G. Pure Economic Loss
| Author | Philip H. Osborne |
| Profession | Faculty of Law. The University of Manitoba |
| Pages | 174-213 |
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The expansion of negligence law prompted by Donoghue v. Stevenson has provided a broad protection of personal security and property interests. It was not until the case of Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd.,76however, that the courts began to extend the tort of negligence to provide a remedy for pure economic loss. The word pure is used to exclude those situations where the economic loss is consequential upon damage to the person or property. Injured earners have always been able to recover their loss of income, and the owner of a damaged chattel may recover repair costs and any unavoidable loss of profits. The distinguishing characteristic of those situations is that the plaintiff has suffered some threshold damage to her person or property and the economic loss flows from that initial damage. The pure economic loss cases deal with plaintiffs whose sole loss is economic or financial.
There are a number of reasons for the delayed and cautious recognition of pure economic loss claims. First, there is the fear that a recognition of liability for economic loss might trigger a flood of litigation. The damage caused to person or property as a result of negligence is, in most circumstances, confined to a handful of people. The
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diversity and wealth of interrelating economic relationships in a market economy suggest that an act of negligence that causes damage to the economic interests of one person may have a ripple effect causing related economic harm to many other persons. This concern has been captured by the evocative words of Cardozo C.J. in Ultramares Corp. v. Touche.77He warned that economic loss cases present the potential for "liability in an indeterminate amount for an indeterminate time to an indeterminate class."78These words have become something of a mantra for judges in all common law jurisdictions. Worst-case scenarios include negligent acts that sever the supply of electricity to a city, close major transportation routes, disable communication networks, or disseminate erroneous investment advice to the world via the Internet. The conventional control devices, as they have been interpreted in personal injury and property cases, could not prevent a multitude of claims that might result in a burdensome liability totally disproportionate to the degree of the defendant’s negligence. Second, economic interests have not traditionally been assigned the same value or importance as personal or property interests. The priority of personal safety is obvious. It is more difficult to explain why property has been assigned greater value than wealth. There may be reasons other than the historical emphasis on property interests in the common law. It may, in part, be because property is the tangible result of a person’s work and effort and it is selected by the owner to serve her personal needs and tastes. There is, therefore, a degree of emotional attachment to property and a sense of personal violation when it is damaged or destroyed. In contrast, wealth, which is independent of property, is not only a luxury that relatively few people enjoy, but is also suggestive of corporate and commercial interests disassociated from the ordinary person. Third, economic loss has conventionally been seen as the subject matter of contract law. Generally, financial interests and expectations have been secured by contractual relationships, and the recognition of tort liability for economic losses inevitably affects traditional ideas about the boundaries between the two regimes of civil responsibility. Contractual liability has been carefully constrained by the doctrines of consideration and privity of contract. In combination, they have, in the main, restricted contractual liability to those who are parties to an exchange transaction. There has been some reluctance to subvert traditional boundaries by unleashing tort law and allowing it to intrude
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into the citadel of contract law.79Fourth, the high cost of liability insurance in comparison to first-party insurance has supported the traditional reluctance to reallocate economic losses from those who suffer them to those who cause them. Finally, in a free market economy it is generally permissible to intentionally inflict economic loss on rivals and competitors. There is, therefore, a certain disassociation from the normal tort principles that provide broader protection of interests from intentional conduct than from negligent conduct.
In spite of these reservations, the House of Lords in Hedley Byrne80
launched negligence law into the field of economic loss by recognizing that in certain circumstances liability may be imposed for pure economic loss caused by a negligent misrepresentation. It was the first step in extending the reach of negligence law to economic losses. Since that decision, the courts have been involved in the as yet unfinished task of defining the scope and extent of liability for economic loss in negligence law. In this process they have been assisted by the insight of Professor Feldthusen,81who has pointed out that economic loss cases can best be analysed by grouping them into categories that give rise to similar policy concerns and similar solutions. These categories include negligent misrepresentation, negligent performance of a service, relational economic loss, and claims for economic loss arising from the supply of poor quality goods and structures.82The Supreme Court has relied on both this framework of analysis and the general test of a duty of care to define the appropriate scope of negligence liability for pure economic loss.
The landmark case on liability for pure economic loss caused by a negligent misrepresentation is Hedley Byrne. In that case, the defendant
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bank negligently provided a positive credit report to the plaintiff in respect of one of the plaintiff’s customers. The plaintiff relied on the information and took a personal responsibility for some of its custom-er’s business liabilities. It suffered economic loss when the customer went into receivership and was unable to discharge those liabilities. The bank had sought to insulate itself from any potential liability by including in the credit report a written disclaimer of responsibility for its accuracy.
The plaintiff was forced to argue its case in negligence because the established causes of action for economic loss caused by words (contract, deceit, and fiduciary law) were not applicable. There was no contract between the plaintiff and the defendant because the plaintiff provided the credit report free of charge. The plaintiff could not, therefore, rely on an implied warranty that reasonable care would be taken in the preparation of the credit report. The plaintiff also had no action in the tort of deceit. Deceit requires proof of fraud. A fraudulent misrepresentation is one that the representor either knows is untrue or is consciously reckless as to whether it is true or false. The common thread uniting these alternative definitions is that the defendant has no honest belief in the truth of the statement. The defendant bank was not guilty of fraud because it had an honest belief in the truth of its credit report. At most, there was a failure to take care in its preparation. There was also no basis for arguing that the relationship between the defendant and the plaintiff was a fiduciary relationship giving rise to stringent obligations of good faith, loyalty, and care. The relationship between a bank and its customer is typically an arm’s length commercial relationship and there must be special circumstances giving rise to a high degree of trust, reliance, and confidence by the customer in the bank before the relationship is transformed into one that requires fiduciary care. Consequently, the plaintiff’s case depended on the tort of negligence and a willingness of the House of Lords to recognize a duty of care.
The House of Lords accepted that in certain circumstances a duty of care may arise in providing "information, opinion or advice."83The Court was, however, cautious in defining those circumstances. It made it clear that the duty of care could not be defined solely by the foreseeability of economic loss. Foreseeability, as interpreted in cases of personal injury and property damage, could not keep liability for economic loss caused by words within reasonable and appropriate boundaries. Particular concern was expressed about the wide range of situations in
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which advice and information is given and the need to avoid imposing liability where words are spoken on social, family, and other informal occasions. A constant obligation to be careful in all that one says would not only be burdensome and a threat to one’s freedom of speech, but would also be unrealistic in the light of human nature. Unless the occasion demands it, people often speak without reflection or prudence and they rarely ponder their words for accuracy or parse them for various connotations. It is not reasonable to expect care to be taken unless the nature of the occasion or the words of the inquirer signal the importance of the information and the likelihood of reliance on it by the plaintiff.
The Court was also influenced by the fact that information...
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