In this section we will deal with cases where defendants owe a claimant a duty of care and considers situations where a claimant has suffered pure economic loss. As we have seen previously the courts will consider whether there is a sufficiently proximate relationship between a claimant and a defendant before establishing a duty of care. In general there is a lack of a proximate relationship between a claimant who has suffered pure economic loss and a defendant who may have caused that type of loss. Courts place limits on the duty of care and pure economic loss cases in order to place limits on the number of potential claims that can be made. There is a general rule that a defendant does not owe any duty of care to a claimant and not to cause pure economic loss. As a general rule a defendant does not owe any duty of care to a claimant not to cause pure economic loss so that where a claimant suffers damage which is classed as pure economic loss that loss is generally not recoverable.
In the case of Murphy –v- Brentwood DC (1990) 908, the claimant bought a newly built house. Some time later, the claimant discovered that the foundations were dangerous the foundations were subsiding and cracks were appearing in the side of the house. Eventually the claimant sold the house for significantly less than the market value would have been had it been in a saleable condition. The claimant sued the Council for negligently approving the foundation plans. The House of Lords found that the loss suffered by the claimant was pure economic loss so not recoverable.
Another kind of pure economic loss is where there has been economic loss unconnected to physical damage to a person or property. Economic loss unconnected to physical damage to a claimant’s personal property can be either economic loss caused by the damage to the property of a third party or economic loss caused where there is no physical damage. In the case of Spartan Steel & Alloys Limited –v- Martin & Co (Contractors) Limited (1973) QB27 the claimants manufactured metal in a factory which was directly supplied with electricity by a cable from a power station. The factory worked 24 hours a day. The factory’s employees damaged the electricity cable while drilling a nearby road. The result was a power cut to the factory caused by the defendant’s negligence. The electricity cable belonged to the electricity supplier and did not belong to the claimant. The loss suffered by Spartan Steel was the loss of productivity caused by the power cut. This was held to be pure economic loss because it was caused by damage to a property belonging to a third party. The result was that Spartan Steel could have been different if the claimant had been the owners of the damaged electricity cable. The lost profit during the time that the electricity was cut off would have been recoverable this is because it would have been consequential economic loss following on from damage to property belonging to the claimant.
In summary if a defendant negligently damages the claimant’s property causing the claimant loss there is a sufficiently close relationship between the claimant and the defendant, the defendant is likely to be considered to owe the claimant a duty of care and the claimant may be able to recover their loss from the defendant this would not be a situation of pure economic loss.
If the defendant negligently damages property belonging to a third party and causes that claimant loss, there is not a sufficiently close relationship between the claimant and the defendant. The defendant does not owe the claimant a duty of care and the claimant cannot recover their loss from the defendant this is a situation of pure economic loss.
This case established that there is a duty owed if there is a special relationship between the defendant. There are two elements to the special relationship (1) an assumption of responsibility by the defendant and (2) reasonable reliance by the claimant on that statement. This doctrine was considered again the case of Caparo Industries that we considered earlier. Caparao considered the case of pure economic loss. It expanded upon the special relationship test given in Headley Byrne. It found that there were four criteria to be satisfied for a defendant to have assumed a responsibility towards the claimant. These are:
- That the defendant knew the purpose for which the advice was required.
- The defendant knew the advice would be communicated to the claimant.
- The defendant knew that the claimant was likely to act on the advice without an independent enquiry.
- The advice was acted upon by the claimant to his detriment.
The case of Caparo has been followed in subsequent cases including James McNaughton Papers Group Limited –v- Hicks Anderson & Co a firm 1991 OER134 and Morgan Crucible Company PLC –v- Hill Samuel Bank Limited 1991 1OER148. The line of authority shows that the general rule is that there is not duty of care owed in respect of advice given in a social situation because there is no assumption of responsibility this is confirmed in a case called Chaudhry –v- Prabhakar (1989) 1WLR29. In this case it was held that the defendant did owe the claimant duty of care despite the fact that they were only friends this was because the defendant had more experience and knowledge in a specific area than the claimant and the claimant had made it clear that she would be relying on his skill and judgement.
The subsequent case law following Headlye Byrne and Heller and Caparo gives rise to the following check list that can be used to determine whether loss is recoverable in the case of a negligent mis-statement the check list is as follows: Firstly is there a special relationship between the defendant and the claimant? This can be developed by asking did the defendant assume a responsibility towards the claimant? Did the defendant know the purpose for which the advice was required? Did the defendant know that the advice would be communicated to the claimant? Did the defendant know the claimant was likely to act on the advice without an independent enquiry? Was the advice acted on by the claimant to his detriment and was it reasonable for the claimant to rely on the defendant for advice? The doctrine established in Headley Byrne and Caparo has been extended to new situations. It’s not always easy to see how the test set out above is satisfied in full however you will see that the cases can be explained as ones in which there is an assumption of responsibility by the defendant of some kind. In Spring –v- Guardian Assurance PLC (1994) 3WLR354 the claimant’s former employee provided a reference to his prospective new employers. The reference had been prepared negligently as a result it was incorrect and was very unfavourable towards the claimant. The claimant claimed damages for pure economic loss which he suffered as a result of the negligent statement in the reference it was held that a duty of care was owed by him by his former employer for the pure economic loss arising from the reference.
In White and Jones (1995) 1OER691 a client instructed a solicitor to draft a new Will for him. The solicitor negligently delayed in drafting the Will. The testator died before the new Will was drawn up. This meant that the testator’s old Will took effect the claimant in the case would have been a beneficiary under the new Will he was not a beneficiary under the old Will. The solicitor’s negligence had therefore caused him to lose his prospective inheritance. The court held that there was a duty owed to the claimant. Although it could not be said that the beneficiary had relied on the solicitor it was still possible to find a sufficiently close relationship between them this was because the solicitor could clearly foresee that if the Will was drafted before the testator had died any potential beneficiaries would not be able to claim their inheritances. The solicitor undertook a responsibility towards the potential beneficiaries in acting for his initial client.
We have been considering so far whether a duty of care is owed where the loss is purely economic loss. Now it’s necessary to consider whether other elements of a claim arise i.e., the breach of duty and causation of damage. We’ll also consider possible defences.
In some cases defendants may be able to rely on an exclusion of liability. In order to rely on such an exclusion they must be able to demonstrate that reasonable steps have been taken to bring the exclusion notice to the claimant’s attention before the Tort was committed and secondly that the wording of the notice covers the loss suffered by the claimant.
An example of this is in Headley Byrne in which the defendant was able to escape any liability by relying on a defence. The defendant excluded liability by using a disclaimer however since then the Unfair Contract Terms Act or UCTA 1977 and the Consumer Rights Act 2015 restrict the ability of a defendant to exclude liability under a disclaimer. In Smith –v- Eric S Bush and Harris –v- Wyatt Forest District Council 1989 2OER514 the House of Lords found that a duty of care was owed by the defendant valuers or surveyors to the house purchasers. Valuations were given in the course of business the House of Lords decided that UCTA governed the use of the exclusion notice in these cases in Smith and Bush the exclusion notice said that neither building society nor surveyor warranted that the report and valuation would be accurate and that the report was supplied without any assumption of responsibility in Harris the exclusion notice said that no responsibility whatsoever was implied or accepted for the value or condition of the property the House of Lords did not find the exclusion satisfied the requirement of reasonableness the House of Lords in this case listed a number of factors which should be taken into account when deciding the question of whether an exclusion is reasonable.
These included:
- Were the parties of equal bargaining power?
- In a case involving advice would it have been reasonably practical to obtain advice from an alternative source?
- How difficult is the task being undertaking for which liability is being excluded?
- What are the practical consequences taking into account the sums of money at stake and the ability of the parties to bear the loss involved particularly in light of insurance?