Economic Loss and Pure Economic Loss in Negligence

Introduction

Economic loss is a core theme in the tort of negligence. The law distinguishes between financial loss that follows physical damage and financial loss that stands alone. That distinction matters: consequential economic loss (flowing from personal injury or damage to property) is generally recoverable, while pure economic loss (loss without accompanying physical damage) is usually not.

Courts have drawn these lines to avoid open-ended claims and to respect how parties allocate risk through contracts. That said, there are recognised routes to recovery for pure economic loss, most notably where there is an assumption of responsibility for statements or services and reasonable reliance by the claimant. Key authorities such as Hedley Byrne, Caparo and Murphy set the boundaries.

What You'll Learn

• The difference between economic loss and pure economic loss
• Why courts restrict claims for pure economic loss
• How the assumption of responsibility principle works in negligent misstatement
• The effect of Caparo on duty of care and scope of liability
• The current approach to defective buildings after Murphy
• When “complex structure” arguments may (and may not) help
• How cases like Spartan Steel and Muirhead draw the line on relational loss
• Practical steps to assess and plead an economic loss claim

Core Concepts

Economic loss vs pure economic loss

• Economic loss: financial harm such as lost profits, wasted expenditure, or reduction in asset value.
• Consequential economic loss: financial loss that results from physical damage or personal injury. Example: a contractor damages a factory’s machinery; the owner can claim for repairs and profit lost while repairs are carried out.
• Pure economic loss: financial loss that is not the result of any physical damage to the claimant or their property. Examples:
  • Losses from negligent professional advice that leads to a bad investment.
  • Lost profits due to a third party’s property being damaged (e.g., a utility cable cut causing a power outage at a nearby business).

General rule: consequential economic loss is recoverable if negligence and causation are proved; pure economic loss is only recoverable in limited situations.

Policy and limits on duty

Courts restrict recovery for pure economic loss for practical reasons:

• Indeterminate liability: a careless act could affect an open class of people with no clear limit on the number or size of claims.
• Proof and causation: purely financial loss can be harder to tie to a single negligent act with certainty.
• Contractual allocation of risk: many financial risks are better dealt with by contract, insurance, and negotiated terms.

Public authority cases show this strict approach. Anns v Merton LBC once suggested a wider duty, but Murphy v Brentwood DC reversed course. Cost of repairing a defective building, absent personal injury or damage to other property, is treated as pure economic loss and is not recoverable in negligence.

The Caparo three-stage analysis (foreseeability, proximity, and whether it is fair, just and reasonable to impose a duty) further shapes when a duty arises, especially for financial losses.

Negligent misstatement and assumption of responsibility

Hedley Byrne v Heller recognises a duty of care for statements or services that cause pure economic loss where:

• The defendant assumed responsibility (expressly or impliedly) for the accuracy or care of what was said or done; and
• The claimant reasonably relied on it.

Key features:

• A “special relationship” often exists in professional contexts (e.g., accountants, solicitors, banks giving references).
• Disclaimers can negate any assumption of responsibility if effective and reasonable (see UCTA 1977 for reasonableness).
• Caparo refines the scope of duty, limiting it to those for whom the advice or service was intended.

Extensions and limits:

• Spring v Guardian Assurance recognises a duty when giving employment references that foreseeably affect someone’s livelihood.
• Customs and Excise v Barclays Bank clarifies that assumption of responsibility is not the only way to analyse duty, but without it or other strong proximity factors, the claim may still fail.
• Robinson v PE Jones confirms that builders do not automatically owe a tortious duty for pure economic loss; something more than the existence of a contract is needed (e.g., advisory role akin to a professional adviser).

Defective buildings and the complex structure idea

• D&F Estates v Church Commissioners and Murphy v Brentwood DC treat defects in a building that render it unsafe or reduce its value as pure economic loss, absent injury or damage to other property.
• The “complex structure” idea suggests different parts of a building might be treated as separate property so that damage from one component to another is “other property”. Courts have largely resisted this, preferring to treat the property as a single whole in ordinary building cases.
• Junior Books v Veitchi allowed recovery for economic loss in circumstances close to a direct contract, but it is now regarded as exceptional and not a basis for broad liability.
• Muirhead shows that property damage (e.g., dead stock) is recoverable, but broader commercial losses without physical damage may not be, particularly against remote manufacturers.

Key Examples or Case Studies

Hedley Byrne & Co Ltd v Heller & Partners [1964] AC 465

• Context: A bank’s reference led an advertising agency to grant credit that went unpaid.
• Ruling: A duty can arise for negligent misstatements where there is an assumption of responsibility and reasonable reliance, though the disclaimer in this case defeated the claim.
• Practical point: Clear disclaimers can prevent a duty from arising; reliance must be reasonable.

Caparo Industries plc v Dickman [1990] 2 AC 605

• Context: Investors relied on audited accounts to buy more shares and then sued the auditors.
• Ruling: No duty to individual investors for a statutory audit. Caparo set a three-stage test for duty: foreseeability, proximity, and fairness.
• Practical point: Ask who the statement was aimed at and for what purpose. A general statutory function rarely creates a duty to a wide class.

Murphy v Brentwood District Council [1991] 1 AC 398

• Context: House with defective foundations settled; owner sought cost of repair from the council.
• Ruling: Claim failed. Cost of remedying a defect is pure economic loss. Anns was overruled.
• Practical point: Absent personal injury or damage to other property, recovery for defective buildings in negligence is unlikely.

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

• Context: A power cable was negligently cut. The claimant recovered for damaged metal and profit on that batch, but not for lost profit during the outage.
• Ruling: Consequential loss tied to physical damage is recoverable; wider lost profits from the outage alone are pure economic loss.
• Practical point: Separate loss linked to damaged items from general lost profits caused by interruption.

Muirhead v Industrial Tank Specialties [1986] QB 507

• Context: Faulty pumps killed lobsters being kept for sale.
• Ruling: Property damage (dead lobsters) was recoverable; broader commercial loss claims against the manufacturer were limited.
• Practical point: Claims against manufacturers for pure economic loss remain tightly controlled.

Spring v Guardian Assurance plc [1995] 2 AC 296

• Context: A former employer gave a negligent reference that harmed job prospects.
• Ruling: Duty recognised; economic loss flowing from a negligent reference was recoverable.
• Practical point: References and similar statements can carry responsibility where reliance is foreseeable.

Customs and Excise Commissioners v Barclays Bank [2007] UKHL 28

• Context: Bank failed to prevent withdrawals after being notified of a freezing order.
• Ruling: No duty. There was no assumption of responsibility and Caparo did not support imposing a duty.
• Practical point: Court orders do not automatically create a duty in negligence to protect third parties from economic loss.

Robinson v PE Jones Ltd [2011] EWCA Civ 9

• Context: Homeowner sued builder in tort for defects causing economic loss.
• Ruling: No assumption of responsibility just because there was a contract. Tort duties to protect against pure economic loss require more.
• Practical point: Contract terms and warranties are primary; do not assume a parallel tort duty.

D&F Estates v Church Commissioners [1989] AC 177 and Junior Books v Veitchi [1983] 1 AC 520

• Contrast: D&F Estates limits recovery for defective work in tort; Junior Books is treated as an exceptional case based on a very close relationship.
• Practical point: Do not rely on Junior Books unless you can show an unusually close link similar to a direct advisory role.

Hamble Fisheries v Gardner (The Rebecca Elaine) [1999] 2 Lloyd’s Rep 1

• Context: Alleged failure to warn about dangers at sea.
• Ruling: Any duty to warn focused on avoiding physical harm; pure economic loss claims did not succeed.
• Practical point: Duties around warnings tend to relate to safety; financial loss claims need a separate recognised basis.

Practical Applications

• Classify the loss:
  • Is there physical damage or injury? If yes, consequential economic loss is usually claimable.
  • If not, treat it as pure economic loss and look for a recognised route to duty.
• For pure economic loss, check for an assumption of responsibility:
  • Was advice or information given for a specific purpose?
  • Did the defendant know the claimant would rely on it?
  • Was there reasonable reliance, and was a disclaimer in place?
  • Review engagement letters, references, reports, or emails for scope and disclaimers.
• Apply Caparo to identify duty limits:
  • Foreseeability is necessary but not enough.
  • Proximity: Was the statement or service directed to this claimant for this purpose?
  • Fair, just and reasonable: Would imposing a duty cut across statutory roles or overwhelm defendants with open-ended claims?
• Defective property claims:
  • Distinguish damage to “the product itself” (usually pure economic loss) from damage to other property or persons (recoverable).
  • Beware of “complex structure” arguments; they rarely succeed post-Murphy.
• Public authorities:
  • Check statutory frameworks and whether the function is aimed at protecting individuals from financial loss.
  • Courts are hesitant to impose duties for pure economic loss in this area.
• Relational loss (e.g., utility outages):
  • Losses caused by damage to someone else’s property are usually not recoverable.
  • Look for a special relationship or specific undertaking to the claimant (rare).
• Contract first:
  • If you have a contract, consider express warranties and exclusion clauses.
  • Assess any exclusion of liability for negligence under the Unfair Contract Terms Act 1977 (reasonableness test).
• Evidence and causation:
  • Document who said what, to whom, for what purpose, and how reliance occurred.
  • Quantify losses clearly and separate consequential losses from pure economic loss.

Summary Checklist

• Identify whether the loss follows physical damage (consequential) or stands alone (pure).
• For pure economic loss, look for Hedley Byrne-style responsibility and reasonable reliance.
• Apply Caparo: foreseeability, proximity, and whether imposing a duty is fair, just and reasonable.
• In defective building cases, cost of repair is usually pure economic loss post-Murphy.
• Treat Junior Books as exceptional; do not rely on it without a very close relationship.
• Consider exclusions and disclaimers; test them for reasonableness under UCTA 1977.
• Prefer contract claims where available; align remedy with the parties’ risk allocation.
• Separate and quantify different heads of loss to avoid overreaching.

Quick Reference