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Negligence in respect of pure economic loss

Judicial reluctance to recognise duties of care in negligence in respect of pure economic loss.

Chantal Chambers

on 14 December 2012

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Transcript of Negligence in respect of pure economic loss

By: Chantal, Katrin and Mehroz Duties of Care in negligence in respect of pure economic loss. “worth incurred without any physical injury to any asset of the plaintiff" MERCURY ENERGY VS CENTRAL BUSINESS DISTRICT OF AUCKLAND (1998) What is ‘pure economic loss’? WELLER & CO V FOOT AND MOUTH DISEASE RESEARCH INSTITUTE (1966) Types of Economic Loss Loss caused by negligent acts Involves failure to receive expected future profit, receipt of financial benefit, property damage sustained by 3rd party, the acquisition of an item of defective property Not linked to physical injury, death or property damage Utility company failed to supply power to the central business district of Auckland in New Zealand for 5 weeks Compensated customers by offering to waive charges, cash equivalent of six months' power bills or up to $10,000 cash, the costs of emergency generators hired by businesses An American judge, Benjamin Cardozo described this case as ‘a dramatic example of pure economic loss Loss caused by negligent statements Plaintiffs (cattle auctioneers) suffered financial loss as they were unable to hold their weekly auctions due to a local quarantine Negligence action failed as they had no proprietary interest in cattle affected by disease Loss was solely loss of profit, therefore not recoverable in negligence Floodgates could open as there would have been plenty local businesses that must have been affected by the quarantine In order to comprehend this aspect of duty of care it is appropriate to split it into two categories, that of Loss caused by negligent acts; and Loss caused by negligent statements Cattle v Stockton Waterworks (1875) In this case, the claimant had a duty through contract to build a tunnel for Knight. The defendants however, negligently allowed for a leak in the water supply consequently flooding the tunnel. As a result of this act, the completion of the tunnel was delayed and the claimant suffered a loss. Held: loss of profit through act was non-recoverable.... Why? ..... Indeterminate Liability Where the defendants liability would be incalculable to an “indeterminate amount for an indeterminate time to an indeterminate class”. Bryan v Maloney subsequent owner of a domestic dwelling was able to recover the cost of repairs to the dwelling from the original builder The dividing line between physical and economic damage. Spartan Steel & Alloys v Martin & Co (1973 Facts: the defendants (Martin & Co) made relevant inquiries about the road they were going to dig up but failed to take reasonably care during their digging resulting in damage to essential underground cable supplying electricity to the claimants (Spartan Steel). The Electricity Board turned off its power supply to the claimants for 14 and a half hours whilst cable was being mended. Consequently, suffering losses under three headings. CA held: only 1st two justified compensation. Third head consisted of pure economic loss because it did not flow directly from physical damage to the claimants property. Presumption until 1964 was that liability in tort was only possible for loss caused by a fraudulent rather than negligent statement. HL in Derry v Peek (1889). Provide exception to reluctance of the law to recognize a duty of care The HL got the opportunity to reassess this position in the case of Hedley Byrne & Co v Heller & Partners (1964) Claimants asked for credit references for their client, defendants gave reference titled with a disclaimer. Claimants relied on this statement and subsequently lost £17,000 when the company went into liquidation. Who might be liable to a duty of care when making a statement? Misrepresentation Act 1967 Duty of care alone brings no claim Chaudhry v Prabhaker Indirect Statements and Silence Caparo v Dickman (1990) Voluntary assumption of responsibility Resulting developments in liability for negligent misstatements. Can a duty of care be recognised when the subject of a statement is suffering the pure economic loss? Held: an action to recoup this loss would fail on the grounds of which the defendant had qualified their reference. Though requirements for ‘a special relationship’ (proximity) were fulfilled, the disclaimer meant there could be no liability on behalf of the defendant Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1971) Facts: the claimant requested investment advice from the defendant (its insurance company) which they then relied on and subsequently lost money. Held: by majority of Privy Council that no duty had arose here therefore not liable. S2(1) states whereby a person enters into a contract under the reliance of a statement made in misrepresentation by another party, and he subsequently experiences a loss, if the maker of such a statement would have been liable in damages for a fraudulent statement he will also be liable here too unless he can prove that he had reasonable grounds to believe and did believe that the statement he made was true. In Hedley Byrne, do you think the claimants would have been able to bring their action under this 1967 Act had it been in force at the time of the events? Hedley Byrne = duty of care under special relationship. JEB Fasteners v Mark Bloom & Co (1981) = defendant’s breach did not cause claimant’s loss. Claimant must also prove breach and causation. Facts: defendant conceded duty of care due to his discouragement in the claimant getting advice from a qualified mechanic. Held: negligent claim successful. NB: courts wary of ‘hazardous’ impact suing friend’s can be. Smith v Eric S. Bush (1989) => HL found the relationship between the valuer and purchaser to be ‘akin to contract’. “As a professional man [the valuer] realised that the purchaser was relying on him to exercise proper skill and judgement in his profession and...it was reasonable and fair that the purchaser should do so.” La Bangue Financiere de la Cite SA v Westgate Insurance Co Ltd (1988) => held, when there is a duty to speak, failure to do so can constitute negligent misstatement. HL held no duty of care owed to Caparo by the defendant, as although there is degree of foreseeability, the lack of proximity proved fatal to a duty of care. Morgan Crucible v Hill Samuel Bank Ltd [1991] => both foreseeability and high degree of proximity present = duty exist. Henderson v Merrett Syndicates [1994] => HL held there was a duty of care not to cause pure economic loss. Lord Goff: “...if a person assumes responsibility to another in respect of certain services, there is no reason why he should not be liable in damages for that other in respect of economic loss which flows...” West Bromwich Albion Football Club v El-Safty (2006 Caparo three stage test applied = would not be fair, just and reasonably to hold doctor in a position of liability to the club Commissioners of Customs and Excise v Barclays Bank plc [2006] HL held: although a degree of voluntary assumption is essential, the defendant owed no duty of care. Lord Bingham: “...assumption of responsibility [is] a sufficient but not a necessary condition of liability...” In Spring v Guardian Assurance plc [1994] a duty of care was recognized when the subject of a statement suffers a pure economic loss. In the HL, Lord Goff held that the defendant’s duty was founded upon the assumption of responsibility as he had an obligation as an employer, to perform the task of referencing with due care. White v Jones [1995] => solicitor found liable, as had it been held that there was no duty of care upon the solicitor to the intended beneficiaries, there would be a huge gap in the law that would need to be filled. The fear of indeterminate liability as regards to ‘amount’ and ‘class’ was regulated by the fact that there could only be one owner at any given point in time As regards to liability for an indeterminate time, the majority considered that the casual proximity between the builder’s negligence and the damage existed independently of the identity of the owner Contract against Tort ‘liability where otherwise lawful commercial activity’ No recovery contract because contract already outlines and effectively deals with the issue of economic loss, tort would simply interfere. Murphy v Brentwood DC the claimant bought a tort action against a builder with whom they had no contractual relationship for the cost of repair of plaster House of Lords concluded that the mere discovery of a defect in a ‘product’ (pure economic loss), cannot justify using tort to circumvent the law of contract. in other words, the courts recognize liability where there has been unlawful commercial activity. These would be instances where commercial practices have aimed to damage competitors business. Can you think o any cases where this is the case? Unless the statement was fraudulent Derry v Peek The claimant bought shares of the company, relying on the allegations of the prospectus. The board of trade refused to allow steam or mechanical power, (something the prospectus said was allowed), and the company was wound up, unable to complete its work. The court found this to be an action of deceit, under which the establishment of misrepresentation alone is not enough to prove liability In this case, Plaintiff relied on the prospectus, which may have been misrepresentation, but Defendants reasonably believed they could glean approval of the board of trade and should not be held liable for their later failure to do so An action of deceit will only stand in a court when a plaintiff can show not only misrepresentation, but also that defendants knew they would be unable to follow through with their representations Important to note The judiciary are generally reluctant to recognise a duty of care in respect to pure economic loss. However, there are some exceptions for which they may recognise duty of care. Special Relationships

Voluntary Assumption

Negligent statements relied upon by third party Thank you for listening. Questions?
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