reliance must have been detrimental to the representee in the sense that damages resulted.
  • Assumption of responsibility has to be voluntarily undertaken.

How can responsibility be assumed?

a)     Express assumptions of responsibility

  • D says that they are assuming responsibility and somehow communicate to the C that they are going to take care of the situation.

Williams v Natural Life Health Foods 1998

  • You have to look at what the C heard or was told by the D, about the D was going to do.
  • How closely do you have to look?
  • Facts: Claim was brought by a disappointed franchisee under the natural life company. One factor that had induced the C to enter into the arrangement was due to the various representations that had been made by a director of the company. C sued for negligence- the company and the individual director.
  • Issue: had the director assumed responsibility for the C? NB company had gone into liquidation by this point.
  • HoL: no because the letters were always sent on the companies note headed paper- director had made no representations as working independently from the company so he hadn’t assumed responsibility.


Calvert v William Hill Credit ltd 2008

  • Facts: claim by someone with a gambling addiction, he had a phone betting account with William Hill, for someone like the C it was a dangerous thing to have as it made it easier for him to gamble. C had occasional moments of clarity where he realised he needed to do something about it. So he called William Hill and said I need to get my phone betting account closed. William Hill said ok we will sort that out for you and failed to act on that assurance so that the account wasn’t closed. C used the account again.
  • Held: duty of care was owed to him precisely because William Hill through its employee assuring the C had assumed duty of care.

b)     Assumptions of responsibility implied from a relationship

  • D must hold himself out as having some special skill or knowledge which they will exercise for the benefit of the c.
    • Relationships between solicitors and C’s, doctors and sportsmen etc.

Henderson v Merret Syndicates ltd 1995

  • Ds were a managing agent of an insurance syndicate. Insurance syndicates run in complicated ways that require you to have special expertise to work in them. Courts said because of special expertise required= we infer that responsibility has been assumed
  • The allowance of concurrent actions was immensely controversial, as it ran contrary to legal orthodoxy.

Test most obviously satisfied in relation to professional Ds

Special skill AND knowledge= assume responsibility.

Spring v Guardian Assurance 1995

  • Facts: C worked in financial services industry, wanted to get another job and under the regulations anyone working within the industry who wants to move to another post in the industry must provide a reference from current employer. Mr S asked for a reference from GA, the one he got was referred to by the court as a ‘kiss of death’ reference… it was that bad and completely unfair. S lost his potential new job as a result of this reference that was negligently written.
  • Issue: had employer assumed responsibility in relation to the reference letter?
  • Held: although they were not professional reference writers, HoL held that they held themselves out as having special knowledge of his work competence, this was sufficient to give rise to an assumption of responsibility.
  • Case changes things, in light of Caparo decision unexpected.


Is it necessary for responsibility to be assumed that D and C have physical contact?

White v Jones 1995

  • Facts: resentful old man fell out with his two daughters and decided he didn’t want them to inherit any of his property so instructed solicitor to exclude them from will. They then reconciled and he decided to write them back in, in order to reflect his new wishes. Solicitor failed to do this, old man dies.
  • Issue: can the daughters sue the solicitor; did the solicitor assume responsibility not just to his client but to the daughters as well? Could they sue and had there been an assumption of responsibility towards them?
  • Controversially: 3:2majority inHoL held that liability exists in these situations. Within themajority there’s a lack of unanimity for finding basic duty of care exists:
    • Goff: liability rose by analogy with Hedley Byrne principle as the solicitor had assumed responsibility for the old man, and as a matter of legal analysis, one could extend this protective effect to cover daughters as well.
    • Browne-Wilkinson: case of assumption of responsibility being satisfied- it didn’t matter that the solicitor had never been in contact with the daughters. It’s all about assuming responsibility for a task. Radical rewriting of the assumption of responsibility
    • Lord Nolan: there was an assumption of responsibility as it turned out the daughters had spoken to the solicitor to check that the solicitor was carrying out the will. Surprising because the case was being argued as if the daughters and solicitor had never had contact/met.
  • This is a controversial case- in unusual circumstances it is POSSIBLE that responsibility has been assumed even when the D has never been in contact with the C. but this is unusual and strange.


Smith v Eric S Bush (a firm) 1990

  • Facts: purchaser relied on surveyor’s report but the surveyor wasn’t instructed by the house purchaser but by the mortgage lender as they had been approached by the C to buy the house. C had to pay a fee to mortgage lender for survey to be carried out. Surveyor’s contract contained a clause, a disclaimer that no responsibility was assumed towards the C- facts similar to Hedley Byrne where a disclaimer worked.
  • HoL: refused to allow the D to rely on the disclaimer as it breached UCTA 1997= reliance wasn’t permitted on the disclaimer and it could therefore be concluded that a duty of care existed between the surveyor and the house purchaser. As a result of the decision we could no longer talk about assumptions of responsibility.
  • Subsequently as a result of the Barclays Bank case the courts have started to talk again about the need for an assumption of responsibility to be voluntary.
  • Case is sceptical of Hedley Byrne- the question shouldn’t really be about whether responsibility has been assumed but it ought to be as a matter of principle/policy that responsibility was/should’ve been imposed.
  • Case also moves away from Caparo test
  • the court extended Hedley Byrne liability to proximate third parties.

C)     The Caparo Test

Caparo Industries v Dickman 1990

Case sets out the new test for economic loss

  • Facts: Caparo wanted to take over another company called Fidelity. Ds were auditors and they were accountants who check the accuracy of financial documents produced by companies. Caparo purchase all the shares in F and they do it in two instalments. When they buy the first batch they aren’t shareholders at all, they subsequently buy the other half but it turns out Fidelity’s directors had been practising grotesque frauds and the auditors hadn’t picked up on this, and so had approved the account which was worth nothing at all, negligently. C sues Ds saying they owed duty of care in relation to them suffering purely economic loss.
  • Firstly, when talking about negligentstatements- the only person allowed to rely on this is the person to whom itwas intended for. In this situation it was to the shareholders= first batch of shares C’s weren’t shareholders, so weren’t entitled to sue in respect of the first batch of shares. As for the second batch of shares by that stage the C’s were shareholders.
    • But the other requirement= you must rely on the statement only for the purpose in which it was made, audited accounts allow shareholders to make decisions about the way in which the company was being run, the purpose of those accounts wasn’t to enable shareholders to make investment decisions by buying more shares- in this situation no duty of care was owed.
    • First batch- the C’s weren’t the people intended to be targeted by the statements
    • Second batch- the purpose for which the accounts were relied on wasn’t the purpose for which the communication had been made in the first place.
  • HoL: made it clear that this test was an improvement on the Hedley Byrne but they didn’t overrule or say it was wrong, and neither did they do this in Smith v Eric Bush.
  • Caparo test
    • That harm was reasonably foreseeable
    • That there was a relationship of proximity
    • That it is fair, just and reasonable to impose a duty of care

By the late 1990s we have an odd looking concept of duty of care for pure economic loss. In some cases e.g. Merrett- CoA said Hedley Byrne wasn’t about whether responsibility was assumed or should it be deemed responsibility was assumed.


*Customs and Excise Commissioners v Barclays Bank plc 2006

Current important case.

  • Facts: company owed VAT to revenue authorities and they didn’t pay, revenue authorities obtained a freezing order over an account of the company which included enough money to pay the debt. Court order faxed Barclays Bank which held the account, and they acknowledged receipt of it and charge the revenue authority for the service of freezing the account. But Barclays fails to freeze the account and the company withdraws the money before the revenue authority is paid.
  • First instance: Coleman J says no duty of care owed. The way to deal with the state of the case law is you should first apply Hedley Byrne assumption of responsibility test- if on the facts there’s an assumption, and the C has relied on this= duty of care arises and you need no further steps. If the answer is no, no duty of care under Hedley Byrne- got to apply three stage Caparo Test as it is potentially broader than Hedley Byrne test.
  • CoA: took a different approach which is criticized.
  • HoL: Coleman’s methodology and conclusionsare confirmed.
    • Current law= first apply Hedley Byrne test if there is a positive answer= duty of care owed. If it gives a negative answer apply the Caparo test which is broader.
    • Also made it clear there isn’t a third separate test called the analogy test.
    • Voluntariness is what you’re looking for. Hoffman- the Hedley Byrne test shouldn’t be distorted, you shouldn’t try to force factual situations to fit into it= make it lose its usefulness.
  • Position before this case was very difficult- two sets of HoL authority that tell you that a different test is the one to apply- neither Caparo nor Hedley overruled to say that assumption of responsibility is the true test.
  • Attempts to solve this problem in the run up to the case
    • Merritt- it’s not about where there’s an assumption of responsibility or whether we should see if we deem that assumption of responsibility has been assumed
    • Phelps-
    • These two cases seem to be mergeing the two cases.
    • Aor test covers a narrower scope than the caparo test

AoR how can we show it?-

  • if the D expressly undertakes responsibility then that satisfies the requirement and there also needs to be reasonable detrimental reliance
  • implied aor- where a D holds himself out as having special knowledge or skill
    • you need the D to be holding themselves out


Merely financial damage doesn’t cry out for compensation in the way that physical damage does

Concern negligence could undermine other areas of law


  • UCTA 1997- Hedley Byrne decided before this. Decision in smith v eric bush shows there being liability where there was no voluntary assumption of responsibility.
    • This is the kind of test lord Hoffman were thinking about, to keep the AoR coherent you mustn’t force factual relationships into it.- Caparo provides residual backup to not stretch aor test.
      • Another difficult case- white and jones – a duty of care was owed by analogy in Hedley Byrne- essentially Goff saying that the facts don’t fit but its close enough.
  • Analyse white v jones after customs and excise



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