Business Law

Running head: BUSINESS LAW
Business Law
Name of the Student
Name of the University
Author Note

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BUSINESS LAW
Issue
The issue is to advise Jack Smith in his action against the Dandenong Council for
negligence amounting to economic loss.
Rule
Pure economic loss is the financial loss that a person suffers due to the negligent act
of another person that is not accompanied by any physical damage or loss to a person or
property. Pure economic loss arises from Negligence of a person who had a duty of care
towards another (Rabin 1985). Economic loss, in general, refers to the financial loss or
detriment that is reflected on the balance sheet of an organisation yet not physically. It is
divided into ‘consequential economic loss’ arising out of physical damage or hurt, while
‘pure economic loss’ arises from anything but physical injury (Farnsworth 2015). The court
are skeptical towards addressing the claims of pure economic loss for it the potential to open
a flood of unlimited claims where the risk was not foreseeable and the claimant must have
suffered irreparable loss. Therefore it is said that pure economic loss is recoverable
(Farnsworth 2015).
In an earlier case of Headley Byrne & Co Ltd v Heller & Partners Ltd in 1963 it was
held by the House of Lord that under certain circumstances if a duty of the defendant arose
while making a statement, the economic laws would be recoverable in such situation
(Oliphant and Nolan 2017). In this case a negligent misstatement was laid down which had
given rise to an action for damages due to economic loss. The court held that the disclaimer
given by Heller & partner was enough to protect them from any liability arising out of the
credit reference given to Headley. Headley’s claim was rejected and it was elaborately
discussed by the House of Lords that under the following situations pure economic loss could
arise:

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BUSINESS LAW
a) where are fiduciary relationship of confidence and trust exists between the claimant and
the defendant;
b) where the defendant who prepared the information for advice for the claimant had the
assumption of the risk;
c) where the claimant had relied upon the advice of the defendant;
d) such reliance of the claimant upon the advice of the defendant was reasonable.
In Spartan Steel & Alloys Ltd v Martin [1972] 3 WLR 502, a claim for pure
economic loss was rejected even when the plaintiff sustained a great loss by way of the
damage done to its cable and furnace by the defendant and for which the plaintiff’s factory
was closed for 15 days, losing business for that many days (Oliphant and Nolan 2017). It was
held by the court that the plaintiff could only recover the damages for the damaged furnace,
the things in the factory they had to discard and the loss sustained by such discarded things.
However, the plaintiff could not recover the loss that it sustained for being non-operational
and losing business for 15 days.
In Anns v Merton London Borough Council [1977] UKHL 4 the court had stated that
the negligent oversight by a Council that resulted to cracks building from faulty foundation
caused a material physical harm and therefore the cost of the repair was recovered as it was
not a pure economic loss (Oliphant and Nolan 2017).
In Shaddock & Associates Pty Ltd and Another v Parramatta City Council (No 1).
(1981) 36 ALR 385, the court decided upon the situation where a local government body was
liable for disseminating wrong information to the general public. It was held that a person is
under the duty of care of the City council that provides information to such person for his
business and there is enough reasonableness as to people’s reliance upon such advice.
Therefore, a liability for negligent statement was put on the city council.