Chapter 10: Pure Economic Loss and Negligent Statements

Truly economic in nature – ‘pure’ economic losses – Financial loss stemming directly from the harm caused
by the negligent act or omission.

Consequential economic losses – financial loss suffered as a secondary consequence of another harm

Pure economic loss is recoverable if it stems from carelessly made statements or advice in the context of
certain relationships, but not when it results from what has been termed a careless ‘activity’.

The difference between pure and other types of economic loss is illustrated by Spartan Steel & Alloys Ltd
v Martin [1973].

Spartan Steel & Alloys Ltd v Martin [1973

While digging up a road the defendant contractors negligently cut an electric cable supplying power to
the claimant’s factory, leaving it without power for 14 hours. In this time the factory owners could not
operate their steel furnace. There was a possibility that the molten metal inside the furnace would solidify
and cause damage; the ‘melt’ had to be poured away and the factory closed. The factory owners claimed
damages under 3 heads:

1. The damage to the steel at the time power cut, which had to be thrown away
2. The loss of profit that could have been made by selling the steel in the furnace; and
3. The anticipated lost profit on other steel that would have been processed during the period the
factory was closed.

First loss straightforward physical damage to property, which poses few problems to recovery in tort.
Second was consequential economic loss.
The third was regarded as pure economic loss in respect of which no duty of care arose.
Exception to the exclusionary rule: Hedley Byrne v Heller

General rule against recovery of pure economic losses

Limited exception stem primarily from Hedley Byrne v Heller – It introduced the tort of ‘negligent
misstatement’ into la and set out the guidelines as to when and how it would operate.

Hedley Byrne v Heller

HB – advertising agency, was asked to buy some advertising space for a company called Easipower Ltd.
To ensure that Easipower could pay for the service, HB decided to credit check the company. HB’s bank
twice contacted Easipower’s bank, H, to ask if the company was creditworthy, and both times were given
a positive response. The second check asked specifically whether Easipower was ‘trustworthy, in the way
of business, to the extent of GBP 100,000 p.a’. On the basis of H’s positive responses, HB contracted with
Easipower and bought advertising space for them for GBP 17,000. Easipower later collapsed and HB
sought to claim back the GBP 17,000 from H on the basis they have been negligent when preparing the
statement about the credit and trustworthiness of Easipower.

However, when issuing statements, H had included a disclaimer saying that each was prepared ‘without
responsibility on the part of this Bank or its officials’; a clause excluding their liability, should it arise. The
House of Lords held that in view of this disclaimer, no liability could arise on the facts of this particular
case.
However, the law lords also considered what the position would be had there been no disclaimer.

On this, their lordships found (obiter) that a duty of care could arise in some situation where advice was
given, even where the only harm caused was what would otherwise be regarded as ‘pure’ economic loss.
But they said this was limited to situations where the following 4 conditions were met:

1. A special (or fiduciary) relationship of trust and confidence exists between the parties; and
2. The party preparing the advice/information has voluntarily assumed the risk (express or
implied); and
3. There has been reliance on the advice/information by the other party
4. Such reliance wad reasonable in the circumstances

On the facts of Hedley Byrne, had there not been a disclaimer attached to the information given, Heller
would have owed a duty of care and would have been liable for Hedley Byrne’s losses.

N.B – Reliance on a statement of some kind – HB v H

Anns v Merton London Borough Council [1978] HL

The claimant alleged that the local authority had negligently failed to supervise the construction of a
building, with the result that cracks appeared in the walls, caused by sinking foundations.

In the HL, Lord Wilberforce classified this as ‘material damage’ (as opposed to pure economic loss)
meaning that damages for the cost of repairs were recoverable.

Junior Books Ltd v Veitchi Ltd [1983] HL

The House of Lords allowed the claim in negligence for the pure economic loss (cost of relaying the floor
and lost profits), categorizing the claim as one where the supply of a defective product (the floor) caused
economic loss. They found, drawing on Hedley Byrne, that Veitchi, which occupied a position of special
skill, had assumed responsibility for the condition of the floor and the claimants had relied on this.

Murphy v Brentwood District council [1991] HL

Mr Murphy purchased a semi-detached house in Brentwood, which had been built by a company called
ABC Homes. Over ten years later, serious cracks started appearing in he walls. These were found to be
caused by a defect in the foundations, the design of which was approved by the district council. The
defect made the house structurally unsound and worth $ 35,000 less than Mr Murphy had paid.

The House of Lords held that the damage in Anns and therefore in Murphy should properly be considered
pure economic loss and not a form of material physical damage. They found that faulty foundations cause
no loss or damage, other than financial loss, unless they are dangerous or cause further physical damage
to the fabric of the house by subsidence or collapsing walls – It is merely the cost of repairing the
foundations that is at issue. This, in their view was pure economic loss for which no duty should be owed.

Thus, Murphy overturned Anns on this point.

Extending Hedley Byrne
A special relationship

A good example of the type of special relationship required to be able to sue for economic loss can be
seen in Esso Petroleum v Mardon [1976]

The required special relationship had been created because, in making the statement, Esso’s employee
had undertaken a responsibility to Mr Mardon based on his expertise in assessing the market of petrol
sales and Mr Mardon had reasonably relied on this. Therefore, a duty of care was owed.

Voluntary assumption of risk

It is a reasonable extension of the special relationship idea that where such a relationship exists, any party
giving advice, without a disclaimer, can be said to have assumed the risk that the statement they make is
reliable. If they did not ant to assume the risk, they could, as in Hedley Byrne itself, attempt to exclude
their liability.

In Goodwill v British Pregnancy Advisory Service [1996], the defendants were sued for negligently
advising the claimant’s partner that his vasectomy had been successful. The claimant relied on this
information and stopped using other methods of contraception, subsequently falling pregnant and giving
birth to a child. The claim was for the costs associated with bringing up the child. While agreeing that the
relationship in which the advice was given could be regarded as one of ‘trust and confidence’, the Court
of Appeal was unwilling to find that the risks of making the statement negligently had been assumed.
Because of this, the court found, the claimant was not entitled to have relied on the advice given and
damages for economic loss should therefore not be recoverable.

Exceptions:

McFarlane

HL decision in Parkinson v St James & Seacroft University Hospital NHS Trust

Rees

The modern test for determining assumption of responsibility was outlined by the House of Lords in
Henderson v Merrett Syndicates Ltd [1995]

Gorham v British Telecommunications

The assumption of responsibility principle was revisited by the HL in Customs & Excise Commissioners v
Barclays Bank [2006] HL.

Customs & Excise Commissioners v Barclays Bank [2006] HL

Customs officers obtained ‘freezing orders’ on the bank accounts of 2 companies which were in debt
with regards their tax payments. This meant that the bank (Barclays) was legally obliged not to let any
payments leave the companies’ bank accounts. However, Barclays negligently allowed some
withdrawals to be made. Customs & Excise sought to recover this money by suing Barclays in
negligence, alleging that this recoverable economic loss, they contended that, once a freezing order had
been received, a bank assumed responsibility for the loss that would be suffered if money was allowed
to leave the frozen accounts.
The House of Lords ruled that there had been no assumption of responsibility in the required sense,
because it could not truly be said the responsibility assumed was voluntary where the bank was obliged
by law to accept the freezing order, therefore the claim failed.

Reasonable reliance

Whether the claimant can be said to have relied on a statement, information or advice is also important
in providing an exception to the general exclusionary rule.

Reliance must be reasonable in the circumstances.

Caparo Industries v Dickman [1990] HL

Caparo was considering a takeover bid of another company, /fidelity. In pursuance of this, Caparo looked
at information prepared by Dickman, Fidelity’s auditors, which it received because it already held a
number of shares in Fidelity. This information showed Fidelity was doing well and, in reliance on this
audit, Caparo launched its takeover bid only to find later that Fidelity was almost completely worthless.
Caparo sued Dickman, alleging negligence in the preparation of the audit.

The HL found no duty of care was owed by Dickman in respect of economic loss caused by Caparo’s
reliance on the information provided. The main reason for this was that it was not reasonable for Caparo
to have relied on this information when preparing its takeover bid of Fidelity. Company audits were an
annual requirement for businesses under the Companies Act 1985, and the information within them was
provided for shareholders; not for potential investors as this would include a class of persons of
indeterminable size. Thus, in Caparo’s capacity as a shareholder of Fidelity, the information could be
relied upon, but in its capacity as a potential investor, it could not be.

Smith v Eric S Bush [1990] HL

The claimant purchased a house, relying on a survey of the property prepared by the defendants. The
survey had been carried our negligently and the house was in fact worth much less than was paid for it.
The survey, as I normal practice, had been commissioned by the building society with which the claimants
had taken out their mortgage – the principal purpose of such a survey is to satisfy the building society that
the value of the house being purchased is at least that of the amount being lent.

The House of Lords held that although a contract exists only between the mortgage lender and surveyor,
surveyors would owe a duty of care to the buyer, as they would be aware that the buyer would rely on
the information provided by them, and it would be reasonable for buyers to do so.

Beyond Hedley Byrne: the ‘will cases’ and a more flexible approach
Provision of services rather than the making of a statement or advice.

White v Jones [1995] HL

Two sisters were cut out of their father’s will following an argument. Later, the rift in the relationship
between the sisters and their father was mended and the father instructed his solicitor to redraft the will,
including an inheritance of $9,000 for each daughter. When, after a month, he discovered that this had
not yet been done, he reissued his instruction. After his death, it was found that the will had not been
changed and the daughters sued the solicitor. The House of Lords found in the claimants’ favour, awarding
them the economic loss they had suffered as a result of the solicitor’s negligence.

Gorham v British Telecommunications pls [2000]

Pension – wrong advice. Benefit for wife

Spring v Guardian Assurance [1995] HL

Spring had worked for the defendant company but had been made redundant. He sought a reference
when he was trying to find new employment with a different company. The reference provided stated
that he was dishonest and incompetent and, as a result, Spring was not employed. He sued the
defendants in negligence for the economic losses caused to him by not getting the new job.

At trial it was found that although the employer genuinely believed in the truth of the reference it had
prepared, it had reached these conclusions wrongly and was therefore negligent.

A duty of care to take care in providing accurate references was owed. The House of Lords agreed that
duty had been owed and that it had been breached.

Notably, unlike n Hedley Byrne and White, the claimant was not the person the statement (in the
reference) was made to or prepared for – he was the person the statement was about. This seems to
indicate that the Hedley Byrne principles can operate in a slightly different direction. The other
components of ‘assumption of responsibility and ‘reasonable reliance’ are apparent in this type of
situation; only the relationship is different. Arguably, however, a comparable relationship of trust and
confidence exists when a past employer is asked to provide reference.

Conclusion
The starting point in relation to pure economic losses – these financial losses that are not consequential
on another type of loss – was that recovery can be made for pure economic loss if it was caused by
negligence (Spartan Steel).

The law on pure economic loss came to be defined more by how the loss was caused – by a negligent
misstatement or a negligent activity or defective product. Economic loss stemming from activities (such
as building houses) or defective products 9including houses) is not recoverable in the tort of negligence,
whereas negligent statements or services can be, providing certain conditions are met.

In Barclays Bank, House of Lords suggested that three categories of case now exist in which a claimant
may succeed in a claim for pure economic loss.

1. An existing situation that has already recognized by the courts, as in other types of negligence
claim.
2. A claimant following Caparo may fulfill the general test for the incremental expansion of tortious
lability into a new area (showing ‘proximity’, ‘foreseeability’, and that it would be ‘fair, just and
reasonable’ to impose liability in that situation.
3. Situations where claimant can establish that their claim satisfies the 4 Hedley Byrne principles.
These are based on the special (fiduciary) nature of a relationship in which there is an
assumption of responsibility coupled with reasonable reliance.
 Subject Guide
10.1 Economic loss
Economic loss consequential on physical injury or damage to property is recoverable.
Spartan & Alloys v Martin provides a simple illustration of the recovery rule.
Exception concerns the cost of bringing up children in wrongful birth cases. Macfarlane vTayside
Health Board decided such claim would not be held in respect of a healthy child.
Rees established where child is disabled or mother is disabled then damages could be recovered
to reflect only the additional cost attendant on bringing up a child with disabilities.
Giving birth an injury? If yes, Macfarlane. If No, pure economic loss. Not recoverable.
10.1.1 Pure economic loss
A defect will result in financial loss but is not a damage and not recoverable. Murphy v
Brentwood is authority that such losses are not recoverable.
Pure economic loss is not recoverable if it is a result of a negligent act as opposed to a negligent
misstatement
10.1.2 What forms of pure economic loss are recoverable?
Financial loss that results from a negligent misstatement is recoverable but, only according to
strict criteria. This principle was established in Hedley v Byrne and Caparo Industries v Dickman.
The general common law rule was that a defendant was not liable for purely economic loss. Since
1964, rules concerning recovery of economic loss have been somewhat relaxed. /this does not
mean that all foreseeable economic loss is recoverable.
10.1.3 Recovery of pure economic loss: policy considerations
1. Economic interests are intrinsically less worthy of protection than physical interests.
2. Burden of particular defendants unbearably high
3. A general rule against recovery of economic loss is clear and easy to apply.
4. Claimants can make good their economic loss by compensation
10.2 Recovery of pure economic loss: Hedley Byrne
The case profoundly changed the law in 2 respects:
1. The defendants were held to owe a duty to take care in the advice or information they
gave
2. That duty extended to purely economic losses
10.3 Economic loss cases (i): negligent misstatements
Economic loss flowing from careless advice or information
10.3.1 When does the duty arise?
1. Requirements for the existence of a ‘special relationship’:
2. Existence of a relationship based on professional or other skill or expertise
3. A reliance by the claimant on the defendant’s special skill and judgement
4. Knowledge, or reasonable expectation of knowledge on the part of the defendant, that
the claimant was relying on the statement
5. That it was reasonable in the circumstances for the claimant to rely on the defendant
6. In some cases that the relationship was close to being contractual
The speaker is therefore usually giving advice in a serious, business or professional context.
It is unusual, although not impossible, for the duty to arise between friends in a relatively social
context.
Chaudhry v Prabhakar [1988] – Plaintiff asked a friend who had some knowledge of cars to find
a suitable car that had not ben involved in an accident. Recommended car was subsequently
found to have been involved in a serious accident.
Court of Appeal imposed liability on defendant.
However, court also stated that the giving of advice sought in the context of family, domestic or
social relationships will not in itself give rise to any duty in respect of such advice.
10.3.2 ‘A voluntary assumption of responsibility’
The concept of ‘voluntary assumption of responsibility’ has subsequently been used to establish
proximity in determining the existence of a duty of care. In smith v Bush [1990] Lord Griffiths
suggested it is not a helpful or realistic test for liability, but in Henderson v Merrett Syndicates
[1995] Lord Goff said that criticism of the concept of a voluntary assumption of responsibility in
Smith v Bush is misplaced.
10.3.3 When is there liability?
The defendant has the opportunity to explain the limits of their knowledge and the amount of
research they have undertaken and is to be judged according to what they promised to do.
It also has to be shown that the negligent advice or information was the cause of the claimant’s
loss.
10.3.4 To whom is there liability?
The loss may be suffered by someone other than those to whom the advice or information was
addressed. Two decision of the House of Lords can be contrasted: Smith v Bush and Caparo
Industries v Dickman.
In Smith a house purchaser, who wished to obtain mortgage finance from a bank, sued a surveyor
who had been commissioned by the lending institution to provide a report (paid by the
purchaser) to the bank about the property. The surveyor was held to owe a duty to the purchaser
and not just the bank, even though the purchaser had been advised about the desirability of
obtaining her own survey but had not done so.
In Caparo, a firm of accountants who had carried out a statutory audit of a company were held
to owe a duty to the shareholders as owners of the company but not to the claimants who
launched a take-over bid for the company on the strength of the accounts.
Consider: (i) number of potential claimants in the 2 situations (ii) the social significance of each
of the 2 situations
10.3.5 The Caparo test
A duty may arise in a Caparo-type situation if the relationship between the claim and the purpose
for which the auditor’s report was prepared is close enough. The decision has been interpreted
as identifying a set of criteria which can be articulated into a three-stage checklist, known as the
Caparo test. Under this testy, for a duty of care to arise:
1. The loss must be reasonably foreseeable
2. There must be a relationship of proximity between the parties
3. It must be fair, just and reasonable that the law should impose a duty – this enables the
court to take account of any underlying policy concerns
In Caparo the report was intended to enable the shareholders, as owners of the company to
decide whether they were satisfied with the management of the company by the board of
directors on the basis of the company’s past performance. It was not intended as a basis for
decision to invest in the shares of the company. Advice on this would be based on different
criteria. There was no voluntary assumption of responsibility towards potential investors, nor
would it be reasonable for such an investor to rely on this report for this purpose.
10.3.6 Reliance by a third party
The advice may be relied by one person but the loss suffered by someone else: Ministry of
Housing v Sharp [1970], Spring v Guardian Assurance [1995].
Spring – Reference case
In Mckie v Swindon college [2011] – an unsolicited email containing largely erroneous and untrue
statements sent by former employer of a lecturer led to his dismissal from a new job. Although
the email was not a reference, applying the Caparo test, the defendant was nevertheless liable
for negligent misstatement.
10.4 Economic loss cases (ii): performance of a service
The Hedley Byrne case was long thought of as being concerned with advice or information on
which the claimant relied. Later it was interpreted more widely and an ‘extended Hedley Byrne
principle’ was recognized: defendant can be liable where there has been a voluntary assumption
of responsibility by the defendant towards the claimant either generally or for the purpose of a
specific transaction. On this view, liability for negligent misstatements is merely an example of
a wider principle and reliance is not a necessary ingredient for liability.
Henderson v Merret Syndicates – The House of Lords held that the agents had assumed a direct
responsibility to the Names and prima facie duty of care arose.
The lordships held that assumption of responsibility can be the basis of recovery in tort where
the defendant undertakes a professional task.
Customs and Excise Commissioners v Barclays Bank
The scope of the extended principle was explained by Lord Steyn in Williams v Natural Life
Health Foods [1998] where the plaintiffs entered a contract with a company to franchise a health
food store. The plaintiff’s business was not a success and they sought to prove that the defendant
had personally assumed responsibility for the negligent advice provided by the company.
Although it was held in this case that the defendants had not personally assumed responsibility
to the plaintiff, Lord Steyn said that the extended Hedley Byrne principle established in
Henderson does not merely apply to negligent statements, but also covers the negligent
performance of services and can even found a tort duty concurrently with contract.

West Bromwich Albion Football Club v El-Safty [2006]

Henderson was applied in West Bromwich Albion Football Club v El-Safty [2006] where a duty
of care to the patient was not accompanied by an assumption of a duty to a third party not to
cause financial loss. In this case the football club brought an action against a consultant surgeon
for the financial losses suffered by the club when one of its valuable players was negligently
prescribed treatment by the defendant. Although the degree of foreseeability and proximity was
found to exist between the consultant and club (which had paid for the treatment) the Caparo
test was applied. The Court of Appeal said that it would not be fair, just and reasonable to impose
a duty to the club on the ground that such duty could conflict with the doctor’s primary duty to
care for his patient.

Burgess v Lejonvarn [2017]

The ratio in Henderson was applied in Burgess v Lejonvarn [2017] in a dispute over the alleged
provision of gratuitous professional services. For about 10 years prior to the events giving rise to
this dispute the claimants (the Burgesses) and the defendant Mrs. Lejonvarn were good friends.
The claimants believed the quote in excess of $150,000 plus VAT from a well-known landscape
gardener to carry out the work to be too expensive and they sought professional assistance from
their friend and former neighbor, the defendant. The defendant secured the contractor to carry
out the earthworks and hard landscaping with the intention that she would provide subsequent
design input for which she would charge a fee. However, the project went badly wrong and the
Burgesses sued Mrs. Lejonvarn both in contract and in tort. The court found it quite impossible
to find any clear form of offer and acceptance and concluded there was no contract between the
parties. However, the claim in tort was successful: the defendant possessed a special skill and
she had assumed a responsibility in respect of both advice and service on which her friends relied.
The case was then remitted to the High Court for determination of the issue of whether this duty
had been breached. The judge found in favour of the defendant, finding that the claims of
negligent design and project management were ‘threadbare’ and ‘lacked credibility and
conviction’. This case is a useful reminder to students that a finding that one element of
negligence exists (here, duty) by no means assures success for a claimant.

White v Jones [1995]

Important example of extended Hedley Byrne principle in White v Jones where the assumption
of responsibility by a solicitor towards his client was extended to the intended beneficiary of the
client’s will who, as a result of the failure of the solicitor to execute the will before the client’s
death, was deprived of the intended legacy.
Claimant suffered no loss. Main reason for extending responsibility of the solicitor was that
otherwise there would be no sanction against the solicitor. Estate suffered no loss. Their
Lordships held that by accepting to draw the will, solicitor came into a special relationship with
those intended to benefit under it and in consequence, imposed a duty on the solicitor to act
with due expedition and care on behalf of the beneficiaries.
Gorham v British Telecommunications [2000]
CA confirmed that White v Jones is not confined to claims relating to wills. In this case, Mr
Gorham sold a personal pension without being advised that BT’s occupational pension might be
better for him. Although, even if he had joined the BT scheme when he was informed that it
might be better, his family would not have been entitled to a pension because he would not have
been a member of the scheme for 2 years before his death. They would however have been
entitled to a lump sum and it was clear that Mr Gorham intended to create a benefit for his
dependent wife and family and therefore a duty of care was owed to them by the insurance
company.