Claims for pure economic loss - Exceptions: Hedley Byrne pri...

Learning Outcomes

This article outlines the Hedley Byrne exception for pure economic loss in negligence, including:

• The general rule against recovery for pure economic loss in negligence
• The Hedley Byrne exception for negligent misstatements
• Assumption of responsibility and reasonable reliance requirements
• Actionable versus non-actionable pure economic loss claims
• Limits of the Hedley Byrne principle for SQE1 purposes
• Judicial assessment of special relationships
• Disclaimers and their operation, including reasonableness
• Interaction between the Caparo approach and Hedley Byrne
• Scope-of-duty limits on damages in negligent misstatement cases

SQE1 Syllabus

For SQE1, you are required to understand the exceptions to the general rule against recovery for pure economic loss in negligence, with particular focus on the Hedley Byrne principle, with a focus on the following syllabus points:

• the general rule that pure economic loss is not recoverable in negligence
• the requirements for a claim under the Hedley Byrne exception (negligent misstatement)
• the concepts of assumption of responsibility and reasonable reliance
• the circumstances in which a duty of care for pure economic loss may arise
• the limits of the Hedley Byrne principle and the relevance of disclaimers
• the effect of the Caparo proximity analysis in negligent misstatement claims
• instances of liability to third parties and extensions to professional services
• measurement of loss and the scope-of-duty principle (SAAMCo/BPE Solicitors)

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 are the two key requirements for a successful claim for pure economic loss under the Hedley Byrne exception?
2. True or false? A casual remark made at a party about the value of shares can give rise to a duty of care under the Hedley Byrne principle.
3. Which of the following best describes the effect of a clear disclaimer in a professional report?
   a) It always prevents liability for negligent misstatement.
   b) It may prevent liability, but only if it is reasonable and brought to the claimant’s attention.
   c) It never prevents liability.
4. In what circumstances will a court find that a defendant has assumed responsibility for a claimant’s economic loss?

Introduction

The general rule in English tort law is that pure economic loss—financial loss not resulting from physical injury or property damage—is not recoverable in negligence. However, there is a key exception for negligent misstatements, established in the case of Hedley Byrne v Heller. This article explains the Hedley Byrne principle, the requirements for a claim, and the limits of this exception for SQE1.

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.

The exception matters because economic loss caused by reliance on inaccurate information or advice is a common feature of modern commerce and professional services. Understanding where a duty of care arises, and where it does not, is essential for applying the law with precision.

The General Rule: No Recovery for Pure Economic Loss

In negligence, claimants cannot usually recover for pure economic loss. This rule exists to prevent unlimited liability for defendants and to maintain a clear boundary between contract and tort. It is also grounded in policy: allowing claims for economic loss in the absence of physical damage would risk opening floodgates to indeterminate liability for an indeterminate class.

This boundary is illustrated by cases involving defective property or negligent acts causing only financial loss. For instance, in Murphy v Brentwood DC the House of Lords confirmed that loss due to a building’s structural defects (e.g., the cost of repairing inadequate foundations and loss on resale) is pure economic loss and not recoverable in negligence. By contrast, consequential economic loss flowing from physical damage may be recoverable. The classic divide is seen in cases such as those where negligent acts cause property damage (recoverable) and broader economic losses unrelated to physical damage (not recoverable).

Key Term: negligent misstatement
An inaccurate statement made carelessly by one party, which causes another party to suffer financial loss.

The Hedley Byrne Exception: Negligent Misstatements

The courts have recognised an exception to the general rule where a defendant makes a negligent misstatement that causes pure economic loss to a claimant. This is known as the Hedley Byrne principle.

Key Term: Hedley Byrne principle
The legal rule that a duty of care for pure economic loss may arise where a defendant assumes responsibility for a statement and the claimant reasonably relies on it.

The leading case is Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. The claimant advertising agency sought a credit reference from the company’s bank; the bank negligently provided a favourable reference but included a clear disclaimer: “without responsibility.” The House of Lords held that a duty to avoid negligent misstatements can arise given a special relationship based on assumption of responsibility and reasonable reliance—though on the facts the disclaimer prevented any duty from arising.

Two features of Hedley Byrne remain central:

• liability is tightly controlled to avoid indeterminate liability
• the existence of a “special relationship” is fact-specific and depends on both assumption of responsibility and reasonable reliance

Requirements for a Claim under Hedley Byrne

To succeed in a claim for pure economic loss under the Hedley Byrne principle, the claimant must show:

1. Assumption of responsibility by the defendant for the accuracy of the statement or advice.
2. Reasonable reliance by the claimant on that statement or advice.

Key Term: assumption of responsibility
A situation where the defendant, expressly or impliedly, accepts responsibility for the accuracy of information or advice given to the claimant.

Key Term: reasonable reliance
The claimant’s reliance on the defendant’s statement or advice is justified in the circumstances, and the defendant knew or ought to have known that reliance would occur.

Assumption of responsibility can be express (e.g., a professional engagement) or implied from conduct and context. It is assessed objectively. Reasonable reliance requires the court to consider factors such as the nature of the statement (advice versus information), the specialist knowledge of the defendant, the claimant’s characteristics (e.g., sophistication), the context (professional versus social), and whether reliance was foreseeable.

Key Term: special relationship
A relationship of proximity established when the defendant has assumed responsibility for a statement or advice and the claimant has reasonably relied on it, giving rise to a duty of care for pure economic loss.

The Special Relationship

A duty of care for negligent misstatement arises only where there is a “special relationship” between the parties. Courts look at purpose, audience, and knowledge. In Caparo Industries plc v Dickman [1990] 2 AC 605, the House of Lords emphasised that auditors owe duties to the company, not generally to investors contemplating share purchases. A special relationship is likely to exist where:

• the defendant knows the statement will be communicated to the claimant or a narrow class
• the statement is made for a specific transaction or purpose
• the defendant knows the claimant is likely to rely on it for that purpose

Examples where courts have found a special relationship include:

• environmental health officers exerting regulatory pressure leading to economic loss (e.g., threats of closure prompting costly work)
• bank staff giving specific mortgage advice to a customer
• a friend holding himself out as having special knowledge advising on a car purchase (a narrow exception in Chaudhry v Prabhakar)

Professional contexts are the typical setting. The more informal and social the interaction, the less likely a duty will arise.

Worked Example 1.1

A financial advisor tells a client that a particular investment is low risk and suitable for their needs. The client invests based on this advice and suffers a substantial loss when the investment fails. Can the client claim for pure economic loss?

Answer:
Yes. The advisor assumed responsibility for the advice, and the client reasonably relied on it. This creates a special relationship under the Hedley Byrne principle.

Application of the Caparo Test

In addition to the Hedley Byrne requirements, the courts may also consider the three-stage Caparo test for duty of care in novel situations:

1. Was the loss to the claimant reasonably foreseeable?
2. Was there sufficient proximity between the parties?
3. Is it fair, just, and reasonable to impose a duty?

However, for negligent misstatements, the focus remains on assumption of responsibility and reasonable reliance. Hedley Byrne and Caparo often work in tandem: Hedley Byrne identifies the special relationship; Caparo ensures the policy limits on duty are respected. For auditors and other professionals producing documents for broad circulation, the proximity requirement is rarely satisfied for third-party investors unless the provider knows the identity and purpose of the intended reliance.

Extending Hedley Byrne Principles to Services

Although Hedley Byrne focused on statements, the principle applies to professional services where a defendant undertakes to exercise skill and care causing pure economic loss. In Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, managing agents at Lloyd’s were liable in tort to Names for negligent management causing economic loss. The duty stemmed from voluntary assumption of responsibility, even where contract claims were unavailable or time-barred. Similarly, solicitors may owe duties to intended beneficiaries under the assumption of responsibility approach (e.g., negligent delay in drafting a will leading to loss for beneficiaries). These cases show the principle can attach to services and omissions producing economic loss, not only to statements.

Third-Party Reliance and Indirect Communication

Duty can arise even where the statement is not made directly to the claimant, provided the defendant knows or should know it will be passed on and relied upon for a particular transaction. In Smith v Eric S Bush [1990] 1 AC 831, a surveyor’s report prepared for a lender was foreseeably relied upon by a modest house buyer; the House of Lords found a duty and held a disclaimer ineffective under the Unfair Contract Terms Act 1977 (UCTA) because reliance was foreseeable and the exclusion was unreasonable.

By contrast, where the claimant is part of a wide, indeterminate class or the statement is prepared for general purposes (such as annual audited accounts), duty is unlikely. Morgan Crucible (identified bidder) and James McNaughton (draft accounts used for a takeover) illustrate how purpose, audience, and knowledge determine proximity.

Key Term: disclaimer
A clear statement, often in writing, indicating that responsibility is not accepted for the accuracy or consequences of information or advice. A disclaimer may negate assumption of responsibility or exclude liability, subject to statutory controls on reasonableness.

Limits of the Hedley Byrne Principle

The courts are cautious about extending liability for pure economic loss. The following limits apply:

• Social or informal advice: Casual statements made in a social context do not usually give rise to liability. Chaudhry v Prabhakar is a narrow exception where the advisor held himself out as having specialist knowledge and undertook the task, making reliance reasonable.
• Disclaimers: A clear and reasonable disclaimer may prevent a duty of care from arising. Where a disclaimer simply negates assumption of responsibility (as in Hedley Byrne), no duty arises. Where a disclaimer operates as an exclusion clause in contract, it must satisfy UCTA 1977 reasonableness (and, for consumers, the Consumer Rights Act 2015 fairness test). In Smith v Eric S Bush, the surveyor’s disclaimer failed the reasonableness test given the foreseeability of reliance by the purchaser.
• Sophisticated claimants: If the claimant is an expert or has access to independent advice, reliance may not be reasonable. Courts assess the claimant’s experience, the transaction’s complexity, and availability of independent verification.
• Indeterminate class: Duty is generally denied where the statement is intended for broad circulation without knowledge of who will rely on it or for what specific purpose (e.g., audited accounts).
• Purpose misalignment: If the statement was prepared for one purpose, reliance for a different purpose is unlikely to be reasonable, deflecting duty.

Worked Example 1.2

A surveyor prepares a report for a house buyer, but includes a prominent disclaimer stating that the report is for information only and no responsibility is accepted for its accuracy. The buyer relies on the report and suffers loss due to a defect not mentioned. Is the surveyor liable?

Answer:
Probably not. The disclaimer was clear and reasonable, so the surveyor did not assume responsibility for the accuracy of the report.

Measuring Damages: The Scope-of-Duty Principle

Even if duty, breach, and reliance are established, damages are limited to loss within the scope of the defendant’s duty. The principle from South Australia Asset Management Corp v York Montague (SAAMCo), reaffirmed by BPE Solicitors v Hughes Holland [2017] UKSC 21, distinguishes:

• “Advice” cases: the adviser is responsible for guiding the claimant on whether to enter a transaction; liability can cover all foreseeable losses flowing from the transaction.
• “Information” cases: the defendant supplies only a part of the material the claimant uses; liability is limited to losses attributable to the information being wrong (not all transaction losses).

This ensures negligence liability does not extend beyond the risks the defendant undertook to guard against. It aligns with the general policy of confining pure economic loss claims to manageable boundaries.

Key Term: scope of duty (SAAMCo principle)
A rule limiting recoverable losses to those within the risk the defendant’s duty was meant to protect against; distinguishes between “advice” and “information” cases in negligent misstatement.

Further Illustrations and Boundaries

• Negligent references: In principle, a person providing a reference may owe a duty to the subject of the reference where loss foreseeably flows from negligent misstatement, provided assumption of responsibility and reasonable reliance are present.
• Company directors and personal liability: Absent personal dealings or express assumption, officers are unlikely to owe personal duties for company statements. Personal proximity and assumption are required.
• Banks and court orders: Where banks act in response to court orders, the absence of voluntary assumption and lack of proximity may defeat claims for negligent failures causing economic loss.

These examples confirm that Hedley Byrne liability is not automatic on careless statements; it depends on a careful, multi-factor analysis focusing on responsibility, reliance, purpose, and class of recipients.

Worked Example 1.3

At a party, a guest casually tells another that a new tech company is “guaranteed to double in value.” The listener buys shares and suffers a loss. Can the listener recover under Hedley Byrne?

Answer:
No. Casual social remarks do not usually create a special relationship. There was no assumption of responsibility and reliance was not reasonable in the social context.

Worked Example 1.4

An auditor prepares annual accounts in accordance with statutory duties, knowing they will be published to shareholders. An investor, not identified to the auditor, relies on the accounts to buy more shares and suffers loss. Is there a duty under Hedley Byrne?

Answer:
Unlikely. The accounts were produced for general statutory purposes and not for a specific, identified transaction. There is insufficient proximity and no assumption of responsibility to the investor for that purchase.

Worked Example 1.5

A lender commissions a valuation report from a surveyor for mortgage purposes on a modest residential property. The buyer is told they may rely on the report. The surveyor includes a boilerplate disclaimer. The buyer relies and suffers economic loss due to defects. Is the surveyor liable?

Answer:
Likely. Reliance by a modest residential buyer is foreseeable. Any contractual disclaimer excluding negligence must satisfy reasonableness under UCTA 1977, which such boilerplate terms often fail. A duty arises and the exclusion may be ineffective.

Exam Warning

The Hedley Byrne principle applies only to negligent statements (or, in some cases, negligent provision of professional services). It does not allow recovery for pure economic loss caused by negligent acts, unless there is physical damage or injury. Be careful to distinguish defective property cases and economic loss without reliance on professional advice; these fall outside Hedley Byrne.

Revision Tip

For SQE1, focus on the two key elements: assumption of responsibility and reasonable reliance. Be able to identify when a special relationship exists and when a disclaimer may defeat a claim. Use the purpose/audience/knowledge framework: What was the statement for? To whom was it directed? Did the defendant know the claimant would likely rely for that purpose? Always consider whether losses are confined by the scope-of-duty principle.

Summary

• The general rule is that pure economic loss is not recoverable in negligence.
• The Hedley Byrne principle creates an exception for negligent misstatements where there is a special relationship.
• The claimant must show assumption of responsibility by the defendant and reasonable reliance on the statement.
• Caparo’s proximity and policy analysis often operates alongside Hedley Byrne to restrict duty in broad-circulation contexts.
• Hedley Byrne principles extend to professional services where responsibility is assumed (e.g., Henderson v Merrett), and can include liability to third parties in limited circumstances.
• Disclaimers and the context of the advice may limit or prevent liability; statutory controls (UCTA/CRA) may render some exclusions ineffective.
• Damages are limited to losses within the scope of the duty (SAAMCo/BPE Solicitors), with a critical distinction between “advice” and “information” cases.

Key Point Checklist

This article has covered the following key knowledge points:

• The general rule against recovery for pure economic loss in negligence.
• The Hedley Byrne exception for negligent misstatements.
• The requirements of assumption of responsibility and reasonable reliance.
• The need for a special relationship between the parties.
• The effect of disclaimers and the limits of the Hedley Byrne principle.
• The interaction with Caparo in determining proximity and policy limits.
• Extensions to professional services and the possibility of third-party claims.
• The scope-of-duty principle limiting recoverable losses in negligent misstatement.

Key Terms and Concepts

• pure economic loss
• negligent misstatement
• Hedley Byrne principle
• assumption of responsibility
• reasonable reliance
• special relationship
• disclaimer
• scope of duty (SAAMCo principle)