Law Information

economic loss doctrine

In this article we shall be looking at the economic loss doctrine.
By: Dapuri M Cephas
Kings University College, Ghana

What is Economic loss?

Economic loss refers to financial loss or damage suffered by a person without any evidential physical damage to the person or property damage of the victim.

Principally, economic loss was recoverable in tort if it resulted from damage of property or physical damage to the victim known as consequential economic loss.

However, if the loss was independent of physical damage, thus, pure economic loss, it could not be litigated under the tort of negligence.

In the celebrated case of Spartan Steel Alloys Ltd. v.
Martin & Co. Ltd, the Court of Appeal held that “even when a plaintiff is owed a duty in respect of physical damage to property, any pure economic loss suffered in addition to physical damage is unrecoverable as either too
remote or outside the scope of the duty of care. However,
economic losses consequential on the damage of property
were recoverable”.

Consequentially, the decision in Spartan Steel (Supra)
indicates that Pure Economic loss, thus, loss without physical damage could not be recovered as damages in law.

The law on pure economic loss is one that is tainted with
several principles and exceptions as well as public policy.

The learned judge, Burroughs J. in Richardson v. Mellish stated that “once you get astride it, you never know where it will carry you”. This Article tends to give clarifications on the law on economic loss and circumstances under which a plaintiff is most likely to succeed in an action of
negligence for pure economic loss.

Pure economic loss most often than not, arises from
negligent misstatement, negligent provision of service and loss resulting from defective buildings. The following categories of pure economic loss shall be discussed in light of Common law court decisions.

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Negligent Misstatement and negligent provision of service

A special relationship must exist between parties:The courts have rejected only foreseeability of damage alone to establish liability, therefore, Hedley Byrne(supra),
provides that there has to be a special relationship between the giver and recipient of the party to establish a duty of care. Lord Morris stated that “My Lords, I consider
that it follows and that it should now be regarded as
settled that if someone possessed of a special skill
undertakes, quite irrespective of contract, to apply that
skill for the assistance of another person who relies on
such skill, a duty of care will arise.”

The Privy Council in Mutual Life and Citizens Assurance
Co Ltd v Evatt sought to limit the special relationship to
only business and where the defendant made it clear that
he was claiming some special skill or competence.
However, the position of the Privy Council had a majority
rejection. In Esso Petroleum v Mardon, the defendants were liable even though they were not in the business of giving financial advice but they did have experience and special skill and knowledge compared to the plaintiffs.

The position of the law therefore is that a special
relationship exists if there is a fiduciary relationship of
trust and confidence. A special relationship and a duty of
care deem to exist in cases involving professional or
business relationships even if there is no contract. But in
situations like Esso Pardon (Supra), expert opinion of a
defendant, if untrue and misleading, will be regarded as a negligent misstatement.

The House of Lords in Caparo Industries plc v. Dickman
has thrown some clarification on the principle in Hedley
Byrne Test. Lord Bridge stated the requirements a plaintiff
must establish to satisfy the courts that there exists a
special relationship sufficient enough for a duty of care to
be owed by the representor of the information. Firstly, the
defendant giving the advice is fully aware of the nature of
the transaction which the plaintiff had in contemplation;
secondly, the defendant knew the advice or information
will be communicated directly or indirectly to the plaintiff;
thirdly, the defendant knew the plaintiff will rely on the
advice or information in deciding whether to invest or

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The party giving the advice must voluntarily assume the
Duty does not arise where a party advises in a social
capacity. However, where a party assumes the risk of
advising in connection with a business, a duty arises (Chaudry v. Prabakhar). The current test for the assumption of risk is that which was established in Henderson v. Merrett Syndicates Ltd (No.1) but does not overrule the principle in Hedley Byrne (Supra).

There has been a reliance on advice from the other party.

There will be no liability if the claimants relied on their
investigations other than the defendants’ advice. Also, the
defendant will not be liable if they indicated that they will
not take official responsibility of giving the advice (Hedley Byrney

The reliance should be reasonable in the circumstance:

In Hedley, the court stated that “When a party seeking
information or advice from another – possessing a special skill- and trusting in him to exercise due care, and that party knew or ought to have known that the first party
was relying on his skill and judgment, a duty of care will
be implied”. Summarily, there must be the reliance of the
other party on the advice of the representor and the reliance must be reasonable in the circumstance.
However, it is not infrequent to find the courts possibly
use two or more precedents to achieve deciding a matter.

In a recent case of Customs and Excise v. Barclays Bank plc the House of Lords applied a multi-test approach including a tripartite test set out by Lord Griffiths in Smith v. Bush, the assumption of responsibility test, and Lord Bridge’s approach in Caparo.

Economic loss resulting from defective products:

As a general rule, the courts will not make provision for
damages for economic loss of receiving/purchasing a
defective product. The courts have cautiously decided cases outside the dictates of the general rule since. An attempt to expand tort law to cover economic loss relating to defective products will normally conflict with
Contract law.

The locus classicus in this area is Anns v. Merton London
Borough Council . The claimant was allowed to recover damages when due to the negligence of the defendants, a faulty building was purchased which lead to an economic loss. The position of the law was followed in Junior Books
Ltd. v Veitchi Co. Ltd. in this particular case, the scope of
Contract law could not possibly be applied due to privity
problems. The claimant (the buyer of a factory) was not in
direct contract with the builders. The building contract
was between the builders and the original owners before
sales to the claimant. Also, the faulty building had not
collapsed nor caused any physical damage to the plaintiff buyer to satisfy a consequential damage suit.

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The majority of the bench court held that the plaintiff will
be successful in his suit for damages in negligence because he was unfortunate and could not bring an action in contract law. This was a kind of compensation given to the claimant rather than waiting until the building causes
damage to life or property.

The position remained as Anns test until 1978 when the House of Lords declined from following Anns and holding that, the loss in Anns was not material nor physical but purely economic loss and therefore could not be sued
under the heading of negligence (Murphy v. Brentwood District Council ). However, the Anns test has widely influenced tort but has been modified. The position of the law therefore is that the recovery of damages under the circumstance of Anns would be successful only if there existed a physical injury before the suit.

Conclusively, the law on economic loss is associated with seemly but different principles. Even upon the similarities and differences that exist between the case laws, the courts have set out many exceptions. This has resulted in what is most likely to be called uncertainty, Burroughs J. stated in Richardson v. Mellish (Supra), stated that “once you get astride it, you never know where it will carry you”.

It is worth knowing that even among the commonwealth
jurisdictions; the law on pure economic loss varies. It is
therefore important for legal systems to establish statutes
to ensure certainty in the law.

The law on economic loss may seem a little clear but for the growth of society, it will be idler for legislators to a well-established law regulation conducts falling within the ambit of economic loss.


Catherine Elliott & Frances Quinn, Tort Law seventh
edition (2009).
Richard Owen, Essential Tort Law third edition (2000).
Professor John Cooke, law of tort, ninth edition (2009).
Emily Finch And Stefan Fafinski, Law of Tort, sixth edition
Vivienne Harpwood, Principles of Tort Law, Fourth Edition

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