A pure economic loss is one which is not related to or results from any physical injury to a person or damage to property. The scope of the duty of care in relation to pure economic loss has caused much difficulty for the courts. Partly because of the desire to avoid crushing liability and partly because of the need to avoid incompatibility with contract law, the courts are unwilling to grant remedy for economic loss caused by a negligent act. In order to control the scope of liability, the courts have adopted a controversial property-based control mechanism to deal with pure economic loss. Gilikar and Beckwith have expressed concern about the 'the arbitrary line between economic loss resulting from damage to the claimant's own property (consequential) and economic loss resulting from damage to property in which the claimant only has a contractual interest (non-recoverable pure economic loss)'.(1) Adding a layer of incoherence to this issue is the controversial distinction between the statement cases (eg. Hedley Byrne v Heller) and the activity cases (eg. Murphy v Brentwood).

Spartan Steel v Martin is a leading case which tries to clarify the distinction between pure economic loss and consequential loss. One of the arguments put forward by Lord Denning to make the former non-recoverable is the 'floodgate theory'. According to Lord Denning, 'if claims for pure economic loss were permitted for this particular hazard (the consequence of cutting of electricity supply), there would be no end of claims. Some might be genuine, but many might be inflated, or even false.'(2) Similar warning was given by Widgery J. in Weller & Co v Foot & Mouth Disease Research Institute. In Spartan Steel, Denning also argued that the need to spread the loss was important. Although 'the further loss (pure economic loss) was foreseeable', Denning explained that 'such losses were better borne by the entire community than by the defendants.'(3)

Another reason for denying recovery for pure economic loss is the unwillingness of the courts to undermine contract law. If he claimant in Spartan Steel had contracted for the installation and maintenance of emergency generators, it would have had a contractual remedy for non-property-based economic loss. In D & F Estates v Church Commissioners, Lord Oliver stated that, in English law, there was no such things as 'transmissible warranties'(4) of quality. Many writers have expressed reservations about the use of tort law to regulate the quality of products because this is a matter for the market and for the rules of contract. Moreover, it is arguable that 'allowing the parties, through contracts, to determine where liability will fall if things go wrong makes for economic efficiency.'(5)

Although the 'floodgate argument' and 'contractual considerations' may reflect the feelings of society, these two policy considerations have injected uncertainty into the foreseeability test of economic loss. The Spartan Steel's arbitrary line between pure economic loss and consequential loss has caused ripples of concern in the legal world. In this case, Edmund-Davies L.J. objected to the arbitrary distinction. He argued that 'the law would be clearer if it stated that all foreseeable economic loss was recoverable. His Lordship could not see why the recovery of economic loss should depend on the purely fortuitous circumstance of who happened to own the piece of property that was damaged.'(6) The Aliakmon has provided additional ammunition for critics to attack the requirement for proprietary interest in claims in negligent acts. In this case, 'the person who had suffered the loss had no remedy, whilst the person who had a remedy (the owner of the coils) had suffered no loss.'(7)
Considerable doubt has also been cast on the arbitrary distinction between claims in negligent acts and negligent words. But it is hard to find any logical justification for such distinction. Hedley Byrne v Heller was the first case to establish that a duty of care could exist in respect of careless statements. First of all, it was necessary to prove that the advice was given and received within a special relationship. This notion was later expanded to include any business or professional context (see Howard Marine v Ogden). Secondly, the claimant had to demonstrate reliance on the statement. In White v Jones, the disappointed beneficiary did not rely on the skill of the solicitor. But for policy reasons, reliance was not regarded as important in the above case. With the exception of White v Jones and Gorham v British Telecommunications plc, the courts do not seem to be willing to extend liabilities beyond the existing clearly-established categories.

The arbitrary distinction between negligent words and negligent acts has created some problems. 'It would appear that a valuer who prepares a negligent valuation survey can be sued by the purchaser who relied on the report (see Smith v Eric Bush) but the original tortfeasor whose negligence created the inherent defect in the building (eg. the builder) cannot be sued because the owner's loss is pure economic loss (see Murphy and D & F Estates).(8)

Influenced by policy reasons, the courts do not merely rely on the foreseeability test of financial loss to control claims for pure economic loss. Obviously, a liability rule based on reasonable foreseeability of financial loss is too wide. But as Gilikar and Beckwith have correctly pointed out, 'it is harder to find a justification in logic for the way in which courts have sought to limit liability for economic loss.'(9) The arbitrary distinction between pure economic loss and consequential loss has attracted much criticism. Besides, the distinction between the statement cases and the activity cases is also arbitrary.

END

Notes

1. P.Giliker & S. Beckwith, Tort (London: Sweet & Maxwell, 2004), p. 70.
2. R. Kinder, Casebook on Torts (Oxford: OUP, 2006), p. 136.
3. V. Harpwood, Modern Tort Law (London: Cavendish Publishing Ltd., 2003), p.84.
4. Gilikar & Beckwith, op.cit., p.78.
5. Ibid., p.74.
6. Ibid., p.70.
7. Ibid., p.82.
8. Robin Martin, Law of Tort (UK: ILEX Tutorial College Ltd., 2006),p. 65.
9. Gilikar & Beckwith, op.cit., p. 70.