Law of Tort: Duty of Care (Economic Loss)

Economic Loss

The rules regarding Economic Loss are separate from general negligence because the pool of potential claims could potentially be limitless. If a careless driver crashes through a support on a bridge leading to the bridge collapsing, this may cause delays. Lets imagine somebody was enroute to a job interview, but because the bridge had collapsed they were late to the interview and didn’t get the job. There must be a limit to what can be claimed for, otherwise there are significant policy considerations to take into account.

The main policy consideration is the ‘flood gates’ argument, which can be explained by imagining what the consequences of allowing a claim would be in the real world. If claims were limitless there would be no end to what could be claimed for. This would have repercussions such as not being able to get insured and not knowing the sheer scope of claims – it could financially destroy anybody.

The general rule is that economic loss is not recoverable in tort. What this means is that if a café owner was on one side of the bridge from the example above, and they lost most of their trade as the café was inaccessible, they could not claim the lost profit. Despite the loss being consequential from the bridge accident. This is known as pure economic loss, which you cannot claim for. This is because you cannot anticipate the exact amount of compensation, and there is a chance that you could overcompensate, which cannot happen within tort law. 

Economic Losses can be caused by Damage to Property and Acquisition of defective goods or Property.

Damage to Property

Spartan Steel & Alloys Ltd v Martin & Co Ltd [1973] CA –

  • Defendants negligently cut an electricity mains cable supplying power to the claimant’s factory
  • No power for 14 hrs and could not operate their steel furnace.
  • Possibility that the molten would solidify = damage
  • Factory had to be closed
  • Owners claimed under three heads

The three heads:

  • A) The damage to the steel in the furnace
  • B) The loss of profit that could have been made
  • C) The anticipated lost profit on the steel that would have been processes.

Court of Appeal allowed recovery for

  • A (physical damage to property)
  • B (consequential economic loss)
  • but NOT C (anticipated profit – pure economic loss) The reason for this is policy, it is not possible to compensate a claimant for an uncertain amount, which may overcompensate the claimant which you cannot do.

A duty of care is ONLY owed in respect of FINANCIAL LOSSES relating to PROPERTY DAMAGE caused by the defendant’s NEGLIGENCE.

  • Must be as a direct result of the damage to the property

Lord Denning – Policy considerations

  • Power failures were a fact of life.
  • A thing they must put up with
  • Inflated claims for lost profits
  • Crushing Liability
  • Contract Law

Acquisition of Defective Goods or Property

Murphy v Brentwood DC [1991] 1 A.C. 398 – failed to adequately inspect foundation of a building, and it became unstable and led to the chimney collapsing. They then sold it at a loss as they couldn’t afford the repairs. The House of Lords held that the council was not liable in the absence of physical injury.

Muirhead v Industrial Tank Specialities Ltd [1986] QB 507 –      “a manufacturer of defective goods could be liable in negligence for economic loss suffered by an ultimate purchaser if there was a very close proximity or relationship between the parties and the ultimate purchaser had placed real reliance on the manufacturer rather than the vendor”.

Exceptions –

As always in law, there are some exceptions to the general rule of not being able to recover economic losses. The exceptions primarily stem from the case of Hedley Byrne v Heller [1963] HL. In this case the concept of Negligent Misstatement was introduced.

Hedley Byrne v Heller [1964] AC 465

Facts

  • Hedley asked to buy some advertising space for Easipower.
  • —To ensure Easipower could pay for this they did a credit check.
  • — Heller (Easipower’s bank) had twice given a positive response to these checks.
  • —  On this basis they contracted for £17,000
  • —  Easipower later collapsed.
  • —  Claim against Heller for negligence when preparing credit statement.
  • —  Heller had added a disclaimer to the statements.

Held

  • House of Lords
  • —  disclaimer meant that no liability could arise in this case
  • —  Considered the position if no disclaimer existed

Obiter

  • —A duty of care could arise
  • —Advice given  
  • Pure Economic Loss
  • Limited to situations with 4 criteria—
  1. —  A special (fiduciary) relationship – Have a duty to the person to get something right
  2. —  Voluntary assumption of risk – must assume responsibility at the time
  3. —  Reliance – reliance on that specific statement from the claimant
  4. —  Reliance reasonable in the circumstances? – must be reasonable

 

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