If the only loss incurred as a consequence of a negligent act (as opposed to a negligent statement) is economic then, unless there is a contract, there is usually no right of compensation. This the principle that there is generally no right of recovery for so-called pure economic loss. An example of so-called “pure” (or more accurately purely) economic loss is where a negligent act cuts an electric cable causing financial loss or damage to local factories.
The law of negligence extends to liability for financial loss caused by negligent statements and advice (as opposed to negligent acts). Negligent misstatement often arises in the context of negligent professional advice or work. However, Outside of negligent statement and advice, negligence law does not generally allow recovery of loss which is economic only.
If the economic loss follows from physical injury or damage to property, then follow on economic loss may be recoverable. For example, where a person is injured in an accident caused by another’s negligence, he will be entitled to recover his past and future lost earnings.
Negligent Misstatement and Advice
Liability for negligent misstatement and advice has general application beyond an advice based professional services, The most famous case which established the principle of liability arose in relation to a careless credit reference by a bank. The same principles that apply to negligence generally, apply to negligent misstatement. There must be a duty of care, breach of that duty with foreseeable actual economic loss and damage caused by that breach.
There must generally be an assumption of responsibility before there is liability for a careless statement. This will not usually be an issue in the case is a professional relationship for payment. The principle would, for example, rule out liability for statements made in casual conversation in a social context.
The person giving the advice or information must assume responsibility for its accuracy. It must be reasonable for the third party to rely on the information. The person giving the information must be aware that the third party was likely to rely on the statement or advice.
Closeness / Proximity
There must generally be a close link or so-called proximity between the parties. The claimant must be someone who is immediately foreseeable as likely to suffer a loss in consequence of the defendant’s negligent statement. They must generally be a relatively small group to whom the duty of care may potentially be deemed to be owed. They must be sufficiently close to create a relationship such that it is reasonable and foreseeable that the latter will rely on the former’s advice.
An auditor, may, for example, be liable for negligence where shareholders rely on his opinion or certificate. The shareholder may be sufficiently proximate. However, the auditor is unlikely, for example, to have a duty third parties generally who might use the information as a basis for decision making. The latter relationship is less likely to be sufficiently proximate. The position will depend on the particular circumstances. An auditor may owe a duty to prospective investors in circumstances where they constitute a narrow foreseeable class in a particular context.
In addition to a relationship of proximity, it must be foreseeable that the claimant will rely on the statement. He must actually rely on the statement. The reliance itself must be reasonable.
Negligence and Breach of Contract
It is in that context of professional services, there is likely to be a contract, which deals with the quality and delivery of the service. The client will be party to the contract. However, the service may be wholly or partly for the benefit of a third party. An example would be where a will is made with a client for the benefit of a third party.
The negligent service or advice may simultaneously constitute a breach of contract and negligent misstatement. The persons to whom the service provider may be liable will person who should be in the immediate contemplation of the service provider as prospectively suffering loss. In contrast, contract law only gives rights to parties to the contract.
Claims for negligent advice are often based both on breach of contract and negligence. The contract may limit or exclude the duty of the service provider. These clauses will generally be upheld in relation to both breaches of contract and negligence provided that they apply to the circumstances. The clause will usually only bind the parties to the contract. A wider category may be bound in respect of limitation of a negligence claim. See our chapter on third parties and contracts.
A claim of negligence may often be more advantageous than a breach of contract claim. This is because the time limits run from the date of loss rather than the date of the original service. In addition, the rules on the extent of the loss for which compensation will be allowed, are more generous under negligence and civil wrongs generally.