Spartan Steel and Alloys Ltd v Martin & Co (Contractors) Ltd [1972] EWCA Civ 3

Contractors negligently cut a power cable, causing a power cut at the plaintiff's factory. The court allowed recovery for physical damage to metal and consequential loss of profit on that metal, but not for pure economic loss on subsequent melts.

Facts

The plaintiffs, Spartan Steel and Alloys Ltd, operated a stainless steel factory in Birmingham which ran 24 hours a day. The defendants, Martin & Co (Contractors) Ltd, were conducting roadworks nearby. In the course of using an excavator to dig up the road, the defendants’ employees negligently damaged an electric cable. The cable was not owned by the plaintiffs, but by the Midland Electricity Board, and it supplied power directly to the plaintiffs’ factory. As a result, the factory was deprived of electricity for 14.5 hours.

This power cut caused three heads of damage which the plaintiffs claimed. First, the reduction in value of a ‘melt’ that was in a furnace at the time and had to be removed to prevent damage to the furnace, resulting in physical damage (£368). Second, the loss of profit that would have been made on the sale of that ‘melt’ (£400). Third, the loss of profit on four other ‘melts’ which could have been processed during the time the power was off (£1,767).

Issues

The central legal issue was the extent to which a defendant is liable for economic loss resulting from their negligent act which damages the property of a third party (the Electricity Board). The court had to determine which, if any, of the three heads of damage were recoverable in law. Specifically:
1. Was the loss of profit consequential on physical damage to the plaintiff’s property recoverable?
2. Was the pure economic loss, namely the loss of profit from melts which were not yet in production, recoverable?

Judgment

The Court of Appeal, by a majority, held that the plaintiff could recover for the physical damage to the melt in progress and the loss of profit directly consequential upon it, but not for the loss of profit from the melts that could not be processed during the power outage.

Lord Denning MR (Majority)

Lord Denning MR approached the issue from a standpoint of legal policy. He allowed the claims for the material damage (£368) and the consequential loss of profit on that specific melt (£400), seeing them as directly linked. However, he rejected the claim for the loss of profit on the four subsequent melts (£1,767) as it constituted ‘pure’ economic loss, distinct from any physical damage to the plaintiff’s property. He articulated several policy reasons for drawing this distinction: the nature of the hazard (power cuts are a common risk of life which businesses should account for), the floodgates argument (allowing such claims could lead to a multiplicity of indeterminate claims), the need for a clear line to be drawn, and the fact that statutory bodies providing utilities are often exempt from liability for interruptions, so it would be anomalous to hold a negligent contractor to a stricter standard.

At bottom I think the question of recovering economic loss is one of policy. Whenever the courts draw a line to mark out the bounds of duty, they do it as a matter of policy so as to limit the responsibility of the defendant. Whenever the courts set bounds to the damages recoverable – saying that they are, or are not, too remote – they do it as a matter of policy so as to limit the liability of the defendant.

He concluded by clearly distinguishing the recoverable and irrecoverable losses:

I would, therefore, hold that the plaintiffs are entitled to recover for the physical damage to the one melt (£368); and the loss of profit on that melt consequent thereon (£400); but not for the loss of profit on the four melts (£1,767), because that was economic loss independent of the physical damage.

Edmund Davies LJ (Dissenting)

Edmund Davies LJ delivered a powerful dissenting judgment. He argued that since the defendants had a duty of care to avoid damaging the cable and it was foreseeable that doing so would cause a factory like the plaintiffs’ to suffer financial loss, all the claimed losses should be recoverable. He saw no logical distinction between the loss of profit on the spoiled melt and the loss of profit on the melts that could not be started. To him, both were an equally direct and foreseeable consequence of the defendant’s negligence.

But for my part I cannot see why the £400 loss of profit on the damaged ‘melt’ is recoverable and the £1,767 loss of profit on the four ‘melts’ which, but for the negligence, would have been produced is not. It is, to my way of thinking, an indefensible distinction. Both types of loss were equally foreseeable and equally the direct consequence of the defendants’ admitted negligence, and the fact that the former is tagged on to physical damage and the latter is not is a distinction without a difference.

Lawton LJ (Majority)

Lawton LJ agreed with Lord Denning in the result but reached his conclusion through a more traditional analysis of remoteness. He reasoned that whilst some economic loss was foreseeable, pure economic loss of this type was too remote to be recoverable in negligence. He based his judgment on finding the limits of the duty of care in any given case, concluding that economic loss detached from physical damage was outside the scope of the duty owed by the contractors.

Implications

Spartan Steel v Martin is a landmark case in the English law of tort which established the general exclusionary rule against recovering for pure economic loss in negligence. It drew a crucial distinction between consequential economic loss (which is recoverable as it flows from physical damage to a claimant’s property) and pure economic loss (which is not). The majority’s judgment, particularly that of Lord Denning, is significant for its open reliance on policy considerations to limit the scope of liability and prevent what was feared to be ‘crushing liability’ on defendants. While the rule has been refined in subsequent cases (such as Junior Books Ltd v Veitchi Co Ltd and later reasserted in Murphy v Brentwood District Council), Spartan Steel remains the foundational authority for the treatment of pure economic loss in negligence claims in English law.

Verdict: Appeal allowed in part. The plaintiff was awarded £768 representing the physical damage to the melt and the consequential loss of profit on that melt. The claim for pure economic loss for subsequent melts was dismissed.

Source: Spartan Steel and Alloys Ltd v Martin & Co (Contractors) Ltd [1972] EWCA Civ 3