How, Pure Economic Loss is interpreted in both Contract Law and Tort Law.

In the early 1980s, it was widely believed that tort of negligence was expanding into territory of contract and had the capacity to take over a substantial parts of contracts role. However, there has been a retreat from this idea in recent years.

The differences between the particular aims of damages in contract and tort follows from the different natures of the obligations concerned rather than from any fundamental difference in the purpose of damages since in both cases the damages are designed to put the claimant in the position he would have been in if the obligation had not been broken – in tort it is the obligation not to do a wrong and thereby not to make someone worse off (including not to deprive him of existing expectations such as his existing earning potential), whereas in contract it is an obligation to fulfil a promise and to fulfil the expectations generated by that promise.

The traditional view of pure economic loss in tort law comes from the case of Hedley v Byrne (1964) case says introduced the concept that a claimant could recover for economic loss arising from negligently made statements. However, the courts have always distinguished such an action from ‘pure economic loss’ arising out of negligent acts. The position here was traditionally very clear: there was no liability for a ‘pure economic loss’.

In the past this was based on policy and the idea that ‘economic loss’ (for instance, a loss of profit) was a concept applicable to contract law rather than tort. The principle has been quite clearly stated and illustrated.

In Spartan Steel v Martin & Co (contractors) Ltd (1973), there appears to be an artificial distinction here created for policy reasons purely for the purpose of restricting any extension of liability the distinction has the obvious potential to create unfair anomalies in the law. For instance, it might mean that an architect giving negligent advice leading to the construction of a defective building could be liable, where as the builder whose negligence leads to a defect in a building may not be.

Nevertheless, other cases have confirmed the principle that a pure economic loss arising from a negligent act is unrecoverable.

In Weller & Co v Foot & Mouth Disease Research Institute (1966), it was some what different as, there have also been situations where an economic loss was recovered, although in less clear – cut situations where the difference between a negligent statements and a negligent act was less obvious.

In Dutton v Bagnor Regis Urban District Council (1972), the case clearly indicates that it is different to distinguish between a negligent inspection (an act) and a satisfactory report based on the inspection (a statement). The case did not fit easily under either Hedley v Byrne (1964) or Donoghue v Stevenson (1932), which perhaps explains the courts reasoning.

Further erosion of the basic principle that pure economic loss is unrecoverable came as a result of Lord Wilberforce’s two part test. As in Anns v Merton London Borough Council (1978), however because of the availability of the Anns two part test, the so called ‘high water mark’ was then reached in respect of recovery for a pure economic loss.  This was pure economic loss under Anns.

Pure economic loss after Anns occurs almost immediately, judges considered that the relaxation of the principle concerning recovery for economic loss had now gone too far. A long line of cases followed in which tried to limit the possibility on the above cases.

Governors of the Peabody Donation Fund v Sir Lindsay Parkinson & Co Ltd (1985). Here the cases had often arisen because an action in contract was not available and the reliance test from Junior books (1983) argued.

Which followed to the case of Muirhead v Industrial Tank Specialists Ltd (1985), this brought about the argument that costs of repairing defects in property that could lead to a danger to health or safety, approved in Anns, was also gradually rejected.

Negligence then developed incrementally, case by case, with a duty of care being established in numerous relationships.

Much later in Anns v Merton LBC (1978), Lord Wilberforce developed a two stage test imposing liability where there was sufficient legal proximity between both parties unless there were policy reasons for not doing so.

However this two part test was criticised and so the case and the test was overruled in Murphy v Brentwood D C (1990). This case approved a three part test from Caparo v Dickman (1990). This test had to consist the following:

• Were the consequences reasonably foreseeable?
• Was there a sufficient relationship of proximity between the parties? and,
• Is it fair, just and reasonable in all the circumstances to impose a duty of care?

Policy has always been a key consideration in determining liability, making many policy factors to influence judges in deciding whether or not to impose a duty.

The law of torts is concerned mainly with compensating for physical damage or personal injury, not for loss that is only economic. The obvious justification for this stance is that economic loss, or for instance loss of a profit or bargain is more traditionally associated with contract law, and the judges have always been eager to separate out the two.  

An action for an economic loss caused by a statement was traditionally available in tort, but in the tort of deceit and only in the case of fraudulently made statements. This was seen in Derek v Peek (1889) however, the action for economic loss caused by reliance on a negligently made statement should be available was reaffirmed even more recently, although not without some fundamental agreement. 

The precise meaning of ‘special relationship’ was never really examined in Hedley v Byrne (1964) and so it has become an area for judicial policy making. The original meaning was towards a narrow interpretation that would then only include a relationship where the party giving the advice was in the business of giving advice of the sort in question.

However, it has since been suggested that a business or professional relationship might in general give rise to the duty if the claimant is genuinely seeking professional advice.

Howard Marine & Dredging Co Ltd v Ogden & Sons Ltd (1978) – a purely social relationship should not normally give rise to a duty of care, but has done when it has been established that carefully considered advice was being sought from a party with some expertise.

In contrast with Chaudhry v Prabhaker (1988), the common relationship where a duty will be identified though are those where valuers or accountants are providing the advice.

It is only fair and logical that if there has been no reliance placed on the advice given, then there should be no liability on the defendant for giving it.

It will not be foreseeable reliance if the claimant belongs to a group of potential claimants that is too large (Goodwill v British Pregnancy Advisory Service (1996)).

But whenever there is foreseeable reliance on advice given, then there will be a duty of care owed

In Smith v Eric S Bush (1990), a building society valuation had identified that chimney breasts had been removed, but the valuer had failed to check whether the brickwork above was properly secured…it eventually collapsed. There was a duty of care because, as in Yianni v Edwin Evans (1982), even though the contract was between building society and valuer, it was reasonably foreseeable that the purchaser would rely on it.

Foreseeable reliance by the party seeking the advice might also prevent an exclusion of liability clause in a contract from operating successfully.

Where a duty to act is imposed by statute, a civil action is only usually available to a party when the type of harm suffered was that anticipated by the statute. This was one of the reasons why the action failed in Caparo v Dickman (1990). However, a duty may apply where the public would generally benefit.

 

It leads to mentioning that as a negligent act, pure economic loss does not allow any other professional to claim under it, apart from solicitors only, (White v Jones (1995)).

The principles on which contractual damages are or should be assessed would merit a separate course of their own but the key issues to be discussed are as follows:

• The aim of contractual damage
• Remoteness of damage
• Non-pecuniary losses
• Mitigation
• Contributory negligence, and
• Penalties and agreed damages

Damages are a sum of money paid by the defendant to the claimant once liability is established in compensation for the harm suffered by the claimant.

The purpose of damages in contract law is to compensate the claimant for the losses suffered as a result of the breach. As Baron Parke put it in Robinson v Harman (1848),

‘the purpose is to put the victim of the breach ,

so far as is possible and so far as the law

allows, into the same position he would have

been in, if the contract had not been broken but

had been performed in the manner and at the

time intended by the parties.’

Damages in contract law puts the victim in the position he would have enjoyed if the contract had been properly completed and performed by the defendant.

There are in effect two tests used in assessing an award for an unliquidated sum of damages in contract. The first test concerns the loss in respect of which the claimant can recover. The second concerns the quantity of damages available.

The test of remoteness was originally derived by Alderson B in the case of Hadley v Baxendale (1854),

‘where the  parties have made a contract which one of them

has broken, the damages which the other party ought to receive in respect such

breach of contract should be such as may fairly and

reasonably be considered arising either naturally, i.e. according to the

usual course of things, for such breach on contract itself, or

such as may be reasonably supposed to have been in the contemplation of both parties

at the time they made the contracts as the probable

result of the breach’

In the case of Hadley v Baxendale (1854), a mill owner contracted with a carrier to deliver a crankshaft for his mill. The mill was actually not operating at the time because the existing crankshaft was broken. The carrier did not know this when the contract was formed. The carrier was then late with deliver. The mill owner sued unsuccessfully because the carrier was unaware of the importance of prompt delivery.

      So therefore, in the essence the test is in two parts, one is measured objectively according to what loss is a natural consequence of the breach. The second is subjective, based on specific knowledge of potential losses in the minds of both parties when the contract is formed.

   The test remains to this day, although it has been modified on occasions, (Victoria Laundry Ltd v Newman Industries Ltd (1949)), nevertheless the test can cause confusion and be made unnecessarily complex.

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