b. Pure economic loss
In negligence, pure economic loss means financial loss that does not result from personal injury or damage to the plaintiff’s own property.
This is different from consequential economic loss, which is financial loss that follows physical injury or property damage, such as lost earnings after an injury or profits lost because machinery has been damaged.
The common law has traditionally been reluctant to allow claims for pure economic loss.
General rule
As a general rule, a person cannot recover pure economic loss in negligence just because the defendant’s act has caused financial harm.
If the defendant damages the plaintiff’s property, the plaintiff can usually recover not only the cost of the physical damage but also business loss or lost profits flowing from that damage as consequential economic loss. By contrast, if the defendant damages someone else’s property and the plaintiff merely suffers financial loss as a result, that loss is generally treated as pure economic loss and is not recoverable.
A classic illustration is the case in which road contractors carelessly severed an underground electricity cable belonging to the local power company. The resulting blackout shut down a nearby steelworks in the middle of a furnace cycle. Because molten metal already in the furnace was ruined, the factory could recover both the value of that damaged metal and the profit that would have been made on its sale. But the owner could not recover the profit on further batches that were never processed during the outage. That loss was treated as pure economic loss: it arose from the interruption of the electricity supply, not from physical damage to the plaintiff’s own property. That additional loss of profit was pure economic loss and was irrecoverable. By contrast, if the severed cable had belonged to the factory itself, the factory could also recover the profit on further batches that were never processed during the outage, since that loss would flow consequentially from damage to the factory’s own property.
The same restrictive approach generally applies where a building or article is defective but has not yet caused personal injury or damage to other property. If the complaint is only that the property is worth less than expected, or that money must be spent to put the defect right, the loss is usually treated as pure economic loss rather than recoverable property damage.
Likewise, a later purchaser of a defective building will usually face difficulty in negligence if the complaint is merely that the building has a latent defect, has fallen in value, or needs repair, because that is treated as pure economic loss.
When a duty may arise
A duty of care may arise, as an exception to the general rule against liability for pure economic loss, where the defendant has assumed responsibility to the plaintiff for a statement, information, advice, or services, and the plaintiff has reasonably relied on what the defendant said or did.
In broad terms, a duty arises where:
- A relies on B for a statement, information, advice or services in circumstances where that reliance is reasonable; and
- B undertakes to provide them knowing, or being taken objectively to know, that A is relying on B.
To establish a duty, 3 requirements will usually need to be satisfied.
(i) Voluntary assumption of responsibility
The defendant must have undertaken to provide a statement, information, advice or services in circumstances where the plaintiff was intended to depend on the defendant’s care and skill, either expressly or by implication.
This is judged objectively. The question is not whether the defendant subjectively intended to accept legal responsibility, but whether, viewed objectively, the defendant’s conduct amounted to an acceptance of responsibility. The court asks whether a reasonable person in the plaintiff’s position would believe the defendant had undertaken to exercise care in performing a task.
A duty generally only arises in a business or professional context. However, this principle is not limited to professionals. A non-professional may also owe a duty if he has presented himself as having special knowledge or skill, and it is reasonable in the circumstances for the plaintiff to rely on them.
A disclaimer may prevent a duty from arising. If the defendant clearly says that no advice is being given, or that no responsibility is accepted, that may negate any inference of assumption of responsibility. Contract terms may have a similar effect. Non-reliance and no-advice clauses were treated as strongly undermining the claim that responsibility had been assumed.
(ii) Reliance
The plaintiff must show that he actually relied on the statement, information, advice or service when deciding how to act, and that this reliance caused the economic loss.
The reliance must relate to the very matter undertaken by the defendant. In other words, the plaintiff must have depended on the defendant’s special skill or judgment in relation to the particular subject on which the defendant assumed responsibility.
A duty may not arise if the plaintiff in truth made their own decision independently.
For example, A asks B, an accountant, whether a company is financially sound before deciding whether to invest. B provides advice that the company is in good financial health. A then decides to invest because of that advice, and later suffers loss when the company collapses. This is an example of reliance because A actually depended on B’s advice when deciding to invest. By contrast, there would be no reliance if A had already decided to invest before speaking to B, or if A only treated B’s advice as background information but made the decision independently.
(iii) Reasonableness of reliance
The plaintiff must show that it was reasonable to rely on the statement, information, advice or service.
This is judged by an objective test. The question is whether a reasonable person in the plaintiff’s position was entitled to use the statement, information, advice or service in the way he did, for the purpose he did, and without getting independent checks or further advice.
A duty of care will usually arise only if the statement, information, advice or service was given for a specific purpose that the defendant knew about, either directly or from the circumstances. In general, the defendant will only be liable if he knew the nature of the transaction the plaintiff was considering.
If a statement, information, advice or service is given for one purpose but relied on for a completely different purpose, that reliance will usually not be reasonable. In that case, no duty of care arises.
The law also draws a distinction between statements made generally to the public or a wide group, and statements made for a particular transaction or purpose. Liability does not extend to the “world at large”. For a duty to arise, the defendant must know that his statement will be communicated to the plaintiff, either as an individual or as a member of an identifiable class and must be fully aware of the nature of the transaction the plaintiff has in contemplation. If a statement is put into general circulation, the maker will usually not owe a duty of care to unknown persons who rely on it for unexpected purposes.
Reasonableness of reliance also depends on whether the plaintiff should have taken steps to protect himself. For example, reliance may be less likely to be reasonable where the statement came from the other party’s solicitor, or the information could have been easily checked independently.
Factors making a duty more or less likely
A duty of care is more likely where:
- the defendant is acting in a professional or business capacity, or otherwise holds himself out as having special skill or expertise in the relevant field (e.g. solicitors, valuers, accountants, financial advisers, specialist agents);
- the advice or service is given in a business or quasi‑commercial setting rather than in a social or informal context;
- the plaintiff’s reliance is reasonable in light of their own experience, the importance of the transaction, the availability and cost of independent advice, and market practice;
- the plaintiff is a known person, or part of a small and identifiable class;
- the potential class of plaintiffs is inherently limited and determinable;
- the defendant knows the particular purpose or transaction for which the advice or statement will be used; and
- the defendant knows, or ought objectively to know, that the plaintiff will not obtain independent checks but will treat the advice as the primary or sole basis for the decision.
A duty is less likely where:
- the statement is made more generally;
- the plaintiff is not clearly identifiable;
- the alleged duty would effectively protect a wide, open-ended group, raising the classic “floodgates” and indeterminate liability concerns.
- the information is produced for a statutory or regulatory purpose (e.g. audits, safety certifications, regulatory inspections), and the plaintiff seeks to use it for a different, essentially private or investment purpose;
- the defendant’s function is merely to provide raw information for others to evaluate (an “information” case) rather than to advise whether the plaintiff should enter a particular transaction (an “advice” case), making it harder to say the defendant undertook responsibility for the overall decision;
- there is an effective disclaimer or other clear indication that responsibility is not being assumed, especially in commercial contexts and where the plaintiff is sophisticated (subject to control of exemption clauses); and
- the plaintiff is a sophisticated commercial actor, well able to protect itself by contract, due diligence and insurance, and has in fact chosen a contractual structure that leaves this loss unprotected;
Special cases
In one case, a solicitor was instructed to amend a father’s will so that his daughters would again receive gifts under it. The solicitor failed to do so before the father died, with the result that the daughters lost the inheritance they were meant to receive. The court allowed the daughters to recover their financial loss, even though they had no contract with the solicitor and the loss was purely economic.
In another case, a former employer carelessly prepared a reference for an ex-employee. The reference caused the employee to lose a job opportunity, and the court held that the employer was liable for the resulting financial loss.
These examples show that the principle can apply even where the negligent statement is communicated to a third party rather than directly to the plaintiff, provided the relationship and the reliance are sufficiently close.
Disclaimers
Disclaimers serve as a primary mechanism to negate an “assumption of responsibility”. If a defendant successfully issues a disclaimer, he is generally considered not to have accepted legal responsibility for his advice or services, thus preventing a duty of care from arising in the first place.
The courts’ approach to disclaimers is highly fact-dependent, and merely issuing one does not automatically guarantee protection from liability. The courts assess its effect contextually: the key question is whether, viewed objectively, the defendant can still be said to have assumed responsibility towards the plaintiff despite the wording used. Several factors influence whether a disclaimer will be upheld:
(i) The nature of the plaintiff
Disclaimers are more likely to be effective if the plaintiff is a business or an experienced individual who can reasonably be expected to understand the implications of the warning. For example, in cases involving valuations of commercial property or high-end housing, disclaimers were found to mean there was no assumption of responsibility.
(ii) Context of the statement
The function of the disclaimer is often analysed together with the purpose of the statement and the size and nature of the relying class. Where a website or publication clearly signals that information is for general guidance only and urges independent checks, courts have treated that as evidence that no responsibility was assumed to any particular reader.
Further, by reason of the Control of Exemption Clauses Ordinance (Cap. 71), such disclaimers will only be effective if it could be shown that the disclaimer was reasonable in the case of business liability.
