Pure economic loss

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Economic loss is a term of art[1] which refers to financial loss and damage suffered by a person such as can be seen only on a balance sheet rather than as physical injury to the person or destruction of property. There is a fundamental distinction between pure economic loss and consequential economic loss, as pure economic loss occurs independent of any physical damage to the person or property of the victim. It has also been suggested for it to be called "commercial loss" as injuries to person or property could be regarded as "economic".[1]

Pure economic loss was not recoverable in negligence until 1963 and the decision of the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. Up until Hedley Byrne was decided, pure economic loss was thought to be entirely within the realm of contract law.[2] From that point on, in jurisdictions following the English common law, it has been possible to recover for some pure economic loss in negligence; however, because purely economic loss can usually be anticipated and allocated differently by contract, the party seeking to be compensated for such loss must demonstrate a compelling reason to change the contractual allocation through tort liability.

Recovery at law for pure economic loss is restricted under some circumstances in some jurisdictions, in particular in tort in common law jurisdictions, for fear that it is potentially unlimited and could represent a "crushing liability" against which parties would find it impossible to insure.[3][4] In the United States, Chief Judge Benjamin N. Cardozo of the New York Court of Appeals famously described it as, "liability in an indeterminate amount, for an indeterminate time, to an indeterminate class."[5] The rule may also be traced back to Roger Traynor's decision in the California case Seely v. White Motor Co. (1965), and was later adopted by the Supreme Court of the United States in East River Steamship Corp V Transamerica Delaval Inc. (1986).[1]

Justice Cardozo's indeterminacy concerns were relied on by the Supreme Court of Canada to restrict imposing liability on a corporation's auditors for negligently auditing the corporation's financial statements. In Hercules Management v Ernst & Young, [1997] 2 SCR 165.[6] The court determined that the auditors owed investors of the company a duty of care, and that the auditors had been negligent in conducting their audit. However, La Forest J, writing for a unanimous court, declined to impose liability on the auditors for policy reasons, citing Justice Cardozo's concerns over indeterminate liability.[7]

Examples of pure economic loss include the following:

  • Loss of income suffered by a family whose principal earner dies in an accident. The physical injury is caused to the deceased, not the family.[8]
  • Loss of market value of a property owing to the inadequate specifications of foundations by an architect.[9][10][11]
  • Loss of production suffered by an enterprise whose electricity supply is interrupted by a contractor excavating a public utility.

The latter case is exemplified by the English case of Spartan Steel and Alloys Ltd v. Martin & Co. Ltd[12] Similar losses are also restricted in German law[13] though not in French law beyond the normal requirements that a claimant's asserted loss must be certain and directly caused.[14]

In Australia it is very difficult to recover pure economic loss in negligence if it is not consequent to property damage.[15]

A few state supreme courts in the United States have departed from the majority rule and authorized recovery for pure economic loss through tort causes of action (usually negligence). The first was California in 1979,[16] followed later by New Jersey[17] and Alaska.[18]

By jurisdiction[edit]

In Malaysia, the Federal Court in Majlis Perbandaran Ampang v Steven Phoa Cheng Loon [2006] 2 AMR 563 followed the decision in Caparo Industries v Dickman [1990] UKHL 2 where it held; pure economic loss is claimable provided 1.) the damage is foreseeable, 2.) whether the relationship between the parties was one of sufficient proximity, and 3.) whether it was fair, just and reasonable to impose a duty of care on the defendant.


  1. ^ a b c Sorenson T, Davidson M, White M. (2012). When Can A Breach of Contract Be a Tort and What Difference Does it Make?. American Bar Association CLE Seminar.
  2. ^ "Hedley Byrne". Bailii. Retrieved November 11, 2014. "It must now be taken that Deny v. Peek did not establish any universal rule that in the absence of contract an innocent but negligent misrepresentation cannot give rise to an action. It is true Lord Bramwell said (at p. 347):" To found an action for damages there must be a contract and breach, or " fraud." And for the next twenty years it was generally assumed that Derry v. Peek decided that. But it was shown in this House in Nocton v. Ashburton [1914] A.C. 932 that that is much too widely stated. We cannot, therefore, now accept as accurate the numerous statements to that effect in cases between 1889 and 1914, and we must now determine the extent of the exceptions to that rule. 
  3. ^ Canadian National Railway Co. v. Norsk Pacific Steamship Co. [1992] 1 SCR 1021 (Canada), per McLachlin J
  4. ^ Bishop (1982)
  5. ^ Ultramares Corporation v. Touche, 174 N.E 441, 444 (N.Y. 1931).
  6. ^ "Hercules Management v Ernst & Young". Retrieved November 11, 2014. 
  7. ^ "Hercules Management v Ernst & Young". 
  8. ^ Baker v. Bolton (1808) 1 Camp 493 (England and Wales)
  9. ^ Murphy v. Brentwood District Council [1991] 1 AC 398 (England and Wales)
  10. ^ Sutherland Shire Council v. Heyman (1985) 60 ALR 1, at 60-61 (Australia)
  11. ^ Winnipeg Condominium Corporation No.36 v. Bird Construction Co. [1995] 1 SCR 85 (Canada)
  12. ^ [1973] QB 27
  13. ^ van Gerven (2001) pp187-188
  14. ^ van Gerven (2001) pp198-199
  15. ^ Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36.
  16. ^ J'Aire Corp. v. Gregory, 24 Cal. 3d 799, 598 P.2d 60, 157 Cal. Rptr. 407 (1979).
  17. ^ People Express Airlines, Inc. v. Consol. Rail. Corp., 495 A.2d 107, 109 (N.J. 1985).
  18. ^ Mattingly v. Sheldon Jackson Coll., 743 P.2d 356, 359–61 (Alaska 1987).