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3.1 LIABILITY FOR PURE ECONOMIC LOSS


3.1.1. Introduction
pure economic loss can be defined as economic loss which does not flow
from damage to the claimants person or property. The law of contract
concerns itself with damage to the claimants person or property. The law
of contract concerns itself with such losses when they are suffered by a
party to a contract, but the law of torts is more reluctant to recognize such
losses as actionable unless they are caused intentionally.
The general rule is that pure economic loss is not recoverable in an action
alleging negligence, but since 1964 an exception to this general rule has
developed when negligent statements lead to pure economic loss. There
is a very close relationship between these topics: a number of leading
cases involves mis-statements that caused financial or economic loss to
the claimant. It is therefore convenient to discuss them together although
you will discover that there are cases about economic loss that do not
involve careless advise or information.
Leading case in this area is Hedley Byrne& Heller & Partners Ltd [ 1964]
AC 465.
The claimant through their bankers asked the
about the creditworthiness of one of the

defendants for advise


latters customers. The

defendants gave a reasonably favourable reply, and the claimant


extended credit to the customer and suffered losses in consequences. The
house of Lords held that in principle the defendant owed a duty of care to
the claimants and would have been liable to them for the resulting losses
if they had not given the advise without responsibility on our part.
This case profoundly changed the law in two respects:

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(a) The defendants were held to owe a duty to take care in the advice
or information that they gave
(b)That duty extended to purely economic losses.
a claimant who suffers loss by relying on inaccurate statements could and
can bring a claim in the tort of deceit but in 1889 the House of Lords had
held that to establish liability in that tort the claimant had to prove that
the defendants either knew that what they were saying was false or were
reckless as to whether what they were saying was true or false.
It was assumed until 1964 that the result of Derry v Peek(1889) LR 14 App
Cas 337 was that there could be no liability where the defendant had not
lied or been reckless, but had merely spoken carelessly. The Hedley Byrne
case put an end to that view.
3.1.2. Distinction between

pure economic loss and economic loss

Pure economic loss( financial or pecuniary) loss is to be distinguished from


consequential economic loss. Consequential economic loss is recoverable
and arises in these cases:
-

A claimant suffers personal injuries: damages are recoverable for the


economic consequences of the personal injuries, such as lost wages

or salary if the claimant is unable to work because of the injuries.


The claimants property is damaged. The claimant can recover for the
economic consequences, which might be: the reduction in the value
of the property or the cost of repairing it and in the value of the
property or the cost of repairing

it and might include the loss of

profit from the use of the property.


Pure economic loss by contrast arises:
-

Where there is no physical injury to any person or to any property


Where there is physical injury to a person other than the claimant

3.1.3 The Recovery of pure economic loss: Policy Considerations


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The general common law rule was that a defendant was not liable for
purely economic loss1. It is helpful to consider the policy reasons that
restrict the right of recovery for economic loss. Many of these are
developed and applied in the cases that follow:

Economic interests are intrinsically less worthy of protection than

physical interests.
If economic loss generally is recoverable, the burden on particular
defendant will be unbearably high.( imagine that the defendant
carelessly pollutes a holiday beach. Holiday makers stay away. All
business interest in the town suffer losses. Is the defendant to have

to compensate them all?)


A general rule against recovery of economic loss is clear and easy to

apply
Claimant 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
potential defendants to insure against economic losses that they

may cause.
It may make more sense for potential claimants to insure against
possible economic losses that they may suffer

rather than

for

potential defendants to insure agaist economic losses that they may


cause.
3.2 Economic Loss cases
3.2.1 Negligent Statements
The Law Before 1963
The difficulty created for tort law by negligent statements is that they
usually cause pure economic loss rather than physical damage.

This principle is illustrated by Simpson & Co v Thomson(1877) LR 3 App Cas 279 and
Candler v Crane , Christmas[1951] 2 KB 164

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No action would lie for a negligent statement causing pure economic loss.
This rule was restated by the Court

of Appeal in Candler v Crane

Christmas & Co[ 1951] . The dissenting judgment of Denning LJ should be


noted. He stated that accountants owed a duty of care to their employers
or client, and any third persons to whom they themselves show the
accounts, or to whom they know their employer is going to show the
accounts so as to induce him to invest money or take some other action
on them. I do not think, however, the duty can be extended still further so
as to include stranger of whom they have heard nothing and to whom
their employer without their knowledge may choose to show their
accounts.
The Law after 1963
S2(1) of the English Misrepresentation Act 1967 (MA 1967) provides that,
where a person has entered into a contract after a misrepresentation has
been made to him by another party to the contract, and has suffered loss
as a result, the representor will be liable in damages unless he can prove
that he had reasonable grounds to believe and did believe that the facts
represented were true. The claimant in such an action need not prove that
he was owed a duty of care and need not prove that the defendant was
negligent. The action does require that a contract be entered into by the
parties to the statement and the benefits of this provision can only be
enjoyed by a party to the contract.
The house of lords laid down the basis for an action in the tort of
negligence for statements : Hedley Byrne & CO v Heller & Partners Ltd
[1964]
The claimants were advertising agents and asked their bank to obtain a
credit reference on one of their clients from the clients bank. The credit
reference negligently stated that the client was good for its ordinary
business transactions and stated that the reference was given without
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responsibility.

The

House

of

Lords

held

that

in

appropriate

circumstances there could be a duty of care and approved the dissenting


judgment of Denning LJ inn Candler, but the defendant were not liable on
these facts because of the disclaimer clause.
The neighbour test was rejected as being inappropriate to deal with the
difficulties associated with statements and instead the courts applied the
special relationship between the parties as the appropriate test.
One way of satisfying the special relationship would be to satisfy the type
of relationship which existed in Hedley Byrne itself, where the claimant
relied on the care and skills of the defendants where the defendants knew
that the claimant was so relying and where it was reasonable for the
claimant to rely on the words or advise of the defendant.
In 1990 , Caparo Industries plc v Dickman[1990] approved the
special relationship approach to duty of care for negligent

statements

and went on to determine that, if there was no special relationship such as


that in Hedley Byrne, an alternative way of establishing a duty of care
with respect to negligent statements causing pure economic loss would
be to satisfy

the three-stage-test for duty based on the criteria

of

foreseability of economic loss, proximity ad justice and reasonableness.


While this

is similar to the test used to determine duty

physical damage, the requirement of foreseability

and , in

in cases of
particular,

proximity, might be more rigorous in the case of economic loss. In James


McNaughten Paper Group Ltd v Hicks Anderson & Co ( a Firm)[1991]
the court of Appeal suggested the following indicators of proximity to
satisfy the three- stage test:

The
The
The
The

purpose of making the statement;


purpose of communicating the statement;
power balance between the parties;
number of people relying on the advice;

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The knowledge of the person giving the information or advise;


The claimants access to other sources of information.

The application of this approach has been used to determine that a duty of
care existed when an employer wrote a reference for a former
employee( Spring v Guardian Assurance[1994], when accountants failed to
detect frauds perpetrated on shareholders of overseas companies of a
bank ( BCCI v price Waterhouse[1998] and when accountants failed to
detect fraud on the part of a senior partner of a law firm such that the Law
Society compensation Fund was obliged to pay compensation to the firms
clients( Law Society v KPMG Peat Marwick[2000].
3.2.2 Assumption of Responsibility
3.2 Liability for Psychiatric Injury
The law adopts a restrictive approach in awarding damages for negligently
inflicted psychiatric injury. In addition to the Caparo test for imposing a
duty of care, the courts have laid down several obstacles which must be
satisfied by claimants in order to establish liability. Firstly there must be
an actual psychiatric injury, mere emotions of fear, worry, grief or sorrow
are not sufficient:
Where the claimant injuries are psychiatric , and not physical, damages
are recoverable only in exceptional circumstances

. it is not enough to

show that psychiatric injury was reasonably foreseeable. Damages are


only available for a recognized psychiatric illness and not for grief ,
distress, sorrow, etc. the circumstance in which the psychiatric injury is
caused is also relevant.. A distinction is drawn between primary victims
and secondary victims.
3.2.1 Primary victims

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A primary victim is directly involved in the accident and is favorable


treated. Where the claimant is a primary victim the House of Lords has
confirmed the principle that the tortfeasor must take the victim a finds
him and this can extend to the recurrence of a condition from which the
claimant had suffered for nearly 20 years prior to the accident. The test to
be applied to the claim of a primary victim is that of reasonable
foreseability of exposure to the risk of physical or psychiatric harm and
this should be contrasted with the more detailed proximity required of
secondary victims who suffer psychiatric harm. See Page v smith [1996]1
AC 155
However more restrictively physical injury (or the fear of it) is a necessary
as well as sufficient condition of liability : white v Chief constable of South
Yorkshire Poice [1992] 1 AC 310 where a majority of the Law Lord held that
an employee should be in no better position by virtue of the contract of
employment that a non- employee regarding recovery of compensation for
psychiatric damage.
An analysis of the responsibility of a primary victim who has inflicted
injuries on himself was provided in Greatorex v Greatorex[2000]. The
defendant was injured in a motor accident which was his own fault. His
father , the claimant, was one of the fire officers sent to the scene of the
accident to release the trapped motorist(his son) from his vehicle. When
the father went on to suffer PTSD he claimed against his son for damages
and the court considered the preliminary issue as to whether a primary
victim who had cuased himself self-inflcted injuries could, in law, owe a
duty to third party. Cazalet J held that such a duty of care could not arise.
3.2.2 A secondary victim suffers
A secondary victim suffers psychiatric injury no through any physical
impact but through witnessing an event that causes or threatens death or
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serious injury to someone else. The principle are derived from two
decisions of the House of Lords :
Mc Loughlin v OBrian[1983] where the Claimants husband and her
three children were involved in a road accident caused by the defendants
negligence. One child was killed and her husband and the other children
were badly injured. The claimant was told about the accident an hour or so
after it had happened and she was taken to the hospital where she saw
the injuries to her family and suffered nervous shock. It was held that the
claimant could recover damages for her nervous shock.
Alcock v Chief Constable of South Yorkshire Pollice [1992] 1 AC
310

This case arose from the events of the Hillsborough disaster in which 95 people
were crushed to death at a football match due to the negligence of the police. The
claim was made by relatives of the victims who had each suffered psychiatric
injury as a result of witnessing the disaster. Some were present at the grounds ,
some were watching television, some heard about it more indirectly. They were
related in different ways to those who died. The Law lord unanimously dismissed
their appeals. Their lordship held that two test must be satisfied:

The test of reasonable foreseability


from the

of psychiatric illness arising

close relationship of love and affection between the

claimants and the primary victims of the defendants negligence; .i.e


parent and children, and spouses . it is not necessarily easy to
establish liability outside the categories where love is presumed.
Brothers were unable to establish the relationship in Alcock.

The test of proximity in terms if physical and temporal connection


between the claimant and the accident caused by the tortfeasor.

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The claimant must have perceived

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the events or their aftermath

with his own unaided senses; it is not enough to be told about it


later. The notion of the aftermath derives from Mcloughlin where Mrs
M saw her relatives in the same state as they had been in after the
accident.

The claimant must

have suffered through an immediate sudden

impact on his or her senses.

The claimant must not have some special sensitivity to shock; the
shock must be foreseeable in a person of reasonable fortitude ( but,
so long as some psuchiatric injury is foreseeable, its precise form or
severity does not have to be foreseen).

3.3 LIABILITY FOR OMISSIONS


The law takes a restrictive approach to imposing liability in relation to
omissions. The law draws a distinction between misfeasance, where a
party does an act negligently, and nonfeasance, where a party does
nothing at all. Omissions relate to nonfeasance. A driver of a car may be
just as careless in omitting to apply the brakes as in pressing the
accelerator too hard. A Doctor may be careless in omitting to test for
allergies before giving an injection. The law generally does not impose
on people a general duty to take positive actions to assist people in
difficulties or to avert harm, even if they are physically well capable of
doing so: an able-bodied person may stand by and watch someone drown
in shallow water.
If there is a moral obligation to assist people in difficulty or danger, why is
there no legal obligation? This was discussed by Lord Nichols of

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Birkenhead and Lord Hoffman in Stovin v Wise [1996] AC 923 where he


suggests that there are political , moral and economic reasons.
The general rule is that no liability exists for an omission:
Stovin v Wise [1996] 3 WLR 389

House of Lords

Mr Stovin suffered serious injuries when he was knocked off his motorcycle
by a car driven by Mrs Wise. She had pulled out of a junction in which
visibility of traffic was hampered due to a bank of earth which was topped
by a fence. The trial judge held that Mrs Wise was 70% to blame for the
accident and that Norfolk County Council were 30% to blame because they
knew the junction was dangerous and had been negligent in not taking
steps to make it safe. The Council appealed.
Held:
The council were not liable as liability related to an omission. There had
only been three accidents in twelve years which was not enough to render
the junction a 'cluster site' under the Council's policy for prioritising
funding which required five accidents in three years.
Lord Hoffman on imposing liability for omissions:
There are sound reasons why omissions require different treatment from
positive conduct. It is one thing for the law to say that a person who
undertakes some activity shall take reasonable care not to cause damage
to others. It is another thing for the law to require that a person who is
doing nothing in particular shall take steps to prevent another from
suffering harm from the acts of third parties or natural causes.
Thus, a person who sees a child drowning in shallow water, is not under a
legal obligation to save the child and will incur no liability for their failure
to do so. If, however, the person attempts to save the child, but in doing
so, acts carelessly and causes harm, they become liable. This rule can be
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seen as operating harshly in many situations it could be argued that there


may well be a moral obligation to act and there is a need for the law to
reflect this. There are exceptions to this rule where the law will impose a
duty of care in certain situations.
1. Undertaking
Where the defendant agrees to act or voluntarily accepts a responsibility,
his later failure to do so will render him liable. E.g. a motorist who fails to
turn the steering wheel or give an appropriate signal is failing to carry out
carefully the activity of driving.
Barret v Ministry of Defense[ 1995] 1 WLR 1217
The Court of Appeal has considered the responsibilities of the Ministry of
Defense for the safety of a naval airman who died after a bout of very
heavy drinking. It was held that an employer had no duty to protect an
employee against his own weakness but that a responsibility arose on the
facts of the case when the serviceman returned to the base and went into
a drunken coma. On the facts there was evidence of a lack of reasonable
care but also a finding of two-thirds contributory negligence on the part of
the deceased.
2. Special relationship
where there exists a special relationship, eg parent and child, employer
and employee, school and pupil, doctor and patient, between the parties
there is a legal duty to act.
3. Control of 3rd party who causes damage:
If there is some relationship between A and C for example, A is Cs
employer- there will be liability for the acts of another. despite the wide
ranging potential of the decision of the House of Lords in Home office v
Dorset Yacht Co Ltd[1970], however, the court have been very reluctant
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to expect one person(A) to control the activities of an independent third


party(c)
Home Office v Dorset Yacht Co Ltd [1970] AC 1004 House of Lords
Some young offenders were doing some supervised work on Brown Sea
Island under the Borstal regime. One night the Borstal officers retired for
the evening leaving the boys unsupervised. Seven of them escaped and
stole a boat which collided with a Yacht owned by the claimant.
Held:
The Home Office owed a duty of care for their omission as they were in a
position of control over the 3rd party who caused the damage and it was
foreseeable that harm would result from their inaction.
4. Control of land or dangerous things:
Smith V Littlewoods Organization[1987] AC 241
The defendant purchased a building and left it empty. A fire started in it
which seriously damaged the claimants property. The fire started in it
which seriously damaged the claimants property. The fire had been
started by vandals (who had started fires on other occasions) but this fact
was not known to the defendants. the court held that there was a duty to
persons

to

ensure that their property was not a source

of danger to

neighbouring properties, but this duty would only extend to preventing


damaged being

caused by vandals where such damage was reasonably

foreseeable. As the defendant

had not known of the previous fires, no

duty owed. Lord Goff said that although there was no duty to prevent
persons deliberately inflicting damage on another person,
Haynes v Harwood [1935] 1 KB 146
The Defendant left a horse-drawn van unattended in a crowded street. The
horses
bolted when a boy threw a stone at them. A police officer tried to stop the
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horses to save a woman and children who were in the path of the bolting
horses. The police officer was injured. It was held that the Defendant owed
a duty of care as he had created a source of danger by leaving his horses
unattended in a busy street.
3.4 The Liability of inspectors and other regulators
Many recent cases have concerned the duties of those who carry out
inspecting, supervising, regulatory and licensing functions. These people
do not normally themselves cause harm, but they have an opportunity to
prevent harm being done by others. Is the

existence of such bodies

sufficient protection for the public or should there be a right of action by


anyone injured by a failure of the regulatory function?
3.4.1 Kind of defendants involved
(i) The central examples are public bodies set up with responsibilities and
regulations. Examples are building inspectors ( Anns v Merton London
Borough Council), bodies set up to regulate the food industry, the drugs
industry, financial services, childrens homes, etc
(ii) other regulatory functions( in the shipping and financial services area)
are not carried out by public bodies , but there is a real strong public
element, in that parliament has consciously favored self-regulation by
an industry itself as an alternative to regulation by the government.
(iii) There are also other function that are not exactly inspection or
regulation but have similar characteristics (e.g. the functions of the police
or fire services). These bodies are expected to protect the public (or a
section of it) by preventing others causing harm or putting things right
when they have gone wrong.
3.4.2 What policy issues are relevant?
In favour of imposing liability on such defendants it can be argued that:
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a) They are set up for the purpose of protecting the public or a section
of it
b) It is clearly foreseeable that harm may be suffered if the supervisory
or regulatory work is carelessly done
c) In some cases the imposition of liability in tort on a regulator may

help to encourage the regulators independence and prevent too


close a relationship between the regulator and the regulated.
3.4.3 Rescuers
Although there is no general duty to attempt a rescue, rescuer may have a
claim for damaged if injured in the rescue attempt. The courts are very
ready to assume that it is foreseeable that, if someone is injured or
endangered, others will go their rescue. The principles are not difficult to
understand. See Haynes v Harwood [1995]
There may be a claim where the defendants invited rescue by putting
himself ( and not other people) in danger: Harrison v British Railway
Board[1981] 3 All ER 679

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