Claims for Pure Economic Loss and Negligent Misstatements

Recognised harm and economic loss

Most losses that result from the tort of negligence are financial losses – also known as economic loss. For instance, if someone’s car is destroyed as a result of another driver’s negligent driving, the cost of replacing the car is classed as financial or economic loss.

In many cases, the losses incurred are purely economic where there are, for instance, no personal injuries or property damage resulting from someone else’s negligence. The loss is purely financial.

Examples of pure economic loss

Consider a manufacturing company. If an electrical contractor negligently cuts through electric cables in the factory, resulting in the factory being ‘unusable’ for the purpose for which it is required, then a claim of pure economic loss would be for the potential earnings the company could have gained had the electric cable not been damaged, and the factory was still usable.

The courts are very restrictive in their approach to claims of pure economic loss: the general rule is that ‘pure economic losses’ are not recoverable for the tort of negligence. There are exceptions, for instance, if there is a commercial contract that allows a party to claim damages for financial loss.

Typical examples of pure economic loss include expenditure, loss of profit, and loss of some other forms of financial gain. These are different to recoverable losses such as quantifiable financial losses, for instance, caused by revenue generating properties as a result of the damage caused by negligence. However, it is not always easy to draw the line between recoverable losses, and pure economic loss.

The development of pure economic loss claims

In 1963, the House of Lords held that a claim for pure economic loss could be permitted if the loss was a result of things the defendant had said or information the defendant had provided. The House of Lords furthered this by saying a person can make a claim for pure economic loss as a result of negligent misstatements – providing there is a special relationship between the parties involved. This is the so-called Hedley Byrne principle following the case ofHedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.

Negligent misstatements

A negligent misstatement is where one party carelessly makes a statement to another person to whom they owe a duty of care. However, in the event of a claim, it must be shown that the defendant owed the claimant a duty of care not to cause such harm which was suffered by the negligent misstatement, that this duty was breached, and the claimant suffered loss as a result.

To succeed in a claim for pure economic loss as a result of a negligent misstatement, the following needs to be proved:

  • A special relationship between the parties
  • A voluntary assumption of responsibility by the party offering the advice
  • Reliance on that advice by the party receiving it
  • The reliance must be reasonable

A special relationship

The characteristics of a special relationship have been described by the courts as the claimant reasonably relying on what the defendant said; and that the defendant should have known or ought to have known that the claimant would have relied on such statements. A typical example will be where there is a commercial relationship between the parties and the advice was given in a business context.

Where someone expresses an opinion in a social setting, they are less likely to take these to be relied upon. It is seen more as expressing an opinion rather than giving advice.

Voluntary assumption of responsibility

Where a person is asked for advice in a business context, they have three options:

  • Choose not to give advice and reduce the risk of liability
  • Give advice but caution that it should not be relied upon
  • Give the advice without warning

As a general rule, if a person decides to choose the last option they will be considered to have voluntarily assumed responsibility.

Reasonable reliance

Reliance in the context of negligent misstatements requires that the claimant relied on the information the defendant provided, or the words spoken, due to the particular nature of the statement and the relevant knowledge and experience of the defendant.

The claimant must not just show reliance, they must also prove it was reasonable to rely on such a statement. The claimant must prove their claim on the balance of probabilities to succeed.