Economic loss is a term of art which refers to financial loss and damage suffered by a person which is seen only on a balance sheet and not as physical injury to person or 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 that this tort should be called "commercial loss" as injuries to person or property can be regarded as "economic". 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. Loss of market value of a property owing to the inadequate specifications of foundations by an architect. 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. Similar losses are also restricted in German law, though not in French law beyond the normal requirements that a claimant's asserted loss must be certain and directly caused.
Common law jurisdictions 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.
Australia In Australia, the general rule is that damages for economic loss which are not consequential upon damage to person or property are not recoverable in negligence even if the loss is foreseeable. Economic loss may be recoverable in cases where the plaintiff can prove an assumption of responsibility by the defendant and known reliance on the defendant by the plaintiff, or vulnerability in the sense of the inability of the plaintiff to take steps to protect itself from the risk of the loss. Cases in which the High Court has held that economic loss was recoverable include:
Caltex Oil (Australia) Pty Ltd v The Dredge 'Willemstad' (1976), in which Caltex was permitted to recover the economic loss it suffered when a dredge severed an oil pipeline. Caltex was not directly affected by the loss of the oil, because that risk was borne by another company, but it suffered loss in obtaining oil by another means of transport while the pipeline was repaired. The loss was recoverable because the defendants knew or should have known that Caltex would suffer it. Bryan v Maloney (1995), in which the purchaser of a home was entitled to compensation from the builder for latent defects. Because compensation for the defects would have been recoverable by the landowner who originally engaged the builder, the subsequent purchaser enjoyed similar rights. (In contrast, the builders in Woolcock Street Investments Pty Ltd v CDG Pty Ltd and Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 owed no duty of care to the original landowner, and were therefore not liable to subsequent owners when latent defects were revealed.) Hill v Van Erp (1997), in which a solicitor was liable to an intended beneficiary when a deceased testator's gift was ineffective as a result of the solicitor's negligence. Perre v Apand Pty Ltd (1999), in which an agricultural company negligently introduced bacterial wilt onto a potato farm and was liable to neighbouring farmers whose crops were not affected by the disease, but could not be sold as a result of regulations prohibiting the sale of potatoes grown within a 20 km radius of an outbreak.
Canada 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. 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.
England and Wales
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). Up until Hedley Byrne was decided, pure economic loss was thought to be entirely within the realm of contract law. 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.
Malaysia 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 if 1) the damage was foreseeable, 2) the relationship between the parties was one of sufficient proximity, and 3) it is fair, just and reasonable to impose a duty of care on the defendant. In the case of Tenaga Nasional Malaysia v Batu Kemas Industri Sdn Bhd & Anor Appeal [2018] 6 CLJ 683, the Federal Court has reaffirmed the position of the Caparo's three-fold test. However, the Court also stressed that the third element shall only be relevant in new and novel cases. In well-established cases such as economic loss, the third element is inapplicable and the Court must adhere to precedents.
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