Recovery of Economic Loss in Negligence

Answer the following questions, within the word limit set for each.

What is the distinction between consequential economic loss and pure economic loss in negligence?

Negligence is a tort. It is the most important ever expanding area of law.  Negligence can be described as a tort involving the branch of legal duty of care causing loss by a failure to the party to whom the duty is owed. In the famous case of Donoghue v Stevenson where Lord Atkins outlined that: “You must take care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour”. The word “neighbour” means anyone so closely affected by the act that the effect upon them would have been foreseeable.

Pure economic loss is loss which is economic in nature only. So, if someone working at a benefits office negligently fills in my benefits form so I don’t get my unemployment benefit for a month that is pure economic loss. However “purely economic” loss in English law is rare in nature but can arise under the Fatal Accidents Act 1976 and for negligent misstatements, as stated in Hedley Byrne v. Heller.

On the other hand consequential economic loss results directly from personal injury or property damage. So as, if you negligently cause me to break my leg and can’t work for two weeks, the economic loss I suffer as a result of being unable to work is consequential economic loss. Similarly, if someone negligently breaks my car, and I need the car to go to work and it takes me two weeks to get a replacement car, the economic loss I suffer is consequently economic loss. It should be noted that for your loss to be consequential economic loss, the injury/property damage has to be to you, not someone else. So, let’s say A negligently crashes his car into B. B is unable to work for two weeks, and so loses his income for two weeks. Because B was a good employee, his employer, C, also loses income. B’s economic loss is consequential. C’s is pure economic loss, because the personal injury was to B, not to him.

How does the “floodgates” principle constrain the right of claimants to claim damages for pure economic loss in negligence?

The floodgates argument is the most common one. It would mean that single events could lead to any numbers of claims. It is argued that because the amounts of pure economic loss claims and the class of people claiming for pure economic loss are so uncertain and so indeterminate, it would make it very difficult and very expensive for people to insure against these claims. Moreover, it would encourage people to be awfully cautious in the business world, not a good thing for the economy.

It is also possible to make a moral type argument that there would be no reasonable limit to a defendant’s liability if pure economic losses were actionable and the courts would become bogged down in claims.

Therefore the floodgates principle, three strands is:

Burden and overwhelm the courts and financial markets, clog up economy.

Excessive burden upon the defendant… Widespread liability would place an excessive burden upon the defendant…what would it lead to if everyone could be sued…

A danger of disproportionate consequences resulting from minor blameworthiness is a matter of fairness, no matter what kind of damage has been caused.

The English courts have always found pure economic loss problematic. Their tendency to reject claims to recover pure economic loss probably arise more from policy than logical considerations. The problem is that holding someone liable for pure economic loss may lead to damages completely beyond the scale of the fault involved. Moreover, it is often difficult to assess just how much economic loss has really been suffered. Where above can be avoided, the court has shown its willingness to allow claim for pure economic loss such as assumption of responsibility, misstatement.

[600 words]

Question 2

Describe the extent of an accountant’s liability to non-clients through the cases of:

• Hedley Byrne v Heller [1963];
• Caparo Industries v Dickman [1990] ;
• Royal Bank of Scotland plc v Bannerman Johnson Maclay [2003].

To begin with as explained above, in order for a person to make a successful claim for damages in negligence and more specific in economic loss there must be some special relationship of proximity and as explained in Caparo Industries plc v Dickman, and it must be fair and reasonable to impose such a duty. In the CAPARO INDUSTRIES PLC v DICKMAN [1] [5] (1990) case the court held that no duty of care was owed to the claimant. The accounts were not for the purpose of providing advice regarding investment decisions. There was insufficient proximity between the claimant and the defendants as the accountants were unaware that the claimants intended using the accounts as guides for investment. Although, Jim could argue that he lacked the required skills to provide advice regarding claims and that she should have made use of independent advice, this may be shunned on the grounds that he was consciously aware of the claimant’s intention of adhering to his advice. In addition Lord Bridge gave a description of a general three stage test; 1 Foresee ability of damage, 2 a relationship of proximity, 3 fair, just and reasonable to impose a duty of care in the circumstances.

Furthermore in Hedley Byrne v Heller, the House of Lords decided that in principle, a person who gives incorrect or false information, where it is reasonably foreseeable that it will be acted on, could be liable for losses suffered as a result of that reliance. However in this case resulted in the defendant being found not liable, the reason being similar to that of Donoghue v Stevenson i.e. the neighbour principle, the plaintiff had not shown sufficient evidence that there was a special reliance between the two parties.

Also in Royal Bank of Scotland plc v Bannerman Johnson Maclay [2003] case Bannerman, a firm of chartered accountants, enrolled a motion for dismissal in the action for damages brought against it by R, a bank. B had been the auditors for a company which had been lent substantial sums of money by R. Receivers had subsequently been appointed to the company and R had been unable to recover much of the moneys lent. R argued that B, as auditors of the company, had owed it a duty of care and that the losses it had sustained had been attributable to B’s breach of that duty. B denied liability, contending that it did not owe R a duty of care as it had not intended that the bank should rely upon the audited accounts when making lending decisions in respect of the company. Held, refusing the motion for dismissal, that in the absence of a disclaimer of responsibility being attached to audited accounts the auditors of a company would owe a duty of care to a lender which they were aware might rely on the information contained in those accounts when advancing money to the company. It was not necessary that the auditors had intended the lender to rely on the audited accounts in order to establish a relationship of proximity between them. Therefore in the instant case, no disclaimer of responsibility to R having been made by B in respect of the company’s accounts, there had been a sufficient relationship of proximity between them to establish that B had owed a duty to R to take reasonable care to save R from suffering loss as a result of relying on the audited accounts when making lending decisions.

Thus to conclude as seen from the cases above in order for an accountant to have liability there must be showed by the non-clients that there is some sort of proximity between the two parties irrespective of that the accountants intended, or not for the non-clients to rely on their accounts.

[600 words]