DUTY OF CARE: ECONOMIC

LOSS

The law of tort has never been hesitant in recognising that a

person can recover damages for personal injury or damage to
property

BUT, historically the courts have been reluctant to find a duty

of care in respect of two kinds of loss

PSYCHIATRIC “PURE” ECONOMIC

INJURY LOSS

In English Law, the tort of negligence contents itself with a restrictive

approach to liability for Pure Economic losses.

The courts adopt AN EXCLUSIONARY RULE towards pure economic

losses

Generally much more difficult to establish a DOC in respect of „economic

loss‟ than damage to property or physical injury
as the courts generally do not attach as much importance to the economic
well-being of a person as they do to his physical wellbeing
 Greenway v Johnson [2016]

Sales LJ recommended – „the courts should be slow to extend the categories of

case in which a duty to protect against pure economic loss will be found to
arise‟.

v
PEL caused by careless activities PEL caused by careless statements

no DOC is owed due to policy considerations very different rules apply - easier for
the C to recover

DEFINITION OF PURE ECONOMIC LOSS

To define it simply as financial loss would be too

simplistic

„PURE‟ ECONOMIC LOSS:

Loss that is purely financial - does not result from damage to the C‟s property or injury to the C‟s
person.
Or
A Financial loss that is not a consequence of physical damage to the C‟s person or property
belonging to the C.

EXAMPLE 1:
A makes a negligent misstatement to B
regarding investment in a company. B relies
on the statement and suffers a financial loss
= pure economic loss
EXAMPLE 2:
A buys a product which is defective  does not
cause any physical injury/property damage 
The only loss in question is the cost of
repairing/replacing the product = pure economic
loss
 GENERAL RULE

Simpson v Thomson [1877]; Candler v Crane Christmas [1951]

A defendant is generally not liable for purely economic loss

Cattle v Stockton Waterworks Co. (1875)

P entered into a contract with a Mr. Knight, under which he was supposed to dig a tunnel on Mr.
Knight‟s land for a fixed price.
D had laid a pipe under Mr. Knight‟s land.
After the C started work, he noticed that the D‟s pipe was leaking and contacted them about this,
however the D failed to repair the pipe.
As a result, the work was delayed and the C was not able to make profits on his contract with Mr.
Knight

Held:
C has suffered a pure economic loss as he has suffered an economic loss resulting from damage to
property in which he has no proprietary interest - not recoverable

Weller v Foot and Mouth Disease Research Institute [1966]

The C‟s were auctioneers of cattle.

The D‟s carelessly allowed the escape of a virus from their Research Institute that causes a
disease in cattle.
As a result all movement of cattle was banned.
The claimants suffered a financial loss as their business could not operate
 Held: C have suffered a pure economic loss - not recoverable.
While the D‟s may be liable to the owners of infected cattle, it could not be liable to the C‟s as
they did not have any proprietary interest in the property (cattle) that had been damaged.

Murphy v Brentwood District Council [1991]

Lord Oliver:
“The infliction of physical injury to the person or property of another universally requires to be
justified. The causing of economic loss does not.”

Caparo Industries v Dickman plc [1990]

Lord Bridge:
“An important distinction must be made b/w the kind of harm that has been caused to the
claimant. In particular the courts must distinguish b/w cases where physical injury and
damage to property has been caused on the one hand and those cases where only economic
loss has been caused.”

Since 1964, the rules concerning recovery of economic loss have been somewhat
relaxed.
Financial loss resulting from negligent statement/negligent provision of service is
recoverable but only according to strict criteria.
 DISTINCTION BETWEEN
„Pure‟ and „Consequential‟ economic loss

The courts draw a distinction between “pure” and “consequential” economic loss

Consequential Economic Loss:

Financial loss that is consequent upon damage to the C‟s person or property.
The losses which stem from physical damage (i.e physical injury or property damage) suffered
by the C are not purely economic but consequential economic loss.

EXAMPLE 2
A negligently damages B‟s property and as a
EXAMPLE 1 result, B suffers the following losses:

A causes B a serious physical injury due to his a. the reduction in value of the property
negligence and as a result of his physical b. the cost of repairing the property and
injury, B is unable to go to work and earn a c. loss of profits from the use of the
living = consequential economic loss. property.

All are consequential economic losses

The courts have long accepted that financial loss which is a consequence of physical damage to the C‟s
person or property is recoverable.
Even where the loss is financial in nature or „damage to the pocket‟  it is recoverable, because it results
from a physical injury or property damage.
 As a rule of thumb, we can say that „consequential economic loss‟ is recoverable
But
„pure economic loss‟ is not (except where it results from negligent
misstatements/negligent provision of services)

Sparton Steel & Alloys v Martin [1973]

illustrates the difference between Pure Economic loss, Consequential Economic loss and damage to
property

The D‟s (construction workers) negligently cut through a cable which supplied power to the C‟s
factory, causing a power cut which lasted for 14.5 hours.
Without electricity, the C‟s furnace could not operate and they had to close their factory.
The metal that was in the furnace at the time the power went off (the „melt‟) began to solidify and
to save damaging the furnace, the C‟s had to throw it away.

C brought an action for three types of

losses:

Loss of profits on four

Loss of the profit which
Damage to the melt that was further melts which would
would have been made on
in the furnace at the time of have been processed during
the sale of that melt
the power cut the 14.5 hours the factory
was closed due to the
power cut

physical damage to
property Consequential Pure Economic loss
economic loss resulting
from property damage
 A majority of the COA held:

THE FIRST TWO CLAIMS WERE RECOVERABLE

(as the D owed a duty to the C not to damage their property and therefore had
to pay for the damaged metal and the loss of profit resulting directly from that
damage),

BUT

THE THIRD CLAIM WAS NOT

(as it did not result from the fact that C‟s property had been
damaged)
and therefore was purely economic in nature.

Policy Considerations

Why are the Courts so reluctant to allow recovery of damages for pure economic loss?

1). The first and principal argument against allowing recovery of economic loss is the
FLOODGATES PRINCIPLE.

If the courts were to find a DOC for pure economic loss as readily as physical
injury/property damage, it would open floodgates and defendants would be exposed to
indeterminate liability, for an indeterminate amount, to an indeterminate class.
 2). The Underlying importance attached by the society as a whole on the protection of its
physical wellbeing its property as opposed to protection of its economic interests.
Economic interests are intrinsically less worthy of protection than physical interests.

3). A general rule against recovery of economic loss is clear and easy to apply.

4). Claimants can often make good their economic loss in other ways than by claiming
compensation:
for example, if a factory has to shut down because of loss of power, it may be possible to
make up for lost production by having extra shifts later.

5) INSURANCE ARGUMENT:
It may make more economic sense for potential claimants to insure against possible economic
losses that they may suffer rather than for potential defendants to insure against economic losses
that they may cause

6) Allowing economic loss to be recovered in tort muddles the boundary b/w contract and
tort.