Pure Economic Loss

“How And Why Does English Law At Present Make It Relatively Difficult To Claim Damages In Negligence For What It Calls 'Pure Economic Loss'?”

‘Pure economic loss’ has been defined as a “worth incurred without any physical injury to any asset of the plaintiff.”

What Is “Pure Economic Loss?”

Pure economic loss is financial damage suffered as the result of the negligent act of another party which is not accompanied by any physical damage to a person or property. Varying texts attempt to define pure economic loss but it arises from negligence and furthermore, for losses which are “purely economic” are represented under the Fatal Accidents Act 1976. For negligent misstatements, the classic authority for the recovery of economic loss in tort is Hedley Byrne v Heller.

From reading several cases, the term ‘pure’ suggests that a loss must be untainted and self-representative, standing apart from other losses such as personal injury. This is a form of loss suffered by a claimant that is not consequential due to a result of physical damage to a person or property. Common categories of pure economic loss are expenditure, loss of profit, profitability or loss of some other form of financial gain. It is therefore important to determine whether a claim is in fact consequential or pure economic loss, as the latter is usually not recoverable in law as damages. In a claim for personal injury following negligence of the defendant, the claimant may be unable to resume work suffering a loss of earnings which is a usual head of damage. We can see that this is clearly a product of personal injury thus representing consequential loss not pure economic loss. From previous readings, economic loss is recoverable using the law of contract, and unless contractual terms or agreements have been breached, there cannot be a claim for loss. Even so, there are other categories of torts known as ‘economic torts’ that act as a vehicle of recovery for economic interests.

What Is Involved?

Negligence is an element of common law applied predominantly in tort cases to achieve compensation in monetary forms for the harm done under the term “damages” for injuries incurred both physically and mentally. If a claimant is able to prove that the defendant acted negligently to cause injury, then a claim for damages can be made to compensate them for harm to their body, property, mental well-being, financial status, or intimate relationships. The ‘pleural plaques’ case in the House of Lords: Johnston V NEI defines damages as it illustrates whether being diagnosed with ‘pleural plaques’ was a true claim against Johnston’s previous employers in negligence. Lord Scott refuted the claim stating that Johnston may develop a more serious asbestos-related condition and this cannot, by itself, form the basis of a claim in negligence. It is clear therefore that in the absence of injury there is no warrant for claim. However, since this judgement, the “aggregation theory” enabled claimants to recover final awards of between £12,500 and £20,000, or provisional damages (leaving open the possibility of a further claims if claimants developed an asbestos-related disease) of between £5,000 and £7,000. It is evident by looking at Lord Denning’s case; Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd, that English law has had problems dealing with cases of pure economic loss as restrictions imposed, particularly within tort and common law, suggest they are in place for the fear unquantifiable claims.

There are four basic elements which make up the vehicle of negligence in Tort, these are, a duty of care owed by a defendant, the breach of that duty, the causal relationship between the breach of duty and the damage suffered and finally, damage to the claimant. It is important to note that not all issues will breach duty of care as English law recognises certain categories where there is a direct obligation to adhere to this. English law does not accept a duty of care for everyone, for all circumstances and for all forms of harm as this is too broad and I believe this would expose the law to opportunists. In the leading case from 1932; Donoghue v Stevenson, the speech given by Lord Atkin’s illustrates the “neighbour” principle, which was derived from the Christian principle of “loving your neighbour” in Luke 10 where Lord Atkin’s states;

“. . . persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions that are called in question . . .”

Lords Buckmaster and Tomlin opposed this theory of determining a duty of care as they believed it would welcome an unprecedented amount of claims and further had concerns of how trade could operate efficiently if this was in place. Considering both Lord Atkin and Buckmasters viewpoints, principally, I agree with Lord Atkin as his theory, albeit in an idyllic world, would determine the parameters for a duty of care. However, in my opinion, with such liability unevenly balanced, also supported by what I would call an evolving global “blame/claim culture”, it is not unreasonable, supported by areas previously discussed, to conclude that this theory would encourage an unquantifiable number of claims. Lord Buckmaster’s reference to the Versailles train crash in 1842 further supports my statement that all those injured could file for claim from the manufacturer which in essence is absurd. It is evident that there has to be limited liability, or ‘ring fenced’ liability in order to maintain control. This further highlights the courts’ fear that a situation could become uncontrollable.

With this in mind, there was a clear need for a process to establish a duty of care and the 70’s saw the ‘Anns test’, a simplified process illustrated by Lord Wilberforce in his case; Anns V Mertin LBC which suggested;

“. . If there is reasonable forseeability of harm to the plaintiff, there will be liability, unless there is some good reason, grounded in policy, there should not be liability. . “

In my opinion, the principles of Anns test are too general, as defining the terms ‘reasonable’ and ‘there is some good reason’ is subject to an individual’s appraisal. I believe that this would lead to inconsistencies and potentially significant differences in judgement as the vague phrasing is dependent on its perception. The 80’s saw a categorised reasoning system therefore Murphy v Brentwood DC overruled and superseded the decision Anns v Merton London Borough Council.

The courts wanted to categorise different situations to reflect the appropriate duty of care to resolve ambiguities which meant a defined relationship between the kind of harm and the degree of duty of care required which would narrow Anns generalist approach. Various categories meant that the two requirements Lord Atkin suggested (the forseeabilty of harm and the neighbourhood relationship, also referred to as proximity) held different weights of duty of care which was favoured in one of the leading cases by Lord Bridge in Caparo Industries Plc V Dickman which established the “three-fold test”. These principles required all three elements of the three stage test to be considered in deciding whether a duty is owed or not. Even so, the focus will be on proximity with justice and reasonableness as potential limiting factors. For cases involving negligent advice, the proximity test involves considering knowledge of reliance and reasonableness of reliance.

Until the 60’s, economic loss was considered a separate entity outside of negligence which was illustrated by Lord Denning’s dissent in Candler -v- Crane Christmas & Co. These principles were then followed by opposition from the House of Lords as illustrated in Hedley Byrne & Co Ltd v Heller & Partners Ltd where it was held that pure economic loss resulting from negligent misstatement was recoverable in theory but dependant on “special relationships between parties”. With particular reference to Hedley Byrne & Co Ltd v Heller & Partners Ltd it is evident that the courts could refine what is deemed recoverable for pure economic loss but their approach in my opinion resembles a reluctance to implement their theories for the fear of a reprisal

Conclusion

I believe that the courts have not established and refined the parameters to claim for pure economic loss due to the courts’ fear that if pure economic loss were actionable, there would be no reasonable limit to a defendant’s liability and the courts would become overwhelmed with claims. The courts often describe this policy, as U.S. judge Benjamin N. Cardozo famously described it as “a fear of an indeterminate number of claims by an indeterminate number of parties in indeterminate amounts of money for an indeterminate amount of time”.

Unsurprisingly therefore, the courts may refer to this as the problem of ambiguity. I feel the key question that is fuelling the courts’ fear is how far can tort liability expand without imposing excessive burdens upon individual activity? The answer to this mirrors the concerns of Lords Buckmaster and Tomlin on the neighbour principle, and until we define the parameters in which pure economic loss can be recovered, this is also indefinable. It is therefore clear to me, that only time will tell, it would also seem that this decision brings a greater degree of certainty and cohesion to an otherwise confused area of the law.

Bibliography

Articles / Books

Elliott, Catherine; Quinn, Frances (2007). Tort Law. Longman

Deakin, Simon; Angus Johnston; Basil Markesinis (2003). Markesinis and Deakin’s Tort Law. Oxford University Press

Lunney, M. & Oliphant, K. (2003). Tort Law: Text and Materials (2nd ed.). Oxford: Oxford University Press. p 341

Barber, J. (2009) “Tort in England & Wales”

Case Law Referenced

Attorney General (Ontario) v. Fatehi, [1984] 2 S.C.R. 536.

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465

Johnston v NEI International Combustion Ltd [2007] UKHL 39, [2008] AC 281

Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] 1 QB 27

Donoghue v Stevenson [1932] AC 562

Anns v Merton London Borough Council [1978] AC 728 (HL).

Murphy v Brentwood DC [1991] 1 AC 398 (HL).

Caparo Industries plc v Dickman [1990] 2 AC 605

Candler -v- Crane Christmas & Co [1951] 2 KB 164; [1951]