LAW OF TORT

PURE ECONOMIC LOSS PART 1

INTRODUCTION
 Many losses resulting from tort could be described as economic; if the claimant’s house is burnt down
because of the defendant’s negligence, the loss is economic in the sense that the claimant no longer
has an asset they used to have. Similarly, a claimant who suffers serious injury which makes them
unable to work suffers a financial loss. The law of tort has always been willing to compensate for these
losses with damages. However, economic loss has a more precise meaning in tort. The term is usually
used to cover losses which are ‘purely economic, meaning those where a claimant has suffered
financial damage that does not directly result from personal injury or damage to property- as when a
product bought turns out to be defective, but does not actually cause injury or damage to other
property.
 Economic loss unaccompanied by physical damage presents a particular problem in negligence, as
negligence has traditionally operated in a protective manner to compensate people for loss caused by
negligently inflicted physical damage.
 In cases of pure economic loss, the law of tort has been reluctant to allow a claim. Where a person has
suffered economic loss, redress has traditionally been in contract law.
 Pure economic loss may arise in cases where there is no physical damage but loss has been caused by a
negligent statement, rather than a negligent action. A claimant's pure economic loss resulting from a
defendant's carelessness can only give rise to a claim in Negligence if a duty of care is established.
 Until 1964 the common law position was that there was no remedy for a negligently false statement in
Negligence.
 See the case of Candler v Crane Christmas & Co [1951] 2 KB 533, where the plaintiff lost money on his
investment after relying on the defendant's carelessly compiled audit reports. The issue before the
court was whether pure economic loss could be recovered? The court held that the plaintiff could not
bring an action because there was no contractual or fiduciary relationship between the parties.

DEFINITION OF PURE ECONOMIC LOSS

 Pure economic loss refers to financial losses which are not attributable to physical harm caused to the
claimant or his property. It includes loss of profits, loss of trade and loss of investment revenue. In
other words, economic loss means pecuniary or financial loss. The term is usually used to cover losses
which are ‘purely economic, meaning those where a claimant has suffered financial damage that does
not directly result from personal injury or damage to property. See the case Spartan Steel v Martin
(1973)- where the defendants had negligently cut an electric cable, causing a power cut that lasted for
14 hours. Without electricity to heat the claimants’ furnace, the metal in the furnace solidified, and the
claimants were forced to shut their factory temporarily.
 They claimed damages under three heads:
i. damage to the metal that was in the furnace at the time of the power cut (physical damage to
property);
ii. loss of the profit that would have been made on the sale of that metal (economic loss arising
from damage to property); and
iii. loss of profit on metal which would have been processed during the time the factory was
closed due to the power cut (pure economic loss).
 Still on the case of Spartan Steel v Martin (1973), the Court of Appeal held (majority) that the first two

1|Page
 claims were recoverable but the third was not. The defendants owed the claimant a duty not to
damage their property, and therefore to pay for any loss directly arising from such damage, as well as
for the damage itself, but they did not owe them any duty with regard to loss of profit. The further loss
was undoubtedly foreseeable but, as Lord Denning conceded, ‘the question, at bottom, was one of
policy’.

HEDLEY BYRNE RULE

 The common law position was significantly changed by this House of Lords decision. It created an
exception to the general rule that pure economic loss could not be recovered in tort if caused by
negligent statements.
 In the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. In this case the plaintiffs,
an advertising firm, extended credit for a third party (Easipower) on the basis of creditworthiness
reference provided by the defendants, Easipower's bank. The reference was an innocent but negligent
misrepresentation. Easipower went out of business and the plaintiff sought damages for pure
economic loss from the defendants. The issue was whether duty of care apply to statements that cause
pure economic loss? The lower courts found that pure economic loss could not be recovered as the
defendant did not owe the plaintiff a duty of care. The House of Lords found that a duty of care was
owed. However, the defendants had used an effective disclaimer of liability, so the losses were not
recoverable.
 The Hedley Byrne rule states that a duty of care is owed if there is a special relationship between the
claimant and defendant. A special relationship arises if there is an assumption of responsibility by the
defendant (if the defendant knows the claimant is relying on their special skill) and the claimant
reasonably relies on the defendant's statement.
 In Hedley Byrne v Heller & Partners Ltd, the House of Lords laid down a number of requirements
which claimants would need to satisfy in order to establish a duty of care. There must be:
i. a ‘special relationship’ between the parties;
ii. a voluntary assumption of responsibility by the party giving the advice;
iii. reliance on that advice by the party receiving it; and
iv. it must be reasonable for that party to have relied on the advice. It should be noted that the
requirements are to a large extent interlinked.

APPLICATION OF THE HEDLEY BYRNE RULE

 The Hedley Byrne decision has been applied in a number of cases. The following are some of the cases
where rule has been applied:
 See the case of Cornish v Midland Bank Plc [1985] 3 All ER 513- where the plaintiff agreed to guarantee
her husband's loan application, by signing a second mortgage on her house. The bank clerk, employed
by the defendant, advised the plaintiff of the implications of signing the mortgage. However, the clerk
inadequately explained the document and failed to highlight that signing meant the plaintiff was liable
for informed all her husband's past, present and future borrowings. Shortly after the mortgage was
signed the marriage broke up. Despite being aware of the marriage breakdown the defendant made
further loans to the husband. When the mortgage was redeemed the plaintiff was left with very little
money from the sale of the house.
 Still on the case of Cornish v Midland Bank Plc, the issue before the court was whether a duty of care
was owed to the plaintiff. The court held that A duty of care was owed as the bank clerk had taken it

2|Page
 upon himself to advise the plaintiff, it was reasonably foreseeable that she would rely on the advice
and he should have made sure it was complete and correct.
 See the case of Chaudhry v Prabhakar [1989] 1 WLR 29 & [1988] 3 All ER 718. In this case the plaintiff
asked the defendant, a friend who claimed to be knowledgeable about cars, to help her purchase a
vehicle. The plaintiff bought a car after the defendant recommended a car which he stated had not
been in any accidents. The car had visible damage and the defendant had not enquired about the
cause. The car was in fact unroadworthy, due to a previous accident. The issue before the court was
whether the defendant owed the plaintiff a duty of care. The Court of Appeal found that a duty was
owed by the defendant as he knew the plaintiff had relied on his advice, on the basis of his claim that
he was knowledgeable about cars.
 It is important to note that the decision in Chaudhry v Prabhakar [1989], has been criticised as it seems
to contradict dicta in Hedley Byrne that suggested a duty could only arise where the advice was sought
and given in a business context.
 See the case of Welton v North Cornwall District Council [1997] 1 WLR 570. In this case, the plaintiff
spent money on extensive refurbishment of their guest house, after being negligently informed by an
environmental health officer, employed by the defendant, that the premises would be shut down if the
work was not carried out. The issue before the court was whether the environmental health officer
owed a duty of care to the plaintiff. The court held that a duty of care was owed. It was reasonable for
the plaintiff to rely on the advice of the environmental health officer, who was in a position of
authority. Hence, the case law followed the Hedley Byrne rule and found that a special relationship,
would give rise to a duty of care in relation to negligent statements.
 See the case of Lambert v West Devon Borough Council (1997)- where a local authority was liable
when the claimant had relied on its advice that he could begin building even though planning
permission had not yet been approved. However, if the statement which was made did not influence
the claimant’s judgment, then it cannot be the basis of a negligence action.
 See the case of Jones v Wright [1991] 3 All ER 88- where the claim was struck out as disclosing no
cause of action when the claimants failed to establish that they had relied on an audit carried out by
the defendants. The claimants were investors whose money was held on trust by a company which had
been audited by the defendants. They alleged that the auditors should have discovered that there had
been misuse of trust monies. It was decided that the mere fact that there was a relationship of trust
between the investors and the company did not place a duty of care on the auditors of the company,
and not only had there never been an assumption of a duty to the investors, neither had there been
any reliance on them.
 See the case of to the case of White v Taylor (2004)- where it was held that the claim must fail. The
Court of Appeal took the view that since the claimant had not demonstrated that he would have acted
any differently without the advice given to him by solicitors, their negligence had not caused his
financial loss. This is as much a matter of causation as it is of reliance.
 See also the case of Goodwill v British Pregnancy Advisory Service [1996] 2 All ER 161- where the
claimant was suing for an unwanted pregnancy. She claimed that her partner had not been properly
advised as to the possibility of his vasectomy operation not being successful. This operation had been
performed some four years previously before the couple had met and formed a relationship and the
claimant’s partner had been advised that he was sterile and need use no other form of contraception.
The Court of Appeal took the view that, in order to succeed in a claim for financial loss occasioned by
negligence, the claimant has to prove that the defendant knew or ought to have known that the advise
was likely to be acted upon without independent inquiry by the claimant.
 An attempt to restrict liability under the Hedley Byrne principle was made in the case of Mutual Life &

3|Page
 Citizens’ Assurance Co Ltd v Evatt [1971] AC 793- where the Privy Council in a majority decision held
that a duty of care would only arise if the defendant is in the business of giving advice or information,
or profess to have expertise in a particular field. It must be clear and obvious that the circumstances
are such that the plaintiff truly required the defendant’s advice and opinion. Therefore, whether it is
reasonable or otherwise for the plaintiff to rely on the defendant’s advice depends on the facts as well
as the circumstances in each particular case. The minority opinion was that a duty of care may
nonetheless arise when a person seek advice from another whilst the other person is conducting his
business, and the person seeking the advice makes it known that he will rely on that advice. If the party
who gives the advice does so without imposing any conditions, he owes a duty of care to act
reasonably in those circumstances.
 Still on the case of Mutual Life & Citizens’ Assurance Co Ltd v Evatt [1971] AC 793, the plaintiff, a policy
holder with the defendant company asked the latter for some advice relating to the financial
soundness of another company, P Ltd. On the basis of the incorrect advice which he received, the
plaintiff invested in P Ltd. He lost his money. In a majority decision, the Privy Council found the
defendant not liable as it was not in the business of giving advice and it therefore owed no duty of care
to the plaintiff. The minority opinion in Evatt was followed in Esso Petroleum Co Ltd v Mardon [1976] 1
QB 801- where even though the defendants were not in the business of giving advice, the court took
into consideration that they were experienced and had special and expert knowledge in estimating the
contents of petrol at a petrol station, compared to the plaintiff who did not possess the requisite
knowledge, and a duty of care was imposed on the defendants. But on appeal the case was decided in
contract rather than tort, so the position remained unclear. However, it was clarified in Howard
Marine and Dredging Co Ltd v Ogden & Sons Ltd [1978] QB 578, and it can now be stated with
confidence, that any business or professional relationship there potential for special relationship to
exist.
 The application of this minority opinion in Evatt which in effect was a liberal interpretation of what
constitutes a ‘special relationship’ was reiterated in 1989 in Smith v Eric S Bush [1990] 1 AC 831- where
the plaintiff applied to a building society for a mortgage to assist her in purchasing a house. The
building society instructed the defendants, a firm of surveyors and valuers to report on the value of the
house. The defendants gave a favourable report, which was in fact inaccurate. The mortgage
application form and the valuation report contained a disclaimer of liability for the accuracy of the
report covering both the building society and the valuer. A copy of the report was given to the plaintiff
who had paid a fee for it. She relied on the report and purchased the house without obtaining any
independent survey. This was in fact a common practice- that house purchasers relying on mortgagees’
report without engaging their own surveyor. One of the chimneys of the house subsequently collapsed.
In a claim from the plaintiff, the defendants relied on the disclaimer in the report and the application
form. The House of Lords held that based on the Unfair Contract Terms Act 1977, the defendants could
not rely on the disclaimer to exclude liability.
 Still on the case of Smith v Eric S Bush, the court stated that the relationship between the parties was
such that it was fair to impose a duty of care. Thus, a valuer who values a house for the purpose of a
mortgage owes a duty to exercise reasonable care and skill to the prospective mortgagor and
mortgagee, especially if he knows that the parties are relying on his report in order to effect the
mortgage, as in this case. This duty of care is however, limited to that purchaser and not to subsequent
purchasers who would be unknown to the defendant (and so imposing a duty would be placing
intolerable burden on them). Duty of care arose in this case based on the deemed assumption of
responsibility on the part of the surveyors. They were aware of the identity of the plaintiff and knew
that she would rely on their report.

4|Page
REFINING THE RULE
 The criteria for establishing a special relationship has been further defined by the House of Lords in the
case of Caparo Industries v Dickman [1990] 2 AC 605. In this case the plaintiff bought shares in a
company, Fidelity, in order to make a successful takeover bid. The plaintiff relied on Fidelity's accounts
prepared by the defendant auditors. The accounts showed that Fidelity were making a profit but in fact
the company was making a loss. The plaintiff made a loss as they bought the shares for an excessively
high price. Was duty of care owed? The House of Lords found that the defendants did not owe a duty
of care to the plaintiff because the necessary special relationship could not be established. A defendant
will have assumed a responsibility towards the plaintiff and a special relationship established if the
following four stage test is satisfied:
i. The adviser knew the purpose for which the advice was required.
ii. The adviser knew that the advice would be communicated to the advisee, either specifically or
as a member of an ascertainable class.
iii. The adviser knew that the advisee was likely to act on the advice without further independent
inquiry.
iv. The advice was acted on by the advisee to his detriment.
 The principles of law derived from the case of Caparo are as follows: Firstly, the auditor of a public
company’s accounts owes no duty of care to a member of the public at large who relies on the
accounts to buy shares in the company. This is because to deduce a relationship of proximity between
the auditor and a member of the public would give rise to unlimited liability on the part of the auditor.
Secondly, there are three criteria for imposition of a duty of care, namely, foreseeability of damage,
proximity of relationship and the reasonableness or otherwise of imposing a duty. Thirdly, there will
not be a relationship of proximity if the maker of the statement has no reason to anticipate that his
statement might be relied on by strangers for any one of a variety of different purposes. Fourthly, a
relationship of proximity can exist if the maker of the statement knows that his statement will be
communicated to the plaintiff, whether as a specific individual or as a member of an identifiable class.
 Still on the case of Caparo, the fifth principle is that proximity is established if the statement is made in
connection to a particular transaction and the (identifiable) plaintiff is very likely to rely on the
statement for the purpose of deciding whether to enter into that transaction. Hence, unlike in Smith v
Eric S Bush, the defendant in Caparo could not be said to be fully aware of what the plaintiff proposed
to do as a result of their report. Following Caparo, it has been held that directors of a company do not
owe a duty of care to shareholders who rely on a prospectus for a different purpose than the intended
distribution of the prospectus.
 The courts have tended to narrowly construe the requirement that the adviser knew the purpose for
which the advice was required. See the case of James McNaughton Papers Group Ltd v Hicks
Anderson & Co [1991] 2 QB 295 & [1991] 1 All ER 134- where the plaintiff was negotiating with a third
party about a takeover bid. The third party instructed the defendant, their accountants, to prepare
accounts as quickly as possible. The plaintiff relied on the accounts which were carelessly drawn up to
make a bid. The plaintiff subsequently made a loss. The issue was whether the defendant owed a duty
of care to the plaintiff. The Court of Appeal found that the defendant did not owe a duty of care to the
plaintiff. There was insufficient proximity for a special relationship as the defendant did not know the
accounts would be sent to the bidder for the particular transaction.
 It is important to note that although professional people do rely on other experts for advice from time
to time, there is less likely to be reliance if both parties are experts than in cases where one is a private

5|Page
 individual and the other is professionally qualified. See the case of Valse Holdings SA v Merrill Lynch
(2004)- where it was held that the defendants were not liable for negligent advice when the client was
a designed expert.
 It must be noted that reliance must reasonable. The claimant’s reliance on the defendant’s statement
must be reasonable in all circumstances. Like the notion of ‘special relationship’, that of ‘reasonable
reliance’ has been seized upon and used by the judges as a device for implementing policy. In other
words, the requirement of ‘reasonable reliance’ allows the courts to control the scope of liability for
negligent misstatements and tasks and services, as whether the plaintiff’s belief and reliance on the
defendant is reasonable depends on the facts of each case.
 Still on the issue or point of reliance must be reasonable, perhaps it would be vital to make reference
to example where an impromptu advice given during a telephone conversation does not give rise to a
duty of care. If the defendant does not give any advice or opinion, generally no liability will arise except
if the defendant has a duty to give advice or to act. See the case of Caparo Industries plc v Dickman
[1990] 2 WLR 358- where Lord Oliver stated that the person giving advice must have known by
inference that the statement would be received by the claimant or class of persons to which the
claimant belonged, and acted upon without further independent advice being sought. This approach
was also taken in some earlier cases.
 See the case of Yianni v Edwin Evans [1982] QB 438- where a prospective purchaser relied upon advice
given by a surveyor to the building society from which he was seeking a mortgage. The building society
had required payment of a fee by the prospective purchaser in the usual way, so that it could instruct
the surveyor to value the property to ensure that it was worth the amount which they prepared to
lend. The building society even informed the purchaser in writing that he should instruct his own
independent surveyor, but he did not do this. Evidence was produced to the effect that only 15% of
private house purchasers have a separate independent survey before purchase and the court
concluded that it was reasonable for the purchaser to rely on the building society survey if the building
society was happy to do so. It transpired that the surveyor was negligent and that considerable
expenditure was required to remedy a major defect in the property. The defendant surveyor was liable.
A duty of care existed, as the test of reasonably foreseeable reliance was satisfied.
 See the case of Morgan Crucible v Hill Samuel [1991] CH 295- where the plaintiffs were bidding to take
over a third party company, to whom the defendants were advisers. During the bidding process a
number of negligent representations were made, which led to the plaintiff making a loss. The issue was
whether the defendants owed the plaintiffs a duty of care. The defendants did owe a duty not to
negligently mislead the plaintiff. There was sufficient proximity because the plaintiff's identity and the
nature of the transaction were known.

EXTENDING THE RULE

 The exception seems to have been extended in some specific circumstances, where the Hedley Byrne
and Caparo requirements have not been satisfied. See the case of Henderson v Merrett Syndicates Ltd
[1995] 2 AC 145, where the plaintiffs made substantial losses through investing in Syndicates,
negligently managed by the defendants. The issue was whether the defendant owed a duty of care to
the plaintiff. The House of Lords found a duty of care existed as the defendant had negligently
performed a professional service. Furthermore, damages could be recovered for a negligent omission
in the performance of a professional service which led to pure economic loss.
 See also the case of White v Jones [1995] 2 AC 207- where the defendant, a solicitor, was asked to
prepare a will, but negligently failed to do so before the testator died. The plaintiffs would have been

6|Page
 beneficiaries had the will been completed. The issue was whether the defendant owed a duty of care
to the plaintiff. The House of Lords found that the defendant's assumed responsibility to the testator
could be extended to the plaintiffs.
 Still on the case of White v Jones, the decision does not fit squarely within Hedley Byrne principle.
Where is the reliance on the part of the plaintiffs upon the defendant solicitors? Yet the House of Lords
held that there existed a special relationship between them by virtue of the defendants’ assumption of
responsibility to ‘protect’ the plaintiffs’ economic welfare. Thus, knowledge on the part of the
defendant that the plaintiff is relying on his services to secure an economic gain is sufficient to give rise
to a special relationship. The element of reliance is not necessary in every case for purposes of
establishing a special relationship. Opening the ‘floodgates’ was also a non-issue in this case as the
plaintiffs and the sum involved were readily identifiable and determinable respectively.
 See also the case of Spring v Guardian Assurance Plc [1995] AC 296, where the plaintiff was not
employed due to a negligent reference provided by the defendant, his previous employer, to a third
party (prospective employer). The issue was whether the defendant owed a duty of care to the
plaintiff. The House of Lords found that a duty of care was owed. The case is not a traditional Hedley
Byrne case, as the defendant did not provide the plaintiff with advice which he relied upon. However,
Lord Goff reasoned that the scope of the Hedley Byrne rule could be extended, as the decision was
originally based on the fact that the defendant had assumed responsibility for the plaintiff's economic
welfare. Therefore, he put forward that the plaintiff in this case had entrusted his affairs to the
defendant tasked to write the reference.
 See also the case of Ross v Caunters [1980] Ch 297- where the court held that Hedley Byrne had paved
the way for pure economic loss claims arising out of negligent advice. In Ross, the plaintiff was a
beneficiary in a will. She was denied her entitlement as the solicitors did not inform the testator that
the spouse of a beneficiary was not allowed to be a witness to the same will. The court held the
defendants liable even though the plaintiff did not ‘rely’ on the defendants. Liability was imposed
based on the neighbourhood principle, that there was proximity between the plaintiff and the
defendant. The recognition of this type of loss which was in fact a loss of ‘expectation’, was in fact
novel at that time.
 It would suffice to note that the courts have extended the Hedley Byrne rule, based on the assumption
of responsibility, beyond the original scope of negligent statements and have included negligent
provision of services. The reasoning for these extensions have been varies however, there seems to
have developed two tests for establishing a special relationship either: the Hedley Byrne and Caparo
principles in negligent statement cases or the broader assumption of responsibility test in relation to
the provision of services.

DISCLAIMER
 The most common defence to a claim to recover damages for pure economic loss caused by a negligent
statement is that a valid disclaimer exists. This defence was relied upon in Hedley Byrne. However,
there are now statutory limitations on defendant's attempting to exclude liability for negligence.
 See also the case of Harris v Wyre Forest District Council [1989] 2 All ER 514- where a survey had been
carried out by a local authority surveyor before the purchase of a property, for which the local
authority was providing a mortgage. The purchaser was not permitted to see the survey, but presumed
that it must have been favourable because the mortgage went ahead. It was decided that it was
foreseeable that the purchaser would rely on the survey, even though there was a clause excluding
liability for negligence in the surveying process. The insertion of an exclusion cause was declared

7|Page
 unreasonable under the Unfair Contract Terms Act 1977 and the defendant local authority was liable to
the claimant in negligence.

CONCLUSION
 This area of the law is not all that easy to understand e.g. are there too many restrictions or too few?
The case of Spartan Steel v Martin (1973) illustrates that the distinction between pure economic loss
and other kinds of loss can be a very fine one- and one that in common sense term is difficulty to
justify. The defendants’ negligence caused all three of the types of loss that resulted from the power
cut, and all three types of loss were foreseeable, so why should they have been liable to compensate
two sorts of loss but not the third? To the non-legal eye, distinguishing them seems completely
illogical- as indeed it must to a claimant who is left with loss caused by someone else, and has no
redress unless they have a contract. In many cases this can be seen as allowing a defendant to get away
with serious careless behaviour, regardless of the loss caused to others.

8|Page