Economic Loss

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13 December 2021

Negligence and Economic Loss

The courts have been traditionally reluctant to grant compensation for pure economic loss. Recovery for economic loss arising from deliberate and reckless acts was allowed in some circumstances recovery for economic loss which followed as a result of personal injury or property damage has long been allowed in a claim based in negligence.

The courts have sought not to create too broad a principle of liability for economic loss, caused by negligence. If such a principle was to be allowed too broad a scope, it might make commercial life impossible. Accordingly, it was held, traditionally that pure economic loss should be primarily a matter for a contract law and restitution.

Over time, the traditional position eroded, so that pure economic loss has become firmly established in certain contexts, particularly negligent advice or the negligent provision of professional services.

A careless statement in itself will not create liability. There must be an assumption of responsibility. Questions may arise, as to whether in the particular circumstances, that the defendant assumed a duty to the claimant.  Casual, off the cuff conversations, are less likely to involve an assumption of responsibility than the formal giving of advice in a professional setting.

The courts are reluctant to impose a duty for pure omissions. A person may he may be liable for negligence if a partial statement itself is misleading. In certain cases, there may be a duty to clarify a statement, this is literally true, but is known to be misleading in context. There may be a duty to correct a statement that has been later rendered untrue by circumstances. The broad principles in this area are similar to those in respect of misstatement in the context of contracts.

Not Generally Recoverable

In an Irish case in 1972, where excavation works had cut the electricity supply to a factory, recovery was denied on the basis it constituted pure economic loss. Notwithstanding the Hedley Byrne principle, the loss was said not to injure the plaintiff’s person or property directly, so that it merely caused consequential loss.

It appears that the retrenchment by Supreme Court in the Glencar case makes it less likely that liability for economic loss will be readily awarded in new circumstances. The courts must proceed incrementally by analogy with existing cases. It must be just and reasonable to impose a duty of care in the circumstances.

The Supreme Court in Glencar required that in addition to foreseeability and proximity, the imposition of a duty of care in the circumstances must be just and reasonable. There must be no powerful public policy considerations against imposing the duty. The Supreme Court reserved for another occasion, whether economic loss is recoverable in actions for negligence, other than a negligent misstatement. It did not overrule the Supreme Court’s earlier cases which had appeared to allow in Ward v McMaster.

The existence of a contractual relationship will not preclude a claim in negligence. The UK courts recognised a concurrent liability in contract and negligence. This concurrent liability has been recognised by the Supreme Court in Ireland Kennedy v. AIB 1998 248.

The existence of a contractual relationship may be relevant in many contexts. The terms of the contract may limit the duty of care. Where a contract defines the relationship and creates expectations, the courts will be reluctant to interpose an additional liability and negligence. The courts, in effect, find that it is not reasonable to impose a duty of care where the contract determines the totality of the relationship.

Accordingly, in areas such as under companies law, where the relationships of the parties are relatively well defined, the courts appear to be reluctant to find an additional duty of care, over and above the duties defined by the company constitution and the shareholders’ agreement.

Pure Economic Loss

The courts have sought to limit liability for so-called pure economic loss. This is economic loss without property loss or personal injury.

The 1963 House of Lords case of Hedley Byrne & Co Ltd v Heller & Partners Ltd. was the seminal case in the development of negligent misstatement. In that case, itself the House of Lords indicated that there was no logic or common sense in distinguishing between negligence causing physical injury and that causing pure economic loss.

However, recovery for pure economic loss arises from a careless act or omission remained limited. In a number of cases where on-going processes in factories were interfered with, recovery was allowed for the loss of material in production but not for an on-going loss of profits.

The traditional position was reasserted notwithstanding the apparent breadth of Hedley Byrne case. In cases where there has been damage to a supply line of crucial importance to a business causing economic loss, recovery was disallowed. Similarly, where negligently undertaken building works caused pure economic loss, recovery was denied.

As set out in other sections, the House of Lords expanded the scope of negligence to allow recovery for pure economic loss arising out of construction defects in buildings. Ultimately, however, the relevant cases were overruled in the late 1980s and early 1990s and the House of Lords has since taken a different approach.

Economic loss arising directly out of physical damage is recoverable. However, economic loss unrelated to where the actual or apprehended physical injury is irrecoverable unless the economic loss flows from injury to a person or to damage to property other than the defective property itself.

Development of the Law

The Hedley Byrne case, which allowed for liability for negligent misstatement causing pure economic loss was rapidly accepted in Ireland. It was acknowledged that circumstances may create a relationship between two parties, in which if one seeks information from the other and has given it, the other is under a duty to take reasonable care to ensure that the information is correct.

The negligent misstatement principle was held to apply in relation to a negligently drawn ill. Both in the UK and in Ireland, it was held that a solicitor who prepared a will owe a duty of care to the beneficiary, notwithstanding the absence of a contractual relationship with him. The solicitor who was negligent could be liable for pure economic loss for the failed legacy.

Liability for negligent misstatement arises where there is a special relationship between the parties. Where the persons who may suffer loss are a a limited or identifiable class of persons, who could be reasonably expected to rely on to their detriment, there may be sufficient proximity for the purpose of imposing liability.

Accordingly, where an inquiry was made of the Department of Agriculture and Fisheries in relation to the availability of fisheries license, the requisite degree of proximity existed so that the duty of care applied.

In Wildgust v. Bank of Ireland in 2006, the Supreme Court allowed a claim for negligent misstatement, notwithstanding that the person who had suffered the loss was unaware of the misstatement and had not relied on it. The misstatement had been such that a bank which had made an inquiry had been misled into believing that a policy had not lapsed so that it was not necessary to renew it. The customer suffered loss and the Supreme Court allowed the claim. The claimant was one of a very small number of persons who would suffer loss by reason of negligence.

A similar approach was taken in relation to the negligent reply to inquiries by a local authority regarding the status of a road. It was foreseeable that successors in title would use the certificate. Accordingly and on the same principles as the Wildgust case, it was not necessary to show that there was express reliance by the person who ultimately suffered loss.

The incorrect representation must have caused the loss. There have been several cases where the Irish courts have upheld liability for negligent misstatement, in the mishandling of cheques.

Where a firm of auctioneers went outside their normal role and undertook to advise a buyer in relation to property in such a way that it was obvious that the buyers were relying on the advice they were liable for breach of that duty. A special relationship and duty of care were held to arise, notwithstanding that the advice was outside the course of the defendant’s usual business.

Relationship of Proximity Required

There must be sufficient proximity to establish liability for negligent misstatement. Important factors include the foreseeability, assumption of responsibility to take care and reliance by the claimant.

Even if an economic loss is foreseeable, damages are recoverable where there is a sufficiently close proximity between the parties and the defendants have the knowledge or at least a means of knowing that a particular person and not just a member of a class will rely on them and be likely to suffer consequences. It must also be fair, just and reasonable that the duty be imposed.

In the case of Hedley Byrne v Heller & Partners, a telephone inquiry was made to a bank regarding a customer’s financial position. Replies were given with a disclaimer to the effect that the customer was respectable and good for normal engagement. The information was passed by the inquiring bank to a claimant advertising agent, which suffered a significant loss in consequence.

The House of Lords held that if in the ordinary course of business, a person gives advice or information to another without a contractual relationship,  in circumstances where a reasonable man would know that he was being trusted or that his skill or judgment was being relied on, he accepts a legal duty to take care in the circumstances.

The duty of care generally arises in relation to the provision of professional services. However, it is not necessarily so limited. It applies to any person who professes a special knowledge or skill. The courts are more likely to hold the defendant liable, where he has made a statement with a view to inducing or persuading another to enter into a transaction with him.

The duty of care is based on an express or implied assumption of responsibility to take reasonable care when giving advice or passing information. It is usually essential to show the defendant knew of the statement communicated by the claimant, either as an individual or a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind. The defendant must know the claimant will be very likely to rely on the statement.

The Supreme Court has held that the solicitor for a seller owes a duty of care to the buyer in answering enquiries when acting in the sale of the property. He assumes responsibility to the buyer, whom he knows the third party must rely on his answers. This was justified under the general principles of liability. This does not necessarily mean that the seller’s solicitor is unconditionally responsible for every reply. In some cases, he will be giving his opinion or replying based on instructions received.

Public Authorities

Public authorities are liable for negligent misstatement in much the same way as individuals. Where they undertake a duty of care, by issuing information which they know persons will reasonably rely on, they may be liable in negligence.

In some contexts, statements by public authorities may create legitimate expectations, which the public authorities may be obliged to fulfil. If the State or public body creates an expectation, it may be liable to the third parties, if this expectation is not fulfilled. The principle is analogous to that of equitable estoppel. The breach of legitimate expectation may give rise to an equity as the case demands.  However, the courts have been reluctant to expound too wide a principle of legitimate expectations.

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