Claims for pure economic loss - Economic loss from defective property

Learning Outcomes

This article explains the concept of pure economic loss in the context of defective property within the tort of negligence. It clarifies the general rule against recovery for such losses and contrasts this with consequential economic loss. Key case law development, particularly the significance of Murphy v Brentwood DC, is outlined. After reading this article, you should understand the typical scenarios where economic loss arises from defective property and why, in negligence, such losses are generally irrecoverable, directing claimants towards contractual remedies where available. This knowledge is essential for applying negligence principles in SQE1 assessments.

SQE1 Syllabus

For SQE1, understanding the rules on pure economic loss, particularly relating to defective property, is essential within the broader topic of negligence. Your ability to distinguish pure economic loss from recoverable damage (like personal injury or damage to other property) and apply the relevant legal principles derived from case law will be assessed.

As you work through this article, pay particular attention in your revision to:

• the definition of pure economic loss and its distinction from consequential economic loss.
• the general rule that pure economic loss is not recoverable in negligence.
• how this rule applies specifically to losses arising from defective property (e.g., cost of repair/replacement, diminution in value).
• the significance of key cases like Murphy v Brentwood District Council in establishing the current position.
• identifying situations where contractual remedies might be more appropriate for defective property claims.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What type of loss occurs when a defect in a newly purchased item causes damage only to the item itself, requiring repair or replacement?
   1. Consequential economic loss
   2. Pure economic loss
   3. Physical damage
   4. Property damage
2. Which landmark House of Lords case significantly restricted the recoverability of pure economic loss arising from defective buildings, overruling a previous, more lenient approach?
   1. Donoghue v Stevenson
   2. Hedley Byrne & Co Ltd v Heller & Partners Ltd
   3. Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd
   4. Murphy v Brentwood District Council

3. True or False: If a negligently installed electrical component causes a fire that damages both the appliance it's part of and the surrounding kitchen units, the cost of repairing the kitchen units is considered pure economic loss in tort law.

Introduction

When property is defective due to negligence, the resulting financial losses can be significant. However, the tort of negligence places strict limits on the recovery of purely financial losses that are not directly consequent upon physical injury to the claimant or physical damage to the claimant's other property. This article focuses specifically on claims for pure economic loss arising from defective property, explaining the general rule against recovery and its rationale, drawing primarily from key case law. Understanding this distinction is important for correctly applying negligence principles in practice and in the SQE1 assessments.

Defining Pure Economic Loss vs Consequential Economic Loss

It is essential to distinguish between pure economic loss and consequential economic loss.

Key Term: Consequential economic loss Financial loss that is a direct consequence of physical injury to the claimant or physical damage to the claimant's property (other than the defective item itself). This type of loss is generally recoverable in negligence, subject to standard rules of causation and remoteness.

Key Term: Pure economic loss Financial loss suffered by a claimant that is not consequent upon physical injury to their person or physical damage to their property. This includes losses like diminution in value or the cost of repairing/replacing a defective item itself.

Worked Example 1.1

A negligently manufactured tyre bursts while a car is being driven. The burst tyre causes the car to crash, damaging the car's bodywork and injuring the driver. The driver loses earnings while recovering. The tyre itself is ruined. Which losses are recoverable in negligence from the tyre manufacturer?

Answer: The driver's personal injury and subsequent loss of earnings are recoverable. The damage to the car's bodywork (property other than the defective item) is also recoverable. These are examples of physical damage and consequential economic loss. However, the cost of the ruined tyre itself represents pure economic loss (damage to the defective item itself) and is not recoverable in negligence from the manufacturer. The remedy for the faulty tyre lies in contract against the seller.

The General Rule: No Recovery for Pure Economic Loss

The fundamental principle in the tort of negligence is that pure economic loss is generally not recoverable. This rule stems from judicial policy concerns, primarily the fear of indeterminate liability – the "floodgates" argument. If a single negligent act could lead to claims from an indefinite number of people for purely financial losses, the potential liability could be crushing and uninsurable. Tort law primarily aims to compensate for physical harm and damage, leaving defects in quality or value largely to contract law.

Pure Economic Loss from Defective Property

This general rule against recovery has significant implications when the loss arises from property that is itself defective.

Cost of Repair or Replacement

If an item of property (e.g., a building, a car, a consumer product) is defective due to negligence in its design or construction, but the defect is discovered before it causes physical injury or damage to other property, the cost incurred in repairing or replacing the defective item itself is considered pure economic loss.

Key Term: Defective property Property that is faulty or substandard in quality, design, or construction, but which has not yet caused physical injury or damage to other property or persons.

The leading case confirming this principle is Murphy v Brentwood District Council [1991] 1 AC 398 (HL).

Murphy v Brentwood District Council

In Murphy, the claimant purchased a house built on foundations that were defective due to the local council's negligent approval of the plans. Cracks appeared, and the claimant sold the house at a significant loss, suing the council for the diminution in value and repair costs. The House of Lords held that this loss was pure economic loss. The defect had become apparent before causing injury or damage to other property. The loss related to the defective quality of the item itself (the house) and was not recoverable in tort. The claimant's remedy, if any, lay in contract against the builder or vendor. Murphy overruled the earlier, more generous decision in Anns v Merton London Borough Council [1978] AC 728 (HL), which had allowed recovery for the cost of repairing dangerous defects to prevent future physical harm, blurring the line between physical damage and economic loss.

The principle from Murphy is clear: the cost of putting right a defect in an item, or the loss in value of that item due to the defect, is pure economic loss and is not recoverable in negligence.

Worked Example 1.2

A company buys a complex piece of machinery manufactured by Innovate Ltd. Due to a negligent design flaw, the machine frequently breaks down, causing significant production delays and lost profits. The machine itself requires costly repairs but has not damaged any other equipment or injured any workers. Can the company sue Innovate Ltd in tort for the repair costs and lost profits?

Answer: No. The repair costs relate to the defective product itself, and the lost profits result from the inability to use that defective product. Both are classified as pure economic loss. The company's remedy against Innovate Ltd would typically lie in contract law (e.g., breach of warranty of quality or fitness for purpose, if applicable under the sale contract), not the tort of negligence.

Distinction: Damage to Other Property

The position is different if the defective property causes physical damage to other property belonging to the claimant.

Worked Example 1.3

A negligently manufactured central heating boiler is installed in a homeowner's house. The boiler explodes due to the defect, damaging the boiler itself, destroying surrounding kitchen units, and causing minor burns to the homeowner.

Answer:

• Personal Injury: The homeowner can recover damages for the burns (negligence).
• Damage to Other Property: The homeowner can recover the cost of the destroyed kitchen units (negligence). This is physical damage to other property.
• Damage to the Defective Item: The homeowner cannot recover the cost of the damaged boiler itself in tort from the manufacturer. This is pure economic loss. The remedy lies in contract against the seller/installer.

Exam Warning

Be very careful to distinguish between damage to the defective product itself (pure economic loss, generally irrecoverable in tort) and damage caused by the defective product to other property or persons (physical damage and consequential economic loss, generally recoverable in tort, subject to standard negligence principles).

The Role of Contract Law

The courts' reluctance to allow recovery for pure economic loss from defective property in tort highlights the primary role of contract law in dealing with issues of quality and value. When purchasing property or goods, buyers can protect themselves through contractual warranties and conditions. If the item is not of satisfactory quality or fit for purpose, the buyer's remedy is typically against the seller for breach of contract, allowing recovery for repair costs, replacement, or diminution in value – the very losses classified as pure economic loss in tort. Tort law generally does not intervene to provide a remedy where contract law is considered the appropriate mechanism for allocating risks related to product quality.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Pure economic loss (PEL) is financial loss not consequent upon physical injury to the claimant or physical damage to their other property.
• Consequential economic loss flows directly from physical injury or damage to other property and is generally recoverable in negligence.
• The general rule in tort is that PEL is not recoverable in negligence.
• Loss arising from defective property itself (cost of repair/replacement, diminution in value) is classified as PEL.
• Murphy v Brentwood DC confirmed that PEL from defective buildings/property is generally irrecoverable in tort, overruling Anns v Merton LBC.
• The primary remedy for defective quality or value lies in contract law against the seller/supplier.
• If defective property causes physical injury or damage to other property, those losses (and consequent financial losses) are recoverable in negligence, subject to normal rules.

Key Terms and Concepts

• Pure economic loss
• Consequential economic loss
• Defective property