Claims for pure economic loss - Defences applicable to pure economic loss claims

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Overview

Defenses against claims for pure economic loss are a vital part of tort law, critical for passing the SQE1 FLK1 exam. These defenses can alter case outcomes, making it essential for future lawyers to fully comprehend them. This article examines these defenses, focusing on voluntary assumption of risk, contributory negligence, and illegality.

Historical Context and Key Cases

The development of defenses to pure economic loss is closely linked to negligence law:

  • Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964]: Introduced the concept that a duty of care could exist in cases of negligent misstatements, affecting economic loss. It highlighted the importance of a 'special relationship' in establishing liability.

  • Murphy v Brentwood District Council [1991]: Defined the limits of liability for pure economic loss, showing the cautious approach courts take.

  • Caparo Industries plc v Dickman [1990]: Created a three-stage test for duty of care, significantly influencing pure economic loss assessments.

These cases show the ongoing evolution of law in this area, emphasizing the importance of historical context.

Voluntary Assumption of Risk

Theory

Voluntary assumption of risk, or volenti non fit injuria, means that one who accepts a known risk cannot later claim harm. This defense is based on the autonomy to make informed choices about risks.

Key Elements

To prove this defense, it must be shown that:

  1. The claimant fully understood the risk.
  2. The claimant willingly accepted it.

Application and Limitations

Courts often hesitate to accept this defense, especially with complex financial products or where one party knows significantly more than the other. The case of Piper v JRI (Manufacturing) Ltd [2006] illustrates that consent must be genuine and informed.

Example: An investor advised on a high-risk venture who proceeds knowing the risks may have assumed the risk, potentially barring claims against the advisor if the investment fails.

Contributory Negligence

Basis

Contributory negligence means a claimant who contributes to their loss may have their damages reduced. It's established in the Law Reform (Contributory Negligence) Act 1945.

Considerations

In these cases, courts evaluate:

  1. How far the claimant strayed from reasonable care.
  2. How the claimant's actions contributed to the harm.
  3. The blameworthiness of both parties.

Application and Recent Trends

Courts decide on damage reduction based on each party's fault. The case of Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] provides examples of contributory negligence in financial transactions, where a company director's fraud led to damage reduction.

Example: A contractor ignoring safety rules, causing delays and costs, may argue that the building owner's lack of oversight also contributed to the economic loss, affecting liability.

Illegality (Ex Turpi Causa Non Oritur Actio)

Concept

The illegality defense stops claims stemming from a claimant's illegal actions. It supports public policy and legal integrity.

Principles

As seen in Patel v Mirza [2016], the approach involves considering:

  1. The purpose of the law broken.
  2. Other public policies that might be affected.
  3. The fairness of dismissing the claim.

Application and Developments

This defense applies when the claimant's illegal actions caused the loss or when the loss resulted from a reaction to those actions. Stoffel & Co v Grondona [2020] refined this defense in professional negligence cases, aiming to balance prevention of tainted claims and maintaining professional standards.

Example: A company making software for illegal uses might struggle to recover damages if tied to its unlawful actions.

Practical Applications

Case Study 1: Negligent Financial Advice

A small business owner follows a consultant's advice on a risky investment, which fails, and sues for negligence. The consultant may claim:

  • Voluntary Assumption of Risk: The owner knew the risks.
  • Contributory Negligence: The owner's lack of due diligence contributed.
  • Illegality: Unlikely unless the strategy involved illegal acts.

Case Study 2: Defective Construction Project

A developer hires a company using poor materials, leading to defects and loss. In suing for negligence, defenses could include:

  • Contributory Negligence: If the developer failed to oversee properly.
  • Voluntary Assumption of Risk: Less likely unless aware of defects.
  • Illegality: Unlikely without illegal acts.

Conclusion

Understanding the defenses available for pure economic loss claims is essential for the SQE1 FLK1 exam. These defenses, such as voluntary assumption of risk, contributory negligence, and illegality, significantly impact case results. By examining their history, principles, and real-life examples, students can better understand this challenging area of law.