Economic loss in contract law

The following sample essay on Economic loss in contract law tells about pure economic loss.

In regard to the extract taken from Markensinis and Deakin’s Tort Law (5th Edition), from the writer’s comments we see that there is dispute on whether cases of ‘pure economic loss’ in regard to compensation and damages, should be exclusive to the area of contract law instead of appearing in both the areas of contract law and tort law. We therefore must explore the similarities and differences between recovering damages and/or compensation in regard to ‘pure economic loss’ in both tort and contract law.

We must pose the question of whether we believe that tort law should allow cases of pure economic loss or whether it should remain exclusively in contract law. The definition for pure economic loss could simply be put as economic loss which is unaccompanied by physical injury or damage; it is also commonly known that pure economic loss is an umbrella term used to bring together various different policies regarding compensation, damages and loss.

For a more in depth image of pure economic loss and how the courts approached cases for damages or compensation due to pure economic loss we must look at precedent cases and how pure economic loss is recovered in both divisions of law. In the law of tort there is a limited approach to pure economic loss which means that recovering for pure economic loss relies on there being a ‘special relationship’ between the two parties – it must be established by the claimant that in fact, there was a ‘special relationship’ between themselves and the defendant.

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This approach is outlined in the case of Williams v Natural Life Health Foods Ltd [1998]1. In this case, it was held that the second defendant was not liable for the economic loss by Williams because he had acted through the company Natural Life Health Foods Ltd to advise the plaintiff and therefore did not have a special relationship with the claimant or did they have any personal contact with the second defendant.

The House of Lords also found that due to the fact that there had not been any ‘special relationship’ between the second defendant and the claimants that therefore the second defendant did not at any point express that he had held personal responsibility for their dealings. As we can see from that case the defendant did not have any assumption of personal responsibility towards the plaintiff or did they have any special relationship and therefore the claim for damages related to the pure economic loss of the plaintiff failed.

In addition observe the case of Smith v Bush2 for a further example of the courts taking into consideration whether there was a ‘special relationship’ between the plaintiff and defendant or a personal responsibility between the defendant and the claimant. In this case it is clear the disregard for the claimant’s financial safety in giving misinformation purposefully is obvious and the courts found that there was reliance and a special responsibility between the two parties.

Due to this the claimant was successful as there was an assumption of a duty of care by the surveyors towards the plaintiff. In the law of tort, recovery of damages due to economic loss can also be made in cases of negligent misstatements – a claimant seeking to recover damages ‘must establish that the statement was made within a relationship and where the claimant could reasonably rely on the skill and care of the defendant in the statement’3- in other terms, a special relationship should be established as is common within tortuous claims for damages due to pure economic loss.

A precedent case of a tortuous claim due to negligent misstatements by the defendant would be Chaudhury v Prabhakar4 in which the defendant claimed to be a specialist in the field of motor cars and assisted his friend, Prabhakar, the claimant in purchasing a motor car – his advice proved to be negligent. A relationship in this case was obvious. Chaudhury claimed to be a specialist in the field that Prabhakar had asked his advice – Chaudhury accepted the request for assistance from the claimant and gave intentional misstatements and as a result Prabhakar suffered a pure economic loss.

As we can see in the law of tort, a ‘special relationship’ – even in regard to negligent misstatements – and an assumption of a duty of care must be evident in order for there to be a successful claim for compensation or damages due to pure economic loss through the actions or negligence of another. The most commonly cited aim of damages in the law of tort is ‘to restore the claimant to the position he would have been in but for the tort’5.

The aim of contractual damages on the other hand is generally that of Parek B in Robinson v Harman (1848): ‘the claimant is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed. ‘6 In contract law, firstly and obviously, there must be a legally binding contract between the two parties. There must also be reliance by the claimant on the defendant to fulfil a promise or expectation outlined in the contract.

For a claim in regard to pure economic loss the expectation interest of that plaintiff must be protected. The expectation interest is an amount close to or equal to the net value of what the plaintiff would have been in receipt of if the contract had been performed and not broken by the defence. An alternative to the expectation measure sometimes used in its place is the reliance measure which protects the plaintiff’s reliance interest – this is a measure which puts the plaintiff in a position which s/he would have been in had they not relied on the terms in the contract.

In regard to both expectation and reliance damages being granted there must have been a action or rather lack of action from the defendant, which went in opposition to the terms of the contract between both parties, in order for the plaintiff to suffer a pure economic loss due to the expectation or reliance on the contractual obligations which went unfulfilled. A case which outlines the way in which contract law deals with pure economic loss would be CCC Films (London) Ltd. v Impact Quadrant Films Ltd. 7 The defendants granted the plaintiffs a licence to exploit, distribute and exhibit three films, the rights to which were owned by the defendants. The plaintiffs paid the agreed consideration of $12,000 for the licence and then requested the defendants to insure and send by recorded delivery to the plaintiffs’ nominee in Munich video tapes of the films, without which the plaintiffs were unable to market the films. In breach of the agreement for secure transmission of the tapes the defendants posted them uninsured by ordinary post in the course of which they were lost.

The defendants also failed to perform subsequent agreements with the plaintiffs to deliver replacement tapes. The plaintiffs were unable to produce any evidence of loss of profits but instead brought an action in which they claimed to recover the $12,000 as wasted expenditure. The defendants contended that it was not open to the plaintiffs to claim for wasted expenditure save where the evidence established either that it was impossible to prove loss of profits or that such loss of profits as could be proved was small.

Furthermore, the defendants, relying on the principle that a claim for wasted expenditure could not succeed if the plaintiffs’ returns, had the contract not been broken, would not have recouped that expenditure, contended that the onus was on the plaintiffs to prove that they would have recouped the expenditure and that the plaintiffs were only relieved of that onus of proof if the breach itself made it impossible to assess whether the returns would have been sufficient to recoup the expenditure.

Neither the plaintiffs nor the defendants produced evidence whether the plaintiffs would or would not have recouped the $12,000 if they had been able to exploit the films. The issue therefore arose on whom the burden of proof lay. Since the onus of proving that the plaintiffs would not have recouped their outlay of $12,000 if they had received the tapes and exploited the films lay on the defendants, who had not discharged that burden, the plaintiffs were entitled to judgment. 8 Now we have covered both areas of law and what must be fulfilled in order to file a successful claim for damages or compensation in regard to pure economic loss, in both contract and tort law, we must look at the case of Hedley Byrne v Heller & Partners9. Hedley Byrne v Heller & Partners was a groundbreaking case in that the decision by the House of Lords first recognised the possibility of liability for pure economic loss.

The House of Lords recognised that a claim could be made for negligent statements instead of being dependent on contractual relationships, as it had been previously. This is where the argument arises between leaving the compensation of pure economic loss to contract law or allowing it to be a part of both tort and contract divisions of law. The Hedley Byrne case found that the plaintiff must prove that there was a liability was held as an “assumption of responsibility” to the claimant, a “special relationship” between the two parties or a relationship “equivalent to contract”.

In Hedley Byrne v Heller & Partners, Hedley Byrne (an advertising partnership) were about to undertake contracts with Easipower Ltd, one of Heller’s client companies. Before taking out the contracts, Hedley Byrne decided to contact the bank of Heller & Partners Ltd. in order to gain knowledge on the financial state of Easipower Ltd. Heller claimed the company were financially secure – Hedley Byrne relied on this information and entered into a contract with Easipower Ltd. whom soon afterwards became bankrupt.

Hedley Byrne filed a claim against Heller & Partners for giving negligent and misleading information – the court found in Hedley Byrne’s favour claiming that there was a special relationship between the two parties as to create a duty of care but due to a disclaimer for Heller’s actions there were no orders for damages. Prior to the Hedley Byrne case, negligent misstatements were lead by the case Derry v Peek10 – Hedley Byrne revised this decision. Before Hedley Byrne, a person suffering from economic loss due to careless or negligent statements could sue in the tort of deceit.

In Derry v Peek, Peek, the defendant, a director of the Plymouth, Devonport and District Tramways Co. Ltd, had the notion that he and the company were allowed to run their trams with steam power provided they had the permission from the Board of Trade. However, their permission was not granted and the company had prior to a decision being made issued a prospectus that declared they were running trams on steam rather than animal power on the belief they would be granted permission.

Derry, the claimant, due to the representation of the company in the prospectus – steam powered trams, had obtained shares in the company and sued the defendants for financial loss under the tort of deceit. However since there was no evidence proving that the defendants intentionally issued the prospectus knowing the information provided was false, the House of Lords held that they were not guilty under the tort of deceit. As it was in Derry v Peek, the difficulty in this was that the House of Lords held that the claimant must prove fraud to establish deceit.

Meaning that the claimant must prove that the defendant knew that his or hers statement was untrue, malicious or reckless. The House of Lords held that sheer negligence was not sufficient. The House of Lords re-examined the precedence on careless statements, Derry v Peek was limited to its function of defining the tort of deceit and was held irrelevant to the issue of whether a duty of care was evident in negligence. Lord Devlin also held the non-existence of a contract was not relevant in the case of Hedley v Byrne, he said: a] promise given without consideration to perform a service cannot be enforced as a contract by the promisee, but if the service is in fact performed and done negligently the promisee can recover in an action in tort. 11 The House of Lords were not willing to identify a duty of care born from negligent statements on the foundations of the Donoghue v Stevenson12 neighbour principle alone. The House of Lords though, in protecting against a flood of cases, held that there was not a special relationship between Derry and Peek.

A prospectus, like an advertisement in a newspaper, is open for all to see and therefore a ‘special relationship’ cannot be formed from this – instead the claimant must prove that the statement was made within a relationship where the plaintiff could reasonably rely on the skill and expertise of the defendant in making the statement. So rising from the Hedley Byrne case we can come up with three questions that may be considered in regard to negligent statements and a claim for pure economic loss: One, was there an “assumption of responsibility” for the claimant by the defendant?

Two, was there a “special relationship” between the two parties? And three, was the relationship “equivalent to a contract”? If the answer to at least one of those questions is yes, then the claimant has a clear case for a recovery of damages or compensation. Where the case of Hedley Byrne gives the principle that one who makes a statement may voluntarily assume responsibility to the person they make it to – if this statement is made negligently then he or she is liable for any damage which may occur because of their negligent statement/s.

We must also though bear in mind the Caparo principles which have risen from the case of Caparo Industries PLC. v Dickman13. These principles question the scope of assumption of responsibility and what the limits of liability ought to be. The Caparo principles, four conditions outlined by the House of Lords which must be met for the defendant to be liable for economic loss resulting from negligent advice or information are. (1) The defendant must be fully aware of the nature of the transaction which the claimant had in contemplation as a result of receipt of the information. 2) He must have either communicated that information to the claimant directly, or know that it would be communicated to him (or a restricted class of persons of which the claimant is an identifiable member). (3) He must specifically anticipate that the claimant would properly and reasonably rely on that information when deciding whether or not to engage in the transaction in question. (4) The purpose for which the claimant does rely on that information must be a purpose connected with interests that it is reasonable require the defendants to protect14.

The case of Hedley Byrne had a major impact on the court’s outlook on cases regarding tortuous and contractual claims for pure economic loss and brings us to the position we are in now in discussing whether the claims should be left to one division of law. What is clear, in my opinion, from my investigations into both pure economic losses being recovered in both contract and tort law is that they both have a reasonable claim for being an advocate of claims of compensation or damages for pure economic loss.

What has been found is that in tort a relationship which is deemed ‘special’ or ‘equivalent to a contract’ must be in place otherwise a claim cannot be made – whereas in contract a legally binding agreement is already in place. The difference being is that the claims in either law of tort and contract protect different interests of the defendant. In contract you will find that the defendant’s reliance and/or expectation of the contract are shown in the damages rewarded, if the court deem necessary of course.

A claimant’s reliance or expectation which is not fulfilled, as stated it would be in the contract, will be rewarded with damages which cover the money they may have lost in one of two conditions: one, an amount close to or equal to the net value of what the plaintiff would have been in receipt of if the contract had been performed or two, placing the plaintiff in a position which s/he would have been in had they not relied on the terms in the contract. In tort though, compensation will be granted if the claimant has consequential economic loss because of the defendant’s actions or negligence.

As long as there be a ‘special relationship’ between the two parties or a relationship ‘equivalent to a contract’ – as was born from the case of Hedley Byrne – then the claimant is likely to be successful. Now, if you look at both sides you will see they cover different interests and arise from various different scenarios – this is something which has made me form an opinion that I believe “this is what has been happening and how things should remain”.