Tort | Negligence
Pure Economic Loss: Rules
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Introduction
A claimant's pure economic loss resulting from a defendant's carelessness can only give rise to a claim in Negligence if a duty of care is proved. For a duty of care to be owed by the defendant to a claimant there must be sufficient proximity in their relationship. Cases where the damage caused is pure economic loss are known as limited duty situations. This means that a claimant may only recover for pure economic loss exceptionally where it is possible to show a sufficiently close relationship between the claimant and defendant.
Definition
The general rule is that a defendant does not owe any duty of care to a claimant not to cause pure economic loss. Therefore, in general, if pure economic loss is the only damage suffered it is not recoverable.
If a claimant suffers personal injury or damage to his property this may lead to economic losses, such as loss of income or cost of hiring a substitute, such losses are categorised as consequential economic loss
. If a claimant suffers no personal injury or damage to property then his losses are purely economic. Therefore, pure economic loss is loss which is not consequential from personal injury or damage to property.
Restricting liability
The theory underlying limiting claims for pure economic loss is that these losses are potentially limitless. Without the special rule for economic loss, the floodgates would be open for an indeterminate number of claimants making claims for limitless amounts.
Damage to a third party's property
Damage to a third party's property may result in pure economic loss. For example, if A borrows an item from B and this item is damaged due to the defendant's negligence. B may make a claim for the damaged property. However, A may not make a claim for any pure economic losses incurred, such as having to hire a substitute item.
Spartan Steel & Alloys Ltd v Martin & Co Ltd [1973] 1 QB 27
Facts:
The plaintiffs owned a factory where they manufacture stainless steel. The factory's electricity was supplied by a direct cable owned by a third party (Midlands Electricity Board). The defendants, were contractors, who carelessness carried out road works and damaged the cable supplying electricity to the factory. Therefore, the Electricity Board had to shut down the electricity supply, to mend the cable, this took fourteen and a half hours overnight.
The factory was usually working continuously, twenty four hours a day. When the power was shut off, there was metal being melt processed in a furnace. The melt process required a constant temperature and therefore needed an electricity supply.
If the plaintiff had left the mixture in the furnace without any power supply it could damage the machinery. Therefore, the plaintiff used an alternative method to melt the metal, using oxygen, however, this produced material worth a lot less money (the physical damage was assessed at £368 and the loss of profit £400). The plaintiffs also lost the opportunity to load the furnace a further four times during the time that the power supply was cut (losing £l 767 in profit).
Issue:
Which losses could the plaintiff recover?
Held:
The plaintiff could recover for the damage to the melt in the process underway when the electricity was cut and the loss of profit on that melt (£368 and £400). This was the cost of physical damage to the plaintiff's property (the melt) and consequential economic loss (the lost profit). However, the plaintiff could not recover for the loss of profit during the whole period that the electricity was off. This was pure economic loss caused by damage to the property of a third party (the damaged cable belonged to the Electricity Board).
Lord Denning: .. I think the question of recovering economic loss is one of policy. Whenever the courts draw a line to mark out the bounds of 'duty' they do it as a matter of policy so as to limit the responsibility of the defendant...
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Therefore, if a defendant negligently damages property belonging to a third party, which leads to A suffering pure economic loss, there is an insufficiently close relationship between the defendant and A, so no duty of care is owed and losses are not recoverable.
No physical damage
Pure economic loss may arise where there has been no physical damage.
Weller & Co v Foot & Mouth Disease Research Institute [1966] 1 QB 569
Facts:
The foot and mouth disease virus was negligently released by the defendant. The plaintiff operated a cattle market, which had to close due to the foot and mouth outbreak. Therefore, the plaintiff lost revenue, through the market closure.
Issue:
Could the plaintiff recover for the loss?
Held:
The plaintiff could not recover the loss, as it was not caused by physical damage, it was pure economic loss and no duty of care was owed by the defendant.
Therefore, pure economic loss without physical damage is not recoverable.
Defective goods or property
The general rule is that a claim for defective goods can be made under contract law.
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Anns v Merton London Borough Council [1978] AC 728
Facts:
The plaintiffs were tenants in a block of flats. The flats had structural damage due to subsidence. The plaintiffs decided not to sue the builders, who they had a contract with, as the firm did not have many resources and instead made a claim against the defendant. The plaintiffs argued that the defendant, the local council, had negligently approved the plans and or negligently failed to inspect the building works.
Issue:
Could the plaintiffs recover in tort?
Held:
The House of Lords found that the plaintiffs could recover from the defendant, despite there being no contract between the parties, because the structural damage was material damage to property.
The decision in Anns v Merton London Borough Council [1978], is controversial as there was no contract and the traditional view is that property damage only applies to someone's existing property, in this case the original property was defective.
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Junior Books v Veitchi [1983] 1 AC 520
Facts:
The plaintiffs had defective flooring laid in their new build factory and lost money during the refit. The plaintiffs had a contract with the main builders. However, the plaintiffs decided to make a claim against the defendants, who were the negligent specialist sub-contractors. The defendant had been present at meetings with the builders and plaintiff to discuss the flooring required.
Issue:
Could the plaintiffs recover in tort?
Held:
The plaintiffs could recover from the defendants, confirming the Anns v Merton London Borough Council [1978], view of property damage.
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Murphy v Brentwood District Council [1991] 1 AC 398
Facts:
The plaintiff bought a new build house but due to defective foundation design the ceiling and water pipes cracked. The cost of repairs was estimated at £45 000. The plaintiff sold the house unrepaired for £30 000, which was £35 000 below the market value of the house in sound condition. The plaintiff sought to recover damages from the defendant, the local council, who had approved the building plans on the basis of negligent advice from an independent contractor.
Issue:
Could the plaintiff recover from the defendant?
Held:
The House of Lords found that the loss was pure economic loss as the property was defective when it was acquired resulting in either having to repair or scrap the property, both at economic loss. The defendant did not owe a duty of care as it was a case of pure economic loss. The effect of the decision is to overrule Anns v Merton London Borough Council [1978].
The complex structure theory was considered but discounted in this case. The theory states where a large item is comprised of a number of components, if a component is defective and damages the whole property then the damage is classed as property damage. However, it was held that this theory cannot apply where the damage to the building was due to structural damage.
Lord Bridge:
.. [no duty arises in the acquisition of defective property] in the absence of a special relationship of proximity imposing on the tortfeasor a duty of care to safeguard the plaintiff from economic loss...
.Therefore, the decision in Junior Books v Veitchi [1983] was distinguished on the basis that the exception was satisfied, there had been a special relationship between the defendant and plaintiff due to the discussions about the flooring.
The decisions in Anns v Merton London Borough Council [1978] and Junior Books v Veitchi [1983] have been heavily criticised. Firstly, the decisions open the floodgates to unlimited claims, where a defendant may have no relationship with the claimant. Secondly, allowing the claims in tort interferes and undermines with contract rights and law.
The House of Lords considered claims for defective items in a further key case.
Therefore, pure economic loss for defective goods, may only be recovered, in tort, if there is a special relationship between the plaintiff and defendant which gives rise to a duty of care.