Learning Outcomes
After reading this article, you will be able to identify when a duty of care arises for pure economic loss in tort, explain the principles of reasonable reliance and assumption of responsibility, and apply these concepts to scenarios involving negligent misstatements or services. You will also understand the limits of recovery for pure economic loss and how disclaimers and unreasonable reliance affect liability.
SQE1 Syllabus
For SQE1, you are required to understand the circumstances in which a duty of care arises for pure economic loss in tort. This article focuses on:
- the definition and types of pure economic loss
- the principles of reasonable reliance and assumption of responsibility
- the requirements for a duty of care in negligent misstatement and negligent services
- the effect of disclaimers and unreasonable reliance
- the limits and defences to claims for pure economic loss
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.
- What is required for a duty of care to arise in a claim for pure economic loss caused by a negligent misstatement?
- What is the difference between reasonable reliance and assumption of responsibility in the context of pure economic loss?
- Can a disclaimer prevent liability for a negligent misstatement? If so, how?
- In what circumstances will a claimant’s reliance on a statement be considered unreasonable?
Introduction
Claims for pure economic loss in tort are subject to strict limits. Unlike claims for personal injury or property damage, pure economic loss—financial loss not resulting from physical harm—is generally not recoverable unless specific requirements are met. The key to recovery is establishing a duty of care, which depends on the principles of reasonable reliance and assumption of responsibility. These principles are especially important in cases involving negligent misstatements or negligent provision of services.
Key Term: pure economic loss Financial loss suffered by a claimant that does not result from physical injury or property damage, but arises independently, such as lost profits or wasted expenditure.
Duty of Care and Pure Economic Loss
Generally, a defendant does not owe a duty of care to avoid causing pure economic loss. The courts have limited recovery to prevent unlimited liability to an indeterminate number of claimants. However, exceptions exist where there is a sufficiently close relationship between the parties, most commonly in cases of negligent misstatement or negligent provision of professional services.
Key Term: negligent misstatement A false or misleading statement made carelessly that causes the claimant to suffer pure economic loss.
Reasonable Reliance
A duty of care for pure economic loss may arise where the claimant reasonably relies on the defendant’s statement or advice. The reliance must be both foreseeable and reasonable in the circumstances.
Key Term: reasonable reliance The claimant’s reliance on the defendant’s statement or advice is justified and foreseeable, making it fair to impose a duty of care.
The courts consider several factors to determine reasonable reliance:
- Did the defendant know the purpose for which the advice or information was required?
- Did the defendant know the advice would be communicated to the claimant?
- Did the defendant know the claimant was likely to act on the advice without independent inquiry?
- Was it reasonable for the claimant to rely on the advice?
If these are satisfied, a duty of care may arise.
Worked Example 1.1
A business owner asks an accountant for advice on a tax issue. The accountant provides incorrect advice, and the business incurs a penalty. Is the accountant liable for the business’s pure economic loss?
Answer: Yes, if the business owner reasonably relied on the accountant’s advice, and the accountant knew the advice would be relied on for that purpose, a duty of care arises. The accountant may be liable for the pure economic loss.
Assumption of Responsibility
A duty of care may also arise where the defendant has assumed responsibility for the accuracy of their statement or the quality of their service. This can be express or implied from the circumstances.
Key Term: assumption of responsibility The defendant voluntarily accepts responsibility for their statement or service, creating a duty of care to the claimant.
Assumption of responsibility is often found where the defendant is a professional or has special skill, and the claimant relies on that skill.
Worked Example 1.2
An architect is hired to design a building. The architect negligently produces flawed plans, causing the client to incur extra costs to fix the errors. Has the architect assumed responsibility?
Answer: Yes, the architect has assumed responsibility for the service provided. The client’s reliance on the architect’s skill creates a duty of care, and the architect may be liable for the pure economic loss.
Negligent Misstatement and the Special Relationship
The leading case of Hedley Byrne & Co Ltd v Heller & Partners Ltd established that a duty of care for pure economic loss can arise where there is a “special relationship” between the parties, based on reasonable reliance and assumption of responsibility.
Key Term: special relationship A relationship between claimant and defendant where reasonable reliance and assumption of responsibility make it fair to impose a duty of care for pure economic loss.
The courts will look for:
- Voluntary provision of advice or information by the defendant
- Foreseeable and reasonable reliance by the claimant
- Knowledge by the defendant that the claimant will rely on the advice
If these are present, a duty of care may be imposed.
Disclaimers and Unreasonable Reliance
A defendant can avoid liability for pure economic loss by expressly disclaiming responsibility for the accuracy of their statement or advice. If a disclaimer is clear and brought to the claimant’s attention, it may prevent a duty of care from arising.
Key Term: disclaimer A statement by the defendant denying responsibility for the accuracy of information or advice, which may prevent a duty of care from arising.
Reliance will also be unreasonable if the claimant knows the advice is unreliable, or if it is not reasonable in the circumstances to rely on the defendant’s statement.
Worked Example 1.3
A bank provides a reference for a customer, stating “without responsibility.” The recipient relies on the reference and suffers loss. Is the bank liable?
Answer: No, the disclaimer prevents the bank from assuming responsibility. No duty of care arises, so the bank is not liable for the pure economic loss.
Limits and Defences
Even where a duty of care exists, recovery for pure economic loss is limited by the scope of the duty, remoteness, and possible defences.
- The duty is limited to the specific context in which it was assumed.
- The loss must be a foreseeable consequence of the defendant’s negligence.
- If the claimant contributed to their own loss, damages may be reduced for contributory negligence.
Exam Warning
In SQE1 questions, be careful to distinguish between pure economic loss and consequential economic loss. Only pure economic loss requires proof of reasonable reliance or assumption of responsibility.
Summary
| Principle | Description |
|---|---|
| Pure economic loss | Financial loss not resulting from physical injury or property damage |
| Reasonable reliance | Claimant’s reliance on the defendant’s statement or advice is justified and foreseeable |
| Assumption of responsibility | Defendant voluntarily accepts responsibility for their statement or service |
| Special relationship | Relationship where reasonable reliance and assumption of responsibility justify a duty |
| Disclaimer | Statement denying responsibility, which may prevent a duty of care from arising |
Key Point Checklist
This article has covered the following key knowledge points:
- Pure economic loss is generally not recoverable in tort unless there is reasonable reliance or assumption of responsibility.
- A duty of care for pure economic loss may arise from negligent misstatements or negligent services where there is a special relationship.
- Reasonable reliance requires that the claimant’s reliance is foreseeable and justified.
- Assumption of responsibility is found where the defendant voluntarily accepts responsibility for their statement or service.
- Disclaimers and unreasonable reliance can prevent liability for pure economic loss.
Key Terms and Concepts
- pure economic loss
- negligent misstatement
- reasonable reliance
- assumption of responsibility
- special relationship
- disclaimer
