Pure economic loss from negligence
Mallonland Pty Ltd v Advanta Seeds Pty Ltd [2024] HCA 25
Summary:
Where there is a no assumption of responsibility, whether there is a duty of care in pure economic loss cases involves an evaluation of the "salient features" (factors such as knowledge of the risks to the plaintiff and the plaintiff's vulnerability to the particular type of loss that eventuated).
The clear disclaimers on the packaging meant that there was no express or implied assumption of responsibility by Advanta to end users. Nor did a duty of care arise by application of the salient features approach. One aspect of this was that the growers were not relevantly vulnerable.
Parties can now only be confident in a future pure economic loss negligence case that the High Court would find a duty of care to take reasonable care to avoid a reasonably foreseeable risk of harm, where there is an assumption of responsibility.
Extracts from Edelman J
This case arises from attempts to propagate from the decision of this Court in Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad". Prior to the decision in Caltex a duty of care could be owed to a plaintiff if the duty was:
(i) based upon an (objective) assumption of responsibility, by an express or implied undertaking by the defendant to the plaintiff or a class of persons of which the plaintiff is a member, or
(ii) (ii) imposed by law.
A duty of care that was imposed by law upon a defendant corresponded with a plaintiff's right to person or property. Caltex purported to recognise a new species of duty of care, one which imposed an abstract duty to take care not to expose a person to loss, independently of a right to person or property, in circumstances involving undefined "salient features".
In Caltex, a dredge called the "Willemstad" was used to dredge a deep-water channel in the bed of Botany Bay. Due to carelessness in navigation and charting, the dredge fractured an underwater oil pipeline causing the loss of oil that was contained in the pipeline and resulting in a period during which the pipeline could not be used. The pipeline connected an oil refinery to an oil terminal. The refinery and the pipeline were owned by Australian Oil Refining Pty Ltd ("AOR"). The terminal and the oil were owned by the appellant, Caltex Oil (Australia) Pty Ltd ("Caltex").
Caltex did not seek to recover for the lost oil that was being transported through the pipeline. AOR had taken the risk of that loss. Nor did Caltex seek to recover for the damage to the pipeline, which it did not own. Instead, in its Admiralty claim in rem (brought, and enforceable, against the dredge), Caltex claimed $95,000 for the loss it had incurred due to the inability to exercise its contractual right to use AOR's pipeline, arising from
(i) obtaining alternative transport for petroleum products from AOR's refinery to Caltex's terminal rather than through the exercise of its contractual right to use AOR's pipeline and
(ii) (ii) taking delivery of low sulphur fuel oil at a different Caltex terminal
In essence, Caltex sought to recover economic loss that it suffered due to the interference by the dredge in Caltex's contractual arrangements with AOR.
The reasoning of each of Gibbs J and Mason J focused upon the need to identify an individual plaintiff (as distinct from an unascertained class of persons) who the defendant knew would suffer economic loss as a consequence of the defendant's negligence. The reasoning of Jacobs J focused upon the "physical propinquity" of the dredge to the terminal owned by Caltex. And Murphy J thought that there was a general duty of care not to cause economic loss subject to reasons which would deny recovery. His Honour found "no reason for limiting recovery". Each of these approaches has its own particular difficulties.
It is the reasons of Stephen J, however, that have come to be treated as the basis for recovery of "pure" economic loss in the law of torts. His Honour's approach involved an attempt to find "sufficient proximity between tortious act and compensable detriment" by reference to five "salient features" of the case:
(i) the defendant knew that the pipelines, if damaged, were inherently likely to cause consequential economic loss;
(ii) (ii) the defendant knew, or had means of knowledge, that the pipelines extended from AOR's refinery to Caltex's terminal;
(iii) (iii) the loss suffered by Caltex was a consequence of a breach of a duty of care owed by the defendant to AOR not to cause physical damage to its pipeline;
(iv) (iv) the loss suffered by Caltex arose from the loss of use of the pipeline; and
(v) (v) the loss suffered by Caltex, being the expense of employing alternative modes of transport, was a direct consequence of its inability to use the pipeline.
One difficulty with creating an exceptional new imposed duty of care, abstracted from a plaintiff's rights to person or property and based on vague and potentially unlimited "salient features", is that no sufficient justification for such an exceptional form of the duty of care has ever been given. Since the plaintiff has no general abstract right not to be exposed to economic loss, what justification is there to create an almost-general abstract duty based on the existence of vague, salient features? The duty of care in such cases is a duty "in the air", but one that is only inflated in unspecified circumstances.
The salient features approach is, on one view, little more than an insistence that each case will turn upon its own facts, with undetermined and indeterminate salient features relevant to a relationship to be identified from those facts.
In some cases it has been suggested that the most significant of the "salient features" should be the feature of "vulnerability". Following Perre, in Woolcock Street Investments Pty Ltd v CDG Pty Ltd, four members of this Court said that "the vulnerability of the plaintiff has emerged as an important requirement in cases where a duty of care to avoid economic loss has been held to have been owed". Vulnerability was described "as a reference to the plaintiff's inability to protect itself from the consequences of a defendant's want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant". (Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; (2004) 216 CLR 515 at 530 [23], citing Stapleton, "Comparative Economic Loss: Lessons from Case-Law-Focused 'Middle Theory'" (2002) 50 UCLA Law Review 531 at 558-559)
On the state of Australian law it is necessary to apply a "salient features" analysis to determine whether a duty of care should be imposed upon the respondent producer, who accepted no responsibility for economic loss that might be suffered by the appellant growers. For the reasons above, however, in the absence of any challenge to an analysis based upon salient features, any application of that analysis should be as narrow as possible.
The appellant growers relied upon the salient features of the case as involving:
(i) reasonable foreseeability of economic loss to end-users such as the appellant growers if the seed was contaminated;
(ii) (ii) a group such as the appellant growers forming a determinate class of persons;
(iii) (iii) knowledge of the respondent producer of the risk of economic harm to growers if reasonable care were not taken in seed production; and
(iv) (iv) the ability of the respondent producer to control that risk by taking reasonable precautions and conversely the vulnerability of the appellant growers, who could not protect themselves from the consequences of a failure by the respondent producer to take reasonable care.
As to the reasonable foreseeability of loss to a determinate class of persons, these salient features can be accepted to have been present, but they have never been sufficient for the recognition of a duty of care to avoid causing pure economic loss to another. An approach that narrowly confines the recognition of a duty of care by application of a salient features analysis must insist upon far more than these factors. The issue is whether the force of the third and fourth factors is sufficient.
As to the respondent producer's knowledge of the risk of economic harm, it can be accepted that in a case like Caltex the type of economic harm known, or which might reasonably have been expected to be known, to AOR was described at a high level of generality involving economic loss consequent upon damage to a pipeline used by Caltex. But the specificity of knowledge that should be required as a salient feature was not the subject of argument in Caltex. The less specific the knowledge, the less force the salient feature will have. In this case, as the joint reasons observe, the knowledge of the respondent producer was limited. In broad terms that knowledge was that end-users would have difficulty in controlling or eradicating the consequences of contaminated seed.
As to the salient features of control and vulnerability, the undisturbed findings of the primary judge were that the respondent producer had failed:
(i) to undertake a comprehensive roguing and crop inspection during the production process to ensure the purity of the seed; and
(ii) to conduct a commercial grow out before supplying seed for commercial sale to growers to prevent contaminated seed from being supplied.
Further, the respondent producer did not seek to disturb the finding concerning the vulnerability of the appellant growers, that "it may be unrealistic to say that the end purchaser is in a position to protect itself against economic loss caused by the negligence of the producer by an appropriate contractual warranty obtained from the retailer".
Nevertheless, speaking of the vulnerability of the appellant growers to this risk of contaminated seed (and, by extension, of the corresponding control over this risk by the respondent producer), the respondent producer submitted that in transactions for the sale of goods "such vulnerability is of limited utility as a salient factor". That submission should be accepted, at least in the circumstances of this case. The appellant growers had methods by which they could reduce the extent of their vulnerability to the risk controlled by the conduct of the respondent producer. As the joint reasons observe, those methods included choosing not to plant the seed or choosing to return the seed after reading the "Conditions of Sale and Use" printed on the bags, which warned about contamination.
The weak justification for any existence of a duty of care based on salient features requires a high bar to establish the presence of salient features of sufficient force. In this case, in the absence of any assumption of responsibility by the respondent producer to the appellant growers, the weaknesses of the two central salient features relied upon by the appellant growers are fatal to their submission that the respondent producer owed them a duty of care, to be imposed by law, to take reasonable care to avoid causing them economic loss that was not consequent upon infringement of any of their rights to person or property.
Extracts from the majority
An essential element of the tort of negligence is that the defendant owes the plaintiff a duty to take reasonable care when engaging in an activity to avoid causing the plaintiff a particular type of damage or loss that is reasonably foreseeable (Sullivan v Moody (2001) 207 CLR 562).
As a general rule, damages are not recoverable in negligence for pure economic loss, that is, for loss that is not consequential upon injury to person or property (Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad" [1976] HCA 65; (1976) 136 CLR 529 at 555). Ordinarily, a person does not owe a duty to take reasonable care to avoid causing reasonably foreseeable pure economic loss to another (Caltex).
This general rule reflects the well-established position at common law that the infliction of economic loss does not, by itself, infringe any right or legally protected interest of the plaintiff (Allen v Flood [1897] UKLawRpAC 56; [1898] AC 1). The general rule is also said to reflect policy concerns about the potentially excessive scope of liability for financial loss, namely, liability for "in indeterminate amount for an indeterminate time to an indeterminate class" (Cardozo C.J. in Ultramares Corporation v. Touche (1931) 174 NE 441, at p 444; 74 ALR 1139). Another policy reason said to justify the general rule is a concern to avoid infringing upon the legitimate pursuit of personal advantage (Caltex).
A consequence of the general rule is that damages for pure economic loss are not recoverable if all that is shown is that the defendant's negligence was a cause of the loss and the loss was reasonably foreseeable (Esanda (1997) 188 CLR 241 at 249; Woolcock [2004] HCA 16; (2004) 216 CLR 515 at 529-530 [21]; Brookfield [2014] HCA 36; (2014) 254 CLR 185 at 214 [68]). That is, reasonable foreseeability is a necessary but not sufficient criterion for the existence of a duty of care to avoid causing pure economic loss. Furthermore, indeterminacy of liability, in the sense that the defendant's liability cannot be realistically calculated, will ordinarily deny the existence of such a duty of care (Woolcock [2004] HCA 16; (2004) 216 CLR 515 at 548 [77]; Brookfield [2014] HCA 36; (2014) 254 CLR 185 at 214 [68]).
Where a defendant has assumed a responsibility towards the plaintiff to take reasonable care to avoid economic loss to the plaintiff, a duty of care may well be established. The term "assumption of responsibility" has been criticised as "imprecise and beguiling but deceptively simple". An assumption of responsibility is best understood as an undertaking (whether express or implied) by a person to take on a task or job for another person or class of persons, from which it can be inferred that the first person accepted that he or she would take reasonable care when engaging in that task or job (Mutual Life & Citizens' Assurance Co Ltd v Evatt [1968] HCA 74; (1968) 122 CLR 556 at 570, 584, 617).
Where a duty to take reasonable care to avoid causing pure economic loss is said to arise out of an assumption of responsibility by a defendant to a particular person or class of persons, the defendant can negate or limit (i.e disclaim) that assumption (and thus the duty) by words or conduct directed to that person or class. That is because such a negation or limitation (i.e. disclaimer) amounts to a denial of an assumption of responsibility on the part of the defendant which the person or class cannot ignore or reject. For example, no duty to avoid causing pure economic loss will arise in connection with the provision of advice or information if the defendant "had effectually disclaimed any responsibility for it" (Shaddock & Associates Pty Ltd v Parramatta City Council [No 1] [1981] HCA 59; (1981) 150 CLR 225 at 231).
In Sullivan v Moody, the Court observed that "[d]ifferent classes of case give rise to different problems in determining the existence and nature or scope, of a duty of care ... The relevant problem will then become the focus of attention in a judicial evaluation of the factors which tend for or against a conclusion, to be arrived at as a matter of principle." Since Sullivan v Moody, other than in cases involving an assumption of responsibility, determining whether the relationship between the parties gives rise to a duty of care to avoid causing pure economic loss has been understood in Australia to involve such an evaluation. This "salient features" approach, as it is now known, has attracted significant academic and judicial criticism.
Their Honours' reference in Sullivan v Moody to "factors ... for or against" recognition of a duty of care in a novel case should not be understood as inviting any form of "instinctive synthesis" of competing considerations "without a chain of reasoning linking these factors with the ultimate conclusion". This is why an incremental and analogical approach, paying close attention to relevant precedents and any risk of incoherence in the principles they establish, is necessary.
On this approach, actual knowledge of the risk to a person or class of persons of the particular type of economic loss that eventuated, and of the magnitude of the economic loss that risk entails, strengthens a case for finding a duty of care. In Perre v Apand Pty Ltd, McHugh J observed that "[t]he cases have recognised that knowledge, actual or constructive, of the defendant that its act will harm the plaintiff is virtually a prerequisite of a duty of care in cases of pure economic loss". For McHugh J, this recognition reflected the simple propositions that "[n]egligence at common law is still a fault based system ... [and it] would offend current community standards to impose liability on a defendant for acts or omissions which he or she could not apprehend would damage the interests of another". Because negligence is fault-based, recklessness or gross carelessness in a defendant's actions resulting in economic loss may be relevant to the existence of any novel duty of care enabling recovery for such loss (Perre v Apand [1999] HCA 36; (1999) 198 CLR 180 at 230-231 [132]).
Another matter that adherence to the required incremental and analogical approach has identified as relevant to the existence of a duty of care to avoid causing pure economic loss is a plaintiff's "vulnerability" to the particular type of economic loss that eventuated (Woolcock [2004] HCA 16; (2004) 216 CLR 515 at 530 [23], 549 [80]; Barclay v Penberthy (2012) 246 CLR 258 at 284 [42]). The relevant vulnerability is the plaintiff's inability to protect him or herself from the economic loss that eventuated as a consequence of a defendant's carelessness, either entirely or in a way that would cast the consequence of loss on the defendant (for example, by contractual stipulations). A mere likelihood of suffering economic loss if reasonable care is not taken will not amount to vulnerability. As McHugh J explained it in Woolcock Street Investments Pty Ltd v CDG Pty Ltd, a plaintiff may be unable to protect him or herself from the risk of economic loss by reason of "ignorance or social, political or economic constraints". Conversely, the capacity of a person to protect him or herself from economic loss by contractual agreement (or, by analogy, by any other reasonable means) is a reason, and often a decisive one, for rejecting the existence of a duty of care.
The seed packaging contained the following terms:
"ATTENTION
CONDITIONS OF SALE AND USE
Upon purchasing this product and opening the bag, the purchaser ('you') agrees to be bound by the conditions set out below. Do not open this bag until you have read and agreed with all the terms on this bag. If, before opening the bag, these conditions are not acceptable to you, the product should be returned in its original condition to the place of purchase immediately, together with proof of purchase, for a refund. The product contained in this bag is as described on the bag, within recognised tolerances.
CONDITIONS
You agree that:
· You acknowledge that, except to the extent of any representations made by [the producer's] labelling of the product in this bag or made in [the producer's] official current ... literature, it remains your responsibility to satisfy yourself that the product in the bag is fit for its intended use;
· If the product in this bag does not comply with its description, within recognised tolerances, the liability of [the producer] will be limited, at [the producer's] option, solely to the cost of replacement of the product or the supply of equivalent goods or the payment of the cost of replacing the goods or of acquiring equivalent goods;
· [The producer] will not be liable to you or any other person for any injury, loss or damage caused or contributed to by [the producer] (or its servants or agents), directly or indirectly arising out of or related to the use of the product in this bag, whether as a result of their negligence or otherwise;
..."
The terms on the packaging (including the information and warnings it contained) communicated to the class of potential future purchasers that the producer was positively not assuming the responsibility which is at the core of the alleged duty of care. The significance of the packaging is not that it merely disclaims legal liability. It is that, by the packaging, the producer legitimately and clearly delimited the nature of the product that it made available to the market. The product was one which had a minimum purity of 99% (but not 100%), and, by the terms of the packaging, it was a product which the growers were told to open only after reading and agreeing with the conditions stated on the bag. Those conditions also made it clear that the minimum purity of 99% was within "recognised tolerances". Those "recognised tolerances" included that the product was not 100% the identified seed (as it could contain up to 1% of other plant matter) and that it could contain 0.1% "maximum other seeds". Moreover, the evidence established that the growers would have readily understood the concept of "tolerances" of impure matter in the seed in this context. Far from assuming responsibility for production of the nature and type of the seed beyond the specifications on the packaging, the producer warned the growers that it was not assuming any such responsibility to them.
The extent to which, if at all, the producer assumed any responsibility to the growers in relation to any economic loss arising from their use of the seed depends on an assessment of the entirety of the relationship, including the circumstances in which the growers obtained the seed. The producer arranged for production of the seed, intending that it would be produced in accordance with certain processes, but without any undertaking to any potential purchaser concerning those processes beyond the information and warnings on the packaging. Furthermore, the growers did not agree to purchase the seed in advance of its supply to distributors for sale. At most, the growers were potential end users of the producer's seed, if and when it was supplied to distributors for sale, in the packaging selected by the producer. Until the growers purchased the contaminated seed from the distributors in the labelled bags and took possession of it, an important aspect of the relationship between the producer and the growers was that the growers were unidentified members of a class of potential users of the producer's product (that product being not merely the seed, but the seed as packaged)
As to the producer's knowledge, the critical fact is that the producer did not know that the seed it placed into the market for sale was contaminated. The producer knew that if it did not take reasonable care in its production processes, there was a risk that an ascertainable class of persons, being persons who would purchase and plant MR43 seed, would suffer economic loss if the seed contained an off-type seed with a shattering characteristic. However, that was not knowledge of the risk of economic loss to the appellant growers specifically, because the producer did not know that those growers would purchase and plant the contaminated seed. Furthermore, the producer did not have knowledge that want of care in the production of the contaminated seed would or could cause economic loss of the magnitude that was suffered by the growers. The producer's admissions of knowledge were carefully confined in their terms. The producer did not admit that it knew there was a material risk that the relevant seed was contaminated by a sorghum off-type with a shattering characteristic, let alone that it was so contaminated. The producer did not admit that it knew that a sorghum off-type with a shattering characteristic (as opposed to a sorghum off-type more generally) had contaminated previous commercial consignments of its seed products. The most that can be said is that, when the contaminated seed was produced, the producer knew that future purchasers would have more difficulty controlling or eradicating a sorghum off-type with a shattering characteristic if it was present amongst the seed, and that if it was planted and it germinated, matured and dropped seed, such purchasers would probably have more difficulty controlling a sorghum off-type with a shattering characteristic in a sorghum crop than an off-type without that characteristic. That kind of knowledge is far distant from the kind that has been identified in other cases as supporting the case for finding a duty of care to avoid economic loss.