UK Degree Transfer Programme

The Law of Tort

LECTURE

ECONOMIC LOSS

MUHAMAD ABRAL BIN ABU BAKAR

 Economic loss
Economic loss

Consequential
Hedley Byrne v
upon physical
Heller
damage

The law of negligence does not give the same level of protection to economic interest as it does to physical
interest.
There are only three types of situation where recovery is allowed in negligence for economic loss:
a) Economic loss which is consequential upon physical damage;
b) Negligent misstatements;
c) Pockets of liability which are thought to survive, see Murphy v Brentwood DC [1990].
 Much stricter controls apply in relation to commercial losses. Recovery was not allowed in Weller
Co v Foot and Mouth Disease Institute [1965] even though the damage was foreseeable, as
damage was also foreseeable to countless other enterprise.
In Spartan Steel and Alloys v Martin Co (Contractors) Ltd [1972], the defendant negligently cut off
electricity to the claimant's factory. Damages for the cost of molten metal which was thrown
away recoverable, as the loss was consequential upon physical damage, but loss of profits while
the electricity was cut off were not recoverable as they were not recoverable as they were purely
commercial profits.
This area was greatly affected by the application of the Anns test. In Junior Books v Veitchi Co Ltd
[1982], recovery was allowed for economic loss in a situation where liability had not been held to
exist before.
The defendant were subcontractor and flooring specialist and had been nominated by the
claimants who had employed the main contractors. The floor was negligently laid and the
claimants claimed loss of profits of profits for the period when floor had been re-laid. Applying
the Anns test, it was held that the damage was recovery.
This promised to open up whole new field of claims for economic loss and Junior Books has not
been followed in subsequent cases, although it has not been former overruled. The House of
Lords found it particularly significant that the subcontractors had been nominated by the
claimants, and it was felt that was sufficient to create a relationship of proximity.
 This has become known as the high water mark of economic loss. The courts have since
returned to the traditional test. For example, in Muirhead V Industrial Tank Specialities Ltd [1985],
the claimant, who had suffered loss because their lobster had been killed as a result of defective
motors on a tank , could only recover the cost of lobster and repair to the tank, they could not
recover for loss of profits. This case has clear echoes of Spartan Steel.
This trend was confirmed by the case of Leigh and Sillavan v Aliakman Shipping [1985], which
again held that it was not possible to recover economic losses arising from negligent misconduct.
Negligence Misstatements
So far we have looked at liability for negligent acts; the situation is very different when it comes to
statement which cause economic loss.
One difficulty is that statements may be made on an informal occasion and may be passed on
without the consent of the speaker.
Special relationship
The major development in this came in the case of Hedley Byrne Co Ltd v Heller & Partner [1963],
where the House of Lords held that where there was a special relationship between the maker
of a statement and the receiver of the statement then there could be liability for the economic
loss caused. In particular case, there was no liability as there had been a disclaimer attached to
the statement, so there had not been a voluntary assumption of responsibility.
The Privy Council in Mutual Life and Citizens Assurance Co Ltd [1971] attempted to limit the
scope of Hedley Byrne by stating that it applied only in respect of advice given in the course of a
business and where the defendant made it clear that he was claiming some special skill or
competence. (There was, however a minority view rejecting this approach).
That attempt has not been followed since and the special relationship has been drawn more
liberally. It became clear in Howard Marine and Dredging Co Ltd v Ogden [1978] that there had to
be considered advice which someone would act upon. Liability would not extend to off-the-cut
information.
 So, in Esso Petroleum v Mardon [1976], the defendants were liable even though they were not in
the business of giving advice; they did have experience and special skill and knowledge compared
to the claimants.
While in Henderson v Merret Syndicates Ltd [1994], there was liability for advice given under a
contract, in Holt v Payne Skillington [1995], it was held that the duty under Hedley Byrne could be
greater than that in contract.
The Privy Council, in Royal Bank Trust Co Ltd (Trinidad) v Pampellanne [1987], made a distinction
between passing on information and the giving of advice. See also Williams v Natural Life Health
Foods [1998] (HL).
Reliance
There must be reliance on the statement by the claimant. Take, for example, Smith v Eric S Bush
[1989] and Harris v Wyre Forest DC [1990], two appeals heard together by the House of Lords.

4) The disclaimer failed the 1) The claimant had applied to 1) Valuaton had been carried
reasonableness test. The a building society for a out by the local authority. 2) Defendant were still
statement had been used mortgage and was required to Valuation had not been
pay a valuation to be done on shown to the claimant and it founf to the liable.
for the purpose for which it
the property by the defendants. also contained a disclaimer.
was intended.

Smith v Eric Harris v Wyre

S Bush Forest DC

3) Lord Templemen said that

the rekatonship was akin to 2) The valuation contained
contract and liability was a disclaimer that the
imposed. In contrast to Herdly defendant would not be
Byrne, this case was decided liable in the event of ny
after the Unfair Contract Terms negligence
1977.
 By contrast, a firm of estate agents could rely on a disclaimer in property particulars as against the
purchaser of a property in McCullagh Lane Fox and Partners Ltd [1995]. The purchaser had not, in
that case, been reasonably entitled to believe that the estate agent, at the time of making the
statement was assuming responsibility for it. The conclusion of a disclaimer put the matter
beyond doubt. The Unfair Contract Terms Act 1977 did not preclude the estate agent relying on
the disclaimer.
It was held in Hemmens v Wilson Browne [1993] that it could not be reasonable to rely on a
statement where a solicitor had advised his clients mistress to obtain independent legal advice
before executing a document.
In addition to reliance, there must be knowledge by the maker of the statement that the recipient
will rely on the statement to his detriment. Both requirement were satisfied in Welton v North
Cornwall District Council [1996]. An environmental health officer negligently required the owner
of food premises to comply with the Food Act 1990 by making unnecessary substantial building
works and major alterations to the kitchen.
He also threatened to close the business down if the works were not completed. The officer knew
that what he said would be relied on by the claimant without independent inquiry. He visited to
inspect and approved the works. The fact that the relationship arose out of the purported
exercise of statutory functions did not give rise to an immunity on the part of the local authority.
In was not necessary consider whether it was fair, just and reasonable to impose a duty, as the
case did not involve an incremental extension to the Hedley Byrne principle.
Purpose
The court will take into account the purpose for which the statement was made. In Caparo
Industries v Dickman [1990], the claimant were shareholders in a company and, as such, were
entitled to annual audited accounts. On the basis of these account, they launched a takeover bid
in the company before discovering that the accounts had been negligently audited and had
wrongly shown the company to be profit-making.
The claimants sued the auditors, who were found not be liable. The annual audited account were
the fulfilment of a statutory obligation, the purpose of which was to enable he shareholders to
take decisions about the management of the company; they were not intended to the basis of an
investment decision.
 Al-Saudi Banque v Pixley [1989],where
auditors did not owe a duty to a bank which
had advanced money to a company on the
basis of annual audited accounts.

Al-Nakib Investment [1990], where account

were provided to existing shareholders to
encourage them to buy additional shares in a
right issue but the claimant used the account
Other cases as the basis of the decisions to buy
additional share on the stock market and
were consequently held not to be owed a
duty

Mariala Marine Corp v Lloyd Register of

Shipping (The Morning Watch) [1990], where
there was no liability where the survey of a
ship had been carried out for the purpose of
a health and safety inspection when the
results of the survey had been used as the
basis of decision to purchase a ship.
Negligent Statements Relied Upon By A Third
Party
An employer who gives a negligent reference about an employee to a prospective employer owes
a duty not only to the prospective employer but also the employee. In Spring v Guardian
Assurance plc [1994], it was held by House of Lords that there could be liability in negligence to an
employee for an inaccurate under the Hedley v Byrne principle.
This overturned the decision by the Court of Appeal in the same case which held that any right of
action would be in defamation where there would be the defence of qualified privilege. This
defence would be defeated by the claimant only if malice could be proved, which is extremely
difficult.
Similar situation have arisen where a doctor has examined a claimant on behalf of someone else,
such as company. In Baker v Kaye [1997], a doctor carried out a preemployment medical
assessment on behalf of a company.
It was held that , in such circumstances, a doctor could owe a duty of care to the prospective
employee, although, on the facts of the case, there had been no breach of duty.
 This case was distinguished from Springs as there had never been a contractual relationship between
the prospective employer and employee, but it was regarded as just and reasonable to impose duty.
In Kapfunde v Abbley National plc [1998], the claimant applied for a job and filled in medical
questionnaire. A doctor who considered the questionnaire felt that the claimant might be frequently
absent from work. The Court of Appeal held that there was no duty of care owed by the doctor to the
claimant as there was insufficient proximity. The Court of Appeal disapproved of the decision in Baker
v Kaye.
VOLUNTARY ASSUMPTION OF RESPONSIBILITY OTHER THAN FOR NEGLIGENT
MISSTATEMENT

There is a line of cases that allows recovery for pure economic loss in negligence when the special skills
of a provider or professional services has been relied on by someone other than his client.
In Ross v Counters [1979], a solicitor allowed the spouse of a beneficiary to witness a will. As a result,
the gift to beneficiary lapsed. It was held that the solicitor was liable to the beneficiary, as damage to
her could have been foreseen and she belonged to a closed category of person.
In that case, was decided during the period of the Anns Test. It was uncertain after the demise of that
test whether this type of economic loss would remain recoverable.
It was found to have survived in the House of Lords decision of White v Jones [1995].
The testator of a will cut his two daughters out of his state following a quarrel. After a reconciliation with
his daughters, he sent a letter instructing a firm of solicitors that legacies 9000 Pound should be given to
each of his two daughters, the claimants.
The letter was received on 17th July and nothing was done by the solicitor for a month. On 16th August
the firms managing clerk asked the firms probate department to draw up will or codicil incorporating the
new legacies.
The following day the managing clerk went on holiday. On his return, a fortnight later, he arranged to see
the testator on 17th September . The testator died on 14th September before the new will had been
executed.
Lord Geff held that the claimants were owed a duty of care as otherwise there would be a lacuna in the
law. The solicitor owes a duty of care to his client generally owes no duty to a third party.
If the extension to the Hedley Byrne principle were not allowed, there would be no method of enforcing
the contractual right. Those who had a valid claim (the testator and his estate) had suffered no loss.
Those who had suffered a loss (the disappointed beneficiaries) would not have a valid claim. Lord Browne-
Wilkinson found that the situation was analogous to Hedley Byrne.
It was held in Hemmens v Wilson Browne [1993] that the principle would not extend to an inter vivos
transaction (that is, one made while the testator is still alive), as it would always be possible to rectify a
mistake.
 White v Jones could not be relied on in Goodwill v British Pregnancy Advisory Service [1996]. A woman who
knew that he partner had undergone a vasectomy did not use ay form of contraception and subsequently
became pregnant. He partner had been assured by the defendants that the operation had been successful
and that the future contraception was unnecessary.
It was argued that the situation was analogous to White v Jones. The claimant was not owed a duty as it
was not known that the advice would be communicated to the advisee and would be acted upon her. She
belonged to an indeterminate class of women with whom the man could have formed a relationship after
the operation.
Some indication of the scope of the duty is provided by Woodward v Walferstans [1997]. The claimant had
purchased a property, raising 95 per cent of the purchase price by way of mortgage. The defendants were a
firm of solicitors who acted for her father who guaranteed the mortgage.
There was no contract between the firm and the claimant. After the mortgage fell into arrears, the lender
commented possession proceedings. It was held that the defendants was assumed responsibility for tasks
which were known or ought to be known to closely affect the claimants economic wellbeing. This did not
extend to explaining the details of the transaction and the implication of the mortgage.
In Carr-Glynn v Frearsons [1998], the solicitor had negligently failed to sever a joint tenancy held by the
deceased, with the result that when she died, her right in the land was extinguished.
o Thus, the testatrix and her estate had suffered a loss (cf White v Jones above). Llyod J held that this
excluded an action by the intended beneficiaries under the will, but the Court of Appeal allowed the appeal,
saying that White v Jones allowed them to extend the duty to his new situation (although it was emphasised
that the estate and the beneficiaries could not both sue solicitor with respect to the same loss.

A Broader Principle?

In HM Customs & Excise Commissioners v Barclays Bank [2006], the defendant bank was served with a
freezing injunction, instructing it not to allow one of its clients to remove any assets from his account.
The bank failed to comply with this order, meaning that the client, with whom customs were engaged in
litigation, had no assets to justify judgement against him in their favour.
Customs sued the bank for this loss, in negligence. The bank argued that this being a case of pure
economic loss, it could be liable only in the exceptional event of a voluntary assumption of responsibility
to the claimant.
There was no such assumption because the bank had not undertaken anything of its own volition-rather,
it had been ordered to take the relevant action by the court order. The bank simply had no choice.
While this argument succeeded at trial, the Court of Appeal held that the bank did owe a duty of care to
customs. The absence of voluntary assumption of responsibility was not fatal.
The bank was anyway under a duty not to allow the assets to be withdrawn, and there was no reason
why his duty should not extend to customs in tort, since they had suffered loss as a result of the banks
failure.
 The Court of Appeal decision was overturned by the House of Lords. The bank owed no duty of care to
the claimant. The injunction was only enforceable by the court.
The document issued by the court did not hint at the existence of any other remedy. That regime made
perfect sense on the assumption that the only duty owed by a notified party was to the court. It could not
be suggested that the customer owed a duty to the party which obtained an order, since they were
opposing parties in litigation and no duty was owed by a litigating party t its opponent.
A duty of care in tort might co-exist with a similar duty in contract of a statutory duty and in principle a
tortious duty of care owed to the claimants could co-exist with a duty of compliance owed to the court.
There was, however, no instance in which a non-consensual court order. Without more, had been held to
give rise to a duty of care owed to the party obtaining order.
The question whether in all the circumstances it was unfair, just and reasonable to impose a duty of care
on the defendant toward the claimant was determinative. In the instant case it was unjust and
unreasonable that the bank should, on being notified of an order which it had no opportunity to resist,
become exposed to a liability which was in the instant case for a few million pounds only, but might in
another case be very much more.
In particular, what is the proper approach to novel claims for pure economic loss if assumption of
responsibility is not the key question (as we were told by the House of Lords in Henderson v Merret
Syndicates Ltd [1994]?