Claims for pure economic loss - Distinction between pure eco...

Learning Outcomes

This article explains the difference between pure economic loss and consequential economic loss within the tort of negligence. It outlines the general principle that pure economic loss is not recoverable and explores the exceptions, particularly concerning negligent misstatements. It also situates the topic within the wider negligence framework (duty, breach, causation, remoteness), showing how the “type of loss” can control whether a duty is recognised at all. It further explains the treatment of losses arising from third-party property damage and defects in products or buildings, and the limited circumstances in which a special relationship based on assumption of responsibility and reasonable reliance will allow recovery. After reading, you should be able to classify losses accurately, articulate the policy reasons behind the exclusionary rule, identify when an assumption of responsibility exists (including for professional services beyond statements), and apply the controlling principles, including the effect of disclaimers and statutory reasonableness/fairness controls.

SQE1 Syllabus

For SQE1, you are required to understand the rules governing recovery for different types of loss in negligence, specifically the distinction between pure economic loss and consequential economic loss, including appreciating the policy reasons behind the general exclusion of recovery for pure economic loss and the specific requirements for establishing a duty of care where exceptions apply, with a focus on the following syllabus points:

• defining pure economic loss and consequential economic loss
• understanding the general rule that pure economic loss is irrecoverable in negligence
• identifying the key exceptions to the general rule, particularly in cases of negligent misstatement
• applying the principles from key case law, such as Hedley Byrne & Co Ltd v Heller & Partners Ltd, to factual scenarios
• recognising the policy reasons limiting recovery for pure economic loss.
• distinguishing economic loss caused by damage to third-party property from consequential loss caused by damage to the claimant’s person/property
• distinguishing loss arising from acquisition of defective property (a pure economic loss in tort) from damage that a defect causes to other property or persons (recoverable)
• appreciating the role of disclaimers and their control under the Unfair Contract Terms Act 1977 and Consumer Rights Act 2015 in misstatement cases
• understanding how assumption of responsibility extends to professional services (e.g. Henderson v Merrett, White v Jones, Spring)
• recognising scope-of-duty limitations in misstatement claims (as refined in Caparo and the “assumption of responsibility” analysis).

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.

1. True or False? Pure economic loss is financial loss that results directly from physical injury to the claimant or damage to their property.
2. What is the general rule in negligence regarding the recovery of pure economic loss?
3. Which landmark case established that a duty of care could arise for pure economic loss caused by negligent misstatement?
4. What are the key elements required to establish a special relationship for the purpose of recovering pure economic loss caused by a negligent statement?

Introduction

In the tort of negligence, establishing that the defendant owed the claimant a duty of care is the first essential element. The type of damage suffered by the claimant significantly influences whether such a duty exists. While the law readily imposes a duty of care regarding physical injury or damage to property, it adopts a much more restrictive approach when the loss is purely financial. The question is not whether negligence caused loss in fact, but whether the kind of loss is one for which the law of negligence recognises a duty at all. This article focuses on the key distinction between two types of financial loss: consequential economic loss, which flows from physical damage to the claimant’s person or property, and pure economic loss, which does not. Understanding this distinction is essential for determining the recoverability of financial losses in negligence claims and for seeing how policy concerns and proximity shape the existence and scope of duty.

Defining Economic Loss in Negligence

Financial loss suffered as a result of negligence can broadly be categorised into two types. It is important to distinguish between them because the rules governing recovery differ significantly.

Consequential Economic Loss

This is financial loss that is a direct consequence of physical damage to the claimant's person or property caused by the defendant's negligence.

Key Term: Consequential Economic Loss
Financial loss that results directly from physical injury to the claimant or damage to the claimant’s property.

Because consequential economic loss stems directly from physical harm, it is generally recoverable in negligence, provided the standard requirements of duty, breach, causation, and remoteness are met. This recognises that once physical damage has occurred, losses naturally flowing from that damage (e.g. loss of earnings during recuperation, the cost of repairs, rental of a replacement item) sit within the ordinary scope of a duty to take reasonable care not to cause such physical damage. The remoteness test (reasonable foreseeability) still applies, but there is no special exclusionary rule.

Worked Example 1.1

A negligent driver crashes into a taxi, causing significant damage to the vehicle and injuring the taxi driver. The taxi driver incurs repair costs for the vehicle, medical expenses for their injuries, and loses earnings while unable to work during recovery and while the taxi is being repaired. Are these financial losses recoverable?

Answer:
Yes. The repair costs, medical expenses, and lost earnings are all consequential economic losses. They flow directly from the physical damage to the taxi (property) and the personal injury suffered by the driver. The driver can claim these losses as part of their negligence action against the negligent driver, subject to standard principles of causation and remoteness.

Pure Economic Loss

This type of loss is financial damage that is not directly linked to any physical injury suffered by the claimant or physical damage to the claimant's property.

Key Term: Pure Economic Loss
Financial loss suffered by a claimant that does not arise directly from physical injury to themselves or physical damage to their own property.

Typical instances include:

• losses suffered because the claimant’s operations are disrupted by negligent damage to property belonging to a third party (e.g. a severed public utility cable cutting power to a factory)
• the cost of repairing or replacing a defective product or building where the “damage” is the defect itself and no further injury to person or other property has occurred
• losses incurred because the claimant relied on negligent advice or information.

These categories are treated alike for duty-of-care purposes because each lacks the limiting factor of damage to the claimant’s person/property and carries a risk of liability to a wide and indeterminate class.

The General Rule: Irrecoverability of Pure Economic Loss

The fundamental principle in the tort of negligence is that pure economic loss is generally not recoverable. Courts are reluctant to impose a duty of care for this type of loss primarily due to policy reasons and proximity concerns.

Policy Reasons for the Exclusionary Rule

The primary policy reason for restricting recovery for pure economic loss is the fear of indeterminate liability, often referred to as the “floodgates” concern: allowing claims for pure economic loss could expose defendants to liability to an undefined number of claimants for an unquantifiable amount, far removed from the immediate physical consequences of their actions. Additional reasons include the view that contract is the appropriate mechanism for allocating pure financial risk between parties who can negotiate terms (warranties, price, insurance), and the difficulty of drawing sensible and predictable boundaries around who should be compensated when a negligent act causes ripple effects across a market or community.

Exam Warning

Do not assume financial loss is automatically recoverable in negligence. Always identify whether the loss is consequential (flowing from physical damage/injury to the claimant) or pure economic loss. The general rule is that pure economic loss is irrecoverable, subject to specific exceptions. Misidentifying the type of loss can lead to incorrect conclusions about duty and recoverability.

Consider the scenario where a defendant negligently damages a bridge, causing it to close for repairs. Businesses in the vicinity may lose profit due to reduced footfall, suppliers might incur increased transport costs, and commuters could incur additional expenses. Allowing all such claims would impose potentially crushing and indeterminate liability on the defendant for losses far removed from the immediate physical consequences of their actions.

A classic illustration of the rule arises where the defendant negligently disrupts a public facility or utility. In Weller & Co v Foot and Mouth Disease Research Institute, cattle markets were closed after negligent release of a virus; an auctioneer’s lost profits were not recoverable as pure economic loss. The same approach underlies recovery for power cuts or road closures where the claimant’s loss is unconnected to damage to their own property.

Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] QB 27

This case provides a clear illustration of the distinction. The defendants negligently damaged a power cable (owned by the electricity board, not the claimant) supplying the claimant's factory. This caused a power cut, resulting in:

1. Physical damage to metal that was being processed in a furnace at the time (due to solidification).
2. Loss of profit on that specific batch of metal.
3. Loss of profit on further batches that could not be processed during the power cut.

The court held that the physical damage to the metal (1) and the loss of profit directly resulting from that damage (2) were recoverable as consequential economic loss. However, the loss of profit on the further batches (3) was deemed pure economic loss because it did not stem from damage to the claimant's property but from the damage to the third-party cable. This loss was irrecoverable. The decision reflects both proximity (no damage to the claimant’s property caused the third head) and policy (preventing indeterminate ripple claims whenever public utilities are interrupted by negligence).

Exceptions to the General Rule

Despite the general exclusionary rule, there are limited circumstances where a duty of care can be owed in respect of pure economic loss. The most significant and well-established exception arises from negligent misstatements (and, by extension, certain professional services) causing financial loss. A narrow set of cases also recognise duty in respect of defective products causing damage to other property or person, but the cost of fixing the defect itself remains irrecoverable in tort.

Negligent Misstatement: The Hedley Byrne Principle

The basis for this exception was laid down in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.

Key Term: Negligent Misstatement
An inaccurate statement made carelessly (negligently) by one party to another, which the recipient relies upon to their financial detriment.

Key Term: Assumption of Responsibility
Where one party (usually possessing special skill or knowledge) assumes responsibility for the accuracy of advice or information given to another party, knowing that the other party will rely on it.

In Hedley Byrne, the House of Lords established that a duty of care could arise for pure economic loss caused by a negligent misstatement if there was a “special relationship” between the party making the statement and the party relying on it. This special relationship typically involves an assumption of responsibility by the defendant and reasonable reliance by the claimant. Whether such an assumption exists is a fact-sensitive question; it may be negatived by an effective disclaimer.

Significantly, the assumption-of-responsibility analysis has been extended beyond formal “statements” to include the negligent performance of professional services where reliance is implicit. Examples include solicitors who negligently delay drafting a will (White v Jones) and negligent employment references (Spring v Guardian Assurance). In such cases, the court focuses on whether the defendant, by undertaking the task, assumed responsibility to the claimant and whether reliance was reasonable.

Disclaimers may defeat or limit any assumption of responsibility, but in consumer contexts and business-to-business contexts they must satisfy statutory controls (see below).

Requirements for Establishing a Duty of Care for Negligent Misstatement

Following Hedley Byrne and subsequent cases such as Caparo Industries plc v Dickman [1990] 2 AC 605, specific criteria must generally be met to establish the necessary special relationship and assumption of responsibility:

1. Reasonable reliance: The claimant must have actually relied on the defendant's statement (or service), and it must have been reasonable for them to do so in the circumstances.
2. Knowledge of reliance: The defendant must have known, or reasonably ought to have known, that the claimant (or a class of persons to which the claimant belongs) would likely rely on the statement without independent verification.
3. Knowledge of purpose: The defendant must have known, or reasonably ought to have known, the specific purpose for which the statement would be used.
4. Assumption of responsibility: The defendant must have assumed responsibility for the statement/service towards the claimant (expressly or impliedly). In a business or professional context this is often inferred; it may be negatived by a clear and effective disclaimer.

The courts recognise a distinction between general statements intended for a wide audience (e.g. published financial reports) and targeted advice for a known purpose addressed to a specific individual or class. In Caparo, auditors’ statutory accounts were not prepared for potential investors’ decision-making; no duty was owed to an indeterminate investing public. By contrast, where the adviser knows both the identity/class of the recipient and the transaction/purpose, a duty may arise.

The law also controls the scope of recoverable loss in misstatement/service cases by reference to the scope of the duty assumed. A defendant is liable only for loss that falls within the scope of the responsibility undertaken, not for all losses that would not have occurred “but for” the reliance. This respects the assumption-of-responsibility basis of the duty.

Worked Example 1.2

A surveyor prepares a mortgage valuation report for a bank. The report negligently fails to identify significant structural defects in the property. The buyer, who is shown the report by the bank, relies on it and purchases the property. Later, the defects become apparent, significantly reducing the property's value. Can the buyer recover their financial loss from the surveyor?

Answer:
Potentially yes. Although the primary contract was between the surveyor and the bank, the surveyor likely knew the buyer would rely on the valuation and for what purpose. If the surveyor assumed responsibility towards the buyer (or ought to have known the buyer would rely on the report without independent inquiry), and the reliance was reasonable, a duty of care for the pure economic loss may be established based on negligent misstatement. The effectiveness of any disclaimer will be subject to statutory reasonableness/fairness controls.

Defective Products and Buildings: the “Defect Itself” as Pure Economic Loss

A recurrent examination trap is loss arising from acquiring defective property. The cost of repairing or replacing a defective product or building (before it has caused damage to other property or personal injury) is pure economic loss in tort. The correct remedy lies in contract (e.g. against the seller or builder). The leading case is Murphy v Brentwood DC [1991] 1 AC 398, which overruled Anns v Merton. There, the cost of repairing subsidence arising from inadequate footings and the diminution in value on sale were irrecoverable in tort as pure economic loss. By contrast, if the defect causes damage to other property (or personal injury), recoverable loss then includes the consequent damage to that other property/person.

Worked Example 1.3

A restaurant buys an oven that is defective. The oven overheats and burns out its internal components. No other items are damaged. The restaurateur incurs the cost of repair and lost profits while the oven is unusable. Can these losses be claimed in negligence against the manufacturer?

Answer:
No, not in tort. The damage to the oven is the defect manifesting in the product itself; the cost of repairing/replacing it and associated profits lost due to its unavailability are pure economic loss in tort. The restaurateur’s remedy would lie in contract (against the seller or possibly under statutory consumer/business sale regimes). If, however, the defective oven starts a fire that damages the kitchen units, the cost of repairing the kitchen units (other property) and associated consequential loss are recoverable in negligence.

Loss Caused by Damage to Third-Party Property

Where the defendant damages property owned by someone else (e.g. a public utility), the claimant’s financial loss due to service disruption is generally pure economic loss.

Worked Example 1.4

Contractors negligently sever a public electricity cable, causing a six-hour power cut. The claimant’s bakery loses profits on orders it cannot fulfil during that period, but none of the claimant’s own property is damaged. Can the claimant recover its profit loss?

Answer:
No. This is pure economic loss because it arises from damage to third-party property (the cable) and not from damage to the claimant’s person or property. Applying Spartan Steel, the lost profits on work that could have been done during the outage are irrecoverable in negligence. If products in the oven at the moment of the outage were physically ruined, that destruction and the lost profit on those specific items would be recoverable as consequential loss.

Disclaimers and Statutory Control

An adviser may seek to exclude or limit liability by disclaimer, but the effectiveness of a disclaimer in misstatement and valuation scenarios is controlled by statute:

• Unfair Contract Terms Act 1977 (UCTA) controls non-consumer notices excluding or restricting liability for negligence. Exclusions for death or personal injury are void; exclusions for other loss must satisfy reasonableness.
• Consumer Rights Act 2015 (CRA) controls trader-consumer terms and notices. Terms must be fair and transparent; exclusions for death or personal injury from negligence are ineffective.

A disclaimer must also be brought to the claimant’s attention before reliance and must unambiguously cover the loss in question. Even where a disclaimer is present, the court may find it unreasonable/unfair in the circumstances.

Worked Example 1.5

A buyer receives a copy of the lender’s valuation report before exchange. The report is headed: “Provided without responsibility to the borrower; the lender and its valuer accept no duty of care to the borrower for the contents of this report.” The buyer reasonably relies on it and later suffers financial loss due to a negligent omission about subsidence. Is the disclaimer conclusive?

Answer:
Not necessarily. A disclaimer can negate assumption of responsibility, but it will be subject to statutory controls. In a consumer context the CRA fairness test applies; otherwise, UCTA’s reasonableness test applies. Factors include relative bargaining power, the availability of alternative sources of advice, and the practical reality that house buyers typically rely on lender valuations. If the disclaimer is not fair/reasonable in all the circumstances, it will not defeat liability.

Extending Assumption of Responsibility Beyond Statements

Courts have treated the Hedley Byrne principle as a broader assumption-of-responsibility doctrine. It has been applied, for example, to:

• negligent services by professionals when reliance is implicit (e.g. managing agents underwriting at Lloyd’s, Henderson v Merrett)
• negligent references given by former employers (Spring v Guardian Assurance)
• solicitors drafting wills where intended beneficiaries suffer economic loss due to delay/error (White v Jones).

In each case, the essential question is whether the defendant undertook responsibility to the claimant (not merely to the immediate client) in circumstances of reasonable reliance and known purpose.

Worked Example 1.6

An employer provides a reference for a former employee applying for a new role. The reference is negligently prepared and contains inaccurate negative statements. The employee is refused the job and suffers financial loss. Can the employee sue the former employer in negligence?

Answer:
Yes. The employer has assumed responsibility to take reasonable care in preparing the reference, foreseeing that the former employee will be affected by errors. Spring v Guardian Assurance recognises a duty in such circumstances, allowing recovery of pure economic loss resulting from negligent misstatement in a reference.

Revision Tip

Remember that the Hedley Byrne exception primarily applies to negligent statements or professional services where reliance is implicit; it does not generally apply to negligent acts causing ripple financial effects (like cutting a third-party cable). Always identify the source and nature of the loss and whether a special relationship based on assumption of responsibility and reasonable reliance exists. Consider any disclaimer and whether it passes statutory reasonableness/fairness tests.

Summary

Distinguishing between consequential economic loss and pure economic loss is fundamental in negligence.

Table 1: Consequential vs Pure Economic Loss

Two practical corollaries flow from this classification:

• Loss caused by damage to third-party property (e.g. closure of a road, severed cable) is ordinarily pure economic loss. The claimant cannot transform it into consequential loss unless there is physical damage to their own property or person.
• Loss arising from acquiring defective property (the defect itself) is a pure economic loss in tort. The appropriate remedy typically lies in contract. If the defect causes damage to other property or injury, that consequent damage is recoverable in negligence.

Policy reasons, particularly the fear of indeterminate liability (“floodgates”) and respect for contractual allocation of risk, underpin the general rule against recovering pure economic loss. The primary exception allows recovery for pure economic loss caused by negligent misstatements or professional services where a “special relationship” based on assumption of responsibility and reasonable reliance exists between the parties. A disclaimer may negate assumption of responsibility but is controlled by statute and must be clear, timely and fair/reasonable.

Key Point Checklist

This article has covered the following key knowledge points:

• Economic loss in negligence is categorised as either consequential or pure.
• Consequential economic loss flows directly from physical damage or injury to the claimant or their property and is generally recoverable (subject to causation and remoteness).
• Pure economic loss is financial loss not linked to physical damage/injury to the claimant or their property, and is generally irrecoverable in negligence.
• Policy concerns (indeterminate liability, proper role of contract, proximity) explain the exclusionary rule.
• Spartan Steel illustrates the distinction, allowing recovery for losses consequential to physical damage but not for lost profits unconnected to such damage.
• Losses from acquisition of a defective product or building (the defect itself) are pure economic loss in tort (Murphy v Brentwood). Damage caused by the defect to other property or persons is recoverable.
• An exception exists for pure economic loss caused by negligent misstatements or professional services where a special relationship arises.
• Establishing this exception requires assumption of responsibility and reasonable reliance for a known purpose; the defendant’s knowledge of the claimant/class and purpose is important.
• Disclaimers may prevent an assumption of responsibility but are subject to UCTA reasonableness and CRA fairness controls, and must be clear and brought to attention before reliance.
• Key case law such as Hedley Byrne, Caparo, Smith v Eric S Bush, Esso v Mardon, Henderson v Merrett, White v Jones and Spring illustrates when recovery is, and is not, allowed for pure economic loss.

Key Terms and Concepts

• Consequential Economic Loss
• Pure Economic Loss
• Negligent Misstatement
• Assumption of Responsibility