Claims for pure economic loss - General rule against recovery

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Overview

Pure economic loss in tort law is a challenging area for legal professionals and students preparing for the SQE1 FLK1 exam. With its general ban on recovery and specific exceptions, this topic requires a deep dive into complex legal principles. This article explores the general rule against recovery, reviews key exceptions, and discusses recent case law developments.

Pure Economic Loss Explained

Pure economic loss refers to financial damage a claimant suffers, unrelated to any physical harm to their person or property. This type of loss is distinct from consequential economic loss, which results from physical damage and is usually recoverable in tort.

Pure vs. Consequential Economic Loss

  1. Pure economic loss:

    • Occurs without physical damage
    • Examples include financial losses from negligent advice
    • Typically not recoverable in tort, with specific exceptions

  2. Consequential economic loss:

    • Results from physical injury or property damage
    • Examples include lost earnings due to physical injury
    • Generally recoverable in tort

The General Rule Against Recovery

The primary principle in tort law regarding pure economic loss is its general non-recoverability. This rule aims to:

  1. Limit potential liability
  2. Prevent indeterminate liability
  3. Maintain economic efficiency

Policy Considerations

Several policy factors support the general rule against recovery for pure economic loss:

  1. Preventing overwhelming claims
  2. Ensuring proportionality
  3. Economic reasoning

Exceptions to the General Rule

While the rule against recovery is established, certain exceptions allow for reclaiming pure economic loss.

1. Negligent Misstatement

A key exception is the negligent misstatement doctrine, established in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. Recovery is possible when:

  1. The defendant takes responsibility for providing advice
  2. The claimant reasonably relies on that advice
  3. The defendant knows this reliance is likely

Key Case: Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465

This landmark case established that a duty of care could arise in negligent misstatement with a "special relationship."

2. Assumption of Responsibility

Following Hedley Byrne, courts recognize a duty of care when the defendant assumes responsibility towards the claimant, applicable in:

  1. Professional advice
  2. Service provision
  3. Voluntary commitments

Key Case: Henderson v Merrett Syndicates Ltd [1995] 2 AC 145

This case broadened the principle of assumed responsibility beyond just statements to include service provision.

3. Incremental Approach

Recently, courts have employed an incremental approach to new duty of care categories in pure economic loss cases by extending existing categories through analogy.

Key Case: Customs and Excise Commissioners v Barclays Bank plc [2006] UKHL 28

This case highlighted the need for an incremental approach to developing new duty categories, considering responsibility, reliance, and policy factors.

Analytical Framework: The Caparo Test

When assessing duty of care in pure economic loss cases, courts often use the Caparo test from Caparo Industries plc v Dickman [1990] 2 AC 605:

  1. Foreseeability: Was the loss foreseeably caused by the defendant's actions?
  2. Proximity: Is there a sufficiently close connection between parties?
  3. Fairness, justice, and reasonableness: Is it fair and reasonable to impose a duty of care?

Applying the Caparo Test

Courts weigh factors such as foreseeability, proximity, and fairness when applying the Caparo test to pure economic loss cases.

Exam Considerations

For SQE1 FLK1 exam preparation, it's important to thoroughly understand pure economic loss in tort law. Key points are:

  1. Identifying pure economic loss
  2. Applying the general rule
  3. Analyzing exceptions
  4. Using the Caparo test
  5. Considering policy factors
  6. Noting the courts' incremental approach

Conclusion

Understanding the issue of pure economic loss in tort law is vital for SQE1 FLK1 exam success and future legal practice. By exploring the general rule, exceptions, and court methodologies, students can tackle this challenging area effectively. Key takeaways include:

  1. Distinction between pure and consequential economic loss
  2. The general rule’s policy justifications
  3. Notable exceptions like negligent misstatement and responsibility assumption
  4. The use and importance of the Caparo test
  5. The courts’ gradual approach to new duty categories
  6. Balancing legal principles with practical and policy considerations in addressing pure economic loss claims