The Difference Between Hedley Byrne and Other Claims for Economic Loss

When Hedley Byrne was decided, the great Patrick Atiyah speculated about whether Hedley Byrne had effectively abolished the exclusionary rule governing the recovery of pure economic loss in negligence.^[1406] He was jousting with a straw man.

The tendency to generalise from misrepresentation cases to relational loss cases has proven unfortunate.

Although Hedley Byrne did approve recovery for economic loss, it is not really an economic loss case at all. The fact that the loss was purely economic was barely mentioned by the Law Lords.^[1419] This turns out to have been wise. The princi­ples of recovery recognised in Hedley Byrne—an assumption of responsibility by a defendant who intends, induces or invites detrimental reliance by the plaintiff— are identical to those that could also support recovery in an analogous action for personal injury or property damage. Someone who directs another to back up into an open trench could be held liable on either the authority of Hedley Byrne or Donoghue v Stevenson. More significant than the fact that the loss is purely economic is the fact that the representation alone does not injure the plaintiff. The direct cause of damage is the plaintiff's choice to rely on the defendant to his or her detriment. In comparable situations where the plaintiff's reliance causes physical damage, the plaintiff may only recover if the defendant assumed respon­sibility for the reliance. The plaintiff's choice to rely must be linked to some act or undertaking by the defendant. It does not matter whether the loss is physical or economic.

Again, perhaps in part because of Hercules, at least one Supreme Court of Canada decision seems to be out of line with other Commonwealth courts, and even its own decisions dealing with affirmative duties. Fullowka v Pinkerton’s of Canada Ltd is a tragic wrongful death case that provides a useful comparison to Hercules.^[1421] Fullowka arose out of a bitter and violent labour dispute at a gold mine in northern Canada. The mine owners continued to operate the mine during the strike. The owners hired Pinkerton's to protect the premises. A striker entered the mine undetected and set a trip wire to dynamite. The wire was tripped killing a total of nine miners and rescuers whose estates brought an action against Pinker­ton's and the government. The action against Pinkerton's failed because the Court found that Pinkerton's did not breach the standard of care. However, the Supreme Court did recognise a duty of care owed by Pinkerton's to the miners based on the fact that Pinkerton's must have known that the miners were relying on Pinkerton's to keep them safe. This was unilateral reliance. Significantly, the Court did not simply apply the assumption of responsibility approach that had been recognised in the courts below.

In the absence of an assumption of responsibility by Pinkerton's to the miners, liability should only have been explored under a third party beneficiary to contract rationale, or indirectly through an action against the owners to whom Pinkerton's did owe a contractual duty. It should not have been based on unilateral reliance. As between Pinkerton's and the miners, this was pure nonfeasance.^[1422] This is Hercules all over again, and objectionable for the same reason.

A. Relational Economic Loss

There is no real relationship of history or principle between the misrepresentation cases on the one hand, and the relational loss cases on the other, save at a meaning­less level of generality.

Earlier, I suggested that the purely economic nature of the loss in Hedley Byrne was not a significant concern. In contrast, the economic nature of the loss is seen by some as critical to the exclusionary rule for relational economic loss. Beever and Benson would explain the exclusionary rule for relational loss on the ground that the plaintiff does not hold a right to be protected from interference with his or her purely economic interests.^[1425] Under this approach, there will not be an issue of potentially indeterminate liability to consider. One weakness of this argument is its apparent circularity—one cannot recover for relational economic loss because one has no right to do so. Another is that it restricts negligence law to recognising pre-existing rights and is therefore inherently conservative.

McBride would put the standard rights-based explanation the opposite way— one cannot recover relational economic loss because tort law has not recognised a coercive right to economic security that can be asserted against other people.^[1426] This is equally circular, but with very different repercussions. It is insufficient to say one cannot recover economic loss because there is no existing right to be protected from interference with purely economic interests. Under the McBride approach, courts may create new rights, including qualified rights, enforceable in negligence.

McBride offers his own guidelines for whether the courts should recognise coercive rights and correlative duties. They include a public interest element. With relational loss, he ends up supporting the exclusionary rule. He concludes that the burden on potential defendants would be disproportionally large and that the flood of claims such a duty would create would have an undesirable effect on individual freedom. One cannot help but be struck by the similarities among the reasons why traditional moral theory has never supported a right to recover rela­tional economic loss; why McBride does not support a right to recover relational loss; why recognising such a duty has not been found to be ‘fair, just and reason­able';^[1427] and why ‘policy' reasons negative a prima facie duty of care under Anns.^[1428] Whether those four approaches are essentially different, similar, or the same, none depends on any reason relevant to recovery in misrepresentation.

B. Product/Structure Defect Loss

The other well-recognised category of claim for pure economic loss concerns product or structural defects. LaForest J gave the judgment for the Court in Winnipeg Condominium v Bird Construction.^[1429] The Supreme Court held that a building owner could recover in negligence from a non-privity builder for the cost of repairing a dangerous structural defect. The Court overruled its previous decision in Rivtow Marine, which had held that product quality claims of this sort must be pursued in contact.^[1430] The Winnipeg Condominium rule also applies today to defective chattels. The question of whether the same rule should apply for non- dangerous defects still vexes the courts.

In Winnipeg Condominium, LaForest continued to stress, as he had in Norsk,^[1431] that the courts ought not to generalise from one line of authority— misrepresentation, for example—to another, such as product defect loss. Then he did exactly what he said the courts ought not to do.

Although LaForest J described the claim as one for pure economic loss, he jus­tified the duty by stating that the ultimate injury would be foreseeable injury to person or property.^[1433] This is why he did not extend the decision to cover non- dangerous defects. Anns and Rivtow Marine are similar in this respect. The justifi­cation for the duty of care was deterrence.^[1434]

At first glance, cases like Winnipeg Condominium appear to be property damage cases. However, the defendant has not damaged the plaintiff's property. The plain­tiff purchased the product or structure from a third party with a latent defect. The plaintiff thereby obtained a property right in a defective product or structure. The defendant did not do anything to interfere with that right. Nor did the defendant do anything to the plaintiff to create or define the plaintiff's rights. The cost of repairing the defect is therefore a pure economic loss.^[1435] This does not necessar­ily mean it is not recoverable. But for a traditional rights-based theorist it does mean the cost of repair is not recoverable, even prima facie recoverable, under the Donoghue v Stevenson neighbour principle of negligence law. If there is a right to recover, it has to be constructed otherwise. This is essentially the position adopted by the House of Lords in Murphy.^[1436]

In the United States, the exclusionary rule for product defects is generally explained by a preference for private ordering effected through contract law or statutory sales law in preference to negligence or strict tort law.^[1437] It is beyond the scope of this chapter to determine whether common law contract's privity requirement is dictated by rights-based corrective justice, or whether a warranty running with the product or structure to the ultimate user might also be so justi­fied. Contractual rights are primary rights and conceivably the justification could be found there. However, LaForest J explicitly rejected the idea that tort should defer to contract.^[1438]

Winnipeg Condominium raises the familiar questions of whether common law judges should ever create liability rules based on policies such as deterrence or various notions of loss distribution, and if so, when. For those who accept that

negligence law may and should pursue policy goals, deterrence and loss distri­bution are non-controversial goals. One problem is that it is arguable whether the rule in Winnipeg Condominium adds much of anything to deterring accidents caused by product or structural defects.^[1439] Another is that it is doubtful that a court will be able to achieve much in the way of intended loss distribution where the parties remain free to reallocate the prospective loss by contract.^[1440] Given that product and structure defects have been the subject of considerable policy-based legislative attention, perhaps it would have been wiser to defer to the statutory regimes?

It is clear that product/structure defect claims of this sort do not involve assump­tions of responsibility to the plaintiff, nor reliance intended, induced or invited by the defendant, at least not the way these terms are employed in misrepresentation cases. The misrepresentation jurisprudence offers little to enlighten us about the defect cases. The fact that the loss is economic is irrelevant in misrepresentation if the defendant has assumed responsibility for the plaintiff's detrimental reliance.

Under a policy-driven approach, issues of deterrence and loss distribution will usually be present in the negligence analysis. So it is with policy discussions about relational loss and product/structure defect loss. However, the specific policy issues in these two types of case are sufficiently different to warrant not generalis­ing from one line of authority to the other. On the other hand, in neither case can the plaintiff assert that the defendant has interfered with his or her primary right. The traditional rights-based theorists would find the fact that there is no right to be free of interference with one's economic interests a sufficient explanation for an exclusionary rule in negligence that applies to both relational loss and product/ structure defect loss.

VII.