Pure Economic Loss and Negligent Misstatements
INTRODUCTION:
Pure economic loss is financial loss unrelated to any personal injury or property damage suffered by
the claimant. It arises in separate ‘categories’ where, for policy reasons, recovery is excluded by
denying a duty of care between the claimant and defendant.
Policy considerations lie behind the courts’ continued reliance on an exclusionary rule in relation to
pure economic loss, including the fear that allowing such claims would lead to a flood of further
claims of that nature. This argument—often referred to as a ‘floodgates’ argument—is grounded in
the assumption that it is better to prevent all claims by denying a duty than to allow a ‘flood’ of
claims. This, in turn, could lead to what is known as ‘crushing liability’, where one defendant, from
one careless act, ends up being substantially liable to numerous claimants. Moreover, it is generally
accepted that a role of the law in a market economy is to shape and develop the framework in which
the market should operate with maximum efficiency. One way this is achieved is by preventing claims
for pure economic losses in negligence as such losses are more traditionally and readily dealt with by
contract law. This is sometimes referred to as the ‘primacy of contract’ justification for the
exclusionary rule. There are exceptions to the general rule and these are considered below.
MAIN BODY:
Categories of financial loss:
Economic loss caused by damage to the property of a third party
Financial loss arising from negligent damage to someone else’s property is generally irrecoverable. In
Spartan Steel the defendant contractor negligently damaged an electric cable which supplied the
power to the claimants’ furnace. The Court of Appeal permitted the claimants to recover the cost of
damage to the melt-in-progress at the time of the power cut (physical damage) and loss of profit
arising from this (consequential economic loss). Profit on four further melts that would have been
processed during the power cut was found to be irrecoverable pure economic loss, unrelated to
physical damage to the claimants’ property.
Lord Denning argued that allowing recovery for such loss of profit would lead to indeterminate
liability in relation to the potential number and size of claims. A contractor would be liable for
exorbitant (and uninsurable) compensation claims, out of all proportion to the magnitude of the
negligent conduct. Thus, according to Lord Denning, it is considered preferable to spread the
economic losses amongst those affected. The law achieves a justifiable balance because it allows for
the partial recovery of losses (i.e. consequential economic losses) and it places the onus on
businesses potentially affected to consider how best to reduce their risks e.g. by installing backup
generators or by taking out insurance. Affected businesses are encouraged to resume their
operations promptly and the possibility of over-inflated/fraudulent claims is reduced.
Edmund Davies LJ, provides a critique of this reasoning in his dissenting judgment. He argued that it
was clearly foreseeable that if the power supply is negligently disrupted, surrounding factories would
be directly affected and would suffer foreseeable loss. As it was inevitable that cutting an electricity
supply to a factory would cause the owners to lose money, it was not clear to Edmund Davies LJ why
this foreseeable loss should, as a matter of course, be unrecoverable
This formulation would arguably put enough restriction on the ability to recover economic loss. Not
all losses will be foreseeable to a party at the time of the negligent act. Thus, rather than saying
INTRODUCTION:
Pure economic loss is financial loss unrelated to any personal injury or property damage suffered by
the claimant. It arises in separate ‘categories’ where, for policy reasons, recovery is excluded by
denying a duty of care between the claimant and defendant.
Policy considerations lie behind the courts’ continued reliance on an exclusionary rule in relation to
pure economic loss, including the fear that allowing such claims would lead to a flood of further
claims of that nature. This argument—often referred to as a ‘floodgates’ argument—is grounded in
the assumption that it is better to prevent all claims by denying a duty than to allow a ‘flood’ of
claims. This, in turn, could lead to what is known as ‘crushing liability’, where one defendant, from
one careless act, ends up being substantially liable to numerous claimants. Moreover, it is generally
accepted that a role of the law in a market economy is to shape and develop the framework in which
the market should operate with maximum efficiency. One way this is achieved is by preventing claims
for pure economic losses in negligence as such losses are more traditionally and readily dealt with by
contract law. This is sometimes referred to as the ‘primacy of contract’ justification for the
exclusionary rule. There are exceptions to the general rule and these are considered below.
MAIN BODY:
Categories of financial loss:
Economic loss caused by damage to the property of a third party
Financial loss arising from negligent damage to someone else’s property is generally irrecoverable. In
Spartan Steel the defendant contractor negligently damaged an electric cable which supplied the
power to the claimants’ furnace. The Court of Appeal permitted the claimants to recover the cost of
damage to the melt-in-progress at the time of the power cut (physical damage) and loss of profit
arising from this (consequential economic loss). Profit on four further melts that would have been
processed during the power cut was found to be irrecoverable pure economic loss, unrelated to
physical damage to the claimants’ property.
Lord Denning argued that allowing recovery for such loss of profit would lead to indeterminate
liability in relation to the potential number and size of claims. A contractor would be liable for
exorbitant (and uninsurable) compensation claims, out of all proportion to the magnitude of the
negligent conduct. Thus, according to Lord Denning, it is considered preferable to spread the
economic losses amongst those affected. The law achieves a justifiable balance because it allows for
the partial recovery of losses (i.e. consequential economic losses) and it places the onus on
businesses potentially affected to consider how best to reduce their risks e.g. by installing backup
generators or by taking out insurance. Affected businesses are encouraged to resume their
operations promptly and the possibility of over-inflated/fraudulent claims is reduced.
Edmund Davies LJ, provides a critique of this reasoning in his dissenting judgment. He argued that it
was clearly foreseeable that if the power supply is negligently disrupted, surrounding factories would
be directly affected and would suffer foreseeable loss. As it was inevitable that cutting an electricity
supply to a factory would cause the owners to lose money, it was not clear to Edmund Davies LJ why
this foreseeable loss should, as a matter of course, be unrecoverable
This formulation would arguably put enough restriction on the ability to recover economic loss. Not
all losses will be foreseeable to a party at the time of the negligent act. Thus, rather than saying
