The Law On Economic Loss

Economic loss refers to financial loss or damage suffered by a person without any evidential physical damage to the person or property damage of the victim. Principally, economic loss was recoverable in tort if it resulted from damage of property or physical damage to the victim known as consequential economic loss. However, if the loss was independent of physical damage, thus, pure economic loss, it could not be litigated under the tort of negligence.

In the celebrated case of Spartan Steel Alloys Ltd. v. Martin & Co. Ltd[1], the Court of Appeal held that “even when a plaintiff is owed a duty in respect of physical damage to property, any pure economic loss suffered in addition to physical damage is unrecoverable as either too remote or outside the scope of the duty of care. However, economic losses consequential on the damage of property were recoverable”.  Consequentially, the decision in Spartan Steel (Supra) indicates that Pure Economic loss, thus, loss without physical damage could not be recovered as damages in law.

The law on pure economic loss is one that is tainted with several principles and exceptions as well as public policy. The learned judge, Burroughs J. in Richardson v. Mellish[2] stated that “once you get astride it, you never know where it will carry you”. This Article tends to give clarifications on the law on economic loss and circumstances under which a plaintiff is most likely to succeed in an action of negligence for pure economic loss.

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Pure economic loss most often than not, arises from negligent misstatement, negligent provision of service and loss resulting from defective buildings. The following categories of pure economic loss shall be discussed in light of Common law court decisions.

Negligent Misstatement and negligent provision of service

A negligent misstatement is a statement of opinion, which may be honest, but made carelessly. Negligent misstatement occurs if the maker of the statement breached the duty of care to give authenticated information which was relied on by the receiver of the information leading to some kind of economic loss to the disadvantage of the receiver of the information. Notably, negligent misstatement falls within pure economic loss since the loss is not a consequential effect of any physical or property damage. Until 1963, when the celebrated case of Hedley Byrne & Co. Ltd v. Heller & Partners Ltd.[3] was decided, pure economic loss in such circumstances was not recoverable under the law of tort. This was held to be under the ambit of Contract law, and if a contractual relation existed, the victim could sue in Contract.

In Candler v. Crane, Christmas & Co.[4]an accountant negligently prepared a report for a company upon which a third party relied on to invest his money. The court was to decide whether the Accountant would be liable for the negligent preparation of the report to the third party for their loss. The court dismissed the action of the plaintiff holding that liabilities could not be imposed on the Accountant for his negligent preparation of the report since no contractual relationship existed between the parties.

However, the case of Hedley Byrne (Supra) establishes an exception to the general rule of pure economic loss. It is however a narrow principle allowing liabilities in few situations. Therefore, Hedley Byrne (Supra) allows liability in Tort for a pure economic loss but establishes conditions necessary for a successful claim. In Hedley Byrne (Supra), the defendant bank was negligent in preparing a report upon which the plaintiffs requested and subsequently relied on. The Court held that liabilities could be imposed in circumstances of this sought even without a contractual relation. In this particular case, there was no liability as there had been a disclaimer attached to the statement, so there had not been a ‘voluntary assumption of responsibility’. The distinction between Hedley Byrne (Supra) and Crane Christmas (Supra) is that the reliability in Crane Christmas was unforeseeable and unreasonable but in Hedley Byrne, the defendant bank had a special relationship with the Plaintiffs and knew or ought to have known that the information would be relied on by the claimants.

The case of Hedley Byrne, therefore, establishes liabilities for negligent misstatement on if the following conditions are met: i) A Special Relationship must exist between the parties; ii) the party giving the advice must voluntarily assume the risk; iii) there has been a reliance on the advice by the other party; iv) and finally the reliance should be reasonable in the circumstance.

1. A special relationship must exist between parties:

The courts have rejected only foreseeability of damage alone to establish liability, therefore, Hedley Byrne(supra), provides that there has to be a special relationship between the giver and recipient of the party to establish a duty of care. Lord Morris stated that “My Lords, I consider that it follows and that it should now be regarded as settled that if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies on such skill, a duty of care will arise.” 

The Privy Council in Mutual Life and Citizens Assurance Co Ltd v Evatt[5] sought to limit the special relationship to only business and where the defendant made it clear that he was claiming some special skill or competence. However, the position of the Privy Council had a majority rejection. In Esso Petroleum v Mardon[6], the defendants were liable even though they were not in the business of giving financial advice but they did have experience and special skill and knowledge compared to the plaintiffs. The position of the law therefore is that a special relationship exists if there is a fiduciary relationship of trust and confidence. A special relationship and a duty of care deem to exist in cases involving professional or business relationships even if there is no contract. But in situations like Esso Pardon (Supra), expert opinion of a defendant, if untrue and misleading, will be regarded as a negligent misstatement.

The House of Lords in Caparo Industries plc v. Dickman[7] has thrown some clarification on the principle in Hedley Byrne Test. Lord Bridge stated the requirements a plaintiff must establish to satisfy the courts that there exists a special relationship sufficient enough for a duty of care to be owed by the representor of the information. Firstly, the defendant giving the advice is fully aware of the nature of the transaction which the plaintiff had in contemplation; secondly, the defendant knew the advice or information will be communicated directly or indirectly to the plaintiff; thirdly, the defendant knew the plaintiff will rely on the advice or information in deciding whether to invest or transact.

1. The party giving the advice must voluntarily assume the risk

Duty does not arise where a party advises in a social capacity. However, where a party assumes the risk of advising in connection with a business, a duty arises (Chaudry v. Prabakhar)[8].The current test for the assumption of risk is that which was established in Henderson v. Merrett Syndicates Ltd (No.1)[9]but does not overrule the principle in Hedley Byrne (Supra).

• There has been a reliance on advice from the other party.

There will be no liability if the claimants relied on their investigations other than the defendants’ advice. Also, the defendant will not be liable if they indicated that they will not take official responsibility of giving the advice (Hedley Byrne)

1. The reliance should be reasonable in the circumstance:

In Hedley, the court stated that “When a party seeking information or advice from another – possessing a special skill- and trusting in him to exercise due care, and that party knew or ought to have known that the first party was relying on his skill and judgment, a duty of care will be implied”. Summarily, there must be the reliance of the other party on the advice of the representor and the reliance must be reasonable in the circumstance.

However, it is not infrequent to find the courts possibly use two or more precedents to achieve deciding a matter. In a recent case of Customs and Excise v. Barclays Bank plc[10] the House of Lords applied a multi-test approach including a tripartite test set out by Lord Griffiths in Smith v. Bush[11], the assumption of responsibility test, and Lord Bridge’s approach in Caparo.

Economic loss resulting from defective products:

As a general rule, the courts will not make provision for damages for economic loss of receiving/purchasing a defective product.  The courts have cautiously decided cases outside the dictates of the general rule since. An attempt to expand tort law to cover economic loss relating to defective products will normally conflict with Contract law.

The locus classicus in this area is Anns v. Merton London Borough Council[12]. The claimant was allowed to recover damages when due to the negligence of the defendants, a faulty building was purchased which lead to an economic loss. The position of the law was followed in Junior Books Ltd. v Veitchi Co. Ltd.[13] in this particular case, the scope of Contract law could not possibly be applied due to privity problems. The claimant (the buyer of a factory) was not in direct contract with the builders. The building contract was between the builders and the original owners before sales to the claimant. Also, the faulty building had not collapsed nor caused any physical damage to the plaintiff buyer to satisfy a consequential damage suit.  The majority of the bench court held that the plaintiff will be successful in his suit for damages in negligence because he was unfortunate and could not bring an action in contract law.  This was a kind of compensation given to the claimant rather than waiting until the building causes damage to life or property.

The position remained as Anns test until 1978 when the House of Lords declined from following Anns and holding that, the loss in Anns was not material nor physical but purely economic loss and therefore could not be sued under the heading of negligence (Murphy v. Brentwood District Council[14]).  However, the Anns test has widely influenced tort but has been modified. The position of the law therefore is that the recovery of damages under the circumstance of Anns would be successful only if there existed a physical injury before the suit.

Conclusively, the law on economic loss is associated with seemly but different principles. Even upon the similarities and differences that exist between the case laws, the courts have set out many exceptions. This has resulted in what is most likely to be called uncertainty, Burroughs J. stated in Richardson v. Mellish (Supra), stated that “once you get astride it, you never know where it will carry you”. It is worth knowing that even among the commonwealth jurisdictions; the law on pure economic loss varies. It is therefore important for legal systems to establish statutes to ensure certainty in the law. The law on economic loss may seem a little clear but for the growth of society, it will be idler for legislators to a well-established law regulation conducts falling within the ambit of economic loss.

REFERENCE

Catherine Elliott & Frances Quinn, Tort Law seventh edition (2009).

Richard Owen, Essential Tort Law third edition (2000).

Professor John Cooke, law of tort, ninth edition (2009).

Emily Finch And Stefan Fafinski, Law of Tort, sixth edition (2017).

Vivienne Harpwood, Principles of Tort Law, Fourth Edition (2000).

 

Written By: Dapuri M. Cephas

Kings University College, Ghana.

Contact details: [email protected]

Telephone: +233503789468.

 

 

 

 

 

[1] [1973] 1 QB 27

[2] (1824) 2 Bing. 229 at 252

[3] [1964] 2 ALL ER 575

[4] [1951] 1 ALL ER 426

[5] [1971] ALL ER 150

[6] EWCA Civ 4, 6^th February 1976

[7][1990] ALL ER 568

[8] [1989] 1 WLR 29

[9] [1995] 2 AC 154

[10] [2006] UKHL 28

[11] [1990] 1 AC 831

[12] [1978] AC 728

[13] [1983] 1 AC 520

[14] [1991] 1 AC 398