pure economic loss

Financial loss can be divided into two distinct categories:

• consequential economic loss - which arises directly from some physical damage or injury; and
• pure economic loss - which is unconnected to any damage to persons or property.

Pure economic loss or recover by suing on the economic torts and by establishing a cause of action under in a contract.

Consequential Economic Loss and Pure Economic Loss

Consequential economic loss is generally recoverable in tortious actions. The general rule in respect of pure economic loss is that there is no duty of care to prevent such loss. Where a claimant suffers damage which is classed as pure economic loss, that loss is generally not recoverable, other than in certain specific circumstances.

Exception - Advisers
There is an important exception to the general rule where pure economic loss is caused by negligent professional advice. The claimant (the person who has been advised) must establish a close or special relationship between themselves and the defendant (adviser), whereby:

• the adviser must be shown to have assumed responsibility towards the advisee; and
• the advisee must have reasonably relied on the advice given.

If the claimant is able to do so, then a duty of care has been established and the claimant can bring a claim for the financial loss incurred.

Assumption of Responsibility

There are four criteria which must be satisfied to establish an assumption of responsibility:

• the adviser must have known the purpose for which the advice was required;
• the adviser must have known that the advice would be communicated to the advisee;
• the adviser must have known that the advisee would be likely to act on the advice without any independent inquiry; and
• the advice must have been acted on by the advisee to their detriment.

Judge made case law has extended the width of the special relationship to include negligent statements made by former to prospective employers who rely on those statements to the detriment of the prospective employee. The former employer is presumed to have assumed a responsibility to the employee to take reasonable care in providing the reference.

Limitation of the special relationship
An important limitation to the special relationship is that no duty of care will be owed in respect of advice given in a social situation, as it is presumed that there is no assumption of responsibility. This presumption can be rebutted if;

• the adviser has more experience and knowledge than the advisee; and
• the advisee makes it clear that they will be relying on the adviser’s greater skill and judgment.

In addition to establishing the special relationship, a claimant must also establish a breach of duty (i.e. that the adviser fell below the requisite standard of care) and causation (that the adviser’s breach caused the loss in question). The adviser may also have a defence by way of a limitation or exclusion clause in a contract for professional services.