Economic Loss
- Elliot Tierney
- Jul 27, 2023
- 6 min read
Updated: Jul 31, 2023
No Liability for Pure Economic Loss:
Generally, the defendant will not be liable for the claimant’s pure economic loss. Economic loss can only be recovered where it can be linked to personal and property harms.
In Spartan Steel v Martin, M is a sub-contractor for the local council who is employed to repair some electrical cables nearby. M carelessly cuts S’s power cable, shutting down their factory. S loses money.
The court awards damages for the loss of value to the steel that had to be discarded, but not for the loss of profit from the time the factory was shut down. The loss of the steel flows from a harm to property, while the loss of profit is pure economic loss.
Justification in Spartan Steel v Martin (Denning LJ):
Risk
Economic harm is a ‘hazard we all run’. The claimant could have backup systems or insurance to cover the loss of their profits.
The same could be said for hazards to personal health and property, so Denning;s reasoning doesn't seem to follow through completely.
Seriousness
Economic harm is ‘less serious than personal / property harm’.
Denning works on the assumption that something less serious is not deserving of compensation, rather than that it should receive less compensation. It also assumes that economic loss is always less serious than other harms.
Floodgates
Allowing claims for pure economic harm would ‘open the floodgates to litigation’.
Alternatively, courts could simply establish a test to weed out weaker claims.
Shared Loss
Economic loss is ‘shared by the community, rather than fall solely on D’.
Harder to Guard Against
It is harder for the defendant foresee and implement steps to prevent economic harm than personal / property risks.
Personal / property harms tend to be localised, whereas economic harm can be spread over multiple the claimants as economic interests are complexly intertwined between multiple parties. This would create a chain of litigation.
Liability for economic loss can become ‘liability in an indeterminate amount, for an indeterminate time, to an indeterminate class’. [1]
The claimant is often in the best position to know about how to protect their own economic interests. The claimant should have some responsibility in their own self-protection against economic loss risks.
Approach of the Courts: [2]
Specific Issues -> General Issues: The court will begin with the dealings between the claimant and the defendant, then turning to the broader reasons and context.
Assumed Responsibility:
Determining whether the defendant has ‘assumed responsibility’ over the claimant’s economic interests is important. If they have, they are liable for the claimant’s loss.
In Hedley Byrne v Heller, C (advertising agency) asks D (E’s bank) if E (a company) is credible. D negligently says they are but supplies the information in a document that has a clause stating they do not accept legal responsibility for the accuracy of the information they provide. The HL finds that C would have won if it weren’t for the disclaimer.
Narrow Reading Hedley Byrne v Heller:
The defendant assumes responsibility where:
The defendant gives advice voluntarily to the claimant,
Invites the claimant to rely on the advice,
and the claimant relies on it.
Refinements to Rule:
The defendant must know the claimant’s identity and what they are assuming responsibility for.
In BNL v Playboy Club, PC request a potential new member to prove their credibility using a front (B) to hide their identity. BNL (bank) provides a reference that is not accurate. The SC held BNL only assumed responsibility to B, not PC.
Sometimes the defendant assumes responsibility by virtue of the nature of their work.
In White v Jones, A gives detailed instructions to their solicitor (J) on how they would like their will to be amended. J never completed the work and A died before the will was signed. Only valid will was the previous one, leading to beneficiaries (W) losing out.
The HL allowed W’s claims; S had a special relationship with W that meant they had voluntarily assumed responsibility.
The defendant is not liable for all foreseeable loss that the claimant suffers. The defendant is only liable for losses that are within the scope of the advice given.
In SAAMCO v York Montague Ltd, S (asset management company) relied on asset valuations given by YM. YM’s advice was negligently incorrect by giving over-valuations, but the values also changed because the market dipped.
The HL only held YM liable for the amount that they had over-valued the properties, not C’s total losses.
Extended / Broad Reading of Hedley Byrne v Heller:
When the defendant takes on a task for the claimant, the defendant ought to use reasonable care and skill. If they do not, they should be liable.
In Spring v Guardian, G gave a reference for S that was not favourable after they parted on bad terms. The reference contained half-truths. S was unable to find work as a result. The court awarded S with damages since G ought to have used reasonable skill in compiling a reference.
Non-Expert:
Non-experts are not expected to exercise reasonable care and skill when both parties are aware that the defendant is not an expert.
In Mutual v Evatt, E goes to renew his insurance with M. E invests based on advice given by M. E sues M when he loses money on the investment. The court does not hold M liable for E’s loss.
Where non-experts hold themselves to be experts to the claimant, they are expected to exercise reasonable care and skill.
In Chaudhry v Prabhakar, C goes to buy used car. C does not know anything about cars, but their friend (P) is more knowledgeable. P holds themselves to be an expert. C buys a car based on P’s advice and loses out. The court held P liable.
Experts:
The claimant’s dependence on the defendant’s expertise is significant.
In Smith v Eric Bush, EB was employed by a bank to value a property for S’s mortgage. S suffered economic loss as a result of EB’s over-valuation but couldn’t claim under contract law as EB was contracted by the bank. The HL allows S’s claim as they had relied on EB’s expert valuation and EB knew that S would rely on it.
In Scullion v RBS, RBS gave a valuation to S about a property they were going to invest in. S sued RBS when they valued the property wrongly. The CA does not allow S to recover. As S is a knowledgeable investor, he should have been aware of the risks he took.
Note: contested judgement – perhaps should have been contributory negligence.
No Assumed Responsibility (Relevant Cases and Caparo Test):
Even if the defendant has not assumed responsibility, they still may be liable.
Where the defendant has not assumed responsibility, the two-test system from Caparo is applied. This has been applied inconsistently for novel cases. [3]
Where the stakes are specifically higher for the claimant than other potential the claimants, the claimant is expected to self-protect if they can readily / easily do so. [4] Similarly, if the defendant had the opportunity to avoid or limit the claimant’s loss, they should.
In Customs v Barclays, X owes C tax but fails to pay. C obtains a court order to freeze C’s bank accounts. B carelessly fails to comply, and X empties their account. C sues B for their negligence.
Since B had not assumed responsibility and the case was novel, court applied Caparo test. HL held that if B owed a duty to comply with the court order, this was to the court, not C.
“It seems to me in the final analysis unjust and unreasonable that the bank should, on being notified of an order which it had no opportunity to resist, become exposed to a liability which was in this case for a few million pounds only, but might in another case be for very much more. For this exposure it had not been in any way rewarded, its only protection being the commissioners' undertaking to make good (if ordered to do so) any loss which the order might cause it”.
Resources:
References:
[1] Ultramares Corporation v. Touche, 174 N.E. 441 (1932) (Cardozo J) [2] Customs & Excise v Barclays [2006] UKHL 28 [3] Compare: Anns v Merton London Borough Council [1977] UKHL 4 and Murphy v Brentwood District Council [1991] [4] Spartan Steel v Martin [1973] 1 QB 27 (Denning LJ)
Cases Mentioned:
Spartan Steel v Martin [1973] 1 QB 27
Hedley Byrne v Heller & Partners [1964] AC 465
BNL v Playboy Club [2018] UKSC 43
White v Jones [1995] UKHL 5
South Australia Asset Management Corporation v York Montague Ltd and Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1996] UKHL 10
Spring v Guardian Assurance [1994] IRLR 460
Mutual Life & Citizens' Assurance v Evatt [1971] AC 793
Chaudhry v Prabhakar [1988] 3 All ER 718
Smith v Eric Bush (a firm) [1990] UKHL 13
Scullion v Royal Bank of Scotland [2011] EWCA Civ 693
Her Majesty's Commissioners of Customs and Excise v Barclays Bank Plc [2006] UKHL 28
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