Claims for pure economic loss - Economic loss from defective...

Learning Outcomes

This article explains how pure economic loss arises from defective property in negligence and clarifies the strict limits on recovery that are central to the SQE1 assessment. It distinguishes pure economic loss from consequential economic loss, stating the core rule that pure economic loss is generally irrecoverable in tort. It then traces the development of the case law, focusing on Murphy v Brentwood DC and related authorities, to show how modern courts treat loss flowing from defective buildings and products. The article develops clear, exam-focused distinctions between damage to the defective item itself and damage to other property, and critically assesses the narrow, largely rejected, role of the complex structure theory. It also explains how negligent misstatement, particularly surveyors’ and valuers’ reports, can exceptionally allow recovery of pure economic loss where a special relationship exists. Finally, it highlights the practical importance of contractual and statutory routes—such as the Defective Premises Act 1972 and Consumer Protection Act 1987—as primary mechanisms for addressing quality and fitness disputes, supporting accurate identification of alternative remedies where negligence provides no claim.

SQE1 Syllabus

For SQE1, you are required to understand pure economic loss arising from defective property within the tort of negligence, with a focus on the following syllabus points:

• the definition of pure economic loss and its distinction from consequential economic loss.
• the general rule that pure economic loss is not recoverable in negligence and its policy justifications.
• how this rule applies specifically to losses arising from defective property (e.g., cost of repair/replacement, diminution in value, loss of use).
• the significance of key cases like Murphy v Brentwood District Council and Spartan Steel v Martin in establishing current principles.
• the boundary between damage to the defective item itself and damage to other property.
• the limited scope of the complex structure theory post‑Murphy.
• how negligent misstatement may provide a route to recovery (e.g., surveyors’ reports) where a special relationship exists.
• identifying when contractual or statutory remedies (e.g., Sale of Goods Act 1979/Consumer Rights Act 2015, Defective Premises Act 1972, Consumer Protection Act 1987) are appropriate.

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. What type of loss occurs when a defect in a newly purchased item causes damage only to the item itself, requiring repair or replacement?
   1. Consequential economic loss
   2. Pure economic loss
   3. Physical damage
   4. Property damage
2. Which landmark House of Lords case significantly restricted the recoverability of pure economic loss arising from defective buildings, overruling a previous, more lenient approach?
   1. Donoghue v Stevenson
   2. Hedley Byrne & Co Ltd v Heller & Partners Ltd
   3. Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd
   4. Murphy v Brentwood District Council

3. True or False: If a negligently installed electrical component causes a fire that damages both the appliance it's part of and the surrounding kitchen units, the cost of repairing the kitchen units is considered pure economic loss in tort law.

Introduction

When property is defective due to negligence, the resulting financial losses can be significant. However, the tort of negligence places strict limits on the recovery of purely financial losses that are not directly consequent upon physical injury to the claimant or physical damage to the claimant's other property. This article focuses specifically on claims for pure economic loss arising from defective property, explaining the general rule against recovery and its rationale, drawing primarily from key case law. Appreciating this distinction is critical: tort protects against personal injury and damage to property, whereas disputes over quality, fitness and value are largely channelled into contract and, for dwellings, specific statutes. The modern law reflects policy concerns (avoiding indeterminate liability and respecting parties’ contractual risk allocation), while still allowing recovery when a defect causes damage to other property or personal injury.

Defining Pure Economic Loss vs Consequential Economic Loss

It is essential to distinguish between pure economic loss and consequential economic loss.

Key Term: Consequential economic loss
Financial loss that is a direct consequence of physical injury to the claimant or physical damage to the claimant's property (other than the defective item itself). This type of loss is generally recoverable in negligence, subject to standard rules of causation and remoteness.

Key Term: Pure economic loss
Financial loss suffered by a claimant that is not consequent upon physical injury to their person or physical damage to their property. This includes losses like diminution in value or the cost of repairing/replacing a defective item itself, and lost profits from being unable to use the defective item.

Key Term: Other property
Property of the claimant that is distinct from the defective item. Physical damage to such other property (or personal injury) is recoverable in negligence; damage confined to the defective item is not.

Worked Example 1.1

A negligently manufactured tyre bursts while a car is being driven. The burst tyre causes the car to crash, damaging the car's bodywork and injuring the driver. The driver loses earnings while recovering. The tyre itself is ruined. Which losses are recoverable in negligence from the tyre manufacturer?

Answer:
The driver's personal injury and subsequent loss of earnings are recoverable. The damage to the car's bodywork (property other than the defective item) is also recoverable. These are examples of physical damage and consequential economic loss. However, the cost of the ruined tyre itself represents pure economic loss (damage to the defective item itself) and is not recoverable in negligence from the manufacturer. The remedy for the faulty tyre lies in contract against the seller.

The practical dividing line often turns on identifying the “item” said to be defective and what counts as “other property.” If a component is integrated into a larger item, the default position post‑Murphy is that the building or product is treated as one item; damage it causes to itself is not damage to “other property”.

The General Rule: No Recovery for Pure Economic Loss

The fundamental principle in the tort of negligence is that pure economic loss is generally not recoverable. This rule stems from judicial policy concerns:

• Indeterminate liability: purely financial ripple effects can be widespread (e.g., a single negligent act impacting many downstream users), making liability unbounded and difficult to insure.
• Contract primacy: issues of quality, fitness, and value are better governed by contractual terms and warranties. Tort should not undermine bargains, risk allocation, and exclusion/limitation clauses negotiated in contract.
• Coherence and foreseeability: physical injury and property damage offer clearer thresholds for liability and scope of duty; purely financial expectations are more diffuse.

The courts therefore draw a line: when negligence results in physical injury or damage to other property, recovery extends to the consequential financial losses. Where negligence results only in the defective quality of the item itself (e.g., a substandard house or machine) or lost profits from its downtime, the loss is pure economic and not recoverable in negligence.

Pure Economic Loss from Defective Property

This general rule has particular bite where loss stems from property that is itself defective. The modern position was crystallised by the House of Lords in Murphy v Brentwood DC, and is consistently applied across consumer goods, machinery, and buildings.

Key Term: Defective property
Property that is faulty or substandard in quality, design, or construction, but which has not yet caused physical injury or damage to other property or persons.

Cost of Repair or Replacement

If an item of property (e.g., a building, vehicle, or product) is defective due to negligence in its design or construction, but the defect is discovered before it causes physical injury or damage to other property, the cost of repairing or replacing the defective item itself is pure economic loss. Likewise, any diminution in value on sale due to the defect is pure economic loss. Lost profits caused by inability to use the defective item are also pure economic loss.

These losses are typically recoverable, if at all, via contract (e.g., implied terms of satisfactory quality/fitness), collateral warranties, or statutory schemes, not via negligence.

Murphy v Brentwood District Council

In Murphy v Brentwood District Council [1991] 1 AC 398, the claimant purchased a house built on foundations that were defective due to the local authority’s negligent approval/inspection. Cracks appeared; the claimant sold at a substantial loss and sought recovery for repair costs and diminution in value. The House of Lords held that this was pure economic loss: the defect became apparent before causing injury or damage to other property. The loss related to defective quality of the house itself. Negligence did not provide a remedy; any remedy lay in contract against those responsible for construction (if available). Murphy overruled the earlier approach in Anns v Merton LBC, which had allowed recovery for the cost of averting a danger, blurring the boundary between physical damage and economic loss.

Key points from Murphy:

• Defects rendering a building dangerous do not, without more, create a recoverable claim in negligence for repair costs or diminution in value.
• The fact that a defect might in future cause injury or damage does not transform the cost of averting that possibility into recoverable tort loss.
• Treat the building as a single item: damage it causes to itself is not damage to other property.

Related authority (pre‑Murphy), D&F Estates v Church Commissioners [1989] AC 177, similarly emphasised that the cost of curing defective work is not recoverable in tort; negligence protects against damage and injury, not defects in quality.

Key Term: Complex structure theory
A suggested analysis (not adopted in Murphy) that an overall structure can be treated as comprising distinct components so that damage by one component to another may count as damage to “other property”. Post‑Murphy, the general rule remains that a building is one item; damage confined within it is not actionable in negligence as “other property” damage.

The “complex structure” idea has limited practical effect in negligence. The safer analytical route is: if the defect causes damage beyond the defective item (e.g., to contents or adjoining property), that consequential damage is recoverable; otherwise, repair costs and lost value are pure economic loss.

Worked Example 1.2

A company buys a complex piece of machinery manufactured by Innovate Ltd. Due to a negligent design flaw, the machine frequently breaks down, causing significant production delays and lost profits. The machine itself requires costly repairs but has not damaged any other equipment or injured any workers. Can the company sue Innovate Ltd in tort for the repair costs and lost profits?

Answer:
No. The repair costs relate to the defective product itself, and the lost profits result from the inability to use that defective product. Both are pure economic loss. The company’s remedy would typically lie in contract (e.g., breach of implied terms as to quality/fitness), or possibly via collateral warranties.

Distinction: Damage to Other Property

The position is different if the defective property causes physical damage to other property belonging to the claimant or causes personal injury. In those situations, the claimant can recover for the physical harm and the consequential financial loss (e.g., loss of profits while repairs are undertaken), subject to the usual causation and remoteness principles.

Worked Example 1.3

A negligently manufactured central heating boiler is installed in a homeowner's house. The boiler explodes due to the defect, damaging the boiler itself, destroying surrounding kitchen units, and causing minor burns to the homeowner.

Answer:

• Personal Injury: Recoverable.
• Damage to Other Property (kitchen units): Recoverable.
• Damage to the Defective Item Itself (boiler): Not recoverable in negligence against the manufacturer; that is pure economic loss. The buyer’s route is contract against the seller/installer.

Worked Example 1.4

A developer installs defective cladding on a block of flats. Before any fire or physical damage occurs, the defect is identified after a publicised safety review. Leaseholders incur large costs for remedial works and suffer a drop in value. Can they recover these costs in negligence from the cladding manufacturer or local authority building control?

Answer:
Not in negligence for pure economic loss. The remedial costs and diminution in value are loss confined to the defective item itself (the building). Post‑Murphy, such loss is irrecoverable in negligence. Alternative avenues might include contractual claims (against the developer/contractor), collateral warranties, the Defective Premises Act 1972 (for dwellings), or specific statutory schemes where applicable.

Worked Example 1.5

A tenant’s new defective fridge overheats and scorches the landlord’s hardwood floor. No one is injured. The tenant wants to recover the cost of replacing the floor from the fridge manufacturer.

Answer:
The damaged floor is other property, but it belongs to the landlord. The tenant cannot recover the landlord’s loss. The landlord, as owner of the damaged property, may bring a negligence claim against the manufacturer for the physical damage to the floor. The cost of the fridge itself remains pure economic loss and is not recoverable in negligence.

Worked Example 1.6

A homebuyer relies on a surveyor’s report arranged by the mortgagee stating the property is sound. Serious structural defects are later found. The buyer has no contract claim against the seller (sold “as seen”) and seeks the repair costs from the surveyor.

Answer:
Although repair costs are pure economic loss, recovery may be possible against the surveyor in tort for negligent misstatement if a special relationship existed: the surveyor assumed responsibility and it was reasonable for the buyer to rely (as recognised in cases such as Smith v Eric S Bush). The viability of any disclaimer is subject to statutory control of reasonableness.

“Other property”: practical boundaries

• Contents and fixtures distinct from the defective item (e.g., kitchen units damaged by a defective appliance) are other property.
• Components integrated into a single product or building will generally not be reclassified as “other” property for negligence purposes simply because they have separate suppliers.
• Property must belong to the claimant. Losses to a third party’s property are not recoverable by the claimant; the owner must sue.

Exam Warning

Be very careful to distinguish between damage to the defective product itself (pure economic loss, generally irrecoverable in tort) and damage caused by the defective product to other property or persons (physical damage and consequential economic loss, generally recoverable in tort, subject to standard negligence principles). Do not assume a building’s internal elements are “other property”; post‑Murphy, a building is usually treated as one item.

The Role of Contract Law

The courts’ reluctance to allow recovery for pure economic loss from defective property in tort highlights the primary role of contract in addressing quality and value. When goods or property are acquired, buyers are protected by terms on satisfactory quality, fitness for purpose and conformance with description (e.g., under the Sale of Goods Act 1979 and, for consumers, the Consumer Rights Act 2015). Construction contracts and collateral warranties allocate responsibility for defects and often give rights to end users and funders. Where available, these contractual routes allow recovery of the very heads of loss classified as pure economic loss in tort.

Contractual allocation also explains the importance of disclaimers and limitation/exclusion clauses. In some contexts, professionals attempt to exclude tortious liability (e.g., surveyors). The effectiveness of such clauses is controlled by statutes (e.g., Unfair Contract Terms Act 1977 for business-to-business and Consumer Rights Act 2015 for consumer contracts). For negligent misstatement claims, broad disclaimers may be ineffective if they fail the reasonableness/fairness tests.

Public authorities and building control

Following Murphy, local authorities exercising regulatory functions (e.g., plan approval/inspection) do not generally owe a duty of care in negligence to avoid pure economic loss to purchasers from defective buildings. That does not preclude contractual or statutory claims against those who designed or built the dwelling.

Statutory routes worth knowing

• Defective Premises Act 1972 (s 1): imposes a duty on those taking on work for or in connection with the provision of a dwelling to see that it is done in a workmanlike/professional manner with proper materials so that the dwelling is fit for habitation. Claims typically sit outside negligence’s pure economic loss restriction because this is a statutory duty relating to dwellings. Limitation for DPA claims was extended by the Building Safety Act 2022 (15 years prospectively; with longer retrospective periods for certain cases).
• Consumer Protection Act 1987 (Part I): creates strict liability for defective products causing personal injury or damage to property. It does not allow recovery of the cost of the defective product itself and imposes a £275 minimum threshold for recoverable property damage. These features align with the tort position distinguishing the product itself from other property.

These alternatives support the policy that negligence is not the primary vehicle for recovering the economic consequences of defects in the item acquired.

Summary

A few additional pointers:

• Treat a building as one item: repair costs and diminution in value are not recoverable in negligence.
• The “complex structure” label rarely helps claimants in negligence post‑Murphy; focus on whether truly separate property was damaged.
• A negligent survey/valuation may create a special relationship permitting recovery of pure economic loss (as negligent misstatement), subject to reliance and reasonableness of any disclaimer.
• Under the CPA 1987, you cannot recover the cost of the defective product itself; property damage must exceed £275.

Key Point Checklist

This article has covered the following key knowledge points:

• Pure economic loss (PEL) is financial loss not consequent upon physical injury to the claimant or physical damage to their other property.
• Consequential economic loss flows directly from physical injury or damage to other property and is generally recoverable in negligence.
• The general rule in negligence is that PEL is not recoverable; this preserves contract’s role and avoids indeterminate liability.
• Loss arising from defective property itself (cost of repair/replacement, diminution in value, lost profits from downtime) is PEL and irrecoverable in negligence.
• Murphy v Brentwood DC confirms that defective building loss is PEL in negligence, overruling Anns v Merton.
• Buildings are ordinarily treated as one item; the complex structure theory does not typically allow recharacterising intra‑building damage as damage to “other property”.
• If a defect causes personal injury or damages other property, those losses (and consequential economic losses) are recoverable in negligence, subject to standard rules.
• Negligent misstatement can provide an exception (e.g., a surveyor’s report relied upon by a buyer), where assumption of responsibility and reasonable reliance are present and any disclaimer is ineffective.
• Contractual routes (Sale of Goods Act/Consumer Rights Act; construction contracts; collateral warranties) are the primary remedies for defective quality.
• Statutory routes: Defective Premises Act 1972 (dwellings) and Consumer Protection Act 1987 (strict liability for injury/other property damage) may apply; CPA does not cover the cost of the defective product itself and imposes a minimum property damage threshold.

Key Terms and Concepts

• Pure economic loss
• Consequential economic loss
• Defective property
• Other property
• Complex structure theory