Example Law Essay:

TORT LAW

Introduction

Accident arising from negligence may cause two divergence of losses – private loss and social loss. Private loss is the loss suffered by the victims while social loss is the loss caused by the accident to the society. As a general rule when an accident arises, injurers should be held liable for social deterrence. An exception to this rule is the concept of pure economic loss, a legal jargon which refers “to a loss that is purely financial i.e. not one that is consequent upon any personal injury or direct property damage”.[1] This common law principle is also called the exclusionary rule. This paper posits that while pure economic loss based on torts is generally not compensable, there are cases under the law where compensation may be allowed.

The Pure Economic Loss Principle

The concept of pure economic loss has been laid down in the landmark case of Spartan Steel and Alloys Ltd v Martin[2], where the Court ruled against the claim of damages based on the loss of profit that the plaintiff sustained. In this case, Spartan Steel owns a factory manufacturing stainless steel in Birmingham. The electricity of the factory is obtained through a direct cable from the Midlands Electricity Board. The contractors of herein defendants admitted that they were digging up a road when they accidentally damaged the cable used by the plaintiff in their manufacturing. As a result of the damage, the plaintiff suffered losses: 1. £368 sustained from the physical damage; 2. £400 reflecting the loss of profit caused by the melt; 3. £ 1767 for the loss of profits which resulted from another four melts. The plaintiff commenced an action to recover the aggregate amount of £2535.5 against the defendant. In deciding the case, the Court ruled that although the value of the damaged sheet may be recovered, plaintiff’s profits that did not accrue while it was out of operation could not be compensated. The first damage results from the physical damage to the property of the plaintiff, the second damage is the consequential damage of the negligence, while the third forms part of pure economic loss; hence not compensable.

What are the policy reasons for this general rule?

Harvey (2006) posits that when a person sought recovery based on torts, it presupposes that the defendant owes duty of care to the claimant. The common law of UK does not acknowledge claims for pure economic losses arising from negligence, on the sole ground of its nature.[3] This type of losses are totally detached from property or personal damage. As contrary to consequential losses, pure economic loss does not flow from any physical injury or damage. On the other hand, consequential losses pertain to losses (i.e. income losses) that may arise as a consequence of the inability to work. In general, consequential losses are recoverable. Whereas, in pure economic loss, the claimant may only recover damage based upon a contractual claim and not based on tort theory.[4] The concept of “damage” pertains to physical damage to the claimant’s property.

A consequential damage emphasizes cause and effect relationship; whereas in pure economic loss, the pecuniary loss is “pure”.[5] For instance, an economic injury sustained by a breadwinner in the family may have an economic consequence to his dependent child. This example shows that although the child suffered economic loss, it cannot be considered as consequential as it is an isolated phenomenon. A pure economic loss is a financial loss unaccompanied by any independent physical or property injury of the plaintiff.

There are other considerations why the court need to slow down in granting recovery for pure economic loss which is based on torts. One of which is the fact that there is actually no losses in pure economic loss as it only involves a transfer of wealth.[6] In consequential loss, there is a physical harm which implies the presence of societal resources destruction. On the other hand, this physical destruction is not present in financial loss. In some cases economic loss only signifies wealth redistribution from one person to another.[7] The victim’s private loss may result to someone else’s gain. It is in this perspective that some proponents believed that pure economic loss should not be compensated. The private loss was set off by the other’s gain. The legal system cannot award compensation to a victim of a certain activity which is deemed beneficial to the majority.[8]

Another reason for such rule is the fact that it is difficult, if not possible, to place a reasonable limit on the liability of the defendant in favor of those who sustained pure economic losses brought by a negligent act. According to Mattiaci (2003), the exclusionary principle “also provides parties with incentives to channel economic loss into contracts and reduces the administrative costs of the judicial system”.[9] Thus, the existence of contract is a condition sine qua non to claim recovery of pure economic loss.

In the case of Murphy V Brentwood District Council, the Court held that the diminution of the property’s value brought by construction defects fall within the ambit of pure economic loss. Hence, in the absence of a pre-existing contract, the law does not grant relief to recover such losses. In a nutshell, recovering of damages on account of defects of a property could only be done on the basis of a contract unless the defendant assumed the responsibility to such specific losses. Further, it is noteworthy to consider that recovery of pure economic loss based on contractual obligation could only be brought by plaintiff against the breaching party and not against anyone who had no privy to the contract.[10]

The law allows recovery of pure economic loss based on contract in order “to restore the innocent party to the same position it would have been in had the contract been performed, so far as the award of money is able to do that”.[11] It is also noteworthy to remember that the existence of contract does not automatically vests right to the claimant to claim damage sustained from pure economic loss. When the cause of the economic loss is too remote, the Court should not award the damages. Hence in the case of Hadley v Baxendale,[12] Alderson B. averred that the damage caused allegedly by the contractual breach:

Should be such as may fairly and reasonably be considered either arising naturally, ie. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract, as the probable result of the breach of it.[13]

From the foregoing reasons, the exclusionary rule aims to draw a line between torts and contract. The liability imposed by the contract in case of pure economic loss is strictly commercial in setting. This is also to protect the tortfeasor (who had no privity of contract with the claimant) from the danger of unlimited liability. The need to protect the line between contact and tort stems from the fact that contractual relation concerns the regulation and enforcement of expectations that arise from the parties’ private agreement; whereas tort law concerns the enforcement and regulation of expectations that are applicable to the general public whether or not there exists a contract.[14] The principle on pure economic loss is premised on the fact that the law governing contracts is more suited to resolve purely economic issues in the contract. Hence, the remedy is to enforce the contract rather than sought claims under the tort law.

Another reason why recovery of a pure economic loss based on tort should be barred is the fact that it could be foreseen.[15] For instance, when a motorway has closed, it could be foreseen that traffic delays and congestion may happen on the road. As a consequence, business traders may suffer economic losses brought by the situation. Applying the rule on pure economic loss, these business traders could not recover damages based on torts against the person responsible of the closure.

In what situations might a Claimant be able to recover pure economic loss?

Conversely, it is important to note that some action based on negligence may still be recoverable. In the same case of Spartan Steel and Alloys Ltd. v Martin & Co, an action based on torts in respect of pure economic loss may be recoverable “provided that it was a reasonably foreseeable and direct consequence of failure in a duty of care”.[16]

Another exception to the rule is when there is an involvement of a fraudulent inducement. Tort damages may be recoverable despite of the presence of contractual obligation. This contemplates a situation where the parties have special relationship whereby the claimant places utmost reliable upon the advice of another.

This principle was laid down in the case of Hedley Byrne V Heller[17], whereby Hedley, a firm, placed on behalf of its client (Easipower) several orders for television advertisement. Concerned about the credit worthiness of its client, Hedley asked Heller, Easipower’s bank, with regard to the latter’s standing. The bank misled Hedley that Easipower had good finances; hence, the former relied on this and extended credit to the latter. Later on Easipower had undergone liquidation of its assets and Hedley sustained losses. In its action against Heller, Hedley asserted that the bank was negligent in giving false information with regard to Easipower’s credit worthiness. Despite the absence of fiduciary relationship between the complainant and the defendant, the Court upheld the existence of tortious liability made by the bank. In the words of Per Lord Morris:

If someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise… Furthermore, if…a person takes it upon himself to give information or advice to…another person who, as he knows or should know, will place reliance upon it, then a duty of care will arise.[18]

Another instance where a claimant can fully recover from pure economic loss is when the damage is intentionally inflicted.[19] There are two important explanations why recovery should be allowed in this case. The first reason is due to the fact that there are only fewer cases of intentional tort claims. Hence, from the point of view of open-ended and derivative litigation, it is less problematic to claim recovery for pure economic losses. The second reason is that recovery for such losses necessitates a full compensation.[20] In a nutshell, pure economic loss is recoverable when the act in question is immoral, culpable, or contrary to the public policy.[21]

Conclusion

From the foregoing discussion, it is clear that the criteria of liability for pure economic loss based on torts are basically robust. An accident may cause more than one external harm – the private and social harm. The private harm represents the losses that the claimant may sustain while social harm is the injury that the society may receive from such accident. The concept of exclusionary rule in Tort law bars the private individual to recover damages from pure economic losses based on torts. This is due to the fact that the purpose of tort law is to impose duty of care in order to protect the society from any harm. On the other hand, laws governing contract arises from the interest of the society in the performance of promises. Hence pure economic losses should be confined in the realm of contract law, subject to several exceptions.

Reference:

Bianco, W, ‘The Economic Loss Rule: Some Practical Consequences of the Distinction Between Contractual Duties and Other Legal Duties’, Claims and Dispute Resolution Group, 2007.

Construction Law Update: Negligence and Pure Economic Loss’, Devonshire Solicitors, 2016. Retrieved <http://www.devonshires.com/wp-content/uploads/2016/02/Negligence-and-Pure-Economic-Loss.pdf> 24 July 2017.

Harvey, M, ‘Pure Financial Loss in Product Liability Claims,’ London: BLM Law, 2007.

Parisi, F, Palmer, V, Bussani, M, ‘The comparative law and economics of pure economic loss,’ 27 International Review of Law and Economics, 2007.

Waddell, M, ‘The Limits to Recovery: Economic Loss Claims from the Defendant’s Perspective,’ 2011.

[1] ‘Construction Law Update: Negligence and Pure Economic Loss’, Devonshire Solicitors, 2016.

[2] [1972] 3 W.L.R. 502.

Anderson Duff Lawyer Attorney Hogan Duff

[3] Waddell, M, ‘The Limits to Recovery: Economic Loss Claims from the Defendant’s Perspective,’ 2011.

[4] Bianco, W, ‘The Economic Loss Rule: Some Practical Consequences of the Distinction Between Contractual Duties and Other Legal Duties’, Claims and Dispute Resolution Group, 2007.

[5] Palmer, V, and Bussani, M, ‘Pure Economic Loss: The Ways to Recover’, 11 Electronic Journal of Comparative Law 3, 2007.

[6] Mattiaci, G, and Schafer, H, ‘The Core of Pure Economic Loss,’ Tinbergen Institute, 2006.

[7] Parisi, F, Palmer, V, Bussani, M, ‘The comparative law and economics of pure economic loss,’ 27 International Review of Law and Economics, 2007.

[8] Ibid.

[9] Mattiaci, G, ‘The Economics of Pure Economic Loss and the Internalization of Multiple Externalities,’ Utrecht University, 2003.

[10] Parisi, F, Palmer, V, Bussani, M, ‘The comparative law and economics of pure economic loss,’ 27 International Review of Law and Economics, 2007.

[11] Harvey, M, ‘Pure Financial Loss in Product Liability Claims,’ London: BLM Law, 2007.

[12] [1854] EWHC J70

[13] Ibid.

[14] Mattiaci, G, ‘The Economics of Pure Economic Loss and the Internalization of Multiple Externalities,’ Utrecht University, 2003

[15] Harvey, Pure Financial Loss in Product Liability Claims, 2007.

[16] [1972] 3 W.L.R. 502.

[17] [1964] AC 465.

[18] Ibid.

[19]Parisi, F, Palmer, V, Bussani, M, ‘The comparative law and economics of pure economic loss,’ 27 International Review of Law and Economics, 2007.

[20] Ibid.

[21] Parisi, F, Palmer, V, Bussani, M, ‘The comparative law and economics of pure economic loss,’ 27 International Review of Law and Economics, 2007.