Liability in negligence for injury to people and damage to property: Negligence - Economic Loss

Introduction

The tort of negligence aims to pay damages for the injury or physical loss experienced by the claimant

Sometimes a claimant may wish to seek damages for those losses which are not physical injuries or physical losses but financial losses. These types of loss can usually only be seen on a balance sheet. These are known as economic losses

Examples of Economic Loss

1. A car crashes into the window of a shop because of the negligence of the driver. The shop owner will be entitled to damages to pay for the repair to the window. However, the shop owner has also experienced an economic loss in that he or she has lost profits while the shop is closed during the repair of the window
2. A man is killed by the negligence of his employer. His widow will have experienced an economic loss in the form of lost income that her husband would have contributed to the family

Two Types of Economic Loss

• Consequential Economic Loss - this is the economic loss that results from a physical injury such as your loss of income if you lose both your legs and can no longer work. This type of economic loss is usually recoverable
• Pure Economic Loss - this is all other types of economic loss that do not arise from a physical injury. This type of economic loss is not recoverable

Cases

• Murphy v Brentwood District Council [1991]
• The claimant had bought a house. When the building became unstable, the claimant had to sell the house at a considerable loss. He claimed that the local authority failed to inspect the foundations of the house adequately when it was being built. He sought to recover his loss from the local authority
• The House of Lords held that the loss was pure economic loss and was not recoverable
• Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973]
• The claimants had a factory in Birmingham, which obtained its electricity by a direct cable from the power station. The defendants were doing work on the ground with an excavator and negligently damaged the cable (they did not own the cable). As a result, the factory was deprived of electricity for a number of hours which caused physical damage to the factory's furnaces and metal, lost profit on the damaged metal and lost profit on the metal that was not melted during the time the electricity was off
• The Court of Appeal held that:
• For the physical damage to the factory's furnaces and metal, damages were payable because the damage was physical
• For the lost profit on the damaged metal, damages were payable as they were a direct consequence of the physical damage
• For the profit lost on the metal that was not melted during the time the electricity was off, damages were not payable because they constituted pure economic loss
• Caparo Industries PLC v Dickman (1990)
• Caparo purchased share in a company based on accounts which misrepresented the company's financial state
• Caparo brought an action against the auditors, claiming negligence
• Held - no duty of care owed as the auditor's report was required by law, and was not done at the request of Caparo for the specific purpose of the investment in/purchase of shares in the company concerned

Economic Loss and the Courts

• The courts have been reluctant to allow damages for pure economic loss as the potential claims could be limitless
• For instance, if every driver who negligently crashed his or her car on the motorway was held to be liable to employers for everyone of their employees being late for work because of the subsequent traffic jam, driving a car would become uninsurable