LAW OF TORT

THE TORT OF NEGLIGENCE

NOVEL DUTY SITUATIONS

PURE ECONOMIC LOSS AND LIABILITY FOR NEGLIGENT MISSTATEMENT

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

INTRODUCTION

What Are Novel Duty Situations?

• A novel duty situation is a situation where the courts are asked to recognise a duty of care in circumstances not previously covered by established negligence principles.

• Courts are generally cautious when recognising new duties because of concerns about:

• Unlimited liability.

• Floodgates of litigation.

• Economic consequences.

• Public policy.

• One of the most controversial novel duty situations involves economic loss.

PURE ECONOMIC LOSS

Definition

• Economic loss refers to financial loss suffered by a claimant.

• Economic loss can arise in many situations:

• Loss of profits.

• Loss of business opportunities.

• Loss of investments.

• Financial expenditure.

Types of Economic Loss

Consequential Economic Loss

• Economic loss flowing from:

• Personal injury.

• Property damage.

Examples

• Lost wages following injury.

• Lost business profits following property damage.

Position

• Usually recoverable.

Pure Economic Loss

• Financial loss occurring independently of:

• Personal injury.

• Property damage.

Examples

• Bad investment decisions.

• Financial advice causing loss.

• Loss of business opportunity.

• Loss of future profits.

Position

• Generally not recoverable in negligence.

WHY ARE COURTS RELUCTANT TO ALLOW RECOVERY FOR PURE ECONOMIC LOSS?

Floodgates Argument

Meaning

• Recognition of liability could create an enormous number of claims.

Concern

• One negligent act may affect countless people.

Indeterminate Liability

Meaning

• Liability could become limitless.

Concern

• Defendant may be liable:

• For an unlimited amount.

• For an unlimited time.

• To an unlimited class of people.

Economic Consequences

Concern

• Excessive liability could burden businesses.

• Insurance costs would increase.

• Commercial certainty would decrease.

Policy Considerations

Courts Wish To Avoid

• Excessive litigation.

• Unpredictable liability.

• Economic instability.

PURE ECONOMIC LOSS CAUSED BY NEGLIGENCE

Leading Case: Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd

Facts

• Defendants negligently damaged an electricity cable.

• Factory lost power.

• Three forms of loss occurred:

• Damage to metal already being processed.

• Profit from damaged metal.

• Profit that would have been earned during shutdown.

Decision

Recoverable

• Physical damage to metal.

• Consequential profit loss relating to damaged metal.

Not Recoverable

• Profit lost during factory shutdown.

Principle

• Pure economic loss generally not recoverable.

Significance

• Leading authority demonstrating judicial reluctance to compensate pure economic loss.

EXCEPTION TO THE GENERAL RULE

Liability For Negligent Misstatement

General Rule

• Pure economic loss is normally irrecoverable.

Exception

• Liability may arise where financial loss results from a negligent statement.

Importance

• This is one of the most important exceptions in negligence law.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

LIABILITY FOR NEGLIGENT MISSTATEMENT

Meaning

• A negligent misstatement is a statement made carelessly which causes another person to suffer financial loss.

Examples

• Financial advice.

• Investment advice.

• Professional reports.

• Property valuations.

• References.

• Audit reports.

Historical Position

Before 1964

• Recovery for pure economic loss caused by statements was generally impossible.

Requirement

• Usually required a contractual relationship.

THE DEVELOPMENT OF LIABILITY

Leading Case: Hedley Byrne & Co Ltd v Heller & Partners Ltd

Facts

• Advertising agency sought credit reference regarding a company.

• Bank provided favourable reference.

• Reference was inaccurate.

• Agency suffered financial loss.

Decision

• Claim ultimately failed because of disclaimer.

• However, House of Lords recognised a new principle.

Principle Established

• Duty of care may arise in relation to statements causing pure economic loss.

Significance

• Created liability for negligent misstatement.

• Major exception to the rule against recovery for pure economic loss.

• One of the most important negligence cases.

THE SPECIAL RELATIONSHIP

Requirement From Hedley Byrne

General Rule

• Liability does not arise automatically.

Requirement

• There must be a special relationship between the parties.

Meaning of Special Relationship

A special relationship exists where:

• Defendant possesses special skill or expertise.

• Defendant assumes responsibility.

• Claimant reasonably relies on the statement.

ELEMENTS OF LIABILITY FOR NEGLIGENT MISSTATEMENT

Element 1: Special Skill

Requirement

• Defendant possesses professional knowledge or expertise.

Examples

• Accountant.

• Auditor.

• Surveyor.

• Solicitor.

• Financial adviser.

Element 2: Assumption of Responsibility

Meaning

• Defendant voluntarily undertakes responsibility for accuracy of statement.

Importance

• Central concept in negligent misstatement cases.

Element 3: Reasonable Reliance

Requirement

• Claimant must rely on the statement.

Additional Requirement

• Reliance must be reasonable.

Example

• Investor relying upon professional financial advice.

Element 4: Foreseeability

Requirement

• Defendant must reasonably foresee reliance and resulting loss.

Element 5: Financial Loss

Requirement

• Actual economic loss must occur.

DISCLAIMERS

Definition

• Disclaimer is a statement excluding responsibility.

Example

• “Without responsibility.”

• “No liability accepted.”

Effect

• May prevent liability.

Hedley Byrne Example

• Bank’s disclaimer prevented successful claim.

Statutory Control

Unfair Contract Terms Act 1977

Effect

• Some disclaimers may be ineffective if unreasonable.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

DEVELOPMENT AFTER HEDLEY BYRNE

Expansion Of Liability

Leading Case: Smith v Eric S Bush

Facts

• Surveyor prepared valuation report.

• Purchaser relied upon report.

• Property defects existed.

Decision

• Surveyor liable.

Principle

• Reasonable reliance established.

Significance

• Expanded liability of surveyors.

Limitation Of Liability

Leading Case: Caparo Industries plc v Dickman

Facts

• Investors relied on audited accounts.

• Financial losses suffered.

Decision

• No duty owed.

Principle

• Duty does not extend to the world at large.

Court’s Concern

• Unlimited liability.

• Indeterminate class of claimants.

Significance

• Restricted scope of negligent misstatement liability.

CAPARO AND NEGLIGENT MISSTATEMENT

Additional Requirements

The court considered:

Foreseeability

• Was reliance foreseeable?

Proximity

• Was there a sufficiently close relationship?

Fair, Just and Reasonable

• Should liability be imposed?

Importance

• Modern negligent misstatement cases often combine:

• Hedley Byrne principles.

• Caparo principles.

PROFESSIONAL NEGLIGENCE

Common Defendants

Accountants

• Financial reports.

Auditors

• Company accounts.

Surveyors

• Property valuations.

Solicitors

• Legal advice.

Financial Advisers

• Investment recommendations.

Standard Applied

Professional Standard

• Reasonably competent professional.

Authority

• Bolam v Friern Hospital Management Committee

POLICY CONSIDERATIONS

Why Courts Restrict Liability?

Floodgates

• Unlimited claims possible.

Indeterminate Liability

• Liability must remain controllable.

Commercial Certainty

• Businesses need predictable risks.

Fairness

• Liability should not be unlimited.

COMPARISON TABLE

AO2 APPLICATION

Problem Question Structure

Step 1

• Identify statement made.

Step 2

• Determine whether defendant possessed special expertise.

Step 3

• Determine whether responsibility was assumed.

Step 4

• Examine reliance.

Step 5

• Apply Hedley Byrne.

Step 6

• Apply Caparo.

Step 7

• Consider disclaimers.

Step 8

• Reach conclusion.

AO3 EVALUATION

Arguments Supporting Liability

Fairness

• Victims deserve compensation.

Professional Responsibility

• Experts should be accountable.

Commercial Trust

• Encourages accurate advice.

Arguments Against Liability

Floodgates

• Unlimited claims possible.

Economic Burden

• High costs for professionals.

Indeterminate Liability

• Difficult to control scope of responsibility.

EXAM QUICK REVISION SHEET

Pure Economic Loss

General Rule

• Not recoverable.

Authority

• Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd

Negligent Misstatement

Exception

• Recoverable where special relationship exists.

Authority

• Hedley Byrne & Co Ltd v Heller & Partners Ltd

Key Requirements

• Special skill.

• Assumption of responsibility.

• Reasonable reliance.

• Foreseeability.

• Financial loss.

Important Cases

• Hedley Byrne & Co Ltd v Heller & Partners Ltd

• Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd

• Smith v Eric S Bush

• Caparo Industries plc v Dickman

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.