Assignment I


Economic Loss Due to Negligence Causing a Claimant to Acquire Defective Goods or Property



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Economic Loss Lecture
Economic Loss Due to Negligence Causing a Claimant to Acquire Defective Goods or Property
As a general rule, tort will not compensate for the economic loss of receiving a defective product. There have been some cases that appear to ignore this rule, however. These should be treated cautiously as an eccentricity, rather than as evidence of any ongoing rule or legal principle, particularly since they have since been overturned. Nonetheless, they represent an important, if temporary, exception to the rule on pure economic loss.
Before describing the law in this area, it is worth noting the position of tort law on defective products. As a rule, it is not possible to recover damages in tort for a defective product. So, if someone sells you a new car that you expect to have a fuel consumption of 40 miles per gallon, but due to a fault it only gets 20 miles per gallon, that is not recoverable in tort. A helpful distinction between property damage and property defect can be that damage involves hurting the quality of a product, whereas defect involves a product being created in a damaged form. For example, if someone damages your new car in an accident, the quality can be described as going from 10/10 to 8/10. However, if someone sells you a new car and it is defective, you receive an 8/10 car in the first place. There’s no direct damage by the seller, the car doesn’t ‘lose’ anything: it has just always been of somewhat low quality. Its resale value will be harmed, however, meaning you lose money down the line - an economic loss. The law of Tort is prepared to deal with damage and harm but leaves it to contract law to deal with defective products. However, contract law will often fail to cover all eventualities. In particular, it is not always the parties to a contract who will be harmed by a breach, and so the rule of privity of contract will prevent the injured party from bringing a claim in contract law. This somewhat explains the law’s position on the defective property - the desire to fill in a gap left by contract law.
The case in Focus here is Anns v Merton London Borough Council [1978] AC 728
The defendant (a local council) negligently approved plans for a block of flats that contained foundations that were too shallow (furthermore, the defendant failed to inspect the foundations during construction.) As a result, several defects emerged in the properties built on the foundations, such as cracks in the walls and the sloping of floors. This meant that the claimants had to spend money correcting the fault. No physical harm to a person or property was caused by the negligence, meaning that the damage was purely economic. Nonetheless, the courts ruled that negligence had occurred, causing the claimants to acquire a faulty property - the economic loss here can be thought of as the difference in value between a flat in a safe condition, and one which has poorly designed foundations and is therefore unsafe. The courts ruled that a duty of care existed between the defendants and the claimants to exercise appropriate skill when inspecting the plans. The loss was held to be recoverable as a result:
"What is recoverable is the amount of expenditure necessary to restore the dwelling to a condition in which it is no longer a danger to the health or safety of persons occupying and possibly (depending on the circumstances) expense arising from the necessary displacement"- Lord Wilberforce, at 759.
This principle was applied similarly in Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520. The defendants negligently laid the flooring of a newly constructed factory. This meant that the floor had to be replaced before it could be used. The claimants, therefore, sued for the cost of replacing the floor, and the profits lost whilst the floor was re-laid. The claimants were successful and recovered for lost profits.
The basis for these exceptions can be thought of as a type of ‘preventative compensation’ - rather than waiting for someone to be injured by a faulty building and then suing, the courts appear to have decided to make the cost of repair recoverable before injury or damage has occurred.
However, Anns was overruled in Murphy v Brentwood District Council [1991] 1 AC 398 - making Murphy the leading case. Again, a council approved faulty plans for some buildings. The resulting properties developed cracks, causing a loss of value in the buildings. The courts ruled that this was not recoverable - it was purely an economic loss, nothing was damaged and nobody was hurt, and so the only harm was receiving a building with a lesser value.
Usefully, in Murphy, Lord Bridge points out the reasoning behind ‘preventative compensation’ of the type seen in Anns and Junior:
"If a building stands so close to the boundary of the building owner’s land that after the discovery of the dangerous defect it remains a potential source of injury to persons or property on neighbouring land or on the highway, the building owner ought, in principle, to be entitled to recover in tort from the negligent building the cost of obviating the danger, whether by repair or demolition, so far as that cost is necessarily incurred in order to protect himself from potential liability to third parties."- Lord Bridge, at 926
In essence, Lord Bridge is pointing out the odd nature of having a legal principle that dictates that someone must be injured by a negligently constructed building before the builder might be sued in tort, rather than one which states that tort should act proactively to prevent the damage from occurring in the first place.
Note however that although overruled or otherwise ignored by the English law currently, Anns and Junior cases represent a distinct departure from the status quo. It is important to be aware of it when discussing the theory of economic loss. Furthermore, the position in Ann’s case remains influential in several commonwealth jurisdictions where it has not been overturned.
In practical situations (i.e. problem questions) it will largely be sufficient to note that whilst the Anns and Junior exception exists, Murphy takes precedence, and so it is unlikely that recovery for the acquisition of a defective product will be possible. This should not be regarded as a complete oversight - never forget that contract law exists to deal with products and transactions! At the same time, the privity of contract prevents a certain proportion of claimants with no legal recourse, demonstrating the reasoning behind the law’s deviation in this area.

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