Revisiting pure economic loss: lessons

to be learnt from the Supreme Court of

Canada?
Dr Paula Giliker*
St Hilda’s College, Oxford

This article examines the treatment of pure economic loss claims in England
and Canada. The two jurisdictions have much in common. Starting from the
same case sources, the common law of each system has struggled to deal with
claims for negligently-incurred pure economic loss. Yet, the systems diverged
in the 1990s when the Canadian Supreme Court refused to follow the lead of
Murphy v Brentwood DC and reiterated its adherence to the Anns two-stage
test. It is submitted that, in view of recent developments which suggest the
gradual convergence of the two systems, English law should carefully examine
the categorisation approach adopted by the Canadian courts. The current
English position is far from clear, and the Canadian model is capable of
bringing transparency and greater clarity to this difJicult area of law.

Tort law has consistently struggled to find a satisfactory response to claims

for pure economic loss suffered due to negligence. Whilst it is accepted that
such losses will be treated differently from claims for physical, proprietary or
even psychiatric injury, the exact boundaries of recovery remain a matter of
dispute. The position in English law is typically pragmatic. For example, the
Court of Appeal in Spartan Steel & Alloys Ltd v Martin & Co (Contractors)
Ltd‘ drew a distinction between pure and consequential economic loss. Lord
Denning MR justified recovery for economic losses consequential on physical
harm on the basis that ‘[sluch cases will be comparatively few. They will be
readily capable of proof and will be easily checked’,* and chose to ignore the
objections of Edmund-Davies LJ that such a distinction would be arbitrary in
practice and would lead to potentially unjust results.3 Recent attempts to
provide certainty through a clear negative rule4 have been subverted by

* This article is based on a paper presented to the 2003 conferenceof the British Association
of Canadian Studies. The author would like to thank the audience and, in particular,
Dr Keith Syrett, Professor Jane Wright and the Legal Studies reviewers for their helpful
comments. Any errors remain those of the author alone.
1. [I9731 QB 27.
2. [ 19731 QB 27 at 39.
3. [ 19731 QB 27 at 41 : ‘what has that purely fortuitous fact [of physical damage] to do
with legal principle?’ See also Lord Millett in McFurlune v Tuyside Health Board [2OOO]
2 AC 59 at 109. One might also question concepts such as the ‘complex structures’rule
set out in D & F Estates Ltd v Church Commissioners for England [1989] AC 177,
which again appears to rest on a rather arbitrary, if not complicated, distinction.
4. See Murphy v Brentwood District Council [ 19911 1 AC 398.
50 Legal Studies

exceptions, most notably the expansion of the Hedley Byrne principle in House
of Lords decisions such as Henderson v Merrett Syndicates Ltds and White v
Jones.6 The existence and growth of these exceptions has called into question
the very basis on which claims for pure economic loss should be limited in
English law.
Such questions arise in most legal system^.^ In French law, for example,
recovery is not addressed directly - indeed French law contains no independent
category of pure economic loss as the courts do not distinguish between different
heads of damage. Nevertheless, the courts have, in practice, restricted claims by
requiring proof that the loss is caused by the fault of the defendant, is certain,
immediate and direct, and by virtue of the considerable fact-finding powers of
the lower court judges (lesjuges dufond).* Whilst recovery in French law is far
more generous than English law, it should not be assumed that liability will be
unlimited? German law, in contrast, starts from a position of non-recovery. Pure
economic loss is not an interest protected by para 8231 of the Biirgerliches
Gesetzbuch (BGB).” Nevertheless, the courts, reasoning by analogy, have
developed the ‘right to an established and operative business’” or utilised other
paragraphs of the BGB to permit recovery, for example paras 82311 (breach of a
statute designed to protect another) and 826 (deliberate harm to another contrary
to public policy). Thus, both systems, from very different starting-points, manifest
the same characteristic: a need to restrict recovery. Whilst the German concept
of protected interests is closer to the position in English law, in that an established
rule of non-recovery has been watered down by jurisprudence,” the emphasis

5. [ 19951 2 AC 145. See also Spring v Guardian Assurance plc [ 19941 2 AC 296;
Williams v Natural Llfe Health Foods Ltd [I9981 2 All ER 577; Gorham v British
Telecommunicationsplc [2000] 4 All ER 867.
6. [ 19951 2 AC 207.
7. For comparative studies of pure economic loss, see JM Van DunnC ‘Liability for
pure economic loss: rule or exception‘?’(1999) 7 ERPL 397; EK Banakas (ed), Civil
Liabilitv,for Pure Economic Loss (The Hague: Kluwer Law International, 1996); W van
Gerven, J Lever and P Larouche Tort LJW (Oxford: Hart, 2000) 2.4; B S Markesinis ‘La
politique jurisprudentielle et la reparation du prejudice Cconomique en Angleterre: Une
approche comparative’ [1983] RIDC 31; and M Bussani and VV Palmer (eds) Pure
Economic Loss in Europe (Cambridge: Cambridge University Press, 2003). More
generally, see C von Bar’s interesting attempt to explore common elements of tort law in
EU states in The Conirnorz European Luw qf’Tort.7(Oxford: Oxford University Press,
2000) Vol 2, Part One.
8. See F TerrC, P Simler and Y Lequette Droit civil: Les Obligations (Paris: Dalloz,
8th edn, 2002) Nos 697-713. Note also Khoury’s study of common and civilian
approaches: ‘The liability of auditors beyond their clients: a comparative study’ (2001)
46 McGill LJ 413.
9. See C Lapoyade Deschamps in Civil Liability for Pure Economic Loss above n 7.
10. ‘One who intentionally or negligently unlawfully violates the life, body, health,
freedom, property or similar right of another is obligated to compensate him for the harm
that thereby ensues.’
11. B S Markesinis and H Unberath The German Law ofTorts: A Comparative Treatise
(Oxford: Hart, 4th edn, 2002) pp 71-74, and 52-67 generally.
12. Notably, by adopting a flexible approach to contractual recovery, for example, by
use of the contract with a protective effect to third parties (Vertrag mit Schutzwirkungfiir
Dritte) or the device of culpa in contrahendo (now incorporated in the revised Code at
para 3 1 111).
 Revisiting pure economic loss 51

remains on the establishment of bases for recovery rather than a satisfactory

justification for the exclusion of claims.”
Yet it is difficult to deny that ‘At bottom ... the question of recovering
economic loss is one of p ~ l i c y ’ . ’This
~ article will argue for a more coherent
approach to this area of law based upon open recognition of the policy
arguments involved. This would have a number of potential advantages. It
would provide a justification for the rejection of the claim, and a basis on which
future courts could develop the law in a clearer and more transparent way.
Clarity would also enhance discussion and analysis of the law. Whilst numerous
commentators have criticised the treatment of economic loss claims,’’ it is
difficult to attack as unfounded or as lacking empirical evidence an approach
which is opaque to say the least. Judicial reticence thus places a barrier against
an open debate as to the merits of recovery in our society. Indeed, decisions
said to rest upon incremental development, ‘practical justice’, ‘voluntary
assumption of responsibility’ or what is ‘fair, just and reasonable’ give little
real indication of why recovery will not be allowed.
Although much attention has been given to recent developments in the High
Court of Australia,I6 this article will contrast the current English position with
that taken by the common law of Canada, noting, in particular, two recent
decisions of the Supreme Court, which openly utilise a policy-based approach.”
Whilst the High Court of Australia has rejected tests based on ‘proximity”x
and the Cuparo three-stage testI9 in favour of a more flexible multi-factor
approach, the Canadian courts have not gone so far. It will be argued that whilst
Australian law has moved away from any obvious comparison with English
law, guidance may be found in Canadian law. The Supreme Court of Canada
has adopted a structured approach towards pure economic loss, dividing claims
into distinct categories with their own identifiable policy concerns. These, as
will be seen, are not exhaustive, but a means of approaching actions in a more
ordered way, with the aim of establishing a balance between the demands of

13. See E K Banakas ‘Liability for incorrect financial information: Theory and practice in
a general clause system and in a protected interests system’ ( 1 999) 7 ERPL 261,282-283.
Note the classic study of K Lipstein ‘Protected interests in the law of tort’ [ I9631 CLJ 85.
14. Lord Denning MR in Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd
[ 19731 QB 27 at 36. See also SCM (United Kingdom) Ltd v WJ Whittall & Sons Ltd
[ 19711 I QB 337 at 344.
15. Note, in particular, the works of Cane, Stapleton and Markesinis cited in this article.
For recent attempts at rationalisation, see C Witting ‘Distinguishing between property
damage and pure economic loss in negligence: a personality thesis’ (2001) 2 1 LS 48 I ,
P Benson ‘The basis for excluding liability for economic loss in tort law’ in D Owen
(ed), Philosophical Foundations of Tort Law (Oxford: Clarendon Press, 1995) and
A Beever ‘A Gghts-based approach to the recovery of economic loss in negligence’ (2004)
4 OUCLJ 25.
16. See J Stapleton ‘Comparative Economic Loss: Lessons from Case-Law-Focused
“Middle Theory”’ (2002) 50 UCLA L Rev 53 1:C Witting ‘The three-stage test abandoned
in Australia - or not?’ (2002) 118 LQR 214; P Cane ‘The blight of economic loss: Is
there life after Perre v Apand?’ (2000)8 Torts LJ 246.
17. Cooper v Hobart (2002) 206 DLR (4th) 193 and Edwards v L a w Society of Upper
Canada (2002) 206 DLR (4th) 21 1.
18. See Hill v Van Erp (1997) I88 CLR 159.
19. See Prrre v Apand Pry Ltd (1999) 198 CLR 180 and Sullivan v Moody (2001) 207
CLR 562.
52 Legal Studies

justice and certainty. It will be argued that, in light of the gradual convergence
of English and Canadian law following the Supreme Court decisions in Cooper
and Edwards, now is the time for English judges to re-examine the approach
taken by their Canadian counterparts and to consider whether the Canadian
approach is able to bring greater clarity to this difficult area of law.

THE COMMON ROOTS OF ANALYSIS

That English law should look to Canadian law for guidance should not be
surprising.20 The common law of England and Canada possess a long-standing
relationship. Indeed, the practical ease of reference in terms of language
(English), resources (many English law libraries carry Canadian materials),2’
and background has served to preserve an ongoing relationship between these
two jurisdictions, long after the formal separation of the two legal systems.22
Thus, while the influence of English law on Canadian law is self-evident, there
is no reason why English law should not develop a reciprocal interest in its
Commonwealth counterpart.
The closeness of this relationship is particularly evident when examining how
each system has struggled to deal with claims for negligently-incurred pure
economic loss. Both systems start from the same rule of non-recovery
articulated in Cattle 1’ Stockton Waterworks Co,*’ and in each jurisdiction

20. See eg the recent decision of the House of Lords in Lister v Hesley Hall Ltd [2002] 1 AC
21 5, in which reliance is placed on the decisions in Bazley v Curry (1999) 174 DLR (4th) 45
and Jacobi v GnfJiths (1999) 174DLR (4th) 7 I , although for criticism, see Giliker (2002) 64
MLR 269. In the field of negligently incurred pure economic loss, one may note references
by Lord Goff to Canadian case-law in Henderson v Merrett Syndicates Ltd [ 199512 AC 145
at 191-194 and in White vJones [ 199512 AC 207 at 254-255, and the considerable academic
coverage of the importantcase of The Norsk (CanadianNational Railway Co v Norsk Paczfic
Steamship Co (1992) 9 1 DLR (4th) 289) on relational economic loss, notably by Professor
Markesinis, see S F Deakin, A Johnston and B S Markesinis Markesinis andDeakin ’s Tort
Law (Oxford: Clarendon Press, 5th edn, 2003), pp 32-36. See also BS Markesinis and S
Deakin ‘The random element of their Lordships’ infallible judgment: an economic and
comparative analysis of the tort of negligence from Anns to Murphy’ (1992) 55 MLR 619; J
G Fleming ‘Economic loss in Canada’ (1993) 1 Tort L Rev 68; M McInnes ‘Contractual
relational economic loss’ (1993) 52 CLJ 12 and N Rafferty ‘Canada: tortious liability for
purely economic loss’ ( 1 993) 9 PN 87.
21. There are also excellent internet resources available, for example the information
website of the Supreme Court of Canada and the Virtual Canadian Law Library (http:/I
www.lexum.umontreal.ca/index-en.html). Canadian law, unlike civilian materials, is also
accessible via LEXIS.
22. Feldthusen has noted that the Canadian courts have in the past been accused of having
too close a relationship with English law and failing, until the 1980s, to develop their
own jurisprudence: B Feldthusen ‘The recovery of pure economic loss in Canada:
Proximity, justice, rationality and chaos’ (1996) 24 Manitoba LJ 1 and ‘Pure economic
loss in Canada’ in Civil LiabiliQfor Pure Economic Loss above n 7, p 131: ‘I doubt
whether there exists another sovereign jurisdiction whose lower courts have so frequently
discredited or ignored decisions of their own appellate courts and turned instead to those
of a foreign country.’
23. (1875) LR 10 QB 453.
 Revisiting pure economic loss 53

liability was, until the 1990s, dominated by one case - Anns v Merton L B C 4
- and the two-stage test of Lord Wilberforce, namely that:
‘ ... the question has to be approached in two stages. First one has to ask
whether, as between the alleged wrongdoer and the person who has suffered
damage there is a sufficient relationship of proximity or neighbourhood such
that, in the reasonable contemplation of the former, carelessness on his part
may be likely to cause damage to the latter - in which case a prima facie
duty of care arises. Secondly, if the first question is answered affirmatively,
it is necessary to consider whether there are any considerations which ought
to negative, or to reduce or limit the scope of the duty or the class of person
to whom it is owed or the damages to which a breach of it may give rise.’25
The Supreme Court of Canada formally adopted the Anns test in Kamloops
(City)v Nielsen,26albeit in a reformulated and this test continues to be
applied by the Canadian courts, even in the light of the House of Lords’
decision in Murphy v Brentwood District Council.’’
Both systems additionally manifest the influence of a number of factors
which dictate that recovery of pure economic loss should be considered
exceptional. The arguments used by the courts are familiar:29
(i) In the hierarchy of interests protected by tort law, pure economic loss is
considered far below personal injury and property damage.’O

24. [ 19781 AC 728.

25. [I9781 AC 728 at 751-752.
26. (1984) 10 DLR (4th) 64 1. Comment J Irvine ‘Kamloops v Nielsen’ (1984) 29 CCLT
185; B Feldthusen ‘City of Kamloops v Nielsen: A comment on the Supreme Court’s
modest clarification of colonial tort law’ (1985) 30 McGill LJ 539. Claims for pure
economic loss had been developed from Rivtow Marine Ltd v Washington Iron Works
(1973) 40 DLR (3d) 530 in 1973, in which the Supreme Court recognised for the first
time that, in limited circumstances, damages for pure economic loss could be recovered.
27. (1984) 10 DLR (4th) 641 at 662-663, per Wilson J: ‘in order to decide whether or
not a private law duty of care existed, two questions must be asked: (1) Is there a sufficiently
close relationship between the parties (the local authority and the person who has suffered
the damage) so that, in the reasonable contemplation of the authority, carelessness on its
part might cause damage to that person? If so, (2) Are there any considerations which
ought to negative or limit (a) the scope of the duty and (b) the class of persons to whom
it is owed or (c) the damages to which a breach of it may give rise?’
28. [I9911 1 AC 398.
29. For an overview in England and Wales, Clerk and Lindsell on Torts (London: Sweet
& Maxwell, 18th edn, 2000) pp 7-85; Lord Denning in Spartan Steel v Martin [ 19731
QB 27 at 37-39; and the classic article of P S Atiyah ‘Negligence and economic loss’
( 1967) 83 LQR 248,269-276. For Canada, see AM Linden Canadian T o r t h w (Toronto:
Butterworths, 6th ed, 1997) at 405406; LN Klar Tort Law (Toronto: Thomson Canada,
3rd edn, 2003) at 202-203, and leading judgments of the Supreme Court of Canada, for
example, Martel Building Ltd v Canada (2001) 193 DLR (4th) 1 at 12-13 and D’Amato
v Badger (1996) 137 DLR (4th) 129 at 133.
30. ‘The infliction of physical injury to the person or property of another universally
requires to be justified. The causing of economic loss does not’: Lord Oliver in Murphy
v Brentwood DC [ 19911 1 AC 398 at 487. See also Martel Building Ltd v Canuda (2001)
193 DLR (4th) 1 at 12 and D’Amaro v Badger (1996) 137 DLR (4th) 129 at 133.
54 Legal Studies

(ii) The occurrence of economic loss is a legitimate consequence of a

competitive economy and thus irrecoverable per se in the absence of
behaviour classified as wrongful.”
(iii) Liability may impose an unfair burden on the defendant (and the courts)
in that he or she may face an indeterminate number of claims (floodgates)”
or an indeterminate amount of liability (crushing liability). The spectre
of ‘liability in an indeterminate amount for a indeterminate time to an
indeterminate class’” continues to haunt tort law in both jurisdictions.
(iv) Liability may conflict with parallel schemes of liability in contract law”
or insurance.” The parties may either have intended their rights to be
governed by these instruments or have created a network or chain of
contracts whose risk allocation would be undermined by allowing a direct
cause of action in tort to cut across these contracts.36 Notably in the
business context, it may be more cost effective to allow inherent business
risks to be covered by insurance.”
(v) In relation to public body defendants, it will raise the following question:
whether this is the best use of resources, Parliamentary intent where the
body is statutory, and whether it would induce undue caution in public
bodies to the detriment of the general public they serve.
(vi) Arguments of efficiency may indicate that the imposition of liability
would not amount to the best use of resources.
In both systems, there is therefore a general acceptance that ‘liability must stop
somewhere’. In the words of Chief Justice McLachlin, ‘The search then must
be for a legal formulation which will permit recovery of economic loss in
appropriate cases, while excluding frivolous and remote claims.’”

31. See Lord Reid in Dorset Yachr Co v Home Office [ 19701 AC 1004 at 1027.
32. See Widgery J in Weller & Co v Foot and Mouth Disease Research Institute [ I9661
1 QB 569. See also Martel Building Ltd v Canada (2001) 193 DLR (4th) 1 at 12 and
D’Amato v Badger (1996) 137 DLR (4th) 129 at 133.
33. Ultramares Corp v Touche 255 NY Rep 170 and 179 ( 1931); 174 NE Rep 44 1 at
444 (1931) per Cardozo CJ. See also Hercules Managements Ltd v Ernst & Young
(1997) 146 DLR (4th) 577 at 592.
34. See Socittt Commerciale de Reassurance v Eras International Ltd (formerly Eras
( U K ) )[ 19921 1 Lloyd’s Rep 570 at 597-598; Simuan General Contracting Co v Pilkington
Glass Ltd (No 2 ) [ 19881 QB 758; Greater Nottingham Co-operative Societv Ltd v
Cementation Piling & Foundations Ltd [ I9891 QB 7 1 and Pac8cAssociates Inc v Buxter
[ 19901 1 QB 993. It is interesting that recent English attempts to extend liability have
focussed on the fact that it will complement contract law by fulfilling an ‘essential gap-
filling role’: see Lord Steyn in Williams v Natural Life Health Foods [ 19981 2 All ER
577 at 584.
35. Contrast the view of McHugh J in Perre v Apand Pry Lid (1999) 198 CLR 180 at
230.
36. See Marc Rich & Co AG v Bishop Rock Marine Co Ltd (The Nicolas H ) [ 19941
1 WLR 1071 (CA) and Lord Brandon’s dissent in Junior Books Ltd v Veitchi Co Ltd
[ 19831 1 AC 520, HL.
37. See La Forest J in The Norsk (Canadian National Railway Co) v Norsk Pacific
Steamship Co (1992) 91 DLR (4th) 289 at 302.
38. The Norsk (Canadiun National Ruilnuy Co) v Norsk Pacific Stearnship Co (1992)
9 1 DLR (4th) 289 at 366.
 Revisiting pure economic loss 55

It is the search for this legal formulation which has caused so much difficulty
in English and Canadian law. The courts have no doubt that such loss should
be limited. The difficulty is how this should be achieved. As will be seen
below, from the 199Os, the English and Canadian courts have adopted different
approaches toward the question of recovery for pure economic loss; a divergence
triggered by the House of Lords' gradual movement away from Anns. The
nature of this difference will be examined below.

A PARTING OF THE WAYS

The dramatic reversal of Anns in Murphy v Brentwood District Council3' may

be traced back to criticisms in Governors of Peabody Donation Fund v Sir
Lindsay Parkinson & Co Ltd in 1985," which found support both in the House
of Lords and Privy C o ~ n c i l . ~The
' condemnation in Murphy was particularly
severe:
'In my opinion it is clear that Anns did not proceed upon any basis of
established principle, but introduced a new species of liability governed
by a principle indeterminate in character but having the potentiality of
covering a wide range of situations, involving chattels as well as real
property, in which it had never hitherto been thought that the law of
negligence had any proper place.' J2
A general rule of non-recovery was thereby asserted, subject only to pre-existing
authority which supported a limited category of claims for negligent
misstatement under the Hedley Byrne rule of liabilit~.~'Otherwise, recovery
would only be permissible via the contractual matrix. In seeking to re-establish
certainty in this area, the House in Caparo Industriesplc v D i ~ k r n a n-~whilst
~
recognising the new three-fold test of foresight, proximity and whether liability
would be fair, just and reasonable - placed considerable faith in the
incremental test favoured by Brennan J in Council ofthe Shire of Sutherland
v Heyrn~n.~'The future therefore appeared to lie in a much narrower view of

39. [I9911 1 AC 398.

40. [I9851 AC 210.
41. See Yuen Kun Yeu v Attorney-General of Hong Kong [I9881 AC 175; Rowling v
Tukaro Properties Ltd [ 19881 AC 473; Hill v Chief Consrahle of West Yorkshire [ 19891
AC 53.
42. Murphy v Brentwood [ 19911 1 AC 398 at 471, per Lord Keith. Their Lordships
rejected more generous Canadian authority: Lord Oliver [ 19911 AC 398 at 488: 'The
suggested distinction between mere defect and dangerous defect which underlies the
judgment of Laskin J in Rivfow Marine Ltd. v Washingion Iron Works [ 19731 6 WWR
692 is, I believe, fallacious.'
43. Founded on Hedley Byrne & Co Ltd v Heller & Partners [ 19641AC 465. See Lord
Bridge in Murphy v Brentwood District Council [ 19911 1 AC 398 at 475: '[Pure economic
loss] is not recoverable in tort in the absence of a special relationship of proximity imposing
on the tortfeasor a duty of care to safeguard the plaintiff from economic loss.'
44. [ 19901 2 AC 605.
45. (1985) 157 CLR 424.
56 Legal Studies

liability. Even the concept of ‘proximity’ as central to the duty of care was put
under question:
‘... it is difficult to resist a conclusion that what have been treated as
three separate requirements are, at least in most cases, in fact merely facets
of the same thing . . . “Proximity” is, no doubt, a convenient expression so
long as it is realised that it is no more than a label which embraces not a
definable concept but merely a description of circumstances from which,
pragmatically, the courts conclude that a duty of care
The Canadian courts, however, chose a different path. The Supreme Court
in The Norsk4I refused to adopt the House of Lords’ condemnation of Anns
and continued to apply the Kumloops test. One sees here a clear break from
the English approach. La Forest J states firmly that: ‘Murphy v Brentwood
District Council does not represent the law in Canada.’4x Nevertheless, on
closer examination, one notes three distinct lines of reasoning in The Norsk.
Whilst that of Stevenson J has since been discredited, the reasoning of
McLachlin and La Forest JJ merits deeper analysis. McLachlin J adopted a
broad formulation of principle, favouring examination of ‘the relationship
between the parties, physical propinquity, assumed or imposed obligations
~ ~contrast, La Forest J favoured the
and close causal c ~ n n e c t i o n ’ .In
categorisation approach proposed by Professor Feldthusen in his influential
work, Economic Negligence: The Recovery of Pure Economic Loss,” and it is
this latter approach which subsequent case law has largely followed.

The categorisation approach

Here, liability is grouped not simply around common questions of fact, but in
light of the unique and distinct policy issues raised by each area of law. As
clarified by the Supreme Court in D’Amato v Badge$’ and Martel Building

46. See Lord Oliver [ 199012 AC 605 at 633. Note also the comments of Lord Bridge at
618.
47. (1992) 91 DLR (4th) 289. This is particularly significant in that in this case the
majority of the Supreme Court (3:2) was prepared to increase recovery for pure economic
loss by supporting a claim for contractual relational loss.
48. (1992) 91 DLR (4th) 289 at 303. See also McLachlin J at 365: ‘[Canadian courts]
will refuse to accept injustice merely for the sake of the doctrinal tidiness which is the
motivating spirit of Murphy.’
49. (1 992) 9 1 DLR (4th) 289 at 370: ‘Viewed in this way, proximity may be seen as
paralleling the requirement in civil law that damages be direct and certain. Proximity, like
the requirement of directness, posits a close link between the negligent act and the resultant
loss.’
50. (Toronto: Carswell, 4th edn, 2000). This work sets out the five categories of
economic loss cases, first put forward in ‘Economic loss in the Supreme Court of Canada’
(1990-1991) 17 Can Bus LJ 356, 357-358, and adopted by La Forest J in The Norsk
(1 992) 9 1 DLR (4th) 289 at 299-300 and Winnipeg Condominium Corp No 36 v Bird
Construction Co (1995) 121 DLR (4th) 193 at 199. See also ‘Liability for economic
loss: Yes, but why?’ (1999) 28 UW Aust L Rev 84. Note also Linden, above n 29, at
405406, Klar Tort Law, above n 29, at 203-204.
51. (1996) 137 DLR (4th) 129.
 Revisiting pure economic loss 57

Ltd v such categories are not exclusive. New categories may

emerge:
‘The reason for the broader five categories is merely to provide greater
structure to a diverse range of factual situations by grouping together cases
that raise similar policy concerns. These categories are merely analytical
tools’.5’
These five categories represent familiar heads of liability: the independent
liability of statutory public authorities (as seen in Kumloops itself), negligent
mi~representation,~~ negligent performance of a service,55negligent supply of
shoddy goods or and, following The Norsk, a limited category of
relational economic 10~s.~’ Whilst the law thus continues to develop on a case-
by-case basis, these individual heads of liability provide a framework for the
development of the law.58
A good example of this approach may be seen in Murtel Building Ltd v
Canadas9itself. In this case, the Supreme Court was asked whether Canadian tort
law would extend a new category of liability imposing a duty of care on those
engaged in commercial negotiations prior to contract.60 Here, the plaintiffs had

52. (2001) 193 DLR (4th) 1.

53. Martel (2001) 193 DLR (4th) 1 at 15 per Iacobucci and Major JJ giving judgment
for the court.
54. See eg Hercules Managements Ltd v Ernsr & Young ( 1997) 146 DLR (4th) 577 and
Queen v Cognos Inc ( 1 993) 99 DLR (4th) 626.
55. BDC Lttf v Hofstrand Farms Lrd (1986) 26 DLR (4th) 1 (delay in delivering envelope
by courier).
56. Winnipeg Condominium Corp No 36 v Bird Construction Co (1995) 12 1 DLR (4th)
193 (claim by subsequent purchaser for negligent construction of building).
57. Note the gloss following from Bow Valley Husky (Bermuda) Ltd v Saint John
Shipbuilding Lrd (1998) 153 DLR (4th) 385, which seems to reconcile the conflicting
approaches of McLachlin and La Forest JJ in The Norsk. Comment I Duncan Wallace
QC ‘Contractual relational loss in Canada’ (1998) 1 14 LQR 370.
58. This approach has received criticism, notably from the High Court of Australia and
Professor Stapleton, who has criticised Feldthusen for attempting ‘to organize precedents
in a manner that has no normatively justifiable basis’: ‘Comparative economic loss:
Lessons from case-law-focused middle theory’ (2002) 50 UCLA L Rev 53 1 , n 45. See
also Cane above n 16. Note also Stapleton’s criticism of what she terms the ‘pockets
approach’ in ‘Duty of care and economic loss: A wider agenda’ (1991) 107 LQR 249
(see also ‘In restraint of tort’ in P Birks (ed) The Frontiers ofLiability Vol I1 (Oxford:
Oxford University Press, 1994) and ‘Duty of care factors: A selection from the judicial
menus’ in P Cane and J Stapleton (eds) The Law ofObligations: Essays in celebration
ofJohn Fleming (Oxford: Oxford University Press, 1998)). Such criticism would appear
harsh. The real utility of the categorisation approach advocated by Feldthusen is that it
presents litigants with a structured approach which utilises the guidance of like cases
whilst identifying relevant policy concerns. Although one may question the categories
chosen, which will inevitably overlap in complicated factual situations, they represent no
more than an overview of cases where economic loss has been found to be recoverable.
What is important is the explicit connection between categorisation and policy.
59. (2001) 193 DLR (4th) 1. Comment I N Duncan-Wallace QC ‘Tender call obligations
in Canada’ (2001) 117 LQR 35 I; N Rafferty ‘Tortious and contractual liability arising
out of pre-contractual negotiations and the tendering process’ (2001) 17 PN 179.
60. A further claim based on contract failed due to the absence of proof of causation.
58 Legal Studies

been in a prior leasehold relationship with the defendant government department

and had complained that it had not taken reasonable care either in renegotiating
the lease or, when in a weakening rental market it resolved to put the matter to
tender, in the exercise of that process. The court indeed found that, in the course
of negotiations, the department’s agent had ‘displayed casual contempt towards
Martel and its personnel as illustrated by broken appointments and general disregard
of the minimum courtesy Martel could have reasonably expected.’6’ Nevertheless,
the court rejected Martel’s claim. Applying the Anns two-stage test, it found, on
the facts, sufficient proximity to satisfy stage one by virtue of the parties’ pre-
existing leasehold relationship and the defendant’s apparent willingness to
contract, but that the plaintiffs’ claim failed under stage two. In its view, the very
nature of the negotiation process rendered a new category of liability
inappropriate.
Martel is a useful case for identifying the methodology of the Supreme Court.
Anns (or Kumloops) is still applicable, but categories of liability are determined
by policy concerns. Although indeterminacy (a primary concern of the court)
was not a problem in this case, the court nevertheless focused on the inherent
risks of the negotiation process, the possible multiplicity of lawsuits, and, in
particular, economic arguments against recovery. It was accepted that it would
be inefficient to hold a defendant liable for private, as opposed to social, loss
and to insulate the claimants from the risks of the negotiation process by
intervention, which, in effect, imposed after-the-fact insurance. ‘The retention
of self-vigilance is a necessary ingredient of commerce.’62

DIFFERENT PATHS -DIFFERENT REASONING?

The common view is therefore that Canadian law approaches the question of
pure economic loss from a very different starting-point to its English
counterpart.63 Murphy would appear to impose upon claimants the burden of
persuading a reluctant court to accede to their request for compensation. In
contrast, the Canadian courts have developed five heads of potential liability,
are prepared to consider new heads as they arise, and openly utilise policy-based
reasoning in their judgments. The impression, therefore, is of a conservative
English approach at odds with its more receptive Commonwealth partner.@
Yet to analyse English law solely from the perspective of Murphy or
Canadian law in the form of Kumloops or even The Norsk is to ignore
important developments in both systems. As will be seen, from these starting
points, the systems have started to converge. Two cases illustrate the illusory
nature of these differences in practice: the Canadian case of Hercules

61. (2001) 193 DLR (4th) I at 19.

62. (2001) 193 DLR (4th) 1 at 20. Equally, the court rejected a duty of care in drafting
tender specifications on the basis that it would undermine the objective nature of the tender
process and lead to uncertainty.
63. See Lord Hoffmann i n Stovin v Wise [ 19961AC 923 at 949, although his Lordship
does question whether, if considerations of policy are properly analysed, this should
make a difference.
64. Markesinis, for example, noted in 1993 that Canadian law ‘scores over Murphy .. .
in its desire to abandon the “all or nothing” approach, which seems to appeal so much to
the House of Lords’: (1993) 109 LQR 5 at 12.
 Revisiting pure economic loss 59

Managements Ltd v Ernst & Younghsand the leading English case of Caparo
plc v Dickman.66
The facts of both cases bear a distinct similarity. Auditors had negligently
produced reports for a public limited company, which had been relied upon
by shareholders to their detriment. Despite the predictable use of divergent
tests - in Caparo the incrementalhhree-fold test and in Hercules the Anns two
stage test - the House of Lords and the Supreme Court of Canada both rejected
the shareholders’ claim. In Caparo, the House, turning to the Hedley Byrne
line of authority, focused on proximity. Recovery should be confined to those
cases where the statement or advice had been given to a known recipient for a
specific purpose of which the maker was or should have been aware and upon
which the recipient had relied and acted to his detriment. Otherwise, a duty of
care to ‘all and sundry’ would invoke the threat of indeterminate liability and
confer an unwarranted right on the world at large gratuitously to appropriate
expert k n ~ w l e d g e .Here,
~ ~ the purpose of the auditors’ report was to provide
the company and shareholders with an overview of the financial state of the
company, enabling shareholders to exercise their powers at the general meeting.
It was not intended to assist them in making informed decisions concerning
future investment in the company. Liability would therefore not be appropriate.
The analysis of the Supreme Court in Hercules Managements Ltd v Ernst &
Young, as may be expected, proceeds from a different starting-point. La Forest J
concentrated on questions of policy. Giving judgment, he noted that:
‘Whether the respondents owe the appellants a duty of care for their
allegedly negligent preparation of the 1980-82 audit reports, then, will
depend on (a) whether a prima facie duty of care is owed, and (b) whether
that duty, if it exists, is negatived or limited by policy considerations.’68
Proximity was found to exist. The injury was foreseeable and the defendant
ought to have foreseen reasonable reliance by the plaintiff such that the parties
‘can be said to be in a “special r e l a t i ~ n s h i p ” ’ . Nevertheless,
~~ at stage two,
policy concerns indicated that a duty of care would not be acceptable. The
purpose of the audit was to enable shareholders collectively to exercise control
over directors, such that losses suffered in their individual capacity would not
be within the scope of the accountant’s duty. To render the auditors liable to
any known class of potential claimants regardless of how they used the reports
would, in the view of the court, lead to an unacceptably broad expansion of
the bounds of liability.
Thus, while starting from the Anns two-stage test so determinedly rejected
by the English courts, the Supreme Court of Canada in Hercules adopted
reasoning which bears a distinct resemblance to that used by the House in
Caparo. In both cases, the courts rejected claims where the auditor could not

65. ( 1997) 146 DLR (4th) 577. Comment M E Deturbide (1998) 77 Can Bar Rev 260.
66. [ 199012 AC 605. Comment J G Fleming (1990) 106LQR 349 and R Martin ( 1 990)
53 MLR 824. Note also the similarities between the approach taken in Martel and the
position in English law: see P Giliker ‘A role for tort in pre-contractual negotiations? An
examination of English, French and Canadian law’ (2003) 52 ICLQ 969.
67. See Lord Bridge [ 19901 2 AC 605 at 621.
68. See above n 65 at 587.
69. See above n 65 at 589.
60 Legal Studies

reasonably be expected to know of the identity of the claimant and where

reliance was not within the purpose for which the report was prepared. Indeed,
one may argue, only two main differences divide the courts. First, although
both courts utilise policy-based reasoning, only in Hercules was policy
specifically identified, and treated as distinct from proximity. Secondly, the
Canadian court is not forced behind labels identifying proximity to justify its
reasoning. It may be suggested that this is merely a matter of semantics. If the
same result is achieved, does the form of the reasoning adopted matter? In my
view, the answer must be yes. One is far more able to understand and apply an
authority if the reason for the decision is openly analysed and discussed. If
facts (A + B) result in liability, then provided one deals only with this set of
facts, the intricacies of the reasoning seem irrelevant. The real importance arises
when one faces a different factual basis: (A + C), (B + C) or (A + B + C). Here,
more open discussion of the policy rationale of the first case will assist dealing
with this new set of facts and give the legal system both some form of certainty
and accountability to its litigants.
Nevertheless, these cases illustrate the gradual convergence of English and
Canadian law. Relevant factors may be termed ‘policy’ or ‘proximity’, but the
adoption of a different filing system does not alter the content of those files.
Such similarities are taken a step further by the Supreme Court of Canada in
the cases below.

Revisiting the Anns test

The leading Canadian case of Cooper v Hobart70 has been described by a
Canadian commentator as a ‘landmark decision’ which ‘signals the end of the
untrammelled expansion of negligence liability in the Canadian context’ .71
It has also been recognised as a significant move towards the House of Lords’
position on the duty Although Cooper concerned a claim for pure
economic loss, it now also provides the starting point for the treatment of all
negligence claims in Canada, as seen in the recent Supreme Court decision in
Odhavji Estate v W o o d h o u ~ eand
~ ~ subsequent lower court decisions.
The facts of the case bear an immediate resemblance to the Privy Council
decision in Yuen Kun Yeu v AG ofHong K ~ n g . ’ ~Here, it may be recalled, the
Commissioner of Deposit-Taking Companies had been sued on the basis that
he knew or ought to have known, had he taken reasonable care, that the affairs
of the company which had been registered had been conducted fraudulently,

70. (2002) 206 DLR (4th) 193.

71. J Neyers ‘Distilling duty: the Supreme Court of Canada amends Anns’ (2002) 118
LQR 22 1. See also S Pitel ‘Negligence: Canada remakes the Anns test’ [2002] CLJ 252
and N Rafferty ‘The test for the imposition of a duty of care: Elucidation or obfuscation
by the Supreme Court of Canada’ (2002) I8 PN 21 8.
72. See Klar, above n 29, p 167; P H Osborne The Law of Torrs (Toronto: Irwin Law,
2nd edn, 2003) pp 66-67; and N Rafferty ‘Developments in contract and tort law: the
2001-2002 term’ (2002) 18 Sup Ct L Rev (2d) 153 at 198.
73. (2004) 233 DLR (4th) 193, noted by N Rafferty (2004) 20 PN 74. Cooper had, by
February 2005, been cited in over 80 reported decisions.
74. [I9881 AC 175.
 Revisiting pure economic loss 61

speculatively and to the detriment of its depositors. In that case, the Privy
Council rejected mere foreseeability of harm as the sole criterion for liability
and considered other factors. Where the Commissioner was exercising powers
of a quasi-judicial nature which concerned the public, and there was no
ascertainable intention on the part of the legislature that the commissioner
should owe any statutory duty to potential depositors, liability should not lie.
Similarly, in Cooper, a class action had been brought by investors against the
Registrar of Mortgage Brokers for failing to suspend a broker for using funds
for unauthorised purposes, or at least to warn them of the broker’s breaches of
the requirements of the relevant Act. It was alleged that, had he acted sooner,
their losses would have been avoided or diminished. The Supreme Court,
applying Anns, rejected the claim. The investors had failed both to show
proximity under stage one and to overcome general policy concerns under
stage two of the test.
What is surprising about the case is the Supreme Court’s interpretation of
the Anns/Kamloops test. Rather than applying a mere test of foreseeability,
stage one now involved a search for an analogous case and, in the absence of
such a case, examination of the statute under which the Registrar acted. Where
the aim of the scheme was to provide a general framework to ensure the efficient
operation of the mortgage marketplace, which involved the balancing of a
myriad of competing interests whilst retaining the public’s confidence, it could
not be said that the Registrar assumed a duty to individual members of the
public. Further, under stage two, the discretionary and quasi-judicial nature
of the Registrar’s position, combined with concerns as to indeterminate liability
where there was no means of limiting the number of investors or amount of
money invested in the mortgage brokerage system, dictated against recovery.
To impose a duty of care, it was held, would effectively create an insurance
scheme for investors at great cost to the taxpaying public.
A number of distinct features stand out. The first, and most notable, is the
reference to analogous cases at stage one of the test,75 which suggests an
acceptance of the incremental approach recommended by the House of Lords
in Caparo.”j The court recognises expressly that such an approach provides
certainty to the law of n e g l i g e n ~ e . ~Stage
~ one, in addition, is given a more
significant role in which ‘proximity’ now extends to some policy
considerations. As stated in Cooper:
‘Defining the relationship may involve looking at expectations,
representations, reliance, and the property or other interests involved.
Essentially, these are factors that allow us to evaluate the closeness of the
relationship between the plaintiff and the defendant and to determine
whether it is just and fair having regard to that relationship to impose a duty
of care in law upon the defendant.’78

75. ‘Thestarting point for this analysis is to determine whether there are analogouscategories
of cases in which proximity has previouslybeen recognised. If no such cases exist, the question
then becomes whether a new duty of care should be recognised in the circumstances’:Edwards
v Law Society ofupper Canada (2002) 206 DLR (4th) 21 1 at 218.
76. [I9901 2 AC 605 at 618,628-629 and 633.
77. (2002) 206 DLR (4th) 2 11 at 204.
78. (2002) 206 DLR (4th) 21 1 at 204.
62 Legal Studies

Here the question of proximity between a regulator and a member of the

public would thus require consideration of the purpose of the statute involved;
a concern dealt with a stage two in Hercules above, but now promoted to the
initial stage.
One is left, therefore, with a checklist of factors: First, can one find an
analogous case? Second, if not, what is the nature of the parties' relationship,
including questions of foreseeable loss, proximity and policy? A third question
still remains: stage two of the Anns test. This is now relegated to policy
questions of a broader nature: indeterminate liability; justiciability; the impact
of public authority claims; liability for judicial or quasi-judicial decision-
making; insurance. Whilst it may seem somewhat confusing to raise policy
under both limbs of the Anns test, the Supreme Court identifies two distinct
heads of policy: those relating to the parties' relationship (stage one) and those
concerning broader social issues (stage two). For example, where a public body
is empowered by statute, liability will require consideration of its relationship
with the claimant with reference to the statute itself (stage one), and, more
generally, by consideration of policy concerns arising from public authority
liability (stage two). Stage two thus becomes a residual category, listing
arguments in the interests of society as a whole.
The companion case of Edwards v Law Society of Upper Canada19 adopted
the same reasoning. Here, the plaintiffs were victims of a gold delivery fraud in
which they had been encouraged to purchase gold via a solicitor's trust account.
No mines existed and no gold was ever produced. The Law Society of Upper
Canada had started an investigation after receiving a letter from the solicitor
regarding the unorthodox use of his trust account, and it was found that over
US$ 9m had gone through the account. The plaintiffs sued the Law Society
for failing to ensure that the solicitor operated his account according to its
regulations, or for failing to warn them that it was not exercising its supervisory
jurisdiction. Again, the claim failed on both limbs of the Anns test: at stage
one due to the absence of any analogous case and the fact that the statute, as
interpreted by the court, sought to protect solicitors' clients and thereby the
public as a whole and not any particular individual dealing with a solicitor in
a business promotion,80 and, at stage two, for the same reasons stated in Cooper
above. The Supreme Court did not appear unsettled that English law might
reach the same result. Its only dispute with Yuen Kun Yeu was that it suggested
a limited role for policy concerns: 'The importance ofAnns lies in its recognition
that policy considerations play an important role in determining proximity in
new situations.'x'

CATEGORISATION: AN EXAMPLE FOR ENGLISH LAWYERS?

Cooper thus marks a distinct movement towards the Cuparo test. Indeed,
considering the reasoning of the courts in cases such as Hercules and Martel,
Cooper would seem to represent a natural evolution towards a more structured,

79. (2002) 206 DLR (4th) 2 1 1 .

80. The investors were not even clients of the solicitor in question, but had simply
deposited money in his account in the course of their transaction with a third party.
81. Cooper (2002) 206 DLR (4th) 193 at 201.
 Revisiting pure economic loss 63

if inevitably restrictive, approach focussed on categorisation and policy. This

is particularly significant in the context of pure economic loss. Where policy
dictates a limited number of claims, a denial of liability can only be regarded
as legitimate if the parties are able to understand when and why liability will
arise. Whilst the Canadian courts have advocated that ‘we think it useful
expressly to ask, before imposing a new duty of care, whether despite
foreseeability and proximity of relationship, there are other policy reasons why
the duty should not be imposed’,** the reasoning of the English courts has, in
contrast, been less than transparent. As will be seen below in the brief survey
of English law, such an open approach to the question of recovery for pure
economic loss may, despite judicial reservations, provide welcome clarity to
the current state of the law.

A MULTITUDE OF RICHES

The main difficulty in English law would seem to arise from the fact that one
simple concept - the ‘duty of care’ - is currently expressed by a number of
different, overlapping tests where the courts openly recognise that no simple
formula or touchstone may be found.x’ When examining a claim for pure
economic loss, the court may choose to adopt the incremental approach, the
three-fold Caparo test or the concept of (voluntary) assumption of
responsibility, or a combination of all three, in deciding whether to impose a
duty of care on the defendant. Brooke LJ recently has identified ‘at least’ two
further relevant concerns: the purpose for which a service was performed and
the principles of ‘distributive justice’.*4 This latter concept appears to be an
argument of last resort reserved for ‘hard’ cases, such as the wrongful
conception cases, where, in the absence of principle, faith is placed on the
‘instinctive’ moral view of the traveller on the U n d e r g r o ~ n d . ~ ~
Such a varied assortment of tests does not lend itself to clarity or help to
identify the real policy issues involved in any such determination. The relative
simplicity of Murphy - no liability in the absence of a contractual relationship
or Hedley Byrne liability - has long since been muddied. One may note, in
particular, the extension of the Hedley Byrne exception by means of the concept
of ‘voluntary assumption of responsibility’ (‘the extended Hedley Byrne

82. Cooper (2002) 206 DLR (4th) 193 at 203 (my emphasis).
83. See Lord Roskill in Caparo plc v Dickman [ 19901 2 AC 605 at 628. See also Sir
Brian Neil1 in Bank of Credit und Commerce International (Overseas) Ltd v Price
Waterhouse (No 2 ) [ 19981 PNLR 564 at 583-587.
84. See Parkinson v St James and Seacroft University Hospital NHS Trust [2002] QB
266 at 273-276 and McLoughlin v Jones [2002] QB 13 12 at 1323.
85. See Lord Steyn in McFarlane v Tayside Health Board [2000] 2 AC 59 at 82. See
also Lord Hoffmann in White v ChiefConstable ofSouth Yorkshire [ 19991 2 AC 455 at
502, where h i s Lordship contrasted the concept with that of correctivejustice and expressed
(at 51 1) a willingness to abandon the incremental approach in favour of a ‘system of
rules which is fair between one citizen and another’ when the authority in question led to
an unsatisfactory result.
64 Legal Studies

principle’). Despite overt academic and judicial criticism,86this concept has

been promoted by the House of Lords as a means of supporting claims for pure
economic loss and of reconciling the negligent misstatement line of authority
with the general Caparo test. In the words of Lord Goff in the leading case of
Henderson v Merrett Syndicates Ltd:
‘the concept provides its own explanation why there is no problem in cases
of this kind about liability for pure economic loss; for if a person assumes
responsibility to another in respect of certain services, there is no reason why
he should not be liable in damages for that other in respect of economic loss
which flows from the negligent performance of those services. It follows that,
once the case is identified as falling within the Hedley B y m e principle, there
should be no need to embark upon any further enquiry whether it is “fair, just
and reasonable” to impose liability for economic loss.’ *’
On this basis, there can be no objection to recovery for pure economic loss
resulting from the negligent performance of services,8xeven where the person
complaining is only a third party.*’ This would appear to extend to omissions,
even in the absence of any reliance by the claimant.’” As stated by Lord Steyn
in Williams v Natural Life Health Foodx9‘
‘The extended Hedley Byrne principle is the rationalisation or technique
adopted by English law to provide a remedy for the recovery of damages in
respect of economic loss caused by the negligent performance of services.’
Yet, this has not brought clarity to the law. An exact definition of the
principle has proved illusive, and it is difficult to disagree with Lord Oliver’s
assessment in Caparo that it is ‘a convenient phrase but ... [i]t tells us nothing
about the circumstances from which such attribution arises’.92 Although in
recent years the ‘voluntary’ nature of the assumption of responsibility has been

86. See, notably, K Barker ‘Unreliable assumptionsin negligence’ (1993) 109 LQR461, in
which he highlights the difficulties in defining the meaning of ‘voluntary assumption of
responsibility’, B Hepple ‘The search for coherence’ (1997) 50 CLP 69 at 88; and P Cane
Tort Law andEconornic Interests (Oxford: Oxford University Press, 2nd edn, 1996)pp 177
and200. Notealsojudicial criticism: Lord Griffiths in Smith v EricSBush [ 19901 1 AC 831,
862 and 864-865; Lords Roskill and Oliver in Cuparoplc v Dickman [ 199012 AC 605 at
628 and 637 respectively; Lord Mustill dissenting in White v Jones [ 199512 AC 207.
87. [I9951 2 AC 145 at 181. See also Lord Steyn in Williams v Naturul Lqe Health
Foods [ 19981 2 All ER 577 at 58 1.
88. Henderson v Merrett Syndicates Ltd [ 199512 AC 145; White v Jones [ 19951 2 AC
207.
89. Henderson v Merrett Syndicates Ltd [ 199512 AC 145; Spring v Guardian Assurance
p l c [ 19941 2 AC 296; White v Jones [ 19951 2 AC 207; Gorham v British
Telecommunicationsplc [2000] 4 All ER 867.
90. White v Jones [ 19951 2 AC 207. Here, potential beneficiaries to a will recovered
their pure economic loss resulting from the solicitor’s negligent omission to re-draft their
father’s will in their favour, although Lord Nolan did suggest (at 295) that reliance did
exist on the family solicitor.
91. [1998]2AllER577at581.
92. [1990] 2 AC 605 at 637.
 Revisiting pure economic loss 65

dropped as unduly confusing,” there still remains the question of when

responsibility will be ‘assumed’. As noted by whilst it may be relatively
straightforward to identify an assumption of responsibility in a two-party
situation, it is far more difficult to identify when a third party is involved.”
Further, despite the statements of Lord Goff, its relationship with the other two
tests is uncertain. Does it replace the Cupuro test in the context of all pure
economic loss claims, claims for the negligent performance of services, or
claims for the negligent provision of information? Do the tests overlapy6 or
complement each other?97 Where does the incremental test fit in?
Even the recent addition of the ‘distributive justice’ test would appear to
offer little clarity. Reserved for ‘difficult’ cases, it represents a fallback appeal
to the moral view of the ‘reasonable person’, as interpreted by the judge. Whilst
this sounds like an appeal to policy, the House in McFurZune emphatically
stated that it was a question of ‘legal’, not ‘public’ policy.98 Such a distinction,
however, is far from clear, although it does permit the courts to be seen to defer
broader social issues to Parliament. Legal policy, we are assured, merely
consists of the moral theory of distributive justice and the requirements of being
just, fair and rea~onable.~~ Setting aside the philosophical questions this raises,
a number of fundamental questions remain unanswered: what would the
reasonable person regard as acceptable? On what basis? How does it differ in
reality from what is fair, just and reasonable?lW In the absence of any
93. It is far from easy to accept that an obligation imposed by law is undertaken
voluntarily: see May LJ in Merrett v Babb [2001] QB 1174 at 1193. The test is clearly
meant to be objective, not subjective: see Lord Goff in Henderson v Merrert Syndicates
Ltd [ 19951 2 AC 145 at 18 1 and Lord Steyn in Williams v Natural Life Health Foods
[ 199812 All ER 577 at 582. It has further been clarified that the responsibility assumed
refers to the task undertaken and not the assumption of legal liability: see Lord Browne-
Wilkinson in White v Jones [ 19951 2 AC 207 at 273.
94. T Weir Tort Law (Oxford: Oxford University Press, 2002) p 37.
95. Contrast, for example, the recent case of Commissioner of Police of the Metropolis
v Lennon [2004] 2 All ER 266 and White v Jones [ 19951 2 AC 207.
96. See Lord Goff in Henderson v Merrett Syndicates Ltd [ 19951 2 AC 145 at 1 8 I .
97. See Clerk and Lindsell above n 29, at 7-95 and 7-23: ‘Rather than viewing assumption
of responsibility as a additional or alternative to the three-fold test, it is suggested that it
be seen as complementary, as means of confirming that the requirements of proximity
and fairness have been met.’ See Bank of Credit and Commerce International (Overseas)
Ltd v Price Waterhouse ( N o 2 ) 119981 PNLR 564 at 583-587. Approved in Parkinson
v St James and Seacrofr University Hospital NHS Trust [2002] QB 266 by Brooke LJ at
273 as a statement which ‘draws a lot of the threads together in a helpful way’.
98. See Lord Steyn in McFarlune [2000] 2 AC 59 at 83: ‘That does not mean that I
would decide the case on grounds of public policy. On the contrary, I would avoid those
quicksands.’
99. Lord Steyn in Rees v Darlington Memorial Hospital NUS Trust [2004] 1 AC 309
at 322. See also Lord Millett in McFarlane [2000] 2 AC 59 at 108: ‘Legal policy in this
sense is not the same as public policy, even though moral considerations may play a part
in both. The court is engaged in a search forjustice, and this demands that the dispute be
resolved in a way which is fair and reasonable and accords with ordinary notions of what
is fit and proper.’
100. Such difficulties are apparent in McFarlane where, of the judges adopting the duty
of care analysis, Lord Steyn ([2000] 2 AC 59 at 83) finds that the claim would fail for
reasons of distributive justice and, if necessary, under the fair, just and reasonableness
test and Lords Slynn and Hope both decide the case on this latter basis.
66 Legal Studies

satisfactory response to these questions, one is left to conclude that distributive

justice amounts to no more than another label signifying when a duty of care
will be found.’”’
Faced with a variety of tests, the courts have sought to compromise. In
Watson v British Boxing Board of Control,Io2 for example, Lord Phillips MR
found liability on the basis that there was an assumption of responsibility and
that liability would be fair, just and reasonable. It would therefore appear safest
to justify liability on the basis that it satisfies all relevant tests. As May LJ
commented in Merrett v Babb:
‘In my view, it is very often a helpful guide in particular cases to ask
whether the defendant is to be taken to have assumed responsibility to the
claimant to guard against the loss for which damages are claimed. But I
also think that it is reaching for the moon - and not required by authority -
to expect to accommodate every circumstance which may arise within a
simple short abstract formulation. The question in each case is whether the
law recognises that there is a duty of care.’In3
This would appear to take us little further. In seeking a rationale for recovery
of pure economic loss, the current law offers limited guidance. The star of
‘assumption of responsibility’ appears to be waning as the courts accept that
‘The phrase simply means that the law recognises that there is a duty of care. It
is not so much that responsibility is assumed as that it is recognised or imposed
by the law.”04 The notion of ‘distributive justice’ has appeared in recent case
law, but, as stated above, has been applied where the courts cannot avoid
discussion of policy and, despite its philosophical basis, offers little guidance
other than an appeal to general morality. Whilst it is ‘a practical attempt to
preserve the general perception of the law as a system of rules which is fair as
between one citizen and an~ther’,’”~ it offers little assistance in explaining
our treatment of economic loss claims generally. It is the central question of
when the duty will be recognised or imposed which needs to be addressed.
The tests used in recent cases do little to clarify this issue.

CONCLUSION:REVISITING THE ENGLISH APPROACH TOWARDS

PURE ECONOMIC LOSS CLAIMS

In view of the difficulties outlined above, it is therefore suggested that English

lawyers should seriously consider the benefits of the categorisation approach

101. See L C H Hoyano ‘Misconceptions about wrongful conception’ (2002) 65 MLR

883. It is of little surprise, therefore, that it was used in White to justify a decision in the
absence of any ‘refined analytical tools’: Lord Steyn [ 19991 2 AC 455 at 500.
102. [2001] QB 1134.
103. [2001] QB 1 174 at 1193. See also Colman J in Commissioners of Customs and
Excise v Barcluys Bunkplc [2004] 1 Lloyd’s Rep 512,587,588.
104. See Lord Slynn in Phelps v Hillbigdon LBC [2001] 2 AC 61 9 at 654 (also Lord Clyde
in Phe/psat 670: ‘Opinionhas differed on the question whether the language of an assumption
of responsibilityis useful or not. . .The expression may be descriptive ratherthan definitive.’)
Approved by Sedley LJ in Dean v Allin C? Watts [2001] 2 Lloyd’s Rep 249 at 264.
105. Lord Hope in McFurkine [2000] 2 AC 59 at 96.
 Revisiting pure economic loss 67

adopted by the Canadian courts towards pure economic loss claims. The mixed
reception C o o p e r has received should not distract from the benefits of
categorisation in this context. Those authors criticising the reasoning in Cooper
have not questioned the result, but focussed on the difficulties arising from the
consideration of policy arguments at two stages of the process.Io6 Klar, for
example, argues that the previous approach benefited from a degree of clarity
and simplicity, which is lacking in the new ‘three-stage’ approach.Io7 Yet, these
arguments focus on Cooper as a general test for the duty of care. As Feldthusen
notes, ‘Fortunately, the Supreme Court has previously laid a clear and credible
foundation for economic loss analysis that should organize the debate without
restricting it unduly in future.’Io8 Such difficulties, therefore, should not diminish
the validity of the Supreme Court’s treatment of pure economic loss claims.Iw
It is the more open use of policy arguments which is significant here. The
Supreme Court of Canada appears to be far more willing than its English
counterpart to analyse the policy questions facing any court deciding a claim
for pure economic loss. Cooper-Stephenson notes that:
‘Theoretical debate in the Supreme Court of Canada is now more open and
articulate. It is more searching than one finds, for example, in England, where
the House of Lords often hides policy decisions behind linguistic dexterity when
interpreting previous cases - sophistry p a r excellence in some instances.”I0
This is not to argue that the English courts do not make occasional references
to policy, most notably recently in the context of distributive justice. These
statements are helpful, but do not provide a structured regime whereby parties
are made aware of the rationale underlying treatment of their claims. Indeed,
the retreat from the Anns test for liability in negligence would appear to
represent, in part, a rejection of the need to articulate clear policy bases for
rejecting liability.
Yet such questions cannot be avoided. Even the seemingly innocuous
purpose test hides, in reality, policy constraints in determining the basis on

106. See eg B Feldthusen ‘TheAnnslCooper approach to duty of care for pure economic
loss: The emperor has no clothes’ (2002) 18CLR (3d) 67 and R Brown ‘Still crazy after all
these years: Anns, Cooper v Hobart and pure economic loss’ (2003) 36 UBCL Rev 159.
This causes particular problems in view of the fact that stage one policy issues will give rise
to a prima facie duty of care. One may also note Chief Justice McLachlin’s rather loose use
of categorisation, which is more reminiscent of her broad statement of principle in The
Norsk ( 1992) 9 1 DLR (4th) 289 than the position taken by La Forest J in that case.
107. See L N Klar ‘Foreseeability, proximity and policy’ (2002) 25 Advocates’ Q 360.
108. See n 106 above.
109. See Klar, above n 29 at 203-204 and Osborne The Law of Torts, above n 72, at 162,
which both continue to analyse pure economicloss according to the Feldthusencategorisation.
110. ‘The fairest of them all: The Supreme Court of Canada’s tort jurisprudence’ (2002)
17 Sup Ct L Rev (2d) 1 (reproduced in S Beaulac, S G A Pitel and J L Schulz The Joy of
Torts (Markham, Ontario: LexisNexis Canada, 2003)).
111. As Cane notes, ‘At the end of the day, courts have to choose to favour one party or
the other: to be “pro-plaintiff” or “pro-defendant”; and the concept of “purpose” does
not relieve them of this choice’: P Cane Tort L a w and Economic Interests above n 86,
pp 178-179. This is particularly apparent in Caparo where the court is clearly influenced
by the floodgates argument and Lord Oliver [ 190012 AC 605 at 642 expressly finds ‘no
pressing reason of policy which would require such an extension [of liability]’.
68 Legal Studies

which the purpose is identified.”’ In Cooper, the Supreme Court appears to

have reproduced the concerns of the Caparo test within a policy-based
framework. The A n n s test is still utilised, but ‘revisited’ in the light of
subsequent developments.”* Although C o o p e r would suggest a more
restrictive approach towards pure economic loss claims generally,”’ this has
not prevented the courts from expanding existing categories of liability. In
Hughes v Sunbeam Corp (Canada),”‘ therefore, the Ontario Court of Appeal
extended the scope of the ‘negligent supply of shoddy goods or structures’
category, as enunciated by the Supreme Court in Winnipeg Condominium Corp
No 36 v Bird Construction Co,’I5 to include non-dangerous products which
nevertheless gave rise to safety concerns in view of public reliance on the
product (here a defective smoke alarm).
Such developments may be contrasted with the position in Australia where
the High Court of Australia has moved away from the Caparo test.Il6 In Perre
v Apand Pty,”’ for example, the majority of the court favoured a more flexible
approach focusing on a combination of factors: the likelihood of harm,
knowledge or means of knowledge of an ascertainable class of vulnerable
persons who were unable to protect themselves from harm, and loss occurring
from activities within the defendant’s control. ‘I* Vulnerability, indeterminacy
and the desire not to render ordinary business conduct tortious were stressed
as factors influencing the incremental development of the law in the absence
of a unifying principle. Liability therefore rests not on any notion of proximity,
but by reference to existing principles and cases where a duty has previously
been established.’” Yet, as indicated by textbook writers,l*O this gives limited
guidance to the courts and, moreover, represents a radical move away from the
position in English law.”’ Whilst it seems unlikely that the English courts

112. See McLachlin LCJ (2002) 206 DLR (4th) 193 at 196. See also at 202: ‘Anns, as
“properly understood”, continues to provide a useful framework in which to approach
the question of whether a duty of care should be imposed in a new situation.’
113.Note the application of Cooper in Rogers v Faught (2002) 212 DLR (4th) 366
(Ontario Court of Appeal); Fraser v Westminer Cannda Ltd (2003) 228 DLR (4th) 5 13
(Nova Scotia Court of Appeal); and Hall v Bennett Estate (2003) 227 DLR (4th) 263
(Ontario Court of Appeal).
114.(2002) 219 DLR (4th) 467.
115. (1995) 121 DLR (4th) 193 (claim by subsequent purchaser for negligent construction
of building).
116. ‘The three-stage approach of Lord Bridge ... [in Caparo]does not represent the law
in Australia’: Sullivan v Moody (2001) 207 CLR 562,579. See, most recently, Woolcock
Street Investments Pty Ltdv CDG Pty Ltd (2004) 205 ALR 522. Feldthusen is predictably
critical of an approach which ‘encourages an expansive and uncertain case-by-case
approach to economic loss generally’: (2000) 8 Torts L Rev 33,52.
117.(1999) 198 CLR 180.
118. The court drawing on Caltex Oil Pty Ltd v The Dredge ‘ Willemstad’ (1 976) I36
CLR 529, rejected by the Privy Council in Candlrwood Navigation Corpn Ltd v Mitsui
Osk Lines [ 19861 AC 1 at 24 and in Canada by The Norsk (1992) 91 DLR (4th) 289.
119. See JA Riordan The Laws ofAustralia: Torts (Sydney: Law Book Co, 2003) 33.2
[161.
120. See Riordan, above n 1 19.
12l.The attempt by Kirby J to support the Caparo principle with explicit recognition of
the policy choices involved has received little support in Australia, as recognised by the
judge himself in Woolcock (2004) 205 ALR 522.
 Revisiting pure economic loss 69

would be prepared to move to the Australian position, the Canadian approach

offers a more acceptable alternative. By expressly engaging in a policy debate,
the Canadian courts present both lawyers and society in general with a greater
understanding of the underlying motivation of the courts and give future courts
guidance as to what factors need be taken into consideration.
It is submitted that it would not be difficult for English law to move in this
direction. A brief overview of this area of law reveals five obvious categories
in which certain duty issues stand out. Although these are by no means
comprehensive and additional, less explicit, policy grounds can no doubt be
found, they represent a starting point for analysis and discussion of the law:

(i) Negligent misstatement claims

Duty issues: Indeterminate and crushing liability, reasonable reliance,’22
purpose, relationship between the adviser, advisee and any relevant third party,
size of any class to which the advisee belongs, state of knowledge of adviser,’23
insurability of risk.’24

(ii) Negligent performance of services

Duty issues: Indeterminate and crushing liability, reasonable reliance (?),I2’
would liability distort or subvert any other area of law?’26some form of
undertaking of responsibility,’*’ ‘practical justice’.’*s

(iii) Wrongful conception’*’

Duty issues: Distributive justice,”O questionable utility of costbenefit
analysis,”’ the birth of a healthy child is a blessing not a detriment,”* human
dignity.‘33

122. Hedley Byrne & Co Ltd v Heller & Partners [ 19641 AC 465.
123.See James McNaughton Paper Group Ltd v Hicks Anderson & Co [1991] 2 QB
113 at 125-126 per Neil1 LJ, in which his Lordship sets out the elements which might
alternatively be described as an undertaking of responsibility.
124. Hoffmann J in Morgan Crucible Co plc v Hill Samuel & Co Ltd [ 1991 ] Ch 295 at
302-303.
125. This is questionable in White v Jones [ 19951 2 AC 207.
126. Henderson v Merrett Syndicates Ltd (No I ) [ 199512 AC 145 and Spring v Guardian
Assurance plc [ 19951 2 AC 296
127. Henderson v Merrett Syndicates Lid (No I ) [ 19951 2 AC 145
128. White v Jones [ 19951 2 AC 207 at 259-260, per Lord Goff (see also Gorham v
British Telecommunications plc [2000] 4 All ER 867).
129. See CR Symmons ‘Policy factors in actions for wrongful birth’ (1987) 50 MLR 269.
130. See Lord Steyn in McFarlane v Tayside Health Board [2000] 2 AC 59, but note
criticisms above.
131. See Lords Hope and Millett in McFarlane at 89 and 114 respectively.
132.Lord Millett [2000] 2 AC 59 at 114. Query whether the birth of a disabled child
continues to justify a sum representing the ‘additional’ costs of bringing up a disabled
child: see Rees v Darlington Memorial Hospital N H S Trust [2004] 1 AC 309.
133.Rees v Darlington Memorial Hospital N H S Trust [2004] 1 AC 309.
70 Legal Studies

(iv) Negligent acts of public authorities

Duty issues: Indeterminate and crushing liability; justiciability; alternative
remedial bases, danger of over-cautious and defensive conduct inter-
disciplinary nature of system(?),IJsdelicate and sensitive nature of decisions.'36

(v) Defective product economic loss

Duty issues: Indeterminate liability, lesser interest for which something more
is required to justify l i a b i l i t ~ , ' ~conflict
' with contract law,"* i n ~ u r a n c e . ' ~ ~

It may be argued that this is simply restating that law as it stands. Does a
structured approach add anything to the law? I would argue strongly that it
does. By identifying the concerns the court must address, one gives clarity to
the law. Therefore, we can state that a claim for negligent misstatement against
a public authority will raise, to a greater or lesser extent, the concerns listed in
categories (i) and (iv). A novel case may raise different concerns. For example,
if English law wished to develop liability in tort for the negligent conduct of
pre-contractual negotiations, concentrating on the defendant's conduct and
not simply negligent misrepresentations, one can focus on the unique concerns
raised in this context, as demonstrated by the Supreme Court in Mnrtel
discussed above.'40 Categorisation forces us to consider how we approach each
area of law: should (i) and (ii) be one extended category or do they raise distinct
concerns? Should there be a separate category for the 'Negligent drafting of
wills' or even 'Domestic house surveys', thereby justifying the approach taken
by their Lordships in cases such as White v Jones or Smith v Eric S Bush?'4'
The development of categories grouped around common policy concerns
would allow the English courts to focus on why recovery should be limited
and thereby promote the rational and coherent development of this area of law.
Further, it is important for the correct development of the law to question the
validity of these concerns. Demands have often been made for the courts to
support their reasoning with empirical research. For example, in assuming that
liability would be better covered by insurance, or, on the contrary, that existing
insurance structures would not survive the imposition of liability, it has
frequently been questioned on what basis these assumptions on drawn. An

134.Lord Slynn in Barrett v Enfield LBC [2001] 2 AC 550 at 568-569 comments that
this is a factor o f little, if any, weight.
135. Doubted by Lord Clyde in Phelps v Hillingdon LBC [2001] 2 AC 619 at 674.
136.The general statement by Lord Browne-Wilkinson in X (Minors) v Bedfordshire
CC [ 19951 2 AC 633 at 749-75 1 must now be reconsidered in the light of subsequent
decisions of the House o f Lords in Barrett v Enfield LBC [2001] 2 AC 550 and Phelps
v Hillingdon LBC [2001] 2 AC 619: see D v East Berkshire Communify Health NUS
Trust [2004] QB 558.
137. Murphy v Brentwood DC [ 1991 1 1 AC 398 at 487, per Lord Oliver.
138. See Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [ 19881QB 758;
Greater Nottingham Co-operative Society Ltd v Cementation Piling & Foundations Ltd
[ 19891 QB 7 1 ; and Pacific Associates Inc v Baxter [ 19901 1 QB 993
139.Spartan Steel v Martin [ 19731 Q B 27 at 38 per Lord Denning.
140.Martel Building Ltd v Canada (2001) 193 DLR (4th) I .
141. [ 19901 I AC 83 1.
 Revisiting pure economic loss 71

open discussion of the policy grounds invoked would, it is hoped, finally enable
the courts to address calls for empirical research to verify the import of the
policy arguments raised.
There is no simple solution to the question of recovery for pure economic
loss in tort law. It will always raise difficult questions as to the scope of liability.
It is submitted that the adoption of a framework which seeks to find a rationale
for recovery and to avoid arbitrariness is one worth considering, particularly
when it derives from a system with such a long-standing relationship with
English law.