Areas of applicable law: Tort law – Negligence – Pure economic loss
Main arguments in this case: Not all financial losses are recoverable in tort.
Pure economic loss is a special type of negligence that may not be recoverable. When a claim is brought in tort of negligence, it is generally brought out of two reasons; 1. The claimant has suffered damage, 2. That damage has financial consequences, i.e., a loss of profit. However, there are sometimes losses that do not occur because of damage but simply are just losses. For example, someone buys a new TV and in a few months down the line, the TV malfunctions and catches fire. The fire damages other properties in the house such as curtains, sofa and carpet.
But suppose that the same TV malfunctions but this time there is no damage, the TV just does not work. There are no pictures on it or any sound. In the above cases the first loss is a consequential economic loss (a TV has a fault > the fault causes fire > fire causes damage) whereas the second scenario is a pure economic loss. This is the type of loss that the courts are often reluctant to allow compensation for.
The fact of the case:Spartan Steel & Alloys Ltd v. Martin the claimant was a steel factory and the defendant was the contractor who negligently cut an electricity supplying cable which resulted in the power cut to the factory. This meant that the factory was temporarily closed for 14 hours and was not able to produce any metal while there was no power. The factory also did not have the power to its furnaces which were in the process of making steel and the metal in them solidified.
The claimants brought a claim of negligence and argued that they suffered three types of losses; (1): Loss due to the solidifying metal (physical damage to the property), (2): Loss on the profit that the factory would have made on the metal that got solidified, (3): Loss of profit on the metal that the factory could not produce while it was temporarily shut down.
The court allowed the first two claims as the first claim was for a loss which arose due to damage to physical property. The second claim was allowed because it was a consequence of the damage to the physical property.
The court however did not allow the third claim in which the claimant argued for loss of profit they would have made on the processed metal had the power not been interrupted. The court classed the third claim as a pure economic loss. It was a potential profit and did not occur because of a damage.