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Pure Economic Loss

Pure economic loss refers to financial loss suffered by a claimant which does not flow from any damage to his own person or property. Where economic loss results from damage negligently caused to the claimant's own property, it is recoverable as a measure of that physical damage (Harris v Hall (1992)). This is termed consequential economic loss. The courts have taken a cautious approach to imposing liability in pure economic loss situations due to a number of policy reasons.

The General Exclusionary Rule
The courts demonstrate a reluctance to impose liability for pure economic loss. The first argument against liability is the floodgates argument which has two elements: the number of claimants may be intolerably high or liability might extend to an indeterminate class of persons. Lord Scott in Hedley Byrne v Heller [1964] indicated that the size and width of the range of possible claims acted as a deterrent to extension of economic protection. The second policy reason is that traditionally losses for pure economic loss could be policed by the law of contract and therefore tort did not need to interfere.

The general exclusionary rule is also recognised by scholars. Markesinis and Deakin (2012) write that for the most part an exclusionary rule bars recovery in these cases; liability being the exception. Lunney and Oliphant (2010) write that in English law, the tort of negligence adopts a general exclusionary rule towards pure economic losses. Horsey and Rackley (2013) write that there is a general rule against recovery of pure economic losses.

Defective Products

Until the 1970s, there was generally no liability for pure economic loss as a result of negligent acts resulting in defective buildings. Since then, there have been shifting paradigms in judicial attitudes in various common law jurisdictions in relation to claims for economic loss (Netto and Christudason 1999). Decisions have veered from allowing recovery for losses where the defect in the property was dangerous, to allowing recovery where the defect could not be categorised as dangerous, and then reverting to the orthodox approach, that the loss incurred in such situations is purely economic and therefore irrecoverable (Netto and Christudason 1999).

In Anns v Merton LBC [1978] the plaintiffs occupied flats in a block which after eight years of occupation began to develop cracks and unstable floors caused by having been built on foundations that were too shallow. The Hose of Lords held that the plaintiffs had suffered material physical damage and ordered the council, who had certified the building work, to compensate repair costs needed to avoid the danger to health and safety. In Anns, the defendants had created defective property, not damaged property. Nevertheless, the court treated this as damaged property and imposed a duty of care. It is submitted that Anns was incorrect in that this was not property damage at all but a defective property. Defective property was properly dealt with by contract law.

This liberal trend reached its pinnacle with the decision of Junior Books Limited v. Veitchi Limited. In this case, the plaintiffs entered into a contract for the construction of a factory. The main contractor entered into a contract with the defendants who were nominated subcontractors specialised in laying floors, to lay the flooring of certain parts of a factory. After completion, the floor showed defects allegedly due to bad workmanship and/or material. The plaintiffs' action was for the cost of replacing the floor. There was no question of any danger to health or safety of any person or risk of damage to any other properties belonging to the owner. Conceding that there was no physical damage on the facts of the case, a majority of the House of Lords said that they saw no reason for disallowing a claim for pure economic loss when a claim for economic loss consequent upon physical damage has been allowed. Lord Brandon gave a powerful dissenting judgment against allowing recovery for pure economic loss. The blurring of the pure economic loss with consequential loss is troublesome and led to an undesirable expansion of liability (Cooke 2012).

However, the law in Anns and Junior Books would be doubted in subsequent cases. In Murphy v Brentwood DC the plaintiff was an owner of a house which had been built on inadequate foundations leading to cracked walls. He lost profit on the sale of the house owing to the remedial work which was going to be necessary to restore foundations and sued the Council who had approved the original construction. The House of Lords held that Anns had been wrongly decided. The loss described in Anns as physical damage was actually pure economic loss and was not recoverable.

Cases in which the claimant suffered pure economic loss due to a negligent statement by the defendant provide a significant exception to the reluctance of the law to recognise an exception in this area. The case of Derry v Peek (1889) established a presumption that liability in tort was only possible for loss caused by fraudulent rather than negligent statements.

That position changed after the seminal case of Hedley Byrne v Heller [1964]. The House of Lords held that a duty of care could exist with regards a statement leading to pure economic loss if the parties had a special relationship. In order for a duty of care to be established three criteria must be met:

C relied on D's skill and judgement or his ability to make careful inquiry

D knew or ought to have known that C was relying on him

It was reasonable in the circumstances for C to rely on D.

Liability has also been extended to indirect statements, where, the supply of information is not made directly to the claimant, or perhaps was made for purposes other than influencing the claimant. In Smith v Eric Bush (1990) a negligent surveyor's report led to the plaintiff purchasing a house which was later found to need expensive repair owing to subsidence. The report was not given to the plaintiff but his building society. The House of Lords held that the relationship between valuer and purchaser was akin to contract, the plaintiff had paid for the survey and therefore it was foreseeable and reasonable and fair for him to rely on it. However, it is important to note one important exception from the case. In this case, the court held that if the house was an high value residential property, and not a modest property, then a duty of care may not be imposed as it would have been prudent for the plaintiff to consult other sources to value the property. One important limitation also exists in that if information is prepared for the public at large then a duty of care will not be found (Caparo v Dickman) [1990]).

The law on pure economic loss is currently in a satisfactory state. In relation to defective buildings, the retreat from Anns (Murphy 2010) is complete and the scope for a duty of care narrowed. The law in relation to negligent statements allows for the imposition of a duty of care when there is sufficient proximity between the parties. However, there are controls in place to ensure that liability is not to an indeterminate class and number.

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Article published 25/05/2017

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