Learning Outcomes
After reading this article, you will understand the rule against recovery for pure economic loss in negligence, the policy reasons behind it, and the main exceptions recognized by courts. You will be able to identify when a claim for pure economic loss may succeed, distinguish it from claims involving physical damage, and apply these principles to MBE-style questions.
MBE Syllabus
For the MBE, you are required to understand the circumstances in which a claimant can recover for pure economic loss in negligence. This includes:
- Recognizing the general rule that pure economic loss is not recoverable in negligence.
- Identifying the policy justifications for this rule.
- Distinguishing pure economic loss from consequential economic loss.
- Knowing the main exceptions where recovery is allowed, such as negligent misstatement and special relationships.
- Applying these principles to fact patterns involving third-party losses, defective products, or professional advice.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
-
Which of the following is generally true regarding claims for pure economic loss in negligence?
- They are always recoverable if the defendant was careless.
- They are recoverable only if there is physical damage.
- They are not recoverable unless an exception applies.
- They are recoverable if the loss was foreseeable.
-
A builder negligently damages a power cable, causing a factory to lose production for a day but suffer no physical damage. Can the factory recover its lost profits in negligence?
- Yes, always.
- No, unless an exception applies.
- Yes, if the builder was insured.
- No, because the loss was not foreseeable.
-
Which of the following is most likely to be an exception to the rule against recovery for pure economic loss?
- Loss suffered by a competitor due to lawful competition.
- Loss caused by a negligent misstatement by a professional advisor.
- Loss of profits due to a general market downturn.
- Loss caused by a stranger’s breach of contract.
Introduction
Negligence claims for pure economic loss are a common source of confusion and a frequent MBE topic. The general rule is that a claimant cannot recover for pure economic loss caused by another’s negligence. This rule is subject to important exceptions, especially in cases involving negligent misstatements or special relationships. Understanding the distinction between pure economic loss and other types of loss is essential for answering MBE questions correctly.
What is Pure Economic Loss?
Pure economic loss refers to financial loss that is not a consequence of physical injury to a person or property. It includes lost profits, loss of business opportunities, or costs incurred due to reliance on incorrect information, where there is no accompanying physical harm.
Key Term: Pure Economic Loss Financial loss suffered by a claimant that does not result from physical injury to a person or property, but arises independently (e.g., lost profits, wasted expenditure).
The General Rule
Courts generally do not allow recovery in negligence for pure economic loss. The rationale is to prevent unlimited liability for defendants and to avoid opening the floodgates to claims from an indeterminate class of potential plaintiffs.
Key Term: Consequential Economic Loss Financial loss that directly results from physical injury to a person or property (e.g., lost earnings due to personal injury), and is recoverable in negligence.
Policy Reasons
The main policy reasons for the general rule are:
- Preventing indeterminate liability to an indeterminate class.
- Encouraging parties to protect themselves through contract or insurance.
- Maintaining clear boundaries between contract and tort law.
Distinguishing Pure from Consequential Economic Loss
It is essential to distinguish pure economic loss from consequential economic loss. If the loss flows from physical damage to the claimant’s property or person, it is consequential and recoverable. If the loss is purely financial, with no physical damage, it is pure economic loss and not recoverable unless an exception applies.
Main Exceptions
There are important exceptions where courts allow recovery for pure economic loss in negligence:
1. Negligent Misstatement (Special Relationship)
If a defendant makes a negligent statement, and there is a special relationship (such as between a professional advisor and client), the claimant may recover pure economic loss.
Key Term: Negligent Misstatement A false or misleading statement made carelessly, resulting in pure economic loss to someone who reasonably relied on it, where a special relationship exists.
2. Assumption of Responsibility
Where the defendant has voluntarily assumed responsibility to the claimant for the accuracy of information or advice, and the claimant reasonably relies on it, recovery may be allowed.
3. Defective Services or Products Causing Danger
If a negligent act creates a dangerous defect that causes physical damage, consequential economic loss is recoverable. However, if the defect only causes financial loss (e.g., cost of repair), this is pure economic loss and not recoverable unless there is physical damage.
4. Limited Exceptions for Third-Party Loss
In rare cases, courts may allow recovery for pure economic loss where the defendant’s negligence interferes with a claimant’s contractual rights, but only if the defendant knew of the contract and intended to interfere.
Worked Example 1.1
A contractor negligently cuts a power cable, causing a blackout. A nearby bakery loses a day’s profits but suffers no physical damage. Can the bakery recover its lost profits from the contractor?
Answer: No. The bakery’s loss is pure economic loss, as there was no physical damage to its property. The general rule bars recovery unless an exception applies, which it does not in this scenario.
Worked Example 1.2
An accountant carelessly prepares a financial report for a client, knowing the client will show it to a potential investor. The investor relies on the report and suffers financial loss. Can the investor recover from the accountant?
Answer: Yes, if the accountant assumed responsibility to the investor and the investor’s reliance was reasonable. This is an exception for negligent misstatement where a special relationship exists.
Exam Warning
Claims for pure economic loss are often tested by presenting scenarios where there is financial loss but no physical damage. Always check if an exception applies before concluding that recovery is possible.
Revision Tip
On the MBE, look for facts indicating a special relationship, assumption of responsibility, or reliance on professional advice. These are common signals for exceptions to the general rule.
Key Point Checklist
This article has covered the following key knowledge points:
- Pure economic loss is generally not recoverable in negligence.
- Consequential economic loss (following physical damage) is recoverable.
- Policy reasons for the rule include limiting liability and preserving contract boundaries.
- Main exceptions: negligent misstatement, special relationship, and assumption of responsibility.
- Always distinguish between pure and consequential economic loss in MBE questions.
Key Terms and Concepts
- Pure Economic Loss
- Consequential Economic Loss
- Negligent Misstatement
