2.2.2 Economic Loss Lecture

What is ‘Pure’ Economic Loss?

The presiding rule is that pure economic loss is not recoverable; that is economic loss which cannot be directly traced back to harm to a person or property. There exist three primary exceptions to this rule, below.

Economic Loss Due to Physical Damage to the Claimant’s Property

Where economic loss stems from physical damage to a product or equipment, then it is recoverable. This can be seen in Spartan Steel v Martin [1973] where the court held that lost profit, due to a disruption in power to a factor, was purely economic loss and not actionable. However economic loss that resulted in the same incident from ruined steel and damaged equipment was actionable.

Economic Loss Due to Negligence Causing a Claimant to Acquire Defective Goods or Property

Tort generally will not compensate for the economic loss of receiving a defective product. Some eccentric cases have ignored this rule, though they have since been overturned. Nonetheless, they represent an important, if temporary, exception (see Anns v Merton London Borough Council [1978]; and Junior Books v Veitchi Co [1983]).

The basis for these exceptions can be thought of as a type of ‘preventative compensation.’ The relevant cases where then overruled (see Murphy v Brentwood District Council [1991]).

Economic Loss Due to Negligent Misstatement

Hedley Byrne v Heller and Partners Ltd [1964] is the leading case for this type of claim. Four conditions must be met before it is possible to recover economic losses due to negligent misstatements:

  1. A special relationship must exist between the parties, such as where one party acts as an expert advisor (see Cornish v Midland Bank [1985]; Chaudry v Prabhakar [1989]);
  1. The advising party needs to have voluntarily assumed the risk of misadvising (Cornish Bank; Hedley Byrne);
  1. There must be reliance on the advice by the defendant (which can exist even where both parties are ‘experts’, Esso Petroleum v Mardon [1976]); and
  1. The reliance must be reasonable and foreseeable (Law Society v KPMG Peat Marwick [2000]).

Other specific situations may arise under this exception:

  • A claimant here does not have to be the individual who has commissioned the advice in the first place, although the claimant must be in the mind of the defendant (Smith v Eric S Bush [1990]).
  • It is rare that a widely disseminated statement will meet the threshold for negligent misstatement, particularly where the claimant uses the misstatement for a purpose other than that which it is designed for (Caparo).
  • Negligent misstatement can occur where the defendant is a public authority, however it should be assumed as a starting point that liability will not be conferred, Welton v North Cornwall District Council [1997].

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