G. Pure economic loss

The expansion of negligence law prompted by Donoghue v. Stevenson has provided a broad protection of personal security and property interests. It was not until the case of Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., [Note 64: [1964] A.C. 465 (H.L.) [Hedley Byrne].] however, that the courts began to extend the tort of negligence to provide a remedy for pure economic loss. The word pure is used to exclude those situations where the economic loss is consequential upon damage to the person or property. Injured earners have always been able to recover their loss of income, and the owner of a damaged chattel may recover repair costs and any unavoidable loss of profits. The distinguishing characteristic of those situations is that the plaintiff has suffered some threshold damage to her person or property and the economic loss flows from that initial damage. The pure economic loss cases deal with plaintiffs whose sole loss is economic or financial.

There are a number of reasons for the delayed and cautious recognition of pure economic loss claims. First, there is the fear that a recognition of liability for economic loss might trigger a flood of litigation. The damage caused to person or property as a result of negligence is, in most circumstances, confined to a handful of people. The diversity and wealth of interrelating economic relationships in a market economy suggest that an act of negligence that causes damage to the economic interests of one person may have a ripple effect causing related economic harm to many other persons. This concern has been captured by the evocative words of Cardozo C.J. in Ultramares Corp. v. Touche. [Note 65: 174 N.E. 441 (N.Y. 1931). ] He warned that economic loss cases present the potential for "liability in an indeterminate amount for an indeterminate time to an indeterminate class." [Note 66: Ibid. at 444.] These words have become something of a mantra for judges in all common law jurisdictions. Worst-case scenarios include negligent acts that sever the supply of electricity to a city, close major transportation routes, disable communication networks, or disseminate erroneous investment advice to the world via the Internet. The conventional control devices, as they have been interpreted in personal injury and property cases, could not prevent a multitude of claims that might result in a burdensome liability totally disproportionate to the degree of the defendant's negligence. Second, economic interests have not traditionally been assigned the same value or importance as personal or property interests. The priority of personal safety is obvious. It is more difficult to explain why property has been assigned greater value than wealth. There may be reasons other than the historical emphasis on property interests in the common law. It may, in part, be because property is the tangible result of a person's work and effort and it is selected by the owner to serve her personal needs and tastes. There is, therefore, a degree of emotional attachment to property and a sense of personal violation when it is damaged or destroyed. In contrast, wealth, which is independent of property, not only is a luxury that relatively few people enjoy but is also suggestive of corporate and commercial interests disassociated from the ordinary person. Third, economic loss has conventionally been seen as the subject matter of contract law. Generally, financial interests and expectations have been secured by contractual relationships, and the recognition of tort liability for economic losses inevitably affects traditional ideas about the boundaries between the two regimes of civil responsibility. Contractual liability has been carefully constrained by the doctrines of consideration and privity of contract. In combination, they have, in the main, restricted contractual liability to those who are parties to an exchange transaction. There has been some reluctance to subvert traditional boundaries by unleashing tort law and allowing it to intrude into the citadel of contract law. Fourth, the high cost of liability insurance in comparison to first-party insurance has supported the traditional reluctance to reallocate economic losses from those who suffer them to those who cause them. Finally, in a free market economy it is generally permissible to intentionally inflict economic loss on rivals and competitors. There is, therefore, a certain disassociation from the normal tort principles that provide broader protection of interests from intentional conduct than from negligent conduct.

In spite of these reservations, the House of Lords in Hedley Byrne [Note 67: Above note 64.] launched negligence law into the field of economic loss by recognizing that in certain circumstances liability may be imposed for pure economic loss caused by a negligent misrepresentation. It was the first step in extending the reach of negligence law to economic losses. Since that decision, the courts have been involved in the as yet unfinished task of defining the scope and extent of liability for economic loss in negligence law. In this process they have been assisted by the insight of Professor Feldthusen, [Note 68: B. Feldthusen, Economic Negligence, 3d ed. (Scarborough, Ont.: Carswell, 1994).] who has pointed out that economic loss cases can best be analysed by grouping them into categories that give rise to similar policy concerns and similar solutions. These categories include negligent misrepresentation, negligent performance of a service, relational economic loss, and claims for economic loss arising from the supply of poor quality goods and structures. [Note 69: There is a fifth category dealing with loss caused by the negligent exercise of statutory powers by public bodies. This issue is given separate consideration because the relevant principles cover personal injury, property damage, and pure economic loss.] The Supreme Court has relied on both this framework of analysis and the general test of a duty of care in Anns [Note 70: 1 Anns v. Merton London Borough Council, [1978] A.C. 728 (H.L.) [Anns].] to define the appropriate scope of negligence liability for pure economic loss.

1) Negligent Misrepresentation

The landmark case on liability for pure economic loss caused by a negligent misrepresentation is Hedley Byrne. In that case, the defendant bank negligently provided a positive credit report to the plaintiff in respect of one of the plaintiff's customers. The plaintiff relied onthe information and took a personal responsibility for some of its customer's business liabilities. It suffered economic loss when the customer went into receivership and was unable to discharge those liabilities. The bank had sought to insulate itself from any potential liability by including in the credit report a written disclaimer of responsibility for its accuracy.

The plaintiff was forced to argue its case in negligence because the established causes of action for economic loss caused by words (contract, deceit, and fiduciary law) were not applicable. There was no contract between the plaintiff and the defendant because the plaintiff provided the credit report free of charge. The plaintiff could not, therefore, rely on an implied warranty that reasonable care would be taken in the preparation of the credit report. The plaintiff also had no action in the tort of deceit. Deceit requires the proof of fraud. A fraudulent misrepresentation is one that the representor either knows is untrue or is consciously reckless as to whether it is true or false. The common thread uniting these alternative definitions is that the defendant has no honest belief in the truth of the statement. The defendant bank was not guilty of fraud because it had an honest belief in the truth of its credit report. At most, there was a failure to take care in its preparation. There was also no basis for arguing that the relationship between the defendant and the plaintiff was a fiduciary relationship giving rise to stringent obligations of good faith, loyalty, and care. The relationship between a bank and its customer is typically an arm's length commercial relationship and there must be special circumstances giving rise to a high degree of trust, reliance, and confidence by the customer in the bank before the relationship is transformed into one that requires fiduciary care. Consequently, the plaintiff's case depended on the tort of negligence and a willingness of the House of Lords to recognize a duty of care.

The House of Lords accepted that in certain circumstances a duty of care may arise in providing "information, opinion or advice." [Note 71: Hedley Byrne, above 64 at 482.] The Court was, however, cautious in defining those circumstances. It made it clear that the duty of care could not be defined solely by the foreseeability of economic loss. Foreseeability, as interpreted in cases of personal injury and property damage, could not keep liability for economic loss caused by words within reasonable and appropriate boundaries. Particular concern was expressed about the wide range of situations in which advice and information is given and the need to avoid imposing liability where words are spoken on social, family, and other informal occasions. A constant obligation to be careful in all that one says not only would be burdensome and a threat to one's freedom of speech but would also be unrealistic in the light of human nature. Unless the occasion demands it, people often speak without reflection or prudence and they rarely ponder their words for accuracy or parse them for various connotations. It is not reasonable to expect care to be taken unless the nature of the occasion or the words of the inquirer signal the importance of the information and the likelihood of reliance on it by the plaintiff.

The Court was also influenced by the fact that information can circulate quickly and spread to large numbers of persons. Moreover, the power of information to cause economic loss to many persons is not exhausted by its initial causation of economic loss to one person. When a defective product causes personal injury, it is discarded or repaired. Defective information may continue to circulate unabated and uncorrected after the initial loss has been caused.

The solution to these concerns was found in the limiting concept of a special relationship that could be used on a case-by-case basis to identify the occasions on which a duty of care may arise. The concept of a special relationship is, of course, not a guiding principle. It is a vehicle to express a judicial conclusion that on the facts of the case the speaker was obliged to exercise care. The factors in Hedley Byrne that supported a finding of a special relationship included the plaintiff's request for the credit report, the expertise of the bank in such matters, the seriousness of the occasion on which the report was given, and the reasonable and foreseeable reliance of the plaintiff. On the other hand, an important factor that pointed to the opposite conclusion was that the credit report was accompanied by a disclaimer. It signalled that no responsibility was being taken for the accuracy of the report and that no reliance should be placed on it. The Court concluded that the disclaimer was the most compelling factor and it concluded that the defendant owed no duty of care to the plaintiff.

The general principle in Hedley Byrne was immediately adopted by Canadian courts and most cases have been decided with reference to the notion of a special relationship. In due course it became apparent that the most compelling factors in deciding whether or not there was a special relationship were the defendant's voluntary assumption of responsibility for the accuracy of her words and the plaintiff's foreseeable and reasonable reliance on the information. In most cases, it was unnecessary to determine which was the true determinant of a duty of care, and the Supreme Court avoided choosing one or the other until its decision in Hercules Management Ltd v. Ernst & Young. [Note 72: [1997] 2 S.C.R. 165.] In that case, the court de-emphasized the language of special relationship and the importance of an assumption of responsibility and stressed the importance of the concept of foreseeable and reasonable reliance by the plaintiff. The Court also noted that the negligent misrepresentation cases should not be isolated from the general law of negligence. As far as possible, the conventional Anns test should be used to determine if a duty of care is owed by the defendant to the plaintiff. Few cases will be decided differently after Hercules but it does provide an authoritative framework for the development of liability for negligent misrepresentations in Canada.

a) Duty of Care

The Supreme Court in Hercules recognized that some modification of the Anns test was necessary to accommodate the special features of negligent misrepresentation cases. To establish the prima facie duty of care under the first branch of the Anns test, it is not sufficient to show that the defendant might reasonably foresee damage to the plaintiff. In negligent misrepresentation cases, the plaintiff must establish that the representor "ought reasonably to have foreseen that the plaintiff would rely on his representation and that reliance by the plaintiff, in the circumstances, would be reasonable." [Note 73: Ibid. at 200 [emphasis added].] It is then necessary, under the second branch of the test, to determine if the prima facie duty creates sufficient concerns of indeterminate liability that it must be negated on the grounds of public policy.