Consequential and Pure Economic Loss in Negligence - Essay Example

Consequential and pure economic loss in negligence S. Anthony, (2009) pure economic loss is a category of loss suffered by a claimant and which is not consequential upon or stemming from physical damage to physical property or to a person. Pure economic loss is loss which is economic in nature only. Taking an example, if someone working at a benefits office negligently fills ones’ benefits form so he or doesn’t don't get the unemployment benefit for a month, that is pure economic loss.  Consequential economic loss is the economic loss that results directly from personal injury or property damage. An example is if you negligently cause someone to break his or her leg and can't work for two weeks, the economic loss he/she suffers as a result of being unable to work as usual is consequential economic loss. Similarly, if someone negligently breaks your car, and he or she needs the car to go to work and it takes him or her two weeks to get a replacement car, the economic loss he or she suffers is consequently economic loss. According to www.gillhams.com, (2010) The importance of determining the differences that exist between pure economic loss and other forms of loss that are consequential to injury to the person, physical loss or to the property is that the pure economic loss is usually not recoverable in law as damages or otherwise. Pure economic loss can commonly be categorized as loss of some other form of pecuniary gain, wasted expenditure, profitability or loss of profit. When pure economic loss is negligently caused to a party to a contractual right or contract are made less valuable by the acts or omissions of a defendant, both instances that is where the terms of the contract have not been breached or violated, cannot give rise to a good cause of action and action to be taken. There is a class arising from a certain class of torts and often referred to as economic torts that allows the recovery of economic interests by the parties involved. However, these economic torts do not allow recovery of pure economic loss, as liability stems from the root of harm to some interest that can be protected in the hands of the claimant, such as harm to a business, procuring a breach of contractual rights, or some other actionable wrong. According to V. Charlotte (2006), it is notable that for the loss to be consequential economic loss, the injury or the property damage has to be to you, not someone else. Lets say A negligently crashes his car into the car of B. B is then rendered unable to work for two weeks. This means that he gets to loses his income for two weeks. Because B was a good employee, his employer, C, also loses income. B's economic loss is consequential. C's is pure economic loss, because the personal injury was to B, not to him. This example therefore shows the difference. The floodgates argument is the most common one. It would mean that single events could lead to any numbers of claims. It is argued that because the amounts of pure economic loss claims and the class of people claiming for pure economic loss are so uncertain and so indeterminate, it would make it very difficult and very expensive for people to insure against these claims (www.gillhams.com, 2010),. S. Anthony, (2009) Economic loss is not always is not always irrecoverable in the tort of negligence, but it requires a claimant to prove the exceptional circumstances necessary in order to establish that a defendant owed him a duty of not to cause such damage. This long standing, reluctance to recognize a duty of care to prevent an economic loss has been largely based on what is referred to as Floodgates argument. The concern is that it would widen the potential scale of liability in tort to an indeterminable extent. In Murphy v Brentwood, there were two main reasons for the decision in the case. Firstly, it was considered established law that in tort the manufacturer of chattel owned no duty in respect of defects that did not cause personal injury or damage to other property. The second main justification was that innovation in the law of consumer protection against defects in the quality of products should be left to parliament especially in the light of remedies provided by the Defense premise act (1992) in the case of residing dwelling. Liability of an issuer of a statement: Hedley Byrne & Co v. Heller & Partners-case In the United Kingdom, the third party liability of an auditor is restricted. Numerous cases describe the necessary conditions in order for a third party to be able to rely and put the confidence on the auditors’ statements is described by numerous cases (D. Poorter. 2008). Hedley Byrne v Heller was the leading case concerning the liability of an issuer of a statement towards third parties. The third party liability principles were an Inspiration to majority of the auditor cases. In this case, the House of Lords ruled that a third party who had relied to his detriment on a negligent statement could sue the issuer of the statement, despite the absence of the doctrine of privity of the contract. For the first time, the House of Lords recognized the possibility of liability for pure economic loss caused by a negligent statement was not dependent on any contractual relationship. Persons uttering statements owe a duty of care to any third person with whom a ‘special relationship’ exists. Special relationships are all those relationships where it is plain that the party seeking information or advice was trusting the other to exercise such a degree of care as the circumstances required, where it was reasonable for him to do that, and where the other gave the information or advice when he knew or ought to have known that the inquirer was relying on him. A special relationship requires more than a fiduciary contractual relationship. It can arise because of a voluntary assumption of responsibility by the defendant. Auditor’s Liability: Caparo Industries v. Dickman. The duty of care of an auditor to third parties was firmly elucidated in the Caparo Industries v. Dickman. The Court specified the necessary relationship, as mentioned in the Hedley Byrne case, between the maker of a statement or giver of advice (adviser) and the recipient who acts in reliance on it (advisee) may typically be held to exist where firstly the advise is required for a purpose, whether particularly specified or generally described, which is made known either actually or inferentially, to the adviser at the time when the advise is given (www.gillhams.com 2010). Secondly, the adviser knows either actually or inferentially, that his advice will be communicated to the advisee, either specially or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose. Thirdly, it is known, either actually or inferentially, that the advice so communicated is likely to be acted on by the advisee for that purpose without independent inquiry. Fourthly, it is so acted on by the advisee to his detriment and fifth, that is not of course, to suggest that these conditions are either conclusive, but merely that the actual decision in the case does not warrant any broader propositions. Based on this judgment a three pronged test for a duty of care is applied and it includes, foreseability of damage, a relationship characterized by the law as one of proximity and that the situation should be one in which the court considers it would be fair, just and reasonable that the law should impose a duty of care given scope on one party for the benefit of the other. Proximity was the focus of the Caparo Court’s legal analysis, given that foreseability is not difficult to establish in many situations. Proximity exists when the professional knew that his or her work product would be communicated to a known third partyor a known third party class. Proximity also exists where the third party suffered damage as a result of relying on the professional’s work product. Lastly, where the work product was used for the purpose for which it was prepared. The professional’s knowledge includes not only actual knowledge but such knowledge as would be attributed to a reasonable person situated as the defendant. The knowledge requirement must be met at the time the work product is prepared. The third requirement - that it should be fair, just and reasonable - was an additional restriction to the Hedley Byrne principles. Based on this three-pronged test, the Court rejected the claim of Caparo Industries against the auditor of a company, Fidelity plc. The facts were that the plaintiff acquired shares in Fidelity based on the accounts of Fidelity as audited by Dickmans, the defendants. Shortly after the plaintiff acquired the shares, it became clear that the reality of the financial position of the company was significantly worse than what the audited accounts suggested. The Court ruled that in the absence of special circumstances, an auditor of a public company owes no duty of care to an outside investor or an existing shareholder who buys stocks in reliance on a statutory audit. According to the Caparo Court, the purpose of the audited statements is to fulfill the auditor’s statutory duty to the shareholders collectively and not to the stockholders as individual shareholders or third parties. RBS os Scotland plc v Bannerman Johnson Maclay (2003. The court rued out that in preparing the audited accounts for the clients, APC limited, Bannerman may have owed RBS one of APC’s creditors bank, a duty of care and therefore liable for any loss suffered as a consequence. It was sufficient for RBS .to show that Bannerman should have been aware that the accounts and the auditors report would henceforth be provided to RBS for the purposes for which RBS relied on them. This was even though they may have been prepared for a different statutory purpose. There was absence of any third party disclaimer in the audit report crucial to the reasoning of the court which have come to be known as the Bannerman statement used by the auditors to discourage third parties from relying on the audit. Reference list: D. Poorter. (2008). Auditor’s liability towards third parties within the EU Financial Law Institute. Retrieved 3rd May, 2011. www.jiclt.com/index.php/jiclt/article/download/43/42. gillhams.com (2010). Pure economic loss. Retrieved 4th May, 2011. http://www.gillhams.com/dictionary/576.cfm. S. Anthony Architect's Legal Handbook: The Law for Architects. Edition 9, illustrated. Architectural Press, 2009 pp23-28. V. Charlotte (2006) Corporate Reporting and Company Law. Cambridge university press. Retrieved 3rd May, 2011. http://81.70.242.211/eab/manual/Publisher/Cambridge%20University%20Press%20www.cambridge.org/0521837936%20Corporate%20Reporting%20and%20Company%20Law%20Jul%202006%20c20060626%20%5B360%5D.pdf Read More