Wednesday, November 01, 2006


Tuesday 31 October 2006

Arriving back from our break, we began by looking at a PURE ECONOMIC LOSS.
It is the first word ‘pure’ that must be remembered, for we are to consider other types of economic loss shortly.

The difficulty created for tort law by negligent statements is that they usually cause economic rather than physical damage. You must remember that I have already said, many many times, that it is possible to claim for an economic loss caused by a negligent statement, but not a negligent act.

An economic loss is usually a matter of contract law, tort is more reluctant to recognise such losses as actionable unless they are caused intentionally for example in the tort of deceit (considered only briefly in the syllabus) and the economic torts (not in the syllabus).

If you look at Donoghue v Stevenson and add another dimension to it, it helps to explain things. Just suppose that the claimant had also been sick down her clothes as well as suffering illness from the contaminated drink. She would have been able to recover for her personal injury and the damage to her property, but could not claim for the cost of the ginger beer. Why? This is a claim for an economic loss. As she had not bought the beer she had no contract, and couldn’t claim for the cost of the beer in contract law.

Emerging liability for economic loss in tort lies in the area of negligent (mis)statement.

Before 1963 an action on a statement would lie where:

The statement formed a term of a contract.
The statement was made fraudulently (tort of deceit)
The statement caused physical damage (negligence).
The statement was made maliciously (malicious falsehood).
The statement damaged reputation (defamation).
The statement preceded a contract and the claimant sought rescission in equity for misrepresentation (Misrepresentation Act 1967 – yet to exist).

However, no action would lie for a negligent statement causing pure economic loss: Candler v Crane Christmas & Co. (1951). The dissenting judgment of Denning LJ is important. He stated that accountants owed a duty of care to their:

“employer or client, and. . . any third person to whom they themselves show the accounts, or to whom they know their employer is going to show the accounts so as to induce him to invest money or take some other action on them. I do not think, however, the duty can be extended still further so as to include strangers of whom they have heard nothing and to whom their employer without their knowledge may choose to show their accounts.”

Two significant developments occurred during the 1960s. The MISREPRESENTATION ACT 1967, s2(1), provides that where a person has entered into a contract, after a misrepresentation has been made to him by another party to the contract, and has suffered loss as a result, then the representor will be liable in damages unless he can prove that he had reasonable grounds to believe and did believe that the facts represented were true. It was not necessary to prove a duty of care, but there must have been a contract. Three things were needed:

Statement of fact, not opinion.
Made by one party to the contract to another party.
Misrepresentation induced the sale.

In 1963 the House of Lords laid down the basis for an action in the tort of negligence for statements: Hedley Byrne & Co. v Heller & Partners Ltd (1964). The claimants were advertising agents and asked their bank to obtain a credit reference on one of their clients from the clients’ bank. The credit reference negligently stated that the clients were “good for their ordinary business transactions” and the reference contained a disclaimer. The House of Lords held that in appropriate circumstances there could be a duty of care, and approved the dissenting judgment of Denning LJ in CANDLER (above). However, the defendants were not liable on these facts because of the disclaimer clause. This disclaimer clause is to figure later.

The neighbour test was rejected as being inappropriate to deal with the difficulties of statements. The biggest difficulty is that when a statement is made it tends to have a wider circulation than a product. If the statement is incorrect it may cause a considerable amount of damage to a large number of people. A defective product on the other hand will probably only cause damage on one occasion.

Instead of the neighbour test, the court said that there had to be a special relationship between the parties. This has three elements:

(1) special skill
(2) reasonable reliance
(3) knowledge of the type of transaction

Let’s look at them one at a time:

The defendant must be possessed of a special skill. In Esso Petroleum Co. v Mardon (1976) 801, Esso had made statements to Mardon as to the estimated throughput of a garage. Mardon’s rent on the garage was calculated on the basis of the throughput. The estimate had been made negligently and it was held that Esso owed a duty to take reasonable care in giving the advice. As Esso’s statement also amounted to a misrepresentation, an action would have arisen under the MISREPRESENTATION ACT 1967 (although it didn’t exist at the time the facts arose).

A special skill is possessed when a statement is made during the course of a business transaction where the representor knows his statement will be relied on. No duty arises if the statement is made on a social occasion, i.e. one where it would be unreasonable to expect the defendant to be exercising due care, although the case of Chaudhry v Prabhakar (1989) suggests otherwise. The claimant had asked a friend who had some knowledge of cars, to find a suitable one that had not been involved in an accident. The defendant found one and recommended it. The claimant bought it, but it was found to have been in an accident. The defendant was found liable but counsel had already conceded that a duty of care was owed. The decision has been criticised many times, and is the only success of a statement on a social occasion.

The second element is that the claimant must reasonably rely on the defendant’s advice. Some cases stated that it was vital, whilst others denied its relevance. Best to say that it is required. It must be foreseeable that the claimant will so rely but this factor is not sufficient in itself. What is the position regarding a surveyors’ negligence in connection with valuation of houses? If the valuation is carried out negligently & the house is worth less than was paid for it, does the surveyor owe a duty of care to the purchaser? The problem can be seen thus:

Surveyor Þ Þ ÞBuilding Society Þ Þ Þ Purchaser

Two contracts exist, but neither is of help to the question. In Yianni v Edwin Evans & Sons (1982) a house was valued for the claimants by the defendants at £12,000. Relying on this the claimants borrowed £12,000 from the building society who had arranged the valuation. The claimants soon discovered that work amounting to £18,000 was required to repair the property. The judge found for the claimants, basing his decision that a large proportion of house buyers rely completely on such a valuation and do not have a full structural survey carried out. This fact is well known to surveyors who carry out such work. Unsurprisingly, surveyors did not welcome the decision, and they began placing disclaimers in their evaluations.

The House of Lords considered the issue of a duty of care in two linked cases: Smith v Bush; Harris v Wyre Forest District Council (1989). The questions requiring answers were:

Was a duty of care owed to the claimant? The unanimous decision was ‘yes’, approving of the decision in Yianni. The surveyors were aware that the claimant would probably rely on the valuation, and it was just and reasonable to impose a duty in such circumstances. The duty is limited to the purchaser; it does not extend to subsequent purchasers.

Did the disclaimers fall within the scope of the UCTA 1977? They agreed that it did, although this was denied by the defendants.

Did the notice satisfy the tests of reasonableness? Section 11(3) UCTA 11977 helps. The House of Lords considered the bargaining power of the parties; whether it would have been practical to seek advice from a further source; the difficulty of undertaking the task for which liability is being excluded; the practical consequences of the decision. It was decided that the risk should fall on the surveyor, the disclaimer is unreasonable. The caveat regarding modest homes and industrial premises was emphasised.

In Merret v Babb [2001] the Court of Appeal followed Smith v Bush. Here the employer of the surveyor had gone bust, and the court held the valuer personally liable.

How is the loss calculated? The House of Lords were at odds with the Court of Appeal here. Consider this:

A. Valuer (V) negligently overvalues property at £100,000
B. Lender (L) lends 90% of valuation £90,000
C. True value of property at date of loan £70,000
D. Amount recovered on sale of property £40,000

Court of Appeal approach:

B (90,000) - D (40,000) = £50,000 (judged at date of sale)

House of Lords approach:

A (100,000) - C (70,000) = £30,000

The House of Lords approach is based on how much security the lender would have had if the information given had been correct and how much security the lender had at the time of the loan.

This ruling has implications for other professions, whose members are asked to provide information and give advice, for example solicitors. Where the third party is a beneficiary under a will there a few potential problems. In Ross v Caunters (1980) a beneficiary under a will was deprived of his inheritance due to the incompetence of a solicitor. It was held that a duty of care was owed to the beneficiary under a will that he made for a client.

This was affirmed by the House of Lords in White v Jones (1995):

March 1986 - Testator quarrels with the claimants - his 2 daughters. He cut them from his will.

June 1986 - The reconciliation. A letter is sent to the solicitor instructing him to prepare a new will with gift of £9,000 to each claimant.

17 July 1986 - The solicitor receives the letter, but does nothing.

16 Aug 1986 - The solicitors clerk asks the firm’s probate department to draw up a will/codicil with the new dispositions. Arranges to visit testator on 17/9/86.

14 Sept 1986 - Testator dies.

The claimants sue for negligence, but the Trial Judge finds that no duty of care exists. There was an appeal to the Court of Appeal which was allowed, and this was affirmed by the House of Lords on 3 grounds:

(1) It was foreseeable by the defendant that the claimant would suffer financial loss.
(2) There was sufficient proximity between the solicitor & the beneficiaries.
(3) It was just & reasonable, a solicitor was in breach of his professional duty & no other remedy was available.

Compare this with Hemmens v Wilson Browne (A Firm) (1993). The defendant solicitors drafted a document at the request of P, giving the claimant the right to call on P to pay her (the claimant) £110,000 to buy a house. The document was defective as it did not confer any enforceable rights to the claimant (no consideration). Some weeks later P called upon Hemmens to fulfil his promise & he refused. She sued. The action failed. The solicitor had been negligent, damage to the claimant was reasonably foreseeable, & there was a sufficient degree of proximity, but it would not be fair, just or reasonable to impose a duty of care because Hemmens was still alive & could also sue the solicitor or take other steps to rectify the situation.

The third requirement of the special relationship is that the defendant must have some knowledge of the type of transaction for which the advice is required, although he need not have knowledge of the actual person who relies on the information.

This has been considered by the House of Lords in the context of auditors in Caparo Industries Plc v Dickman (1990). It was that a company’s auditors do not owe a duty of care to potential investors whether they are already existing shareholders increasing their holding in the company, or members of the public. The allegedly negligent statement was put into general circulation and might foreseeably have been relied upon for a variety of different purposes by total strangers to the defendants. The defendant auditors were not liable for their alleged negligence, because, as Lord Oliver stated:

“To widen the scope of the duty to include loss caused to an individual by reliance on the accounts for a purpose for which they were not supplied and were not intended could be to extend it beyond the limits which are so far deducible from the decisions of this House. It is not, as I think, an extension which either logic requires or policy dictates .”

What this means is a defendant takes on a responsibility for giving advice to a known recipient for a specific purpose, being aware that the advice would be followed.

Hedley Byrne principles were applied by Lord Goff in Spring v Guardian Assurance (1994). Two other of their Lordships also found for the claimant but without resort to Hedley Byrne. The majority held that a duty is owed by the provider of a reference to the subject of the reference for economic loss which flows from the negligent provision of a reference. An ex-employer was required by LAUTRO rules to provide a reference for the claimant. An unsatisfactory reference effectively curtailed the claimant’s chances of getting work in the financial services industry. An action for defamation might lie if the content of the reference was defamatory but such actions are usually met by the defence of qualified privilege. Their Lordships did not consider that the recognition of a duty in the tort of negligence would undermine the policy embodied in the defence of qualified privilege. (See Chapter 17 for a discussion of the tort of definition and relevant defences.)

Spring was followed by the EAT in TSB v Harris [2000] where it was held that an accurate and truthful reference may not be a fair and reasonable reference.

Until the Hedley Byrne decision in 1963 there was a general principle that pure economic loss was not recoverable in a negligence action.

Pure economic loss must be distinguished from economic loss which is consequential to physical damage (i.e. damage to the claimant’s person or property). An example of consequential economic loss would be loss of wages as a result of injuries received in a negligently caused car accident. An example of pure economic loss would be suffered by a person, kept waiting in the queue of traffic which built up behind the car accident, the loss of earnings, but who had no actual damage to his own body or property.

The principle of non-recovery is said to stem from Cattle v Stockton Waterworks Co. (1875). The defendants negligently burst a water main, thereby adding to the claimants expense in building a tunnel which he was under contract with a third party to build. The claimant was unable to recover this expense as it was pure economic loss. The court was concerned with opening the floodgates (ouch!) of litigation.

Cattle illustrates a recurring problem in this area: where A has made a contract with B, and C acts negligently, thereby making it more expensive for A to complete his contract.

The Hedley Byrne decision had the effect of allowing a claim for pure economic loss caused by a negligent statement. Did this decision have any effect on liability for negligent acts?

This was considered by the Court of Appeal in Spartan Steel & Alloys Ltd v Martin & Co. (1973). The defendants negligently severed an electricity cable, causing the claimant’s factory to shut down. The claimant claimed under three different heads:

damage to goods in production at time of power cut (physical damage)
loss of profit on (a) (consequential economic loss)
loss of profit on goods which could not be manufactured due to the power cut (pure economic loss)

The Court of Appeal allowed (a) & (b), but not (c). If such claims were allowed the potential losses could be enormous. Only the one factory had been affected; what if it had been 10 factories? Companies could insure against losses such as (c), to shift the loss to a defendant would impose a crippling burden.

The decision was followed in Muirhead v Industrial Tank Specialities Ltd (1986), the claimant contracted with the first defendant to install a tank for him to store his lobsters. The second defendant supplied the pumps for the tank. The third defendant made the pumps. The pumps failed and the claimant lost his stock of lobsters. The first defendant went into liquidation and the claimant sued the third defendant in negligence. He was able to recover for the physical damage to the lobsters but not for his other losses which were pure economic loss.

Finally, the House of Lords considered the pure economic loss question where goods are damaged in transit: The Aliakmon [1986]. The claimant had suffered economic loss when goods which he had contracted to purchase were damaged at sea. At the time of the damage the risk (but not ownership) of the goods had passed to the claimant. The claimant claimed that he was owed a duty of care by the defendants who had damaged the goods. The loss was classified as economic loss rather than physical damage as the goods at the time of damage were owned by a third party. The House of Lords held that no duty was owed. Where property is damaged then a person must be the owner of or in possession of that property in order to sue in negligence, as otherwise the loss is pure economic loss.

We begin next week with the important House of Lords decision in Murphy v Brentwood DC [1991].

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