Pure economic loss & psychiatric harm

TOR.04 — Pure Economic Loss & Psychiatric Harm

Both areas restrict the duty of care for policy reasons (floodgates, indeterminate liability). Pure economic loss is generally irrecoverable in negligence save in recognised exceptions. For psychiatric harm, primary victims recover on ordinary principles where personal injury is foreseeable, while secondary victims must satisfy the Alcock controls.

Pure economic loss (PEL)

PEL = financial loss not flowing from physical damage to the claimant's own person or property.

• Consequential economic loss (e.g. lost profit because your damaged machine stopped) IS recoverable.

• Pure economic loss is generally not recoverable in negligence.

• Spartan Steel v Martin — cut power cable: damaged melt + its lost profit recoverable; profit on melts that could not be made (pure loss) not recoverable.

• Murphy v Brentwood DC [1991] 1 AC 398 (overruling Anns): the cost of repairing a defect in the building or product itself is pure economic loss and is not recoverable in negligence. That includes money spent removing a danger before it injures anyone: once the danger is known, the defect 'becomes merely a defect in quality', and Murphy rejected the Anns 'imminent danger' basis. (Lord Bridge, obiter, suggested a qualification: where a defective building remains a danger to people or property on neighbouring land or the highway because it stands so close to the boundary, the owner ought in principle to recover from the negligent builder the cost of removing that danger by repair or demolition, so far as necessarily incurred to protect the owner from potential liability to third parties.) Physical damage to other property, or injury to persons, caused by the defect is recoverable on ordinary negligence principles. This does not rule out a separate contractual or statutory claim.

• Do not generalise Junior Books v Veitchi [1983] 1 AC 520: the House of Lords allowed a factory owner's claim for replacing defective flooring to proceed against a nominated specialist subcontractor, on an exceptionally close relationship and known reliance on its expertise. In Murphy, Lord Bridge explained Junior Books by reference to a special relationship sufficiently akin to contract to introduce reliance. It is not a general right to recover the cost of defective work in negligence.

The exception - negligent misstatement (Hedley Byrne v Heller): pure economic loss may be recovered where there is an assumption of responsibility plus reasonable reliance (a special relationship). For statements, Caparo v Dickman [1990] 2 AC 605 requires that the maker knew the statement would be communicated to the claimant, individually or as a member of an identifiable class, in connection with a particular transaction or transactions of a particular kind, and that the claimant would be very likely to rely on it in deciding whether to enter that transaction. Foreseeable reliance alone is not enough. The auditors of a public company's statutory accounts owed no duty to a shareholder or potential investor buying shares in reliance on them: the statutory audit serves shareholders as a body in governing the company, not individual investment decisions. Assumption of responsibility also extends to negligent provision of services (Henderson v Merrett). In White v Jones, a solicitor who negligently delayed carrying out will instructions owed a duty to the disappointed intended beneficiary: no reliance by the beneficiary was required, and the estate had not lost the legacy, so otherwise no one could recover that loss.

• Reliance by someone who is not the client: a valuer instructed by a mortgage lender to value a house of modest value owes a duty of care to the purchaser where he knows the purchaser has in effect paid for the valuation, will probably rely on it in deciding whether to buy, and is unlikely to obtain an independent survey. No contract between them is needed, and the purchaser need not see the report: in Harris the report was never shown to the buyers, who relied on the council's loan offer made on the strength of it (Smith v Eric S Bush; Harris v Wyre Forest DC [1990] 1 AC 831). Lord Griffiths limited the duty to that purchaser and would not extend it to later purchasers. He also expressly reserved his position for industrial property, large blocks of flats and very expensive houses, where a purchaser may be expected to obtain their own survey and it may be reasonable for the valuer to exclude or limit liability.

• Employment references: an employer who prepares a reference for an employee or former employee owes that person a duty to take reasonable care in preparing it; a careless reference causing loss of employment prospects may found a negligence claim (Spring v Guardian Assurance [1995] 2 AC 296). The employee need not have read or acted on the reference itself. Lord Goff's assumption-of-responsibility analysis, with which Lord Lowry agreed, treated the relevant reliance as the employee's reliance on the employer to exercise due care and skill when preparing the reference.

• Social advice: off-the-cuff opinions in ordinary social conversation normally involve no assumption of responsibility (Hedley Byrne, Lord Reid). Friendship or the absence of payment does not itself decide whether a duty exists: consider whether responsibility was objectively undertaken for the task and whether reliance was reasonable. A casual remark understood as ordinary conversation differs from an accepted task undertaken with due care and skill; the circumstances may show an assumption of responsibility even without a contract (Henderson v Merrett).

Trap: a disclaimer may prevent a duty arising at common law (Hedley Byrne), but statute controls it even when it is worded to deny that any duty exists (UCTA 1977 s.13(1); Smith v Eric S Bush). Where UCTA applies (business liability, s.1(3)), a notice cannot exclude liability for negligently caused death or personal injury (s.2(1)), and for other loss it must satisfy the reasonableness test (s.2(2), s.11(3)); the burden is on the person relying on it (s.11(5)). UCTA s.2 does not apply to a consumer notice (s.2(4)), meaning a notice relating to rights or obligations between a trader and a consumer, or purporting to exclude or restrict a trader's liability to a consumer (CRA 2015 s.61(4)). A valuer's disclaimer to a home buyer is therefore now judged under the CRA (Smith was decided under UCTA): it binds the consumer only if fair (s.62), and a trader cannot by a consumer notice exclude or restrict liability for negligently caused death or personal injury (s.65(1)).

Psychiatric harm

Must be a recognised psychiatric illness (e.g. PTSD, clinical depression) — not mere grief, fear or distress.

• Primary victim - a person within the range of foreseeable physical injury may recover for psychiatric illness caused by the accident even without physical injury; psychiatric illness need not be separately foreseeable (Page v Smith). The Alcock controls and the secondary-victim ordinary-fortitude test do not apply. The eggshell-skull rule applies. In Frost the House of Lords held that primary victims are limited to persons exposed, or who perceived themselves to be exposed, to physical danger (Paul [46]). In Paul the Supreme Court said that precisely how the distinction is or should be drawn potentially raises difficult questions, and recorded the House of Lords' view in W v Essex CC [2001] 2 AC 592 that the concept is still to be developed, but held that the point did not arise on the appeals (Paul [51]).
• Secondary victim - a claimant whose illness results from witnessing an accident involving another person, or its immediate aftermath, must satisfy the Alcock control mechanisms: (1) a close tie of love and affection, presumed rebuttably for spouses, parent and child, and engaged couples; others, such as siblings, must prove it; (2) proximity in time and space to the accident or its immediate aftermath; and (3) direct perception of it, not merely being told by a third party. In Alcock, live television that did not show the suffering of recognisable individuals was not equivalent to presence; seeing a body in the mortuary for identification was outside the immediate aftermath (Paul [43]). Psychiatric injury must also be foreseeable in a person of ordinary fortitude.
• McLoughlin v O'Brian [1983] 1 AC 410: the immediate aftermath requirement was satisfied where the mother saw her family in hospital more than two hours after the accident, still in the condition the accident had left them in, covered with oil and mud and distraught with pain. Lord Wilberforce put this 'upon the margin'; the claim depended critically on that condition (Paul [108]).
• Paul v Royal Wolverhampton NHS Trust [2024] UKSC 1: a doctor's responsibility does not extend to protecting a patient's close relatives from the trauma of witnessing the patient's death, or the manifestation of the disease or injury that the negligence failed to prevent, so they cannot recover as secondary victims [138], [142]. Whether an accident in a medical setting (such as a wrong drug causing an acute reaction witnessed by a relative) could ground a claim was left open [123]. The Alcock requirements otherwise stand as authoritatively summarised in Frost (Paul [45], [73]).

Traps: rescuers and employees are not automatically primary victims. A rescuer must at least have objectively exposed himself to danger or reasonably believed he was doing so; otherwise a claim based on witnessing injury to others must satisfy the secondary-victim controls. Employment status alone does not remove those controls (White v CC South Yorkshire [1999] 2 AC 455; Paul [46]). There is no separate 'sudden shock' or 'horrifying event' requirement for secondary victims (Paul [73], [75], [78]), though the claimant still needs presence at, and direct perception of, the accident or its immediate aftermath (Paul [74], [105]), and psychiatric injury must still be reasonably foreseeable. Distinguish primary from secondary before applying the tests.

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