Liability for Economic Loss and Psychiatric Injury (AQA A-Level Law): Revision Notes

Liability for Economic Loss and Psychiatric Injury

Introduction

This topic examines two special circumstances where the law restricts liability in negligence: cases involving pure economic loss and psychiatric injury. These areas are carefully controlled by the courts to prevent an excessive number of claims and ensure fairness. Understanding the distinction between different types of loss and different categories of claimant is essential for applying the law correctly in problem scenarios.

Pure economic loss caused by negligent acts and negligent misstatements

The general rule on pure economic loss

Pure economic loss refers to financial loss that is not connected to any personal injury or damage to property. The general legal position is that no duty of care exists to prevent another person from suffering purely financial harm.

This principle was established in Spartan Steel and Alloys Ltd v Martin (1972). In this case, the defendant negligently cut through an electricity cable while digging a trench, causing a power cut to the claimant's steelworks. The claimant could recover damages for the value and lost profits of the metal that was being processed at the time of the power cut (as this was consequential economic loss following damage to property). However, the court refused to allow recovery for the profits that would have been made from four additional melts that could not take place during the power outage.

The exception: negligent misstatements

Although pure economic loss is generally not recoverable, an important exception exists where the loss results from a negligent misstatement rather than a negligent act. A negligent misstatement includes advice given carelessly or without proper consideration.

The leading case establishing this exception is Hedley Byrne and Co. Ltd v Heller and Partners Ltd (1963). Hedley Byrne, an advertising agency, asked Heller (a bank) for a credit reference about one of Heller's clients. Relying on the positive reference provided by Heller, Hedley Byrne entered into contracts with the client. When the client went into liquidation, Hedley Byrne suffered substantial financial losses. The House of Lords recognised that liability could arise for economic loss caused by negligent statements, establishing a new principle in tort law.

The special relationship test

According to the principle established in Hedley Byrne, a defendant will owe a duty of care when making a statement (typically when giving advice) only if a special relationship exists between the defendant and claimant.

1. Special skill or expertise

The defendant must possess some special skill, knowledge or expertise relating to the subject matter of the statement. This could be professional qualification, technical knowledge, or recognized experience in a particular field.

2. Knowledge of likely reliance

The defendant must know, or reasonably ought to know, that it is highly likely the claimant will rely on the statement when making decisions. This creates a responsibility on the part of the person giving the advice.

3. Actual reliance

The claimant must actually rely on the statement in practice, and this reliance must cause them to suffer financial loss. If the claimant did not rely on the advice, or would have suffered the loss anyway, no claim can succeed.

4. Reasonable reliance

It must have been reasonable in all the circumstances for the claimant to rely on the statement. This involves considering factors such as the context in which the advice was given, the relationship between the parties, and whether the claimant should have sought independent verification.

Key cases on special relationship and reliance

Chaudhry v Prabhakar (1989) demonstrates how the special relationship test operates in practice. The defendant helped the claimant purchase a car, failing to notice that it was unroadworthy. The claimant relied on the defendant's advice and consequently suffered economic loss when discovering the car's defects. The court held that because the claimant believed the defendant was knowledgeable about cars, and the defendant knew the claimant was relying on this expertise, a special relationship existed and the defendant owed a duty of care.

Caparo v Dickman (1990) illustrates the importance of the knowledge and reliance elements. The case involved shares that were mis-valued in company accounts. The defendants (auditors) had no knowledge of the claimant's existence, let alone that the claimant would rely on the accounts for investment decisions. Without knowledge that reliance was likely, no duty of care could arise.

JEB Fasteners v Bloom (1983) shows that actual reliance must be proved. The claimant acquired a company but claimed they relied on negligently prepared accounts. However, evidence showed that the claimant already knew the true financial state of the company and had acquired it primarily to obtain the services of its directors. Since the claimant did not genuinely rely on the accounts, the claim for negligent misstatement failed.

Summary table: Key cases on pure economic loss

Case	Facts	Legal principle
Spartan Steel and Alloys Ltd v Martin (1972)	Defendant negligently cut electricity supply to claimant's steelworks while digging. The value and profits of metal ruined by the power cut were recoverable, but not profits from four further melts that could not take place.	Pure economic loss is not recoverable as a matter of policy to limit defendant's liability (Lord Denning).
Hedley Byrne and Co. Ltd v Heller and Partners Ltd (1963)	Hedley Byrne relied on a credit reference from Heller about a client and suffered financial loss when the client entered liquidation.	A negligent misstatement may give rise to liability for economic loss where a special relationship exists.
Chaudhry v Prabhakar (1989)	Defendant helped claimant purchase a car without realising it was unroadworthy. Claimant relied on defendant's advice and suffered economic loss.	Where the claimant believed the defendant possessed relevant knowledge, reliance could be established.
Caparo v Dickman (1990)	Company shares were mis-valued in accounts.	Defendant had no knowledge of claimant's existence or that they would rely on the accounts, so no duty arose.
JEB Fasteners v Bloom (1983)	Claimant acquired a company to obtain its directors' services.	Claimant knew the true financial state of the company, so could not claim to have relied on negligently prepared accounts.

Psychiatric injury sustained by primary and secondary victims

What is psychiatric injury?

Psychiatric injury means a long-term, diagnosed mental illness that goes significantly beyond ordinary shock, grief or distress. The claimant must be able to prove they are suffering from a medically recognized psychiatric condition.

This requirement was established in Behrens and Ors v Bertram Mills Circus Ltd (1957). During a circus performance, a dog antagonised elephants, causing them to stampede. Performers were injured and suffered shock. Devlin J stated: "I should like to award him a substantial sum ... but I am satisfied that I cannot do so except to the extremely limited extent that the shock resulted in physical or mental harm." This demonstrates that only diagnosed psychiatric harm is compensable, not ordinary emotional upset.

What does NOT constitute psychiatric injury

The following do NOT qualify as psychiatric injury:

Grief and sorrow

In Hinz v Berry (1970), a woman suffered depression after witnessing an accident that killed her husband and injured her children. Lord Denning MR explained: "In English law no damages are awarded for grief or sorrow caused by a person's death … Damages are, however, recoverable ... for any recognisable psychiatric illness caused by the breach of duty by the defendant." This establishes that grief itself is not compensable, but a diagnosed psychiatric illness resulting from traumatic events can be.

Fear, panic and terror

Hicks v Chief Constable of South Yorkshire (1992) involved parents of victims of the Hillsborough football stadium disaster who sought damages for the fear and terror their loved ones experienced before death. Lord Bridge held: "Fear by itself, of whatever degree, is a normal human emotion for which no damages can be awarded." Temporary emotional distress, regardless of its intensity, does not meet the legal threshold.

Primary victims vs secondary victims

The courts apply different legal tests depending on whether the claimant is classified as a primary victim or a secondary victim. This distinction is fundamental to establishing whether a duty of care exists.

Duty of care owed to primary victims

For primary victims, the test is relatively straightforward. The claimant need only establish that physical harm was reasonably foreseeable. There is no requirement to prove that psychiatric injury specifically was foreseeable, provided some form of personal injury was a foreseeable consequence of the defendant's negligence.

The objective nature of the test is illustrated by McFarlane v E. E. Caledonia (1994). The claimant was on board a rescue vessel at the time of the Piper Alpha oil rig disaster. Although he believed himself to be in danger and witnessed horrific scenes, the court held he was not objectively within the zone of physical danger. Therefore, he could not claim as a primary victim and would need to satisfy the more stringent tests applicable to secondary victims.

The Alcock tests for secondary victims

Secondary victims face considerably more restrictive requirements. Following Alcock v Chief Constable of South Yorkshire (1992), a secondary victim must satisfy all four of the following tests:

1. Close ties of love and affection

The claimant must have a close tie of love and affection with a primary victim. The law presumes such a relationship exists between:

• Parents and children
• Spouses and civil partners

For all other relationships (including siblings, fiancés, grandparents, or friends), the claimant must provide evidence proving the closeness of their relationship. The Hillsborough disaster cases illustrate this: claims by parents and spouses could proceed on the basis of the presumption, but others had to demonstrate the strength of their emotional bond.

2. Proximity through own unaided senses

The claimant must witness the traumatic event, or its immediate aftermath, with their own unaided senses. This means:

• Seeing or hearing the event directly
• Being physically present at the scene

3. Proximity in time and space

The claimant must be proximate to the event itself or its immediate aftermath. This test derives from Lord Wilberforce's judgment in McLoughlin v O'Brian (1983), where he referred to "sight or hearing of the event or of its immediate aftermath."

What constitutes "immediate aftermath" is assessed on the facts of each case. It generally means seeing the victim at the scene or very shortly afterwards, while they are still in the same condition as they were at the time of the incident. The aftermath does not extend to visiting someone in hospital hours or days later.

4. Shocking event

The psychiatric injury must result from a sudden shocking event. In Alcock v Chief Constable of South Yorkshire (1992), Lord Ackner described this as "the sudden appreciation by sight or sound of a horrifying event, which violently agitates the mind."

Additional requirement: appreciation of injury

Following Young v Downey (2020), there is an additional requirement for secondary victims. The claimant must appreciate that their loved one has been, or might have been, injured in the incident they witnessed. Merely witnessing a shocking event is insufficient if the claimant did not realize at the time that someone they cared about was involved or at risk.

The position of rescuers

Rescuers are individuals who come to the aid of primary victims but are not themselves within the zone of physical danger and do not have the close relationship with victims required for secondary victim status.

Prior to 1998, the courts sometimes treated rescuers as a special category who could claim more easily than other secondary victims. However, White v Chief Constable of South Yorkshire (1998) definitively established that rescuers receive no special treatment.

Summary table: Key cases on psychiatric injury

Case	Facts	Legal principle
Behrens and Ors v Bertram Mills Circus Ltd (1957)	During a circus performance, a dog antagonised elephants causing them to stampede. Performers were injured and suffered shock.	Devlin J held that damages can only be awarded "to the extremely limited extent that the shock resulted in physical or mental harm" – establishing the need for diagnosed psychiatric injury.
Hinz v Berry (1970)	Woman suffered depression after witnessing an accident that killed her husband and injured her children.	Lord Denning MR: damages are not awarded for grief or sorrow itself, but are recoverable for any recognizable psychiatric illness caused by the defendant's breach of duty.
Hicks v Chief Constable of South Yorkshire (1992)	Parents of Hillsborough victims sought damages for fear suffered prior to death.	Lord Bridge: fear by itself, of whatever degree, is a normal human emotion for which no damages can be awarded.
Page v Smith (1996)	Car accident triggered recurrence of claimant's ME, which became chronic and permanent, preventing him from working.	For primary victims, provided some kind of personal injury was foreseeable, it does not matter whether the injury was physical or psychiatric.
McFarlane v E. E. Caledonia (1994)	Claimant was on board a rescue vessel at the time of an oil rig disaster.	He was not objectively in the zone of physical danger despite his subjective belief, therefore was not a primary victim.
Alcock v Chief Constable of South Yorkshire (1992)	Friends and family members claimed for psychiatric injury suffered as a consequence of the Hillsborough football stadium disaster.	This case established the four tests that secondary victims must satisfy.
Sion v Hampstead Health Authority (1994)	Claimant's son was negligently treated in hospital after an accident and died after a fortnight.	Death was not sudden but expected over time, therefore the claimant could not satisfy the "shocking event" requirement.
White v Chief Constable of South Yorkshire (1998)	Police officers on duty during Hillsborough disaster claimed as rescuers and argued they should be treated as primary victims.	Policy decision: rescuers cannot claim more easily than relatives. They are not promoted to primary victim status and must satisfy the Alcock tests.

Exam application and technique

When answering problem questions on this topic:

For pure economic loss:

1. Identify whether the loss is purely financial or consequential on physical damage
2. Determine whether it results from a negligent act or negligent statement
3. If negligent statement, apply all four elements of the Hedley Byrne test systematically
4. Consider whether reliance was reasonable in the circumstances
5. Remember to address breach and causation if a duty is established

For psychiatric injury:

1. Confirm the claimant has a diagnosed psychiatric condition (not just grief/shock)
2. Determine whether they are a primary or secondary victim by assessing if they were in the zone of physical danger
3. For primary victims: was any personal injury foreseeable?
4. For secondary victims: work through all four Alcock tests methodically, plus the Young v Downey requirement
5. Remember to address breach and causation if a duty is established

Evaluation and reform

The law in this area has been criticized for being overly restrictive and producing harsh outcomes, particularly for secondary victims.

Summary