Pure Economic Loss

Holding someone liable for pure economic loss may lead to damages completely beyond the scale of the fault. - Justin Santiago

This question essentially requires a discussion of the floodgates argument - whether it is fair to impose liability for damage caused to an indeterminate class of claimants in an indeterminate amount thereby imposing an undue burden upon the defendant in cases of pure economic loss. Courts have been increasinly unclear on a position and have put foward various arguments according to the situation at hand.

Pure economic loss is the loss arising from negligence which can be seen on a balance sheet but not physically. Economic loss is then divided into "consequential economic loss" - that which arises directly from some physical damage or injury (e.g. loss of earnings from having your arm cut off) and "pure economic loss", which is everything other).

The fear behind allowing claims for "pure economic loss" is that potentially unlimited claims could flood in. The risks may be unknowable, and parties would find it impossible to insure. The courts have therefor imposed several limitations on claims for damages :-

For defective products or buildings – the courts insist that the manufacturer of a defective product will be liable only in respect of damage that the product causes to another’s person or property. If a product is simply no good or merely physically deteriorates even if it blows up and destroys itself, any financial loss that results is purely economic.

There are three arguments put foward to expand on liability :-

Firstly - preventive damage was argued in the case of Anns v Merton LBC where the plaintiff was allowed to recover the cost of remedying the damage to the building so as to avoid a present or imminent danger to the health or safety of the persons occupying it. Preventive damage is claimable if a dangerous defect in a building should threaten to injure those in neighbouring houses or in the street. The owner might be able to recover the cost of demolition or repair work effected to remove the danger to third parties : Morse v Barrat (Leeds) Ltd . However since then the courts have gradually retreated to a more conservative position.
Murphy v Brentwood DC, flatly states that Anns was wrongly decided. According to Murphy, cracks and subsidence was merely the manifestation of a defect in the building not as damage accordingly the money lost on the subsequent sale of the house was purely economic and fell within the scope of the general no recovery rule.

Secondly - the complex structures argument – the owner would be able to sue in respect of damage to one component part caused by a defect in another.

Thirdly - close relationship argument - in the case of Junior Books v Veitchi where there was a close relationship (equivalent to a contract) between the owners and the subcontractors who were appointed by them enabled the owners to make a claim against them. This is an extension of the principle found in Hedley Byrne v Heller which stated that economic loss resulting from a negligent misstatement was recoverable provided there was a special relationship between the maker of the statement and the recipient and there was no need for an element of fraud or recklessness in the statement, carelessness was sufficient.

The courts sought to develop a narrow exception to the no liability rule by building incrementally upon an existing principle by which liability for carelessness might arise. The principle was one of equity rather than tort law : the principle that in a fiduciary relationship the fiduciary must take reasonable care of the interests of the beneficiary : Nocton v Lord Ashburton.

The narrowing of requirements was explained in Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830 - Lord Steyn commented that there was no better rationalisation of the relevant head of tort liability than assumption of responsibility. In determining whether one party has assumed a responsibility to another the court will apply an objective test. It must be reasonable for the party to rely upon the assumption of responsibility by the other. The claimant must in fact have relied upon the assumption of responsibility by the other - for if not there will be no causative effect of the negligence upon the loss sustained.

Cases such as Law Society v KPMG Peat Marwick and Smith v Eric Bush where specific representations made to a particular audience and White v Jones 1995 where no representations were made tends to suggest that the Hedley Byrne principle is wide enough to encompass situations where there was indirect reliance and indirect loss without reliance. It would also boil down to the purpose of the statement – general v specific, statutory requirement v non statutory requirement, profit making exercise or not, whether the information was paid for or not, number of potential claimants, social significance of each of the two situations.

We have Lord Denning’s view in Spartan Steel it was best to leave the losses to lie where they fell rather than concentrating them on the defendant : if the losses were small, they might without hardship be absorbed by the victims themselves; if they were serious, then the victims ought to have taken out insurance by way of protection against that risk. In D&F Estates Ltd v Church Commissioners for England and Wales it was decided where the defect simply renders the product less valuable, the remedy lies in contract,

In other words the courts are unable to decide convincingly on who should pay for damages arising from pure economic loss.