CLS 106 -Lesson 3

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[LESSON THREE - NEGLIGENCE :

SPECIAL PROBLEMS]

[2012

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3.1 LIABILITY FOR PURE ECONOMIC LOSS

3.1.1. Intr!"#t$n

pure economic loss can be defned as economic loss which does not ow

rom damage to the claimants person or property. The law o contract

concerns itsel with damage to the claimants person or property. The law

o contract concerns itsel with such losses when they are suered by a

party to a contract but the law o torts is more reluctant to recogni!e such

losses as actionable unless they are caused intentionally.

The general rule is that pure economic loss is not reco"erable in an action

alleging negligence but since #$%& an e'ception to this general rule has

de"eloped when negligent statements lead to pure economic loss. There

is a "ery close relationship between these topics( a number o leading

cases in"ol"es mis)statements that caused fnancial or economic loss to

the claimant. *t is thereore con"enient to discuss them together although

you will disco"er that there are cases about economic loss that do not

in"ol"e careless ad"ise or inormation.

+eading case in this area is ,edley -yrne ,eller /artners +td [ #$%&]

01 &%2.

The claimant through their ban3ers as3ed the deendants or ad"ise

about the creditworthiness o one o the latters customers. The

deendants ga"e a reasonably a"ourable reply and the claimant

e'tended credit to the customer and suered losses in conse4uences. The

house o +ords held that in principle the deendant owed a duty o care to

the claimants and would ha"e been liable to them or the resulting losses

i they had not gi"en the ad"ise 5 without responsibility on our part.

This case prooundly changed the law in two respects(

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:a;The deendants were held to owe a duty to ta3e care in the ad"ice

or inormation that they ga"e:b;That duty e'tended to purely economic losses.

a claimant who suers loss by relying on inaccurate statements could and

can bring a claim in the tort o deceit but in #

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The general common law rule was that a deendant was not liable or

purely economic loss#. *t is helpul to consider the policy reasons that

restrict the right o reco"ery or economic loss. Bany o these are

de"eloped and applied in the cases that ollow()

Cconomic interests are intrinsically less worthy o protection than

physical interests. * economic loss generally is reco"erable the burden on particular

deendant will be unbearably high.: imagine that the deendant

carelessly pollutes a holiday beach. ,oliday ma3ers stay away. 0ll

business interest in the town suer losses. *s the deendant to ha"e

to compensate them allD; 0 general rule against reco"ery o economic loss is clear and easy to

apply 1laimant can oten ma3e good their economic loss in other ways

than by claiming compensation ( or e'ample i a actory has to shut

down because o loss o power it may be possible to ma3e up or

potential deendants to insure against economic losses that they

may cause. *t may ma3e more sense or potential claimants to insure against

possible economic losses that they may suer rather than or

potential deendants to insure agaist economic losses that they may

cause.

3.2 E#n+$# L&& #&(&

3.2.1 N(,$(nt Stt(+(nt&

T( L) B(r( 143

The diEculty created or tort law by negligent statements is that they

usually cause pure economic loss rather than physical damage.

#This principle is illustrated by Fimpson 1o " Thomson:#

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Ho action would lie or a negligent statement causing pure economic loss.

This rule was restated by the 1ourt o 0ppeal in 1andler " 1rane

1hristmas 1o[ #$2#] . The dissenting @udgment o =enning +I should be

noted. ,e stated that accountants owed a duty o care to their employers

or client, and any third persons to whom they themselves show the

accounts, or to whom they know their employer is going to show the

accounts so as to induce him to invest money or take some other action

on them. I do not think, however, the duty can be extended still further so

as to include stranger of whom they have heard nothing and to whomtheir employer without their knowledge may choose to show their

accounts.

T( L) t(r 143

FA:#; o the Cnglish Bisrepresentation 0ct #$%? :B0 #$%?; pro"ides that

where a person has entered into a contract ater a misrepresentation has

been made to him by another party to the contract and has suered lossas a result the representor will be liable in damages unless he can pro"e

that he had reasonable grounds to belie"e and did belie"e that the acts

represented were true. The claimant in such an action need not pro"e that

he was owed a duty o care and need not pro"e that the deendant was

negligent. The action does re4uire that a contract be entered into by the

parties to the statement and the benefts o this pro"ision can only be

en@oyed by a party to the contract.

The house o lords laid down the basis or an action in the tort o

negligence or statements ( ,edley -yrne 17 " ,eller /artners +td

[#$%&]

The claimants were ad"ertising agents and as3ed their ban3 to obtain a

credit reerence on one o their clients rom the clients ban3. The credit

reerence negligently stated that the client was good or its ordinary

business transactions and stated that the reerence was gi"en without

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responsibility. The ,ouse o +ords held that in appropriate

circumstances there could be a duty o care and appro"ed the dissenting

@udgment o =enning +I inn 1andler but the deendant were not liable on

these acts because o the disclaimer clause.

The neighbour test was re@ected as being inappropriate to deal with the

diEculties associated with statements and instead the courts applied the

special relationship between the parties as the appropriate test.

7ne way o satisying the special relationship would be to satisy the typeo relationship which e'isted in ,edley -yrne itsel where the claimant

relied on the care and s3ills o the deendants where the deendants 3new

that the claimant was so relying and where it was reasonable or the

claimant to rely on the words or ad"ise o the deendant.

*n #$$J 5 C*r In!"&tr$(& *,# / %$#6+n[10] appro"ed the

special relationship approach to duty o care or negligent statements

and went on to determine that i there was no special relationship such as

that in ,edley -yrne an alternati"e way o establishing a duty o care

with respect to negligent statements causing pure economic loss would

be to satisy the three)stage)test or duty based on the criteria o

oreseability o economic loss pro'imity ad @ustice and reasonableness.

6hile this is similar to the test used to determine duty in cases o

physical damage the re4uirement o oreseability and in particular

pro'imity might be more rigorous in the case o economic loss. *n7+(&

M#N"t(n P*(r Gr"* Lt! / H$#6& An!(r&n 8 C: a 8irm;[#$$#]

the court o 0ppeal suggested the ollowing indicators o pro'imity to

satisy the three) stage test(

The purpose o ma3ing the statementK

The purpose o communicating the statementK

The power balance between the partiesK

The number o people relying on the ad"iceK

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The 3nowledge o the person gi"ing the inormation or ad"iseK

The claimants access to other sources o inormation.

The application o this approach has been used to determine that a duty o

care e'isted when an employer wrote a reerence or a ormer

employee: Fpring " Luardian 0ssurance[#$$&] when accountants ailed to

detect rauds perpetrated on shareholders o o"erseas companies o a

ban3 : -11* " price 6aterhouse[#$$

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0 primary "ictim is directly in"ol"ed in the accident and is a"orable

treated. 6here the claimant is a primary "ictim the ,ouse o +ords has

confrmed the principle that the torteasor must ta3e the "ictim a fnds

him and this can e'tend to the recurrence o a condition rom which the

claimant had suered or nearly AJ years prior to the accident. The test to

be applied to the claim o a primary "ictim is that o reasonable

oreseability o e'posure to the ris3 o physical or psychiatric harm and

this should be contrasted with the more detailed pro'imity re4uired o

secondary "ictims who suer psychiatric harm. Fee /age " smith [#$$%]#01 #22

,owe"er more restricti"ely physical in@ury :or the ear o it; is a necessary

as well as suEcient condition o liability ( white " 1hie constable o Fouth

Mor3shire /oice [#$$A] # 01 >#J where a ma@ority o the +aw +ord held that

an employee should be in no better position by "irtue o the contract o

employment that a non) employee regarding reco"ery o compensation or

psychiatric damage.

0n analysis o the responsibility o a primary "ictim who has inicted

in@uries on himsel was pro"ided in Gr(tr( / Gr(tr([2000]. The

deendant was in@ured in a motor accident which was his own ault. ,is

ather the claimant was one o the fre oEcers sent to the scene o the

accident to release the trapped motorist:his son; rom his "ehicle. 6hen

the ather went on to suer /TF= he claimed against his son or damagesand the court considered the preliminary issue as to whether a primary

"ictim who had cuased himsel sel)incted in@uries could in law owe a

duty to third party. 1a!alet I held that such a duty o care could not arise.

>.A.A A &(#n!r /$#t$+ &";(r&

0 secondary "ictim suers psychiatric in@ury no through any physical

impact but through witnessing an e"ent that causes or threatens death or

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serious in@ury to someone else. The principle are deri"ed rom two

decisions o the ,ouse o +ords (

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The claimant must ha"e percei"ed the e"ents or their atermath

with his own unaided sensesK it is not enough to be told about it

later. The notion o the atermath deri"es rom Bcloughlin where Brs

B saw her relati"es in the same state as they had been in ater the

accident.

The claimant must ha"e suered through an immediate sudden

impact on his or her senses.

The claimant must not ha"e some special sensiti"ity to shoc3K the

shoc3 must be oreseeable in a person o reasonable ortitude : but

so long as some psuchiatric in@ury is oreseeable its precise orm or

se"erity does not ha"e to be oreseen;.

3.3 LIABILITY FOR OMISSIONS

The law ta3es a restricti"e approach to imposing liability in relation to

omissions. The law draws a distinction between miseasance where a

party does an act negligently and noneasance where a party does

nothing at all. 7missions relate to noneasance. 0 dri"er o a car may be

@ust as careless in omitting to apply the bra3es as in pressing the

accelerator too hard. 0 =octor may be careless in omitting to test or

allergies beore gi"ing an in@ection. The law generally does not impose

on people a general duty to ta3e positi"e actions to assist people in

diEculties or to a"ert harm e"en i they are physically well capable o

doing so( an able)bodied person may stand by and watch someone drown

in shallow water.

* there is a moral obligation to assist people in diEculty or danger why is

there no legal obligationD This was discussed by +ord Hichols o

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-ir3enhead and +ord ,oman in Fto"in " 6ise [#$$%] 01 $A> where he

suggests that there are political moral and economic reasons.

T( (n(r, r",( $& tt n ,$'$,$t ($&t& r n +$&&$n:

Stovin v Wise[14] 3 >LR 3= H"&( Lr!&

Br Fto"in suered serious in@uries when he was 3noc3ed o his motorcycle

by a car dri"en by Brs 6ise. Fhe had pulled out o a @unction in which

"isibility o traEc was hampered due to a ban3 o earth which was topped

by a ence. The trial @udge held that Brs 6ise was ?JN to blame or the

accident and that Horol3 1ounty 1ouncil were >JN to blame because they

3new the @unction was dangerous and had been negligent in not ta3ing

steps to ma3e it sae. The 1ouncil appealed.

,eld(

The council were not liable as liability related to an omission. There had

only been three accidents in twel"e years which was not enough to render

the @unction a Ocluster siteO under the 1ouncilOs policy or prioritising

unding which re4uired f"e accidents in three years.

+ord ,oman on imposing liability or omissions(

There are sound reasons why omissions reuire di!erent treatment from

positive conduct. It is one thing for the law to say that a person who

undertakes some activity shall take reasonable care not to cause damage

to others. It is another thing for the law to reuire that a person who is

doing nothing in particular shall take steps to prevent another from

su!ering harm from the acts of third parties or natural causes.

Thus a person who sees a child drowning in shallow water is not under a

legal obligation to sa"e the child and will incur no liability or their ailure

to do so. * howe"er the person attempts to sa"e the child but in doing

so acts carelessly and causes harm they become liable. This rule can be

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seen as operating harshly in many situations it could be argued that there

may well be a moral obligation to act and there is a need or the law to

reect this. There are e'ceptions to this rule where the law will impose a

duty o care in certain situations.

1. Un!(rt6$n

6here the deendant agrees to act or "oluntarily accepts a responsibility

his later ailure to do so will render him liable. C.g. a motorist who ails to

turn the steering wheel or gi"e an appropriate signal is ailing to carry outcareully the acti"ity o dri"ing.

Brr(t / M$n$&tr %((n&([ 1?] 1 >LR 121@

The 1ourt o 0ppeal has considered the responsibilities o the Binistry o

=eense or the saety o a na"al airman who died ater a bout o "ery

hea"y drin3ing. *t was held that an employer had no duty to protect an

employee against his own wea3ness but that a responsibility arose on theacts o the case when the ser"iceman returned to the base and went into

a drun3en coma. 7n the acts there was e"idence o a lac3 o reasonable

care but also a fnding o two)thirds contributory negligence on the part o

the deceased.

2. S*(#$, r(,t$n&$*

where there e'ists a special relationship eg parent and child employer

and employee school and pupil doctor and patient between the parties

there is a legal duty to act.

3. Cntr, 3r! *rt ) #"&(& !+(:

* there is some relationship between 0 and 1 P or e'ample 0 is 1s

employer) there will be liability or the acts o another. despite the wide

ranging potential o the decision o the ,ouse o +ords in ,ome oEce "

=orset Macht 1o +td[#$?J] howe"er the court ha"e been "ery reluctant

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to e'pect one person:0; to control the acti"ities o an independent third

party:c;

Home Ofce v Dorset Yacht Co Ltd[1@0] AC 100 H"&( Lr!&

Fome young oenders were doing some super"ised wor3 on -rown Fea

*sland under the -orstal regime. 7ne night the -orstal oEcers retired or

the e"ening lea"ing the boys unsuper"ised. Fe"en o them escaped and

stole a boat which collided with a Macht owned by the claimant.

H(,!:

The ,ome 7Ece owed a duty o care or their omission as they were in a

position o control o"er the >rd party who caused the damage and it was

oreseeable that harm would result rom their inaction.

. Cntr, ,n! r !n(r"& t$n&:

S+$t L$tt,()!& Orn$t$n[1=@] AC 21

The deendant purchased a building and let it empty. 0 fre started in itwhich seriously damaged the claimants property. The fre started in it

which seriously damaged the claimants property. The fre had been

started by "andals :who had started fres on other occasions; but this act

was not 3nown to the deendants. the court held that there was a duty to

persons to ensure that their property was not a source o danger to

neighbouring properties but this duty would only e'tend to pre"enting

damaged being caused by "andals where such damage was reasonably

oreseeable. 0s the deendant had not 3nown o the pre"ious fres no

duty owed. +ord Lo said that although there was no duty to pre"ent

persons deliberately inicting damage on another person

Haynes v Harwood[13?] 1 DB 14

The =eendant let a horse)drawn "an unattended in a crowded street. The

horses

bolted when a boy threw a stone at them. 0 police oEcer tried to stop the

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horses to sa"e a woman and children who were in the path o the bolting

horses. The police oEcer was in@ured. *t was held that the =eendant owed

a duty o care as he had created a source o danger by lea"ing his horses

unattended in a busy street.

3. T( L$'$,$t $n&*(#tr& n! t(r r(",tr&

Bany recent cases ha"e concerned the duties o those who carry out

inspecting super"ising regulatory and licensing unctions. These people

do not normally themsel"es cause harm but they ha"e an opportunity topre"ent harm being done by others. *s the e'istence o such bodies

suEcient protection or the public or should there be a right o action by

anyone in@ured by a ailure o the regulatory unctionD

3..1 D$n! !((n!nt&< $n/,/(!

:i; The central e'amples are public bodies set up with responsibilities and

regulations. C'amples are building inspectors : 0nns " Berton +ondon-orough 1ouncil; bodies set up to regulate the ood industry the drugs

industry fnancial ser"ices childrens homes etc

:ii; other regulatory unctions: in the shipping and fnancial ser"ices area;

are not carried out by public bodies but there is a real strong public

element in that parliament has consciously a"ored 5 sel)regulation by

an industry itsel as an alternati"e to regulation by the go"ernment.

:iii; There are also other unction that are not e'actly inspection or

regulation but ha"e similar characteristics :e.g. the unctions o the police

or fre ser"ices;. These bodies are e'pected to protect the public :or a

section o it; by pre"enting others causing harm or putting things right

when they ha"e gone wrong.

3..2 >t *,$# $&&"(& r( r(,(/nt

*n a"our o imposing liability on such deendants it can be argued that(

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a; They are set up or the purpose o protecting the public or a section

o it

b; *t is clearly oreseeable that harm may be suered i the super"isory

or regulatory wor3 is carelessly done

c; *n some cases the imposition o liability in tort on a regulator may

help to encourage the regulators independence and pre"ent too

close a relationship between the regulator and the regulated.

3..3 R("(r&

0lthough there is no general duty to attempt a rescue rescuer may ha"e a

claim or damaged i in@ured in the rescue attempt. The courts are "ery

ready to assume that it is oreseeable that i someone is in@ured or

endangered others will go their rescue. The principles are not diEcult to

understand. Fee ,aynes " ,arwood [#$$2]

There may be a claim where the deendants in"ited rescue by putting

himsel : and not other people; in danger( ,arrison " -ritish 9ailway

-oard[#$ 0ll C9 %?$

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CLS 106 -Lesson 3

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