Summary Negligence - Economic Loss PQ Notes (First Class)

Negligence: Duty of Care for Economic Loss


a. Not tested for Essay, only PQ
Introduction
 Negligence is concerned with physical harm to person and property  can be quantified in
terms of economic loss
 Consequential economic loss: Loss that arises from physical harm to your person or
property
 Pure economic loss: Either no physical harm caused, or physical harm caused on third party

 General rule: No duty of care for pure economic loss (Spartan Steel)  subject to exception
where duty of care arises if D voluntarily assumes responsibility for C’s economic welfare
(Hedley)


b. Justifications for the Rule
 Canadian National
o AF: Economic loss is an inevitable by-product of desirable but inherently dangerous
activity  fair to distribute the costs amongst all who benefit

o AF: Contractual allocation of risk
 Persons who stand to suffer economic loss can allocate such risks
appropriately within their contracts  should not be able to claim for pure
economic loss

o CA: Insurance argument
 D is in a better position to predict economic loss  more able to obtain
cheap insurance
 This incentivises them to take less care (eg. cheaper for builder to dig without
checking for cables)  reduced care leads to higher risk of accidents
 But C is unlikely to find general insurance against loss of profit  would raise
problems of moral hazard
 Unfair that D is much more well-insured than C  C should be able to claim

c. Distinction between pure economic loss and consequential economic loss

Spartan Steel
o C manufactures in a factory, and D damaged a cable  cut off electricity in factory
o C claimed the following losses
o Ruined metal in the furnace (physical damage to property)
o Loss of profit on the ruined metal (consequential economic loss)
o Loss of profit they expected to make by using the furnace during the period when
electricity was off (pure economic loss)

, Negligence: Duty of Care for Economic Loss



o Held that D owes a duty of care in respect to physical damage to property and
consequential economic loss, but not pure economic loss

o Rationale (Lord Denning)
o Risk of economic loss should be suffered by the community as a whole
o Nature of the hazard (losing electricity) is something that people should have to
put up with

o Floodgates argument (Justice Cardozo)
o Liability would be in an indeterminate amount, for an indeterminate time, and an
indeterminate class  no boundary for who can claim

o Counters (Davies LJ)
o Absurd results will be removed by causation and remoteness
o Duty of care might not be found in the first place because of the general
negligence rules which apply

d. Pure Economic Loss for Defective Products
 Conflicting case law starting from Ann, now overruled by Murphy

Dutton
o C bought house that had defective foundations  sued local authority for negligently
approving the building
o Lord Denning: Case is about physical damage to property  duty of care is owed

Anns
o Foundations in C’s house were defected and caused cracks in the walls  sued local
authority for negligently approving building
o HoL stated that it was physical damage to property  duty of care is owed
o Necessary to avoid present or imminent danger to the safety of the occupant

o Criticism: Property is defective, meaning that property is worth less than C thought. But
defective property did not harm other physical goods  no physical damage to other
property
o Court used complex structure argument  foundation is a separate entity from the
walls  foundation has damaged the walls

e. Subsequent Case Law Development

Murphy