Duty of Care

Pure Financial Loss

Introduction
A claimant's pure economic loss resulting from a defendant's carelessness can only give rise to a claim in

Negligence if a duty of care is proved.

For a duty of care to be owed by the defendant to a claimant there must be sufficient proximity in their
relationship.
Cases where the damage caused is pure economic loss are known as limited duty situations.
This means that a claimant may only recover for pure economic loss exceptionally where it is possible to
show a sufficiently close relationship between the claimant and defendant.

Definition
The general rule is that a defendant does not owe any duty of care to a claimant not to cause pure economic loss.
Therefore, in general, if pure economic loss is the only damage suffered it is not recoverable. If a
claimant suffers personal injury or damage to his property this may lead to economic losses, such as loss of
income or cost of hiring a substitute, such losses are categorised as 'consequential economic loss'. If a claimant
suffers no personal injury or damage to property then his losses are purely economic. Therefore, pure
economic loss is loss which is not consequential from personal injury or damage to property.
Restricting liability
The theory underlying limiting claims for pure economic loss is that these losses are potentially limitless. Without
the special rule for economic loss, the floodgates would be open for an indeterminate number of
claimants making claims for limitless amounts.
Damage to a third party's property
Damage to a third party's property may result in pure economic loss. For example, if A borrows an item from B and
this item is damaged due to the defendant's negligence. B may make a claim for the damaged property. However,
A may not make a claim for any pure economic losses incurred, such as having to hire a substitute item.
SPARTAN STEEL & ALLOYS LTD V MARTIN & CO LTD [1973] 1 QB 27
FACTS:
The plaintiffs owned a factory where they manufacture stainless steel. The factory's electricity was supplied by a
direct cable owned by a third party (Midlands Electricity Board). The defendants, were contractors, who
carelessness carried out road works and damaged the cable supplying electricity to the factory. Therefore, the
Electricity Board had to shut down the electricity supply, to mend the cable, this took fourteen and a half hours
overnight. The factory was usually working continuously, twenty four hours a day. When the power was shut off,
there was metal being melt processed in a furnace. The melt process required a constant temperature and
therefore needed an electricity supply.
If the plaintiff had left the mixture in the furnace without any power supply it could damage the machinery.
Therefore, the plaintiff used an alternative method to melt the metal, using oxygen, however, this produced
material worth a lot less money (the physical damage was assessed at 368 and the loss of profit 400). The
plaintiffs also lost the opportunity to load the furnace a further four times during the time that the power supply
was cut (losing l 767 in profit).
ISSUE:
Which losses could the plaintiff recover?
HELD:
The plaintiff could recover for the damage to the melt in the process underway when the electricity was cut and
the loss of profit on that melt (368 and 400). This was the cost of physical damage to the plaintiff's property (the
melt) and consequential economic loss (the lost profit). However, the plaintiff could not recover for the loss of profit
during the whole period that the electricity was off. This was pure economic loss caused by damage to the property
of a third party (the damaged cable belonged to the Electricity Board).
Lord Denning: '.. I think the question of recovering economic loss is one of policy. Whenever the courts draw a line
to mark out the bounds of 'duty' they do it as a matter of policy so as to limit the responsibility of the defendant...'.
Therefore, if a defendant negligently damages property belonging to a third party, which leads to A suffering pure
economic loss, there is an insufficiently close relationship between the defendant and A, so no duty of care is owed
and losses are not recoverable.
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No physical damage
Pure economic loss may arise where there has been no physical damage.
WELLER & CO V FOOT & MOUTH DISEASE RESEARCH INSTITUTE [1966] 1 QB 569
FACTS:
The foot and mouth disease virus was negligently released by the defendant. The plaintiff operated a cattle
market, which had to close due to the foot and mouth outbreak. Therefore, the plaintiff lost revenue, through the
market closure.
HELD:
The plaintiff could not recover the loss, as it was not caused by physical damage, it was pure economic loss and no
duty of care was owed by the defendant.
Therefore, pure economic loss without physical damage is not recoverable.

Defective goods or property

The general rule is that a claim for defective goods can be made under contract law.
ANNS V MERTON LONDON BOROUGH COUNCIL [1978] AC 728
FACTS:
The plaintiffs were tenants in a block of flats. The flats had structural damage due to subsidence. The
plaintiffs decided not to sue the builders, who they had a contract with, as the firm did not have many resources
and instead made a claim against the defendant. The plaintiffs argued that the defendant, the local council, had
negligently approved the plans and or negligently failed to inspect the building works.
HELD:
The House of Lords found that the plaintiffs could recover from the defendant, despite there being no contract
between the parties, because the structural damage was material damage to property. The decision in Anns v
Merton London Borough Council [1978], is controversial as there was no contract and the traditional view is that
property damage only applies to someone's existing property, in this case the original property was defective.

JUNIOR BOOKS V VEITCHI [1983] 1 AC 520

FACTS:
The plaintiffs had defective flooring laid in their new build factory and lost money during the refit. The plaintiffs had
a contract with the main builders. However, the plaintiffs decided to make a claim against the defendants, who
were the negligent specialist sub-contractors. The defendant had been present at meetings with the builders and
plaintiff to discuss the flooring required.
HELD:
The plaintiffs could recover from the defendants, confirming the Anns v Merton London Borough Council [1978],
view of property damage. The decisions in Anns v Merton London Borough Council [1978] and Junior Books v
Veitchi [1983] have been heavily criticised. Firstly, the decisions open the floodgates to unlimited claims, where a
defendant may have no relationship with the claimant. Secondly, allowing the claims in tort interferes and
undermines with contract rights and law.
The House of Lords considered claims for defective items in a further key case.
MURPHY V BRENTWOOD DISTRICT COUNCIL [1991] 1 AC 398
FACTS:
The plaintiff bought a new build house but due to defective foundation design the ceiling and water pipes cracked.
The cost of repairs was estimated at 45 000. The plaintiff sold the house unrepaired for 30 000, which was 35
000 below the market value of the house in sound condition. The plaintiff sought to recover damages from the
defendant, the local council, who had approved the building plans on the basis of negligent advice from an
independent contractor.
HELD:

The House of Lords found that the loss was pure economic loss as the property was defective when it was acquired
resulting in either having to repair or scrap the property, both at economic loss. The defendant did not owe a duty
of care as it was a case of pure economic loss. The effect of the decision is to overrule Anns v Merton
London Borough Council [1978]. The complex structure theory was considered but discounted in this case. The
theory states where a large item is comprised of a number of components, if a component is defective and
damages the whole property then the damage is classed as property damage. However, it was held that this
theory cannot apply where the damage to the building was due to structural damage.
Lord Bridge: '.. [no duty arises in the acquisition of defective property] in the absence of a special relationship of
proximity imposing on the tortfeasor a duty of care to safeguard the plaintiff from economic loss...'.

Therefore, the decision in Junior Books v Veitchi [1983] was distinguished on the basis that the exception was
satisfied, there had been a special relationship between the defendant and plaintiff due to the discussions about
the flooring.
Therefore, pure economic loss for defective goods, may only be recovered, in tort, if there is a special
relationship between the plaintiff and defendant which gives rise to a duty of care.

Pure economic loss may arise in cases where there is no physical damage but loss has been caused by a negligent
statement, rather than a negligent action. A claimant's pure economic loss resulting from a defendant's
carelessness can only give rise to a claim in Negligence if a duty of care is established.
Until 1964, the common law position was that there was no remedy for a negligently false statement in Negligence.
CANDLER V CRANE CHRISTMAS & CO [1951] 2 KB 533
FACTS:
The plaintiff lost money on his investment after relying on the defendant's carelessly compiled audit reports.
HELD:
The plaintiff could not bring an action because there was no contractual or fiduciary relationship between the
parties.

Hedley Byrne rule

The common law position was significantly changed by this House of Lords decision. It created an exception to
the general rule that pure economic loss could not be recovered in tort if caused by negligent
statements.
HEDLEY BYRNE & CO LTD V HELLER & PARTNERS LTD [1964] AC 465
FACTS:
The plaintiffs, an advertising firm, extended credit for a third party (Easipower) on the basis of creditworthiness
reference provided by the defendants, Easipower's bank. The reference was an innocent but negligent
misrepresentation. Easipower went out of business and the plaintiff sought damages for pure economic loss from
the defendants.
HELD:
The lower courts found that the pure economic loss could not be recovered as the defendant did not owe the
plaintiff a duty of care. The House of Lords found that a duty of care was owed. However, the defendants
had used an effective disclaimer of liability, so the losses were not recoverable.
The Hedley Byrne rule states that a duty of care is owed if there is a special relationship between the
claimant and defendant. A special relationship arises if there is an assumption of responsibility by the
defendant (if the defendant knows the claimant is relying on their special skill) and the claimant
reasonably relies on the defendant's statement.
Application
The Hedley Byrne decision has been applied in a number of cases.
CORNISH V MIDLAND BANK PLC [1985] 3 ALL ER 513

FACTS:
The plaintiff agreed to guarantee her husband's loan application, by signing a second mortgage on her house. The
bank clerk, employed by the defendant, advised the plaintiff of the implications of signing the mortgage. However,
the clerk inadequately explained the document and failed to highlight that signing meant the plaintiff was liable for
informed all her husband's past, present and future borrowings. Shortly after the mortgage was signed the
marriage broke up. Despite being aware of the marriage breakdown the defendant made further loans to the
husband. When the mortgage was redeemed the plaintiff was left with very little money from the sale of the house.
HELD:
A duty of care was owed as the bank clerk had taken it upon himself to advise the plaintiff, it was reasonably
foreseeable that she would rely on the advice and he should have made sure it was complete and correct.
CHAUDHRY V PRABHAKAR [1989] 1 WLR 29
FACTS:
The plaintiff asked the defendant, a friend who claimed to be knowledgeable about cars, to help her purchase a
vehicle. The plaintiff bought a car after the defendant recommended a car which he stated had not been in any
accidents. The car had visible damage and the defendant had not enquired about the cause. The car was in fact
unroadworthy, due to a previous accident.
HELD:
Court of Appeal found that a duty was owed by the defendant as he knew the plaintiff had relied on his advice, on
the basis of his claim that he was knowledgeable about cars. The decision in Chaudhry v Prabhakar [1989], has
been criticised as it seems to contradict dicta in Hedley Byrne that suggested a duty could only arise where the
advice was sought and given in a business context.
WELTON V NORTH CORNWALL DISTRICT COUNCIL [1997] 1 WLR 570
FACTS:
The plaintiff spent money on extensive refurbishment of their guest house, after being negligently informed by an
environmental health officer, employed by the defendant that the premises would be shut down if the work was
not carried out.
HELD:
A duty of care was owed. It was reasonable for the plaintiffs to rely on the advice of the environmental health
officer, who was in a position of authority. Therefore, the case law followed the Hedley Byrne rule and found that a
special relationship, would give rise to a duty of care in relation to negligent statements.
Refining the rule
The criteria for establishing a special relationship has been further defined by the House of Lords.
CAPARO INDUSTRIES V DICKMAN [1990] 2 AC 605
FACTS:
The plaintiff bought shares in a company, Fidelity, in order to make a successful takeover bid. The plaintiff relied on
Fidelity's accounts prepared by the defendant auditors. The accounts showed that Fidelity were making a profit but
in fact the company was making a loss. The plaintiff made a loss as they bought the shares for an excessively high
price.
HELD:
The House of Lords found that the defendants did not owe a duty of care to the plaintiff because the
necessary special relationship could not be established. A defendant will have assumed a responsibility
towards the plaintiff and a special relationship established if the following four stage test is satisfied:

The adviser knew the purpose for which the advice was required.
The adviser knew that the advice would be communicated to the advisee, either specifically or as a
member of an ascertainable class.
The adviser knew that the advisee was likely to act on the advice without further independent inquiry.
The advice was acted on by the advisee to his detriment.

The courts have tended to narrowly construe the requirement that the adviser knew the purpose for which the
advice was required.
JAMES MCNAUGHTON V HICKS ANDERSON [1991] 2 QB 295

FACTS:
The plaintiff was negotiating with a third party about a takeover bid. The third party instructed the defendant, their
accountants, to prepare accounts as quickly as possible. The plaintiff relied on the accounts which were carelessly
drawn up to make a bid. The plaintiff subsequently made a loss.
HELD:
The Court of Appeal found that the defendant did not owe a duty of care to the plaintiff. There was insufficient
proximity for a special relationship as the defendant did not know the accounts would be sent to the bidder for the
particular transaction.
MORGAN CRUCIBLE V HILL SAMUEL [1991] CH 295
FACTS:
The plaintiffs were bidding to take over a third party company, to whom the defendants were advisers. During the
bidding process a number of negligent representations were made, which led to the plaintiff making a loss.
HELD:
The defendants did owe a duty not to negligently mislead the plaintiff. There was sufficient proximity because the
plaintiff's identity and the nature of the transaction were known.
Extending the rule
The exception seems to have been extended in some specific circumstances, where the Hedley Byrne and Caparo
requirements have not been satisfied.

HENDERSON V MERRETT SYNDICATES LTD [1995] 2 AC 145

FACTS:
The plaintiffs made substantial losses through investing in Syndicates, negligently managed by the defendants.
HELD:
The House of Lords found a duty of care existed as the defendant had negligently performed a professional service.
Furthermore, damages could be recovered for a negligent omission in the performance of a professional service
which led to pure economic loss.
SPRING V GUARDIAN ASSURANCE PLC [1995] 2 AC 296
FACTS:
The plaintiff was not employed due to a negligent reference provided by the defendant, his previous employer, to a
third party (prospective employer).
HELD:
The House of Lords found that a duty of care was owed. The case is not a traditional Hedley Byrne case, as the
defendant did not provide the plaintiff with advice which he relied upon. However, Lord Goff reasoned that the
scope of the Hedley Byrne rule could be extended, as the decision was originally based on the fact that the
defendant had assumed responsibility for the plaintiff's economic welfare. Therefore, he put forward that the
plaintiff in this case had entrusted his affairs to the defendant tasked to write the reference.
WHITE V JONES [1995] 2 AC 207
FACTS:
The defendant, a solicitor, was asked to prepare a will, but negligently failed to do so before the testator died. The
plaintiffs would have been beneficiaries had the will been completed.
HELD:
The House of Lords found that the defendant's assumed responsibility to the testator could be extended to the
plaintiffs.
Therefore, the courts have extended the Hedley Byrne rule, based on the assumption of responsibility, beyond the
original scope of negligent statements and have included negligent provision of services. The reasoning for these
extensions have been varies however, there seems to have developed two tests for establishing a special
relationship either: the Hedley Byrne and Caparo principles in negligent statement cases or the broader
assumption of responsibility test in relation to the provision of services.

Disclaimers
The most common defence to a claim to recover damages for pure economic loss caused by a negligent statement
is that a valid disclaimer exists. This defence was relied upon in Hedley Byrne. However, there are now statutory
limitations on defendant's attempting to exclude liability for negligence.
UNFAIR CONTRACT TERMS ACT 1977
S1: Scope of Part I
S(1): For the purposes of this Part of this Act, 'negligence' means the breach S(1)(b): of any common law duty to take reasonable care or exercise reasonable skill (but not any
stricter duty);
S1(3): In the case of both contract and tort, sections 2 to 7 apply (except where the contrary is stated
in section 6(4)) only to business liability, that is liability for breach of obligations or duties arising S1(3)(a): from things done or to be done by a person in the course of a business (whether his own business or
another's); or
S2: Negligence liability
S2(1): A person cannot by reference to any contract term or to a notice given to persons generally or to particular
persons exclude or restrict his liability for death or personal injury resulting from negligence.
S2(2): In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except
in so far as the term or notice satisfies the requirement of reasonableness.
S2(3): Where a contract term or notice purports to exclude or restrict liability for negligence a person's agreement
to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk.
S11: The 'reasonableness' test
S11(3): In relation to a notice (not being a notice having contractual effect), the requirement of reasonableness
under this Act is that it should be fair and reasonable to allow reliance on it, having regard to all the circumstances
obtaining when the liability arose or (but for the notice) would have arisen.
S11(5): lt is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show
that it does.
S14 : Interpretation of Part I
In this Part of this Act - 'business' includes a profession and the activities of any government department or local or
public authority; 'negligence' has the meaning given by section 1(1);
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'notice' includes an announcement, whether or not in writing, and any other communication or pretended
communication; and 'personal injury' includes any disease and any impairment of physical or mental condition.
Therefore, the limitations of a purported disclaimer under UCTA 1977 applies only to business liability (s.1(3)).
Under
s.2(2) UCTA 1977, liability for other loss, such as pure economic loss, can only be excluded if it satisfies the
reasonableness test, set out in s.11 UCTA 1977.
SMITH V ERIC BUSH AND HARRIS V WYRE FOREST DC [1990] 1 AC 831
FACTS:
The conjoined cases involved plaintiffs who were house buyers who suffered pure economic loss. The houses were
negligently valued by the defendants, who were surveyors employed by third parties, the mortgage lenders. The
defendants argued that disclaimers exempted them from liability.
HELD:
The House of Lords found that the defendants owed a duty of care to the plaintiffs as they were proximate third
parties. The UCTA 1977 applied as the valuations were provided in the course of business. The courts found that
the disclaimers were unreasonable. Lord Griffiths highlighted the following factors as important in determining
whether a disclaimer is reasonable:
Did the parties have equal bargaining power?

Would it have been reasonably practicable to obtain the advice from an alternative source taking into account
considerations of costs and time? How difficult is the task being undertaken for which liability is being excluded?
What are the practical consequences of the decision in relation to the parties' ability to bear the loss involved,
especially with regard to insurance?

Answering a misstatement problem question

Bobby has provided a report, requested by Anil, which contains inaccurate and misleading information. Anil acted
upon the information provided by Bobby and incurred a loss as a result. The question that needs to be asked is
whether or not Anil can successfully bring an action against Bobby and recover his losses.
There is no contractual nexus between Anil and Bobby. Therefore Anil must bring his claim in tort rather than in
contract. There is no evidence that Bobby deliberately misled Anil. The appropriate cause of action therefore lies in
negligence.
Anils claim is in pure economic loss. As a matter of policy, this type of loss is generally not recoverable in
negligence. Without the special rule for economic loss, the floodgates would be open for an indeterminate number
of claimants making claims for limitless amounts. An exception to this is where the claimant can demonstrate that
the loss was the result of a negligent misstatement.
As in all claims for negligence, it is necessary to establish that the claimant was owed a duty of care by the
defendant, that the defendant was in breach of that duty, and that breach caused the claimant to suffer damage
that is not too remote.
The leading case on negligent misstatement is Hedley Byrne v Heller [1964], in which the House of Lords decided
that a duty of care might arise in negligent misstatement cases if it could be shown that a special relationship
existed between the parties. Such a special relationship may be established by showing:
1. That the defendant possessed some special skill or knowledge
2. That the claimant reasonably relied upon the advice of the defendant
3. That the defendant knew that the advice would be relied upon.

The question of when a party may be possessed of a special skill was considered in Mutual Life & Citizens
Assurance Co v Evans [1971] in which a majority of the Privy Council held that an insurance company was not
liable for giving negligent investment advice because it was not in the business of providing such advice and it did
not hold itself out as being so. A minority of the Privy Council took the view that the company did owe a duty of
care because it knew that its advice would be reasonably relied upon. The minority view has been preferred by the
English courts: see Esso Petroleum v Marden [1976] and Midland Bank Trust Co v Hett Stubbs & Kemp [1976].
The questions then arise of whether the advice is reasonably relied upon and whether the defendant knew the
advice would be relied upon.
In Caparo v Dickman [1989] The House of Lords found that the defendants did not owe a duty of care to the
plaintiff because the necessary special relationship could not be established. A defendant will have assumed a
responsibility towards the plaintiff and a special relationship established if the following four stage test is satisfied:
The adviser knew the purpose for which the advice was required.
The adviser knew that the advice would be communicated to the advisee, either specifically or as a member of
an ascertainable class.
The adviser knew that the advisee was likely to act on the advice without further independent inquiry.
The advice was acted on by the advisee to his detriment.
The courts have tended to narrowly construe the requirement that the adviser knew the purpose for which the
advice was required.
Given the nature of the relationship between Bobby and Anil, it is eminently foreseeable that Anil would rely on
Bobbys report. Bobby may then be said to owe Anil a duty of care.
Anil then needs to establish that the duty of care owed by Bobby was breached. In order to do this Anil must show
that Bobby failed to reach the objective standard of care set out by Alderson B in Blyth v Birmingham Waterworks
Co (1856): he must show that Bobby failed to act as a reasonable person would in the situation in question.

The act complained of involves Bobby acting in the course of his trade or profession. Anil must then show that
Bobby failed to show the knowledge or skill normally possessed by a person doing that kind of work, that he lacked
the degree of knowledge and skill he held himself out as possessing.
The test is an objective one. It is irrelevant that Bobby is new to the profession: Nettleship v Weston (1971). If it
can be shown that a reasonable business consultant would have inspected the CDE Ltds accounts and would have
been aware of an important trade journal and would have referred to that journal, things that Bobby omitted to do,
then he is in breach of duty.
It is necessary to establish that Anils loss was caused, in fact, by Bobbys breach of his duty of care. The but for
test as set out in Barnett v Kensington & Chelsea Hospital (1969) requires causation to be shown on that basis that
but for Bobbys negligent advice, Anil would not have purchased the business and thus incurred his losses. In
absence of any evidence indicating that Anil would have purchased the business in any event it would seem that
Bobbys advice has caused the damage suffered by Anil.
Finally, it is necessary to show causation in law. That is, that Anils loss was not too remote. In order to do so it is
necessary to show that the nature of the harm suffered was reasonably foreseeable: see The Wagon Mound (no1)
[1961]. This would seem to present little difficulty to Anil.
It is therefore arguable that Anil has a good claim against Bobby. No defences appear to be available to Bobby.
Consider In relation to establishing a duty of care (owed by Bobby to Clive), it should be noted that Caparo v
Dickman has been distinguished on several occasions. In Morgan Crucible v Hill Samuel [1991] directors and
financial advisors made statements as to the accuracy of accounts and profit forecasts that they intended the
purchaser should rely on. Those representations had been made after the plaintiff had emerged as an identifiable
bidder.
Similarly in Galoo v Bright Grahame Murray [1995] the Court of Appeal took the view that where an auditor
confirms the accuracy of accounts after being informed that an identifiable bidder will rely on those accounts a
duty of care will arise.
It is then arguable that a duty exists on the basis of the special relationship: Clive is a potential investor, the class
of which was specifically mentioned as a potential recipient of the report. The court may therefore decide that a
duty of care was owed by Bobby to Clive. If that is the position then breach, causation and remoteness are
established as above.