Learning Outcomes
This article outlines the general principles governing claims for pure economic loss in the tort of negligence, with a specific focus on losses arising from negligently prepared wills and references. After reading this article, you should understand the general reluctance of courts to allow recovery for pure economic loss, the exceptions based on negligent misstatements and assumption of responsibility, and how these principles apply specifically to claims by disappointed beneficiaries under wills and individuals harmed by negligent references. This knowledge is essential for answering SQE1-style questions accurately.
SQE1 Syllabus
For SQE1, you need to understand the principles governing claims for pure economic loss as a specific aspect of the duty of care in negligence. This includes recognising situations where recovery is generally disallowed and the exceptions where a duty may arise, particularly concerning negligent statements. Pay attention to:
- The definition and types of pure economic loss.
- The general rule against recovery for pure economic loss and the policy reasons behind it.
- The requirements for establishing a duty of care for negligent misstatements causing pure economic loss (the Hedley Byrne principle and assumption of responsibility).
- The specific application of these principles to claims by beneficiaries disappointed by negligently drafted or executed wills (White v Jones).
- The potential liability for negligent references causing economic loss (Spring v Guardian Assurance).
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.
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What is the general rule in tort regarding claims for pure economic loss?
- Pure economic loss is always recoverable if causation is proven.
- Pure economic loss is recoverable only if the defendant intended the loss.
- Pure economic loss is generally not recoverable, subject to exceptions.
- Pure economic loss is recoverable only if it results from physical damage.
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Which landmark case established the principle that a duty of care could arise for pure economic loss caused by negligent misstatements where a special relationship exists? a) Donoghue v Stevenson
*b) Hedley Byrne & Co Ltd v Heller & Partners Ltd
c) Caparo Industries plc v Dickman
d)*White v Jones* -
In White v Jones, why were the solicitors held liable to the intended beneficiaries?
- Because the beneficiaries had a contract with the solicitors.
- Because the solicitors committed fraud.
- Because the loss suffered was consequential economic loss.
- Because the solicitors assumed responsibility towards the testator to benefit the beneficiaries, creating sufficient proximity.
Introduction
In the tort of negligence, 'damage' is a key element required for a successful claim. While claims for personal injury and damage to property are commonplace, the recovery of damages for financial loss that is purely economic presents specific challenges. Pure economic loss refers to financial damage suffered by a claimant that is not a direct consequence of physical injury to the claimant or damage to their property. Examples include loss of potential profit, acquiring a defective (but not dangerous) product, or losses arising from reliance on inaccurate advice.
The courts have traditionally been restrictive in allowing claims for pure economic loss, primarily due to policy concerns about potentially indeterminate liability – the 'floodgates' argument. However, exceptions have evolved, particularly in cases involving negligent statements or advice where a defendant has assumed responsibility towards the claimant. This article focuses on these exceptions, specifically in the context of negligently prepared wills and references.
General Principles of Pure Economic Loss
The general rule is that no duty of care is owed in respect of pure economic loss. This means that even if a defendant's negligence directly causes financial loss to the claimant, without accompanying physical damage to the claimant or their property, the claimant usually cannot recover damages in tort.
Key Term: Pure Economic Loss
Financial loss suffered by a claimant that is not consequent upon physical injury to the claimant's person or damage to their property.
This rule distinguishes pure economic loss from consequential economic loss. Consequential economic loss is financial loss that is a direct result of physical injury or property damage caused by the defendant's negligence (e.g., loss of earnings due to injury, cost of repairing damaged property). Consequential economic loss is recoverable under normal negligence principles.
Key Term: Negligent Misstatement
An inaccurate statement made carelessly (negligently) by one party to another, which the other party relies upon to their financial detriment.Key Term: Special Relationship
A relationship between the parties where one party assumes responsibility towards another party in relation to the provision of information or advice, knowing that the other party will reasonably rely on it.
The requirements for establishing this special relationship generally involve:
- Assumption of Responsibility: The defendant must have voluntarily assumed responsibility for the statement, knowing it would be relied upon by the claimant for a specific purpose.
- Reasonable Reliance: The claimant must have actually relied on the statement, and it must have been reasonable for them to do so in the circumstances.
- Knowledge: The defendant knew, or ought to have known, that the claimant (either specifically or as a member of an identifiable class) would rely on the statement.
The Caparo Industries plc v Dickman [1990] 2 AC 605 test (foreseeability, proximity, fair, just and reasonable) is also relevant in determining duty for negligent misstatements, often overlapping with the assumption of responsibility/reliance criteria.
Economic Loss in Wills
A significant application of the exception for pure economic loss arises in the context of wills. If a solicitor negligently fails to prepare or execute a will correctly according to the testator's instructions, the intended beneficiaries may lose their expected inheritance. As these beneficiaries typically have no contract with the solicitor, their loss is purely economic.
Duty Owed to Beneficiaries: White v Jones
The leading case is White v Jones [1995] 2 AC 207. Here, a testator instructed his solicitors to change his will to benefit his daughters, but the solicitors negligently delayed, and the testator died before the new will was executed. The daughters received nothing under the previous will. The House of Lords held, by a majority, that the solicitors owed a duty of care to the intended beneficiaries.
The reasoning was based on an extension of the Hedley Byrne principle. The solicitors had assumed responsibility to the testator for the task of preparing the will. This assumption of responsibility extended to the intended beneficiaries because it was clearly foreseeable that they would suffer financial loss if the solicitors were negligent. Imposing a duty was considered fair, just, and reasonable to avoid an injustice where the estate itself could not sue (as it suffered no loss) and the beneficiaries would otherwise have no remedy.
Worked Example 1.1
Ahmed instructs his solicitor, Priya, to draft a new will leaving his entire estate to his niece, Yasmin. Priya drafts the will but negligently fails to ensure it is correctly witnessed before Ahmed dies suddenly. The will is invalid, and Ahmed's estate passes under the intestacy rules to his distant relatives, leaving Yasmin with nothing. Can Yasmin sue Priya?
Answer: Yes, Yasmin can likely sue Priya in negligence. Following White v Jones, Priya assumed a responsibility towards Ahmed to prepare the will correctly, and this duty extends to the intended beneficiary, Yasmin. It was foreseeable that Priya's negligence would cause Yasmin pure economic loss. It would be fair, just, and reasonable to impose a duty to provide Yasmin with a remedy.
Economic Loss from Negligent References
Another area where pure economic loss claims may arise from negligent statements involves the provision of references, typically employment references.
Duty Owed by Referee: Spring v Guardian Assurance plc
In Spring v Guardian Assurance plc [1995] 2 AC 296, the House of Lords held that an employer providing a reference for a former employee owed a duty of care to that employee regarding the preparation of the reference. If the reference contained negligent inaccuracies that caused the former employee financial loss (e.g., by preventing them from obtaining new employment), the employer could be liable for that pure economic loss.
The duty arises from the employer's assumption of responsibility when providing the reference, knowing it will be relied upon by both the former employee and the prospective new employer.
Worked Example 1.2
Ben applies for a new job. His former employer, Croft Ltd, provides a reference to the prospective employer. The reference carelessly contains inaccurate negative information about Ben's performance, which Croft Ltd failed to verify. As a result, Ben does not get the job and suffers a period of unemployment, losing income. Can Ben sue Croft Ltd?
Answer: Yes, Ben may be able to sue Croft Ltd in negligence. Following Spring v Guardian Assurance, Croft Ltd owed Ben a duty of care when preparing the reference. By providing the reference, Croft Ltd assumed responsibility for its accuracy. If the negative information was negligently included and caused Ben foreseeable pure economic loss (lost income), Croft Ltd may be liable.
Revision Tip
Remember that the key distinction between recoverable consequential economic loss and generally irrecoverable pure economic loss lies in whether the financial loss flows directly from physical damage to the claimant or their property. Cases involving negligent statements (like advice, wills, or references) are the main exceptions where pure economic loss may be recoverable, based on an assumption of responsibility and reasonable reliance.
Key Point Checklist
This article has covered the following key knowledge points:
- Pure economic loss is financial loss not consequent upon physical injury to the claimant or damage to their property.
- The general rule in tort is that pure economic loss is not recoverable.
- An exception exists for pure economic loss caused by negligent misstatements where there is a special relationship (Hedley Byrne principle).
- A special relationship requires an assumption of responsibility by the defendant and reasonable reliance by the claimant.
- Solicitors owe a duty of care to intended beneficiaries who lose their inheritance due to negligence in the preparation or execution of a will (White v Jones).
- Employers (or other referees) owe a duty of care to the subject of a reference regarding its accuracy (Spring v Guardian Assurance).
Key Terms and Concepts
- Pure Economic Loss
- Negligent Misstatement
- Special Relationship
