PURE ECONOMIC LOSS

Dr. Sonny Zulhuda

PURE ECONOMIC LOSS

Definition

When Not recoverable?

When recoverable?

Definition of Economic Loss• Economic loss = pecuniary or financial

loss, both ‘consequential’ and ‘pure’.

• Consequential economic loss – Loss(es) incurred as a result of physical injuries or damage to property.

• Pure economic loss – other losses that follow which do not flow from the damage (independent from it).

Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973]

• C had a stainless steel factory which obtained its electricity by a direct cable from the power station. D were doing work on the ground with an excavator and negligently damaged that cable.

• As a consequence, the factory was deprived of electricity for 15 hours which caused:– physical damage to the factory’s furnaces and metal, – lost profit on the damaged metal and – lost profit on the metal that was not melted during the time the

electricity was off.

• Spartan Steel claimed all the three heads of damage.

YOU JUDGE!

Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd

• The first two were allowed because they were consequent upon a threat of physical damage to the plaintiff’s property.

• The third claim was not allowed being a pure economic loss.

• C suffered these losses because he was prevented from using the furnace and was not consequent upon physical damage to the property

When not recoverable?

• Cattle v Stockton Waterworks Co.

Loss resulting from damage to property belonging to a 3rd party

• Murphy v Brentwood District Council

Loss due to a defective product

• Cattle v Stockton Waterworks Co.• C contracted to build tunnel under an embankment for a mr. X –

D negligently caused flood to the embankment and the surrounding land belonging to mr. X – this disrupted C’s work and C suffered a loss of profit in the performance of his work for mr. X – C sued D.

• Court disallowed the claim for being a pure economic loss.

• Murphy v Brentwood District Council • C (house owner) suffered losses after selling his defective house

far below market price – C sued D for such losses and for expenses incurred in moving into a new house.

• Court only allowed C to recover the cost of repairing a defective building due to the negligence, but not the loss for abandoning the premise or expenses for remedying the defect.

When recoverable?• Hedley Byrne &

Co. Ltd v HellerLoss caused by negligent misstatement

• Yong & Co v Wee Hood Teck Development Corp.

Loss caused by negligent provision of

services

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964]

• D, a bank gave a reference to C (advertising agent) regarding the financial responsibility of a customer, expecting C to act on it.

  • D replied in a letter that was headed: "without

responsibility on the part of this bank,“ it said that the customer was "considered good for its ordinary business engagements".

• C relied on the advise, that customer then went into liquidation and C lost £17,000 on contracts. C sued Heller & Partners for negligence, claiming that the information was given negligently and was misleading.

• D argued there was no duty of care owed regarding the statements, and in any case liability was excluded.

 

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964]

• Held:  The law will imply a duty of care when a party seeking information from a party possessed of a special skill trusts him to exercise due care, and that party knew or ought to have known that reliance was being placed on his skill and judgment (i.e. when there is a special relationship with reliance)

 • However, since here there was an

express disclaimer of responsibility, no such duty was, in any event, implied.

 • Therefore, C lost the case.

Yong & Co v Wee Hood Teck Development Corp.• Developer-purchaser-financier arrangement: Financier

(Resp) gives loan to purchaser, and the letter agreed to charge the land to the financier.

• App (legal firm) prepared an agreement between the developer, the purchaser and the financier – They undertook to have the land charged in the financier’s favor – but then acted for developers in charging the lands to another bank.

• When the developer defaulted, the lands were sold to a 3rd party, and financier was left as an unsecured creditor who cannot execute their claim from the memorandum of charge resulting in a pure economic loss to the financier.

• Can the Financier recover for the loss from the App?

Yong & Co v Wee Hood Teck Development Corp. [1984]

• Argued by App: They should not be liable as there is no retainer (retainer contract) between App and Respondent.

• Court: clear records and evidence from the past showed the existence of the solicitor-client relationship between App and respondent by way of implication Special relationship.

• Court: App had not only failed to perform their obligation under the contract with the required skill and care but were also liable in tort for their wrongful act of depriving the financier from having security for the loan (i.e. when the Financier failed to execute the memorandum of charge from the Purchaser).

Majlis Perbandaran Ampang Jaya v Steven Phoa Cheng Loon & Ors [2006] 2 MLJ 389

Steve Shim CJ: • “The third question postulated the consideration of whether pure

economic loss is recoverable under the Malaysian jurisprudence in negligence and nuisance.

• In the law of negligence, there is no immutable rule that pure economic loss is not recoverable. All major Commonwealth jurisdictions recognize that pure economic loss is recoverable in negligence.

• Under English law, the general duty of care test enunciated in Caparo Industries Plc v Dickman [1990] 2 AC 605 is applicable to all negligence claims, including claims for pure economic loss. – Pursuant to this test, three questions have to be addressed, namely, whether the

damage suffered by the plaintiff is reasonably foreseeable; whether there is a relationship of proximity between the plaintiff and defendant; and whether it is fair and reasonable that the defendant should owe the plaintiff a duty of care.”

• …from the analysis of Murphy v Brentwood; pure economic loss is recoverable in negligence in English law on the two alternate bases, namely the 'categorization approach' and the 'open-ended approach'.

• The recognized categories include:– where a defendant has assumed a particular responsibility towards the plaintiff.

For example, in White v Jones [1995] 2 AC 207, where a solicitor was found to have assumed a responsibility towards the beneficiary under a will when drafting the will pursuant to a testator's instructions;

– where a defendant has exposed a plaintiff to a particular danger (see Harris v Evans [1998] 1 WLR 1285); and

– where there is a recognized legal relationship between the plaintiff and defendant. For example, in Phelps v Hillingdon London Borough Council [2001] 2 AC 6019, at p 667, it was found that a teacher-pupil relationship might place a teacher under a duty of care not to cause pure economic loss by teaching pupils the wrong syllabus

MPAJ v Steven Phoa Cheng Loon & Ors… (cont’d)

• The. 'open-ended approach‘: if the facts of a particular case do not come within a recognized category of liability, a court could go further to look at the facts closely to determine if a duty of care should nevertheless be owed by the defendant to the plaintiff.

• Recent statements by the English courts confirm that the 'open-ended approach' can be used to recognize duties of care in new situations; supported by courts decisions in Australia, NZ and Singapore.

• Couort: “Having had the benefit of reading the various authorities on this subject… I would also endorse the view that caution should be exercised in extending the principle in Donoghue v Stevenson to new situations. Much would depend on the facts and circumstances of each case in determining the existence or otherwise of a duty of care. (So; favouring open-ended approach)

MPAJ v Steven Phoa Cheng Loon & Ors… (cont’d)

• Resp submitted that they should be allowed to recover economic loss against MPAJ, because:– First, the danger posed by the concept of diverting the East stream across the hill

slope behind Highland Towers was reasonably foreseeable. It was recognized by existing engineering codes.

– Secondly, the drainage requirements for the hill slope imposed by JPS were the result of its concerns for the safety of the Highland Towers apartment blocks, which were in close proximity to the hill slope. There was therefore a direct link between the need for a safe drainage scheme on the hill slope and the Highland Towers apartment blocks below it.

– Thirdly, the Highland Towers tragedy rocked the nation and the world. 48 died and many were made homeless. It has been urged upon this Court that public policy would only accord with common sense and public perception if MPAJ and/or its predecessor were held liable for requiring or approving the diversion of the East stream without ensuring its proper maintenance.

• Court held: On the grounds so advanced, negligence would have been attributed to MPAJ and/or its predecessor. But, for the reasons already stated, they are however immunized against any liability under s 95(2) of Act 133.

Uda Holdings Bhd v Koperasi Pasaraya Malaysia Bhd

• Hawkers were relocated and issued a TOL to erect and operate stalls on public road near plaintiff’s supermarket.

• This caused reduced business and substantial loss of profit to P. Plaintiff sued defendants on public nuisance and breach of statutory duty.

• Court held that due to the breach of statutory duty, DBKL and the Government were liable for a claim based on pure economic loss. All the three were joint tortfeasors.

THE END