Claims for pure economic loss - Reasonable reliance and assu...

Learning Outcomes

This article explains claims for pure economic loss in negligence, including:

• distinguishing pure economic loss from consequential economic loss and identifying when negligence can and cannot be used to recover financial loss;
• identifying when a duty of care arises for negligent misstatements and negligent provision of services, with emphasis on reasonable reliance, assumption of responsibility and the Hedley Byrne “special relationship” as developed by Caparo and Henderson;
• applying the Caparo proximity factors to exam scenarios to decide whether reliance is reasonable, and recognising when public bodies and statutory actors will not owe a duty for pure economic loss;
• using scope-of-duty (SAAMCo) analysis to confine recoverable loss to the risks the defendant’s duty was intended to guard against, and distinguishing “information” from “advice” cases;
• evaluating the effectiveness of disclaimers and exclusion clauses under UCTA 1977 and the Consumer Rights Act 2015, including how they interact with reasonable reliance;
• analysing remoteness, causation, and contributory negligence in pure economic loss claims, and structuring clear SQE1 answers that move from duty, through breach and scope of duty, to loss and defences.

SQE1 Syllabus

For SQE1, you are required to understand pure economic loss in negligence, including reasonable reliance, assumption of responsibility, duties in negligent misstatement and services, and how liability may be excluded or limited, with a focus on the following syllabus points:

• the definition and types of pure economic loss
• the principles of reasonable reliance and assumption of responsibility
• the requirements for a duty of care in negligent misstatement and negligent services
• the effect of disclaimers and unreasonable reliance
• the limits and defences to claims for pure economic loss

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 is required for a duty of care to arise in a claim for pure economic loss caused by a negligent misstatement?
2. What is the difference between reasonable reliance and assumption of responsibility in the context of pure economic loss?
3. Can a disclaimer prevent liability for a negligent misstatement? If so, how?
4. In what circumstances will a claimant’s reliance on a statement be considered unreasonable?

Introduction

Claims for pure economic loss in tort are subject to strict limits. Unlike claims for personal injury or property damage, pure economic loss—financial loss not resulting from physical harm—is generally not recoverable unless specific requirements are met. The key to recovery is establishing a duty of care, which depends on the principles of reasonable reliance and assumption of responsibility. These principles are especially important in cases involving negligent misstatements or negligent provision of services.

Key Term: pure economic loss
Financial loss suffered by a claimant that does not result from physical injury or property damage, but arises independently, such as lost profits or wasted expenditure.

Key Term: consequential economic loss
Financial loss which is a consequence of physical injury to person or damage to property; consequential loss is generally recoverable if the physical harm is recoverable.

Duty of Care and Pure Economic Loss

Generally, a defendant does not owe a duty of care to avoid causing pure economic loss. The courts have limited recovery to prevent unlimited liability to an indeterminate number of claimants. However, exceptions exist where there is a sufficiently close relationship between the parties, most commonly in cases of negligent misstatement or negligent provision of professional services.

These boundaries reflect the distinction between pure and consequential economic loss. For example, where a negligent act causes physical damage to property, the resulting loss of profits from halted production is potentially consequential and recoverable; but anticipated profits on goods not produced due to a temporary shutdown, with no physical damage to those goods, is pure economic loss and barred.

In the defective property context, claimants cannot use negligence to recover diminution in value or lost resale value absent physical damage: a negligence claim for purely defective property or a poor bargain is typically barred (the proper route is in contract). This line is reflected in case law where local authorities’ statutory functions did not create a duty sounding in pure economic loss for defective building approvals absent physical damage.

Key Term: negligent misstatement
A false or misleading statement made carelessly that causes the claimant to suffer pure economic loss.

Reasonable Reliance

A duty of care for pure economic loss may arise where the claimant reasonably relies on the defendant’s statement or advice. The reliance must be both foreseeable and reasonable in the circumstances. This occurs within a “special relationship” and is sensitive to context.

Key Term: reasonable reliance
The claimant’s reliance on the defendant’s statement or advice is justified and foreseeable, making it fair to impose a duty of care.

The courts consider several factors to determine reasonable reliance (drawn from the Caparo approach and subsequent authority):

• Did the defendant know the purpose for which the advice or information was required?
• Did the defendant know the advice would be communicated to the claimant, either specifically or to a sufficiently identified class?
• Did the defendant know (or ought to have foreseen) that the claimant was likely to act on the advice without independent inquiry?
• Was it reasonable for the claimant to rely on the advice in light of the nature of the transaction, the size of the class of recipients, the availability of independent verification, and any disclaimers?
• Was the advice or information provided in the course of business for this purpose, rather than for a different statutory or general purpose?

If these are satisfied, a duty of care may arise, subject to the scope-of-duty constraints considered below.

Worked Example 1.1

A business owner asks an accountant for advice on a tax issue. The accountant provides incorrect advice, and the business incurs a penalty. Is the accountant liable for the business’s pure economic loss?

Answer:
Yes, if the business owner reasonably relied on the accountant’s advice, and the accountant knew the advice would be relied on for that purpose, a duty of care arises. The accountant may be liable for the pure economic loss.

Worked Example 1.2

An investor purchases shares based on audited annual accounts prepared by the company’s auditors. The accounts were prepared to comply with statute and sent to shareholders generally. The investor sues the auditors when the company later proves loss-making. Is a duty likely?

Answer:
Unlikely. Where accounts are prepared for statutory purposes and communicated to a wide class, proximity and foreseeability are insufficient without a special relationship. Unless the auditors knew the investor (or an identified class) would rely on the accounts for a takeover or specific transactional decision without independent inquiry, a duty will probably not arise.

Assumption of Responsibility

A duty of care may also arise where the defendant has assumed responsibility for the accuracy of their statement or the quality of their service. This can be express or implied from the circumstances. Assumption of responsibility can be decisive even when the claimant is not the direct recipient of the advice.

Key Term: assumption of responsibility
The defendant voluntarily accepts responsibility for their statement or service, creating a duty of care to the claimant.

Assumption of responsibility is often found where the defendant is a professional or has special skill, and the claimant relies on that skill. The Hedley Byrne principle extends beyond statements to professional services.

Key Term: negligent services
The negligent provision of professional services (such as management, advisory or legal services) which causes the claimant pure economic loss.

Examples include:

• References: a former employer providing a negligent reference to a prospective employer can owe a duty to the former employee whose job prospects are harmed.
• Wills and estates: a solicitor drafting a will may assume responsibility to intended beneficiaries; negligent delay leading to the testator’s death before execution can found liability in tort.
• Financial and management services: managing agents and professional advisers may assume responsibility where the nature of their engagement indicates the defendant undertook to exercise reasonable care vis-à-vis the claimant.

Worked Example 1.3

An architect is hired to design a building. The architect negligently produces flawed plans, causing the client to incur extra costs to fix the errors. Has the architect assumed responsibility?

Answer:
Yes, the architect has assumed responsibility for the service provided. The client’s reliance on the architect’s skill creates a duty of care, and the architect may be liable for the pure economic loss.

Worked Example 1.4

A solicitor is instructed to urgently prepare a new will benefitting A and B. The solicitor delays; the testator dies before signature, so A and B receive nothing under the old will. Do A and B have a claim against the solicitor?

Answer:
Likely yes. The solicitor can be held to have assumed responsibility to the intended beneficiaries, and the negligent delay caused pure economic loss to them. Liability arises even though they were not the solicitor’s contracting client, provided the duty in tort aligns with professional duties.

Negligent Misstatement and the Special Relationship

The leading case of Hedley Byrne & Co Ltd v Heller & Partners Ltd established that a duty of care for pure economic loss can arise where there is a “special relationship” between the parties, based on reasonable reliance and assumption of responsibility. Later cases refined how proximity and fairness are assessed, often using Caparo’s incremental approach and three-fold test in novel situations.

Key Term: special relationship
A relationship between claimant and defendant where reasonable reliance and assumption of responsibility make it fair to impose a duty of care for pure economic loss.

The courts will look for:

• Voluntary provision of advice or information by the defendant for a known transactional purpose
• Foreseeable and reasonable reliance by the claimant
• Knowledge by the defendant that the claimant will rely on the advice (or that an identified class will do so without further inquiry)
• Contextual proximity (size of class, means of verification, and role of the defendant)

If these are present, a duty of care may be imposed, subject to an essential additional constraint: only losses within the scope of the duty are recoverable.

Key Term: scope of duty (SAAMCo)
A principle limiting recoverable loss to the consequences of the risk the defendant’s duty was meant to guard against. For information-only cases, recovery is limited to loss attributable to the information being wrong; advice cases can include wider transactional loss if the defendant undertook responsibility for the decision outcome.

Scope-of-duty analysis is now central. A mountaineer advised “fit to climb” by a doctor could not recover for general climbing injuries unrelated to the knee risk; similarly, a valuer who negligently overvalues a property is not responsible for all commercial losses from a transaction but for the difference caused by the valuation being wrong, unless the valuer assumed responsibility for the transaction outcome.

Worked Example 1.5

A surveyor negligently values a property at £500,000; its true value was £450,000. The buyer completes and later suffers loss when the local market falls sharply. What losses are recoverable?

Answer:
The surveyor’s scope of duty covers the risk that the valuation figure was wrong. Recoverable loss is the £50,000 overvaluation (and foreseeable consequential fees linked to that error). Wider market losses not attributable to the valuation error are outside scope unless the surveyor assumed responsibility for the transaction outcome.

Disclaimers and Unreasonable Reliance

A defendant can avoid liability for pure economic loss by expressly disclaiming responsibility for the accuracy of their statement or advice. If a disclaimer is clear and brought to the claimant’s attention, it may prevent a duty of care from arising. However, statutory controls mean disclaimers are not automatically effective.

Key Term: disclaimer
A statement by the defendant denying responsibility for the accuracy of information or advice, which may prevent a duty of care from arising.

In consumer and business contexts, contractual and non-contractual notices excluding liability for negligence are controlled:

• Business-to-business: the Unfair Contract Terms Act 1977 (UCTA) prevents exclusion of liability for death or personal injury and requires exclusions for other losses to satisfy the reasonableness test.
• Business-to-consumer: the Consumer Rights Act 2015 (CRA) invalidates terms or notices excluding liability for death or personal injury and requires other terms or notices to be fair. The focus includes transparency and good faith, looking for significant imbalance to the consumer’s detriment.

Disclaimers must be:

• Express, clear and prominent (brought to the attention of the claimant before reliance)
• Appropriate to the nature of the communication
• Reasonable/fair under applicable statute (UCTA/CRA), where those regimes apply

Where a communication states it is given “without responsibility” and the recipient understands this and proceeds, a court may find no assumption of responsibility and therefore no duty. But in consumer house-buying valuations, attempts to exclude liability are commonly struck down as unreasonable.

Key Term: Unfair Contract Terms Act 1977
Statute controlling exclusion of liability for negligence in business contexts; prohibits exclusions for death/personal injury and subjects other exclusions to a reasonableness test.

Key Term: Consumer Rights Act 2015
Statute controlling unfair terms and notices in consumer contracts; prohibits exclusions for death/personal injury and requires other terms or notices to be fair and transparent.

Reliance will also be unreasonable if the claimant knows the advice is unreliable, or if it is not reasonable in the circumstances to rely on the defendant’s statement—for example, where there is an obvious opportunity and expectation to obtain independent verification for a high-stakes decision.

Worked Example 1.6

A bank provides a reference for a customer, stating “without responsibility.” The recipient relies on the reference and suffers loss. Is the bank liable?

Answer:
No, the disclaimer prevents the bank from assuming responsibility. No duty of care arises, so the bank is not liable for the pure economic loss.

Worked Example 1.7

A house buyer relies on a mortgage valuation by a surveyor that contains a standard exclusion of liability to the buyer. The buyer suffers loss due to an obvious defect the surveyor should have identified. Is the exclusion effective?

Answer:
Likely no. In residential purchases, attempts to exclude negligence liability via standard form notices are commonly struck down as unreasonable under UCTA (and unfair under CRA for consumer notices). The surveyor can owe a duty to the buyer despite a disclaimer if reliance was foreseeable and reasonable.

Worked Example 1.8

A supplier engages with a bank purely to obtain a non-contractual credit reference about a prospective customer. The bank issues a short note “without responsibility.” The supplier proceeds without further inquiry and suffers loss. Is a duty likely?

Answer:
Unlikely. The bank’s clear disclaimer prevents assumption of responsibility, and the limited, informal nature of the reference reduces proximity. Absent a special relationship or statutory control making the disclaimer ineffective, no duty arises.

Limits and Defences

Even where a duty of care exists, recovery for pure economic loss is limited by the scope of the duty, remoteness, and possible defences. Two modern constraints are especially important:

• Scope-of-duty (SAAMCo): loss must be of the kind the defendant undertook to guard against. In information-only cases, recovery is limited to loss attributable to the information being wrong; advice cases can extend further.
• Causation and remoteness: the loss must be a foreseeable consequence of the defendant’s breach and satisfy “but for” causation. Losses caused by market movements, the claimant’s independent choices, or third-party interventions may be outside the duty’s scope or too remote.

Contributory negligence can reduce damages where the claimant failed to take reasonable care—for example, not taking obvious steps to verify critical information, or proceeding with known risks.

Disclaimers may prevent duty arising or form part of the reason reliance was not reasonable. A claimant who knew or should have known that a statement was unreliable may fail on reliance even without a disclaimer.

Public bodies and statutory functions generally do not attract a duty to avoid causing pure economic loss. For example, a bank subject to a freezing order does not, merely by receipt of the order, assume responsibility to the claimant for consequential losses if payments are mistakenly made; absent assumption of responsibility, proximity and fairness may be insufficient.

Worked Example 1.9

Revenue authorities obtain a freezing order against Company X’s bank accounts. The bank negligently permits payments out. A competitor of Company X sues the bank in negligence for losses flowing from X’s continuing trading. Does a duty arise?

Answer:
No. There is no special relationship, no reasonable reliance or assumption of responsibility to the competitor, and it is not fair, just and reasonable to impose a duty in this context. Absent assumption of responsibility, proximity and reliance are lacking.

• The duty is limited to the specific context in which it was assumed.
• The loss must be a foreseeable consequence of the defendant’s negligence and within the scope of the duty.
• If the claimant contributed to their own loss, damages may be reduced for contributory negligence.

Exam Warning

In SQE1 questions, be careful to distinguish between pure economic loss and consequential economic loss. Only pure economic loss requires proof of reasonable reliance or assumption of responsibility. Also apply scope-of-duty analysis: identify what risk the duty covered and confine recovery to that risk.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Pure economic loss is generally not recoverable in tort unless there is reasonable reliance or assumption of responsibility within a special relationship.
• Reasonable reliance requires proximity: the defendant’s knowledge of purpose, communication to the claimant or a defined class, likelihood of reliance without independent inquiry, and reasonableness in context.
• Assumption of responsibility can be express or implied and extends to negligent professional services (references, wills, advisory/management engagements).
• Scope-of-duty (SAAMCo) constrains recoverable losses to the consequences of the risk the duty covered; distinguish information-only from advice cases.
• Disclaimers must be clear and prominent and are subject to UCTA 1977 and CRA 2015; they can prevent duty or make reliance unreasonable.
• Contributory negligence and remoteness apply; public bodies or statutory actors rarely owe duties to avoid pure economic loss absent assumption of responsibility.

Key Terms and Concepts

• pure economic loss
• consequential economic loss
• negligent misstatement
• reasonable reliance
• assumption of responsibility
• negligent services
• special relationship
• scope of duty (SAAMCo)
• disclaimer
• Unfair Contract Terms Act 1977
• Consumer Rights Act 2015