3. Liability for ‘Pure Economic Loss’

‘Pure economic loss’ may be defined as that financial loss which is not consequential on damage to property owned by the claimant⁴² or on personal injuries suffered by the claimant.⁴³ Pure economic loss caused by the death of another person is also irrecoverable at common law, but important exceptions were made for ‘dependents’ of the deceased by the Fatal Accidents Acts.⁴⁴ Where economic loss is consequential on a claimant’s damage to property it is in principle included within the duty of care, but may be irrecoverable on the ground that it is too remote.⁴⁵ The test of remoteness in the tort of negligence is one of a lack of reasonable foreseeability of the type of harm suffered by the claimant,⁴⁶ and its function can be seen as a way of controlling liability even in respect of types of harm in principle included within the scope of the tort and otherwise falling within the scope of a duty of care.

(p.184) Quite apart from the question of remoteness of damage, we could distinguish further between the types of pure economic losses relevant to liability for products. In the case of defective products, losses may be caused by the devaluation of the product or its need of repair or replacement (though English courts treat the case where the product is simply defective and where its defect has caused its own damage or destruction both equally as giving rise to ‘pure economic loss’);⁴⁷ or as a result of a product’s causing some other harm to a person’s other economic interests, notably by triggering a liability to a third party under a contract (for example, where the purchase of defective machinery disrupts a claimant’s industrial process and so causes his failure to perform a contract with a third party or even then triggers a liability in his buyer to a fourth party).⁴⁸

However, English courts do not distinguish between these different types of loss in coming to a firm general rejection of liability for pure economic loss caused by defective products nor between whether the product in question is a movable or an immovable.⁴⁹ To this general picture, there is only one caveat, as there remains the possibility of liability under the case law set in motion by Hedley Byrne.⁵⁰ While this case law first centred on cases where a defendant’s misstatement caused the claimant pure economic loss (so, in the context of liability for products, in cases concerning the liability of surveyors, architects or designers),⁵¹ in Henderson v Merrett Syndicates Ltd.⁵² Lord Goff saw the basis of liability under Hedley Byrne in a ‘broad doctrine’ of assumption of responsibility capable of applying equally to liability for the negligent performance of services and for misstatements,⁵³ and this suggests that liability for pure economic loss caused by defective products may be imposed as long as the defendant can be said to have agreed to do the work for the claimant and possessed or held himself out as having special skill in doing so.⁵⁴ On the other hand, Lord Goff distinguished the ‘ordinary case’ of the liability of a building sub-contractor who would not be liable for sub-standard work to the commissioner of the building beyond privity of contract because the parties had chosen to structure their relationship in a way inconsistent with such a direct relationship.⁵⁵

This observation explains in part why English courts have taken such a restrictive attitude to the imposition of liability for pure economic loss caused by defective products in tort of negligence. For while they are generally concerned with opening the ‘floodgates’ to claims which would be over-burdensome to defendants and sometimes have seen limited Parliamentary intervention as a reason against judicial creativity,⁵⁶ in the context of defective products there is also a strong sense that recovery in respect (p.185) of qualitative defects (as opposed to dangerous defects) should be left to the law of contract. This idea lies behind judicial concern that the tort of negligence should not disrupt the contractual structure which the parties have put in place⁵⁷ and that imposing liability in tort may nullify the protection with which the defendant was provided by a contractual exemption clause.⁵⁸ Even more fundamental, though, is the difficulty of determining the appropriate standard of liability to be required of a defendant. For the tort of negligence bases liability on a defendant’s lack of reasonable care, as judged by an assessment of the balance between the risk of harm against the cost of its avoidance,⁵⁹ whereas the contractual basis of liability for products rests either on the express terms of the contract in question or on the achievement of a standard of quality or utility.⁶⁰ Where express or implied contract terms require the attainment of a particular result, the defectiveness of a product is surely to be judged by reference to these standards rather than by reference to the degree of care which the defendant used in trying to achieve this result.⁶¹

However, the reluctance of the courts to use the tort of negligence to impose liability for pure economic loss caused by defective products has not prevented its occasional recovery by other means. So, products (and particularly buildings) can be constructed under a scheme of arrangements by which an express direct contract is made to create a basis of liability in the event of defect;⁶² a right of recovery in respect of defects under a contract may be assigned to its subsequent purchaser;⁶³ and the parties to a contract under which a product is made may create a right in a non-party in respect of any subsequent defects.⁶⁴ The courts themselves have also sometimes used circumventing techniques, either by finding ‘collateral contracts’⁶⁵ or by allowing the person who commissioned a product to recover substantial damages in respect of its defects which they hold on trust for the benefit of a person who actually suffers the loss as a result (such as a sub-purchaser).⁶⁶

All this contrasts very strikingly with the position in French law, where in principle ‘pure economic loss’ may be recovered under the general provisions for delictual fault, but where many cases which English law would see as concerning liability for pure economic loss caused by defective products would be governed exclusively by (p.186) special contractual rules extended beyond the parties either by the courts themselves (in the case of the law of sale) or by legislation (as regards liability for buildings).⁶⁷ As a result, French law subjects liability to the contractual standards and to any exemption or limitation clauses which it considers should be effective as a matter of public policy.⁶⁸