## **Learning Outcomes**

This article outlines the general rule in the tort of negligence regarding claims for pure economic loss and how it is tested in SQE1. It explains the definition of pure economic loss and contrasts it with consequential economic loss flowing from personal injury or property damage. It examines the policy rationale for the general prohibition on recovery, including floodgates concerns, indeterminate liability, and the contract–tort boundary, and shows how these policies operate within the Caparo framework to limit the scope of the duty of care. It discusses the main categories of pure economic loss—relational economic loss, defective product economic loss, and stand-alone financial loss—and links each category to leading authorities such as Spartan Steel, Murphy v Brentwood DC, Weller v Foot and Mouth Disease Research Institute, The Aliakmon, and Junior Books. It details the contrast between negligent acts and negligent misstatements based on assumption of responsibility, highlighting the narrow circumstances in which economic loss may be recoverable. It equips you to identify and label different types of economic loss, determine whether a duty of care is owed, and apply the correct rule to multiple-choice problem scenarios and short case-based questions.

## **SQE1 Syllabus**

For SQE1, you are required to understand the principles governing claims for pure economic loss within the broader context of negligence, including the ability to distinguish pure economic loss from other types of damage and appreciate the policy reasons limiting recovery, and to apply these principles to factual scenarios presented in single best answer multiple-choice questions, with a focus on the following syllabus points:

- Define pure economic loss and differentiate it from consequential economic loss.
- Explain the general rule that pure economic loss is not recoverable in negligence.
- Identify the key policy reasons supporting this general rule.
- Understand how the general rule affects the scope of the duty of care in relevant situations.
- Recognise the main categories of pure economic loss claims and link them to controlling case law (e.g., damage to someone else’s property; defective product losses; stand-alone financial loss).
- Situate these rules within the Caparo framework and appreciate the special treatment of negligent misstatements by assumption of responsibility (addressed in a separate article).

## **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. Which of the following best defines pure economic loss in tort?
   a) Financial loss resulting directly from physical damage to the claimant's property.
   b) Financial loss suffered independently of any physical injury or property damage to the claimant.
   c) Compensation awarded for pain and suffering.
   d) The cost of replacing a defective product.

2. What is the general rule regarding recovery for pure economic loss in negligence?
   a) It is always recoverable if caused by a negligent act.
   b) It is recoverable only if caused by a negligent statement.
   c) It is generally not recoverable.
   d) It is recoverable if the loss is substantial.

3. Which policy reason is often cited for the general rule against recovering pure economic loss?
   a) The difficulty in proving the defendant was negligent.
   b) The need to encourage claimants to take out insurance.
   c) The desire to avoid imposing potentially indeterminate liability ('floodgates').
   d) The fact that financial loss is less serious than physical injury.

## **Introduction**

In the tort of negligence, a claimant must demonstrate that the defendant breached a duty of care, causing actionable damage. Damage typically involves personal injury or physical damage to property. However, claimants sometimes suffer financial loss that is not directly linked to such physical harm. This type of loss is termed pure economic loss. The general rule established through case law is that pure economic loss is not recoverable in negligence. This principle significantly limits the scope of a defendant’s duty of care and is used by courts to control liability in novel duty situations.

This control reflects the Caparo Industries plc v Dickman approach: even where loss is foreseeable and there is factual closeness (proximity), it may not be fair, just and reasonable to impose a duty to avoid purely financial harm. The courts have therefore drawn a sharp boundary around the kinds of economic loss for which negligence will give a remedy, reserving recovery to economic losses that are consequential on physical damage to the claimant’s person or property.

## **Distinguishing Pure Economic Loss from Consequential Economic Loss**

It is essential to distinguish between pure economic loss and consequential economic loss, as the rules governing recovery differ significantly.

> **Key Term: Consequential Economic Loss**
> Financial loss that is suffered as a direct consequence of physical injury to the claimant or physical damage to the claimant's property.

Consequential economic loss is generally recoverable in negligence because it flows directly from damage for which a duty of care is already owed (ie, physical injury or property damage). Typical heads of consequential loss include lost earnings during incapacity following personal injury, loss of profit while damaged equipment is repaired, and replacement/repair costs for damaged property.

### **Worked Example 1.1**

Ahmed, a self-employed taxi driver, is involved in a road traffic accident caused entirely by Ben's negligent driving. Ahmed suffers a broken arm and his taxi is damaged. Due to his injury, Ahmed cannot work for two months, losing £4,000 in earnings. The repairs to his taxi cost £1,500. Are Ahmed's lost earnings and repair costs recoverable?

> **Answer:** Yes. Both the lost earnings (£4,000) and the repair costs (£1,500) are consequential economic loss. The lost earnings result directly from Ahmed's personal injury (the broken arm), and the repair costs result directly from the physical damage to his property (the taxi). Ben owed Ahmed an established duty of care as a fellow road user not to cause physical injury or property damage, and this duty extends to the consequent financial losses.

Now consider the definition of pure economic loss.

> **Key Term: Pure Economic Loss**
> Financial loss suffered by a claimant which does not flow directly from physical injury to their person or physical damage to their property.

This type of loss stands alone, independent of any physical harm suffered by the claimant. The main categories relevant in practice are:

> **Key Term: Relational Economic Loss**
> Financial loss suffered by a claimant because a third party’s property is physically damaged, disrupting the claimant’s economic relations (e.g., suppliers, customers, infrastructure providers), where the claimant’s own person or property is unharmed.
>
> **Key Term: Defective Product Economic Loss**
> Financial loss consisting only of the cost of repairing or replacing a defective product (or lost profits caused by the defective product) where no separate damage has occurred to the claimant’s person or other property.

### **Worked Example 1.2**

Beta Ltd operates a factory relying on a continuous electricity supply provided via a cable owned by the electricity company. Gamma Ltd, carrying out roadworks nearby, negligently damages this cable, causing a power cut to Beta Ltd's factory for eight hours. Beta Ltd suffers no physical damage but loses £10,000 in profits due to the interruption of production. Can Beta Ltd recover this loss from Gamma Ltd?

> **Answer:** No. Beta Ltd's loss of profit (£10,000) is pure economic loss. It does not result from any physical damage to Beta Ltd's own property (the cable belonged to the electricity company). Under the general rule, pure economic loss is not recoverable in negligence. Gamma Ltd did not owe Beta Ltd a duty of care in respect of this type of loss. (Based on Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973])

The boundary between consequential and pure economic loss is reinforced by a series of leading cases. A fuller appreciation of how the rule operates will help you categorise the loss correctly.

### **Worked Example 1.3**

An ice cream manufacturer suffers three types of loss after a negligent severing of the power cable by the electricity supplier’s employee: (i) physical damage to the batch in pasteurisation (£500); (ii) physical damage to packed frozen product (£1,000); and (iii) anticipated profits on new raw mix ingredients that could not be processed because of the outage (75% profit margin on stock that had to be discarded). Which losses are recoverable?

> **Answer:** The physical damage to the batch and the packed frozen product is recoverable, together with profits consequential on that physical damage. The further anticipated profits from new ingredients that were never processed are pure economic loss and irrecoverable. This reflects the Spartan Steel approach: recovery for physical damage to the claimant’s property and profits directly consequential on that damage, but not for profits lost from production that would have occurred had the power supply continued.

### **Worked Example 1.4**

Weller & Co are livestock auctioneers. Due to negligent handling of a virus at a research institute, a foot-and-mouth outbreak forces cattle markets to close temporarily. Weller & Co, whose premises and property are undamaged, lose commission income during the closure. Can they recover their lost income from the negligent institute?

> **Answer:** No. The lost income is pure economic loss. The auctioneers suffered no damage to their person or property; their loss arises from public health measures responding to damage elsewhere. This is relational economic loss—financial harm suffered because third parties and the market were affected. It is not recoverable in negligence.

### **Worked Example 1.5**

A local authority negligently approves foundations for a house. Years later, the house begins to crack and is structurally unsafe due to the defective design. The owner sells at a reduced price and incurs repair costs to prevent collapse. Is this loss recoverable in negligence against the authority?

> **Answer:** Generally no. In Murphy v Brentwood District Council [1991] the House of Lords held that the cost of remedying a defect in a building (and loss in value because the building is defective) is pure economic loss and irrecoverable in negligence against the local authority. The defect makes the property itself inherently defective; without damage to other property or personal injury, the loss is economic in nature. Contract and statutory schemes (not tort) are the preferred routes to allocate such risks.

### **Worked Example 1.6**

A buyer under a sale contract suffers loss when goods are damaged in transit before title passes. The carrier negligently damages the goods; the buyer wants to sue the carrier for the economic loss (e.g., lost resale margin) as a result of the damage. Can the buyer recover?

> **Answer:** Not in negligence on these facts. In The Aliakmon [1986] the House of Lords held a claimant cannot recover for negligence causing damage to property unless the claimant owned the property or had an immediate right to possession when the damage occurred. Without such property rights, the buyer’s financial loss is pure economic loss and irrecoverable in negligence.

These examples illustrate key categories of pure economic loss: losses caused by damage to someone else’s property, losses tied solely to a defect in the product itself, and stand-alone financial losses caused by widespread interruptions. By contrast, economic loss that is the direct consequence of physical damage to the claimant’s own property (or personal injury) is recoverable.

## **The General Rule Against Recovery**

The fundamental principle is that no duty of care is owed in respect of pure economic loss. Therefore, such loss is generally irrecoverable in negligence. This rule applies whether the loss is caused by a negligent act or a negligent statement, although specific exceptions exist for negligent statements where a defendant has assumed responsibility (addressed separately under the Hedley Byrne line of authority).

Courts apply this general rule as a duty limitation, often at the “fair, just and reasonable” stage of the Caparo test in novel duty contexts. Where the only loss is financial and arises without damage to the claimant’s person or property, imposing a duty is usually considered not fair, just or reasonable.

### **Policy Reasons for the Rule**

1. The Floodgates Argument: Allowing recovery for pure economic loss could result in an unmanageable volume of claims. A single negligent act affecting public infrastructure (power, water, communications, roads) may cause ripple effects to numerous businesses and individuals, escalating liability far beyond the defendant’s conduct. The courts avoid opening the floodgates to indeterminate claims by confining recovery to narrower, tangible harms (injury or property damage).

2. Indeterminate Liability: The concern is liability “in an indeterminate amount for an indeterminate time to an indeterminate class”. Financial losses can diffuse through supply chains and markets in unpredictable ways. Limiting recovery ensures that liability remains determinate and proportionate to fault.

3. Contract/Tort Distinction: Tort protects bodily integrity and property rights; contract is the proper mechanism to protect financial expectations and allocate economic risks. Businesses can negotiate warranties, limitation clauses, and pricing to reflect risk of defects and downtime; insurance can be purchased for business interruption. Extending tort duties into these spheres would undermine commercial risk allocation.

4. Insurance and Risk Allocation: Individuals and businesses are generally expected to protect against purely financial risks through contractual arrangements and insurance. Tort law is not designed to be a universal compensation scheme for economic disruption.

These policy concerns explain why courts deny recovery for relational economic loss (losses linked to third-party property damage), for defective product losses where only the product itself is affected, and for widespread losses arising from public decision-making or market closures. The line drawn protects defendants from massive, unforeseeable exposure and encourages claimants to manage economic risk contractually.

### **Effect on Duty of Care**

The general rule against recovery for pure economic loss operates as a significant control mechanism, limiting the scope of the duty of care in negligence. It means that even if harm is foreseeable and there is some connection (proximity) between the parties, a court may find it is not 'fair, just and reasonable' (Caparo Industries plc v Dickman [1990]) to impose a duty of care where the only loss suffered is purely economic.

In practice:

- Damage to property not owned by the claimant: No duty is owed to avoid the claimant’s relational economic loss arising from third-party property damage (e.g., Spartan Steel’s power cable example; The Aliakmon property rights requirement).
- Defective buildings and products: The cost of rectifying a defect in the thing itself is pure economic loss (Murphy v Brentwood DC), so negligence claims are usually barred. The anomalous result in Junior Books Ltd v Veitchi Co Ltd [1983], where economic loss was allowed against a specialist subcontractor due to a very close relationship, has been treated as exceptional and confined to its facts; it does not create a general duty to avoid economic loss from defects.
- Public bodies and omissions: Duty to avoid pure economic loss is especially constrained where loss arises from public decision-making or failures to confer benefits (e.g., regulatory approvals), reflecting both policy and proximity concerns within the Caparo framework.

It is important to distinguish these duty limitations from other tort contexts where duties are recognised. For example, a negligent driver owes a duty not to cause personal injury and property damage, and economic losses consequential on such damage are recoverable. Similarly, product liability under statute (Consumer Protection Act 1987) addresses personal injury and property damage caused by defective products, but not pure economic loss.

### **Worked Example 1.7**

A manufacturer supplies a complex machine to Delta Ltd. Due to a latent manufacturing defect, the machine fails repeatedly, causing Delta to incur repair costs and lost profits while production is interrupted. The defect does not cause injury or damage to other property. Can Delta recover its losses in negligence against the manufacturer?

> **Answer:** The repair/replacement costs and lost profits are defective product economic loss. Absent personal injury or damage to other property, negligence does not generally provide a remedy for these purely economic losses. Delta must look to contractual remedies (e.g., express warranties, fitness/quality terms) or insurance. Tort is not designed to reallocate these commercial risks.

### **Worked Example 1.8**

A contractor damages a water main supplying a shopping district. Several retailers suffer trading losses during the disruption but no physical damage to their premises. One retailer sues the contractor in negligence for lost profits. Is the claim viable?

> **Answer:** No. The retailer’s loss is relational economic loss caused by damage to infrastructure belonging to someone else. Consistent with Spartan Steel and similar authorities, there is no duty to avoid purely financial harm to others caused by damage to a third party’s property. The claim fails.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Pure economic loss is financial loss that is not consequent upon physical injury to the claimant or physical damage to their property.
- Consequential economic loss flows directly from physical injury or property damage and is generally recoverable.
- Relational economic loss (loss linked to damage to third-party property) and defective product economic loss (cost of remedying a defect in the thing itself) are paradigmatic forms of pure economic loss.
- The general rule in negligence is that no duty of care is owed in respect of pure economic loss, making it irrecoverable.
- This rule is based on policy reasons, primarily the floodgates concern, the need to avoid indeterminate liability, and maintaining the distinction between contract and tort (with insurance and commercial arrangements used to manage financial risk).
- The Caparo “fair, just and reasonable” stage is frequently used to deny a duty for pure economic loss even where foreseeability and proximity exist.
- Limited exceptions exist for negligent misstatements where there is an assumption of responsibility (addressed separately). By contrast, negligent acts causing purely financial harm generally do not attract a duty of care.

## **Key Terms and Concepts**

- Pure economic loss
- Consequential economic loss
- Relational economic loss
- Defective product economic loss


Claims for pure economic loss - General rule against recovery