Duty - pure economic loss

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To recover pure economic loss resulting from the negligence of others (such as when a defendant damages a person or his property and that causes an economic loss to the plaintiff), a plaintiff must establish that the defendant owed it a duty to prevent pure economic loss. Such a duty requires more than the usual reasonable foreseeability[1], and is established according to the following considerations, depending on the respective scenario:

  • If the economic loss was the result of a negligent statement, the court considers the following salient features:[2]
    1. Reasonable reliance - this is broken down into two parts:
      • Knowledge - the defendant knew, or ought to have known by reasonable standards, that the plaintiff would rely on his words.
      • Reliance - the plaintiff was acting reasonably when he decided to rely on the defendant's words (a plaintiff can't recover damages for loss suffered as a result of unreasonable reliance on any remark).
        • The purpose for which the statement was said is relevant to whether it was reasonable to rely on it.[3]
    2. Special skill - was the defendant an expert (or in a position where he is perceived as an expert) in the field he was commenting on?
    3. Request for information - did the plaintiff request information from the defendant?
    4. Financial interest - did the defendant have anything to gain (directly or indirectly) from the Plaintiff's reliance on his words?
    5. Disclaimers or assumptions of liability - Was there either a disclaimer from liability, or to the contrary, an undertaking/assumption of liability?
      • Notice that a disclaimer can be ineffective if the court deems it too unfair.
  • If the economic loss was the result of a negligent act or omission, the court considers the following salient features:[4]
    1. Reasonable foreseeability.
    2. Indeterminacy of liability.
      • Liability is indeterminate only when it cannot be realistically calculated
    3. Burden on commercial activity.
    4. Vulnerability of the plaintiff.
      • A plaintiff is vulnerable if he was unable of taking reasonable steps to protect himself from the negligent act.
      • Control and reasonable reliance also matter when determining vulnerability.
    5. Knowledge of the defendant about the possible harm to the particular plaintiff.

If the court determines that the considerations for imposing a duty of care outweigh those against the imposition of a duty of care, the defendant will owe a duty of care to avoid causing pure economic loss and the plaintiff will be able to recover damages for such losses, granted that he can establish the rest of the negligence requirements.

This article is a topic within the subject Torts.

Contents

Required Reading

Sappideen, Vines, Grant & Watson, Torts: Commentary and Materials (Lawbook Co, 10th ed, 2009), pp. 301-306 [10.05-10.20]; 170-174 [7.45-7.50]; 303-308 [10.20-10.30].

Introduction - the old approach

[5] Pure economic loss should be distinguished from consequential economic loss. Consequential economic loss is an economic loss that follows physical harm (not being able to go to your job, having to pay hospital bills etc). Pure economic loss occurs when the economic loss occurs without preceding physical or property damage, for example, the negligence of one person causes another to miss a business opportunity.

The basic and traditional rule of the common law is that a plaintiff cannot recover damages for pure economic loss[6]. This is for a number of reasons:

  • Usually seen as arising from interference with contractual rights and therefore a part of the law of contract.
  • The issue of indeterminate liability - too many people will be able to sue.[7]
  • Commercial competition and aggressive business techniques can lead to economic loss, but they're an integral part of our capitalistic society - the court does not want to limit this.

The current law

Negligent words

In 1964, Hedley Byrne & Co Ltd v Heller & Partners Ltd changed the law to allow the recovery of pure economic loss resulting from negligent words[8]. However, a duty of care in this context cannot arise simply from reasonable foreseeability - there are other special conditions (similarly to the control mechanisms of cases of pure mental harm).

Hedley Byrne & Co Ltd v Heller & Partners Ltd establishes five factors for determining when a duty of care to prevent economic loss arises. These are:

  1. Reasonable reliance - this is broken down into two parts:
    • Knowledge - the defendant knew, or ought to have known by reasonable standards, that the plaintiff would rely on his words.
    • Reliance - the plaintiff was acting reasonably when he decided to rely on the defendant's words (a plaintiff can't recover damages for loss suffered as a result of unreasonable reliance on any remark).
  2. Special skill - was the defendant an expert (or in a position where he is perceived as an expert) in the field he was commenting on?
  3. Request for information - did the plaintiff request information from the defendant?
  4. Financial interest - did the defendant have anything to gain (directly or indirectly) from the Plaintiff's reliance on his words?
  5. Disclaimers or assumptions of liability - Was there either a disclaimer from liability, or to the contrary, an undertaking/assumption of liability?
    • Notice that a disclaimer can be ineffective if the court deems it too unfair.

The first requirement of 'reasonable reliance' is probably the most central and most important.

These issues were also discussed in Esanda Finance v Peat Marwick Hungerfords:

  • "Mere foreseeability of harm does not, where the only harm is pure economic loss, give rise to a duty of care[9]."
  • Reasoning from Caparo Plc v Dickman[10] - In determining whether it was reasonable to rely on the words, the purpose to which the negligent words were said makes a difference.
    • In other words, if the defendant said the negligent words for a different purpose than to induce or advise the plaintiff (i.e, the words were meant for someone else), than it was not reasonable for the plaintiff to rely on them.

Negligent words in statutory law

[11] s52 of the Trade Practices Acts (Cth) (equivalent state legislation exists in all states) prohibits 'misleading or deceptive conduct' and provides compensation in cases where such conduct resulted in damage. Since it can be difficult to establish a duty of care in cases of pure economic loss, plaintiffs often plead s52 as an alternative to negligence.

Negligent acts

[12] The courts have been even more reluctant to award damages for pure economic loss caused by negligent acts. This is because it is harder to consider limiting factors such as reliance with physical acts as compared to words. The court is particularly reluctant to interfere with commercial competition and the capitalistic society - where economic loss was caused by the aggressive business techniques of one party, the court will not award damages. Once again, the court placed restrictions on when a duty of care can arise in the case of pure economic loss resulting from negligent acts. This was first established in Caltex Oil v The Dredge "Willemstadt":

  • Recovery may be possible for pure economic loss in cases where the defendant has knowledge that its negligence might cause economic loss to that particular plaintiff and not just a general class of plaintiffs.
  • Recovery for pure economic loss should be limited by a control mechanism based on proximity.

The court expanded more on this issue in Perre v Apand:

  • Incremental approach: "most helpful approach to the duty problem is first to ascertain whether the case comes within an established category. If the answer is in the negative, the next question is, was the harm which the plaintiff suffered a reasonably foreseeable result of the defendant's acts or omissions?... But a positive answer invites further inquiry and an examination of analogous cases where the courts have held that a duty does or does not exist[13]."
  • Rejects proximity as a control mechanism and instead establishes an incremental approach or a 'salient features' approach (a list of considerations). These include:
    1. Reasonable foreseeability.
    2. Indeterminacy of liability.
    3. Burden on commercial activity.
    4. Vulnerability of the plaintiff.
    5. Knowledge of the defendant about the possible harm to the particular plaintiff.

End

This is the end of this topic. Click here to go back to the main subject page for Torts.

References

Textbook refers to Sappideen, Vines, Grant & Watson, Torts: Commentary and Materials (Lawbook Co, 10th ed, 2009).

CLA refers to Civil Liability Act 2002 (NSW)

  1. Esanda Finance v Peat Marwick Hungerfords (1997) 188 CLR 241, 252
  2. Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465
  3. Esanda Finance v Peat Marwick Hungerfords (1997) 188 CLR 241
  4. Perre v Apand (1999) 198 CLR 180
  5. Textbook, pp. 301-2 [10.05]
  6. Cattle v Stockton (1875) LR 10 QB 453
  7. Ultramares Corporation v Touch, Niven & Co 174 NE 441
  8. This law was adapted in Australia in Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1970) 122 CLR 628
  9. (1997) 188 CLR 241, 252
  10. [1990] 2 AC 605
  11. Textbook, p. 308 [10.30]
  12. Textbook, p. 308 [10.35]
  13. Perre v Apand (1999) 198 CLR 180
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