Chapter Pure Economic Loss

Revision Aid

1. Definition:

Pure economic loss is financial damage that stems from the negligence of the defendant but is not a
result of either physical injury or damage to property.

Traditionally the law of tort compensated for pure economic loss resulting from fraud through the tort of
deceit.

Derry v Peek: it was held that the defendant must either know that a statement is false or is reckless as
to whether the statement is true.

There has however been reluctance to compensate for pure economic loss caused by negligent words.
Even where the loss is foreseeable.

This is because traditionally contract was the means by which this loss was compensated and also the
floodgates argument.

This area of law has developed inconsistently.

2. Origins of Pure Economic Loss:

Candler v Crane Christmas: a third party suffered financial loss because of relying on the work of a firm
of accountants. Court of Appeal held that no duty of care was owed by the accountants to the third
party. Lord Denning stated that there should be a duty of care if the defendants knew the information
was going to be used and for what purpose.

This dissenting judgment was followed in

Hedley Byrne v Heller: even though there was no liability in this case on account of the disclaimer, the
court held that a duty of care would exist in relation to statements where there is a special relationship
between the giver and recipient of advice.

This case also laid down the elements needed to establish duty of care.

Anns v Merton London Borough Council: there was judicial expansion of liability under negligence and
cracks in the walls of the claimant’s house were compensated for.

Junior Books v Veitchi: HOL allowed recovery for a defect in the floor.

In the 1980s the situation was that a claimant could recover for economic loss caused by negligent
statements under Hedley Byrne and for economic loss caused by negligent acts under Anns and Junior
Books.
Murphy v Brentwood: this overruled Anns and the HOL put a stop to the possibility that defects in
products could be equated with damage to property and could not be recovered under economic loss.
Also added the additional requirement of

3. Current Law:

Economic loss arising from acts not recoverable in negligence.

Economic loss arising from statement and advice is recoverable if fitted into the requirements of Hedley
Byrne.

4. Hedley Byrne requirements:

In order to recover for economic loss caused by negligent statement/advice there must be:

(a) Special relationship between the parties.

(b) Voluntary assumption of responsibility by the party giving advice.
(c) Reliance on that advice by the party receiving it.
(d) It must have been reasonable for that party to have relied on the advice.

Caparo v Dickman added the extra element of having to show that the claimant suffered some loss
when relying on that information or advice.

5. Special Relationship:

Hedley Byrne v Heller: the court did not explain a special relationship but set out the requirements for
its existence. There should be a reliance on by the claimant on the defendant’s special skill and
judgment. Secondly there should be reasonable knowledge that the claimant will be relying on the
statement and it should be reasonable in the circumstances for the claimant to rely on the defendant.

Initially special relationship was taken to mean a relationship where the person giving the advice was in
the business or appeared to be in the course of business of giving advice that was being requested.

Mutual Life Assurance v Evatt: it was suggested that a special relationship could be any business or
professional relationship. It was held that insurance companies are not in the business of giving advice
about business and so the claim failed.

Howard Marine Dredging v Ogden and Sons: the suggestion in Mutual Life Assurance was confirmed.

Esso Petroleum v Mardon: Court of Appeal held that in predicting how much petrol will be sold the
petroleum company had assumed a responsibility to Mardon who had relied on their expertise.

Social relationships are not included in special relationships.

Chaudry v Prabhakar: liability was imposed on the defendant for giving advice regarding the sale of a
car. But the Court of Appeal made it clear that this was an unusual case and as a general rule there is no
liability in social relationships.
Lennon v Commissioner of the Metropolis: Court of Appeal held that even though the personnel officer
was not a professional adviser, she had led the claimant to believe he could rely on her advice instead of
telling him the question was out of her sphere of experience.

6. Reasonable Reliance:

The defendant must know or be in a position to reasonably expect to know that the claimant is relying
on the statement. Moreover this reliance must be reasonable.

Caparo Industries v Dickman: House of Lords held that the auditors’ report was not prepared for the
purpose it was used for and defendants were not liable.

But there have been cases where the courts have held that advice given for one purpose does not always
mean it is unreasonable for the recipient to rely on it for another purpose.

Law Society v KPMG: the accountants to a solicitor’s firm failed to uncover fraud by a senior partner.
When uncovered, 300 clients claimed compensation from the Law Society that in turn claimed from the
accountants. The Court of Appeal held that if the accountants’ reports failed to highlight the fraud it was
foreseeable that loss to the fund of the Law Society would occur and they were therefore held liable.

Reliance is less likely to be proved if both parties are experts.

If the statement does not influence the claimant’s decision then there will be no liability in negligent
misstatement.

JEB Fasteners v Marks Bloom and Co: it was shown that the reason the claimant took over the company
was to acquire the expertise of the directors and he was not concerned about the value of the stock. The
action failed as causation could not be proven.

7. Voluntary Assumption of Responsibility:

When a person is asked for advice in a business context they may one of three things:

(a) Not give advice.

(b) Give advice but provide a disclaimer.
(c) Give advice without a disclaimer.

It is in the third scenario that a person will be considered as having voluntarily assumed responsibility for
that advice.

Commissioner of Police of the Metropolis v Lennon: the officer lost his entitlement having relied on
advice given to him and the court held there was liability as the adviser had voluntarily assumed
responsibility for advising the claimant.

Patchett v Swimming Pool and Allied Trades Association: the advice was given on a website run by the
defendant. There was no assumption of responsibility for the information given by the defendant. The
degree of reliance was limited as customers had to obtain an information pack.
The responsibility must be assumed voluntarily.

Customs and Excise Commissioners v Barclay’s Bank: the House of Lords held that the bank had not
voluntarily assumed responsibility for safeguarding the money through the freezing order; the order had
been imposed on the bank through the court.

Dean v Allin and Watts: the Court of Appeal held that a solicitor had also assumed responsibility for
Dean as he had not involved his own solicitor and it was clear that he was relying on the advice of the
solicitor.

What if the claimant is not known to the defendant?

Goodwill v British Pregnancy Advisory Service: the claimant sued the defendants for negligence and
claimed the cost of bringing up her daughter stating that she was not known to the defendant but
claimed to be falling within an identifiable class. The Court of Appeal held that at the time the advice
was given the claimant was not known to the defendant and was simply one of a potentially large class
of women who may have a relationship with the defendant’s patient. Therefore the relationship
between the claimant and defendant was not sufficiently proximate to give rise to liability.

What is the effect of disclaimers?

The courts have stated that merely issuing a disclaimer will not always prevent liability.

Smith v Eric S Bush: the House of Lords held that the existence of a disclaimer did not prevent liability
towards the buyers of the home as the surveyor were aware that the buyers will likely rely on their
evaluation.

8. Can there be recovery without reliance?

Yianni v Edwin Evans: a surveyor was held liable to a house buyer even though he was employed by a
lender to carry out the survey.

But it may not always be reasonable for buyers to rely on the lender’s surveyor.

Smith v Eric E. Bush: where the advisor knows there is a high degree of probability that some other
identifiable person will act upon the advice that a duty of care should be imposed.

The claimant has to show that the defendant knew or ought to have known that the advice given by the
defendant was likely to be acted upon without being checked independently. The claimant’s reliance
should be reasonable.

Goodwill v British Pregnancy Advisory Services: the claimant was not known to the defendant and the
defendant could not be expected to reasonably foresee that some years later the patient would pass on
the advice and it would be relied on.
If the relationship between the claimant and defendant is contractual it is more likely that there will be
reliance.

There are some cases that do not fit into the requirements that have been laid down by the courts.

White v Jones: the Hedley Byrne principle was extended to allow the sisters compensation even though
there had been no reliance by them on the advice given by the solicitor. The HOL stated that when the
solicitor accepted the instructions to draw up the will he entered into a special relationship with the
individuals who were to benefit from it.

Gibbons v Nelson: the court stated that a solicitor’s duty of care to an intended beneficiary of whom he
was unaware was limited. This duty would only be owed if the solicitor knows about the benefit that the
testator intends to give and the person or class of persons that the benefit is intended for.

9. Evaluation:

The courts are reluctant to extend the law.

During the period of expansion it was possible to claim pure economic loss arising from negligent acts.
The courts later retreated from this position.

Recent cases show that it is possible to bring a claim for loss arising from negligent provision of services
and this extension of the law has allowed claimants to obtain compensation more easily but this is being
criticized as going beyond the boundaries of the tort.

The requirements of Hedley Byrne have not been consistently applied.

One example of this inconsistency is finding liability in a social relationship in Chaudry v Prabhakar.

The courts continue to show reluctance to expand the law.