LAWS1114 Lecture 5

Economic Loss 1: Relational Economic Loss


  • Could have been referred to as ‘pure economic loss’ (as opposed to ‘economic loss’)
    • Within ‘pure economic loss’, there are the subheadings:
      • ‘relational economic loss’;
      • ‘negligent misstatement’; and
      • ‘defective structures’.

Relational economic loss

  • The plaintiff suffers economic loss that is consequent upon damage to property but the plaintiff has no proprietary or possessory interest in that damaged property.
    • As a consequence of this damage to a third party’s property, the plaintiff claims to have suffered some form of financial loss.
  • In other words, the property damaged belongs to someone else, a third party. Accordingly, the plaintiff suffers a pure economic loss.
  • This type of loss is sometimes referred to as ‘relational economic loss’ because it arises out of the economic relationship between the plaintiff and the property of the third party.

Negligence misstatement

  • The week 6 lecture analyses the common law principles governing liability for economic loss suffered as a consequence of a negligent misstatement.
    • Government providing documents about potential redevelopment of land
    • Audit opinion
  • Policy concerns
    • To what extent should there be liability?
    • If you accept financial advice at a party, the law considers such reliance unreasonable
  • Two party cases: direct dealings between plaintiff and defendant
  • The influential ‘Barwick’ formulation (or test)
  • Three party cases: indirect relationships between the plaintiff and defendant

Defective structures

A negligently designed or constructed building can cause personal injury or damage to property. Builders, architects and engineers owe a duty of care to any person who might reasonably be expected to suffer physical damage, that is personal injury and damage to property other than the defective structure as a consequence of their negligent work: Voli v Inglewood Shire Council (1963) 110 CLR 74.

  • This case is not an example of economic loss!!!
  • When we have a situation where an architect is negligent resulting in actual physical and personal injury (or property damage), a duty of care is owed.
  • Defects in the construction or design of a building can also bring about economic loss. This economic loss is ‘pure’ in the sense that it is not consequent upon physical harm.
    • It arises because there is a defect in the building and consists of the cost of rectifying the defect or the diminution in value of the structure due to the defect.
  • So basically, any defective structures that lead to personal injury or property damage does not come under economic loss. An example of a ‘pure economic loss’ example would be when the value for the property falls because of the defect.

Relational economic loss

  • Policy concerns
    • Economic interests are less valuable?
    • Economic losses are not socially harmful?
    • A duty of care would impair commercial freedom (autonomy)?
    • Indeterminate liability would result?
    • A duty of care could conflict with contractual risk allocations?
      • The courts are careful not to interfere with the contractual risk
    • Does the plaintiff have any alternative means of self protection?

The traditional exclusionary rule

  • The traditional exclusionary rule: a plaintiff cannot recover economic loss consequent upon damage to property unless the plaintiff had a proprietary or possessory interest in that property.

Origins of the rule: Cattle v The Stockton Waterworks Company (1875) LR QB 453

Stockton Waterworks, the defendant waterworks company, (under their Act) laid down one of their mains along and under a turnpike (toll) road, (made under another Act) which declared the soil to be in the owners of the adjoining land, subject only to the right to use and maintain the road.

Knight was owner of land on both sides, at a spot where the road was carried across a valley on an embankment, and wanting to connect his land on either side, Knight employed Cattle, the plaintiff, to make a tunnel under the road.

In doing the work, it was discovered that there was a leak in the defendant’s main water pipe higher up the road, and on the plaintiff digging out the earth, the water from the leak flowed down upon the work and delayed it, so as to cause pecuniary damage to the plaintiff, for which he brought an action against defendants.

  • According to Blackburn, Mellor and Lush JJ at page 458:
    • ‘In the present case there is no pretence for saying that the defendants were malicious or had any intention to injure anyone. They were, at most, guilty of a neglect of duty, which occasioned injury to the property of Knight, but which did not injure any property of the plaintiff.’
    • ‘The plaintiff's claim is to recover the damage which he has sustained by his contract with Knight becoming less profitable, or, it may be, a losing contract, in consequence of this injury to Knight's property. We think this does not give him any right of action.’

Exception to the exclusionary rule: ‘common venture’ – Morrison Steamship Co Ltd v Greystoke Castle (Cargo Owners) [1947] AC 265

  • According to Lord Roche at 280: ‘…if two lorries A and B are meeting one another on the road, I cannot bring myself to doubt that the driver of lorry A owes a duty to both the owner of lorry B and to the owner of goods then carried in lorry B.’
  • ‘Those owners are engaged in a common adventure with or by means of lorry B and if lorry A is negligently driven and damages lorry B so severely that whilst no damage is done to the goods in it the goods have to be unloaded for the repair of the lorry and then reloaded or carried forward in some other way and the consequent expense is by reason of his contract or otherwise the expense of the goods owner, then in my judgment the goods owner has a direct cause of action to recover such expense.’

Application of the exclusionary rule – Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] 1 QB 27

On June 12, 1969, while digging up a road with a power-driven excavating shovel, men employed by the defendants, Martin & Co. (Contractors) Ltd., damaged a cable, which the defendants knew supplied electricity from the Mechalls Power Station of the Midland Electricity Board direct to the Spartan Works, Birmingham. The plaintiffs, Spartan Steel & Alloys Ltd., were the owners of the factory and they manufactured stainless steel alloys.

  • The plaintiffs claimed that, due to the defendants' negligence, their arc furnace, which worked on a 24-hour basis, was rendered inoperative from about 7.40 p.m. on June 12 until the electricity supply was restored at 10 a.m. on June 13, 1969, that material in the furnace was damaged and depreciated in value and that their loss and damage totalled £2,535.
  • That sum was made up of £368 for loss of value of the metal in the furnace at the time the electricity supply failed, £400 for loss of profit on that metal and £1,767 for loss of profit on four further melts which could have been carried out during the period that there was no electricity supply.
  • The defendants, by their defence, formally denied negligence and pleaded that the damage was too remote.
  • At the hearing before Faulks J., the defendants admitted negligence and liability for damages of £368 but denied liability for the £400 and £1,767 damages. On December 14, 1971, Faulks J. awarded the plaintiffs £2,535 damages with interest at 6 per cent. from the date of the accident.
  • The defendants appealed on the grounds that Faulks J. was wrong in law and misdirected himself in holding that:
  • (1) the plaintiffs were entitled to recover any sum in excess of £368, or any sum in respect of damage other than physical damage to their plant and materials;
  • (2) alternatively, in holding that the plaintiffs were entitled to recover any sum in excess of £768, or any sum in respect of damage not directly arising out of the physical damage to their materials and plant;
  • (3) by applying the doctrine of parasitic damages and by holding that the plaintiffs were entitled to recover damages in respect of loss of profit not directly arising out of and attributable to physical damage to materials and plant; and
    • Parasitic damages refer to the £1,767 claim for the loss of the melts.
    • Must be parasitic upon some other damage that is recoverable (in this case, upon property damage)
  • (4) Faulks J. failed to direct himself and to hold that the plaintiffs' economic loss unrelated to physical damage was irrecoverable.
  • Held: The majority of the English Court of Appeal held that the plaintiffs were entitled to recover the £400 as damages because the loss of profit from the melt was a foreseeable financial damage immediately consequential on the foreseeable physical damage to the metal but they were not entitled to recover the loss of profit from the four melts due to the negligent interruption of the electricity supply.
    • That’s not how Lord Denning decided on the issue (used judicial policy)
    • This is just Lord Lawton’s reasoning.

The Australian approach to relational economic loss

Caltex Oil (Australia) Pty Ltd v The Dredge ‘Willemstad’ (1976) 136 CLR 529

The circumstances of this case occurred in Botany Bay. Australian Oil Refinery had a refinery in Kurnell and there were four pipes that went across Botany Bay. Caltex had an oil terminal at Banksmeadow. AOR owned the refinery at Kurnell as well as the pipes that went across the bay.
There was a contractual agreement between AOR and Caltex whereby AOR would refine the oil and it would be pumped across to the Caltex terminal. Caltex owned the refined oil.

One day they were dredging. The navigation equipment was supplied by another defendant. However, this equipment was faulty. The ship was about 30 m away from the position the captain it was. The Dredge damaged the pipe. The oil supply had to be turned off. Caltex then had to transport oil by truck from Kurnell to Banksmeadow (cost a lot more).

  • Main issue: Caltex suing ship and navigation supplier for negligence.
  • If you apply the exclusionary rule, the property was owned by AOR (damage to property of third party)
    • Notwithstanding this rule, can Caltex recover relational economic loss?
  • A duty was owed.
  • Gibbs J p. 555
    • However, there are exceptional cases
    • Damages not recoverable upon economic losses not consequential upon injury to P’s property, person
    • Principle
      • Must be reasonably foreseeable
      • Exceptional cases, D has knowledge of P that P will be likely to suffer economic loss, D owes P DOC.
      • NB: This statement is wider than the rule stated by Mason J
  • pp. 563-566 – Stephen J analyses Spartan case
    • Lord Denning uses judicial policy in the Spartan case
    • At top of p. 566, he says: Lord Denning’s approach must lead to great uncertainty
    • At p. 567, concludes that he does not find suitable guidance from Spartan Steel
    • At p. refers to famous statement by Cardozo CJ (we must avoid liability of an indeterminate amount from an indeterminate time to an indeterminate class)
    • pp. 576-577
      • Stephen J’s judgment
      • Salient features
      • p. 579 Stephen J applies lorry example (from Morrison Steamship?)
  • Mason J
    • ‘A defendant will then be liable for economic damage due to his negligent conduct when he can reasonably foresee that a specific individual, as distinct from a general class of persons, will suffer financial loss as a consequence of his conduct.’
    • More narrow than Gibbs J
      • Restricts the liability to a specific individual as distinct from a general class of persons – because the pipe led directly from the refinery to Caltex station, a DOC is owed because there was knowledge on the part of the D that if there was damage to the pipe, it would lead straight to Caltex Oil
    • In that statement of principle b Gibbs J, he probably contemplated (according to Hinchy) that a plaintiff could fall within an ascertainable class.
  • Murphy J – social responsibility and public policy
  • Caltex Oil provided an exception to the traditional exclusionary rule
    • In circumstances where the defendant had knowledge or ought reasonably to have had knowledge of the fact that a plaintiff could suffer economic loss

Perre v Apand

The D Apand was the manufacturer of potato crisps. In Victoria, it was involved in seed experimentation. Apand became aware that there were problems (potentially) with the seed. The problem involved bacterial wilt. Apand started to supply seed into South Australia.

The farm was owned by Sparnon (in South Australia). They used this experimental seed. The bacterial wilt affected the potato crops of Sparnon as well as his neighbours (which included Perre). The South Australian growers exported a significant amount to Western Australia (can get a much higher price in Western Australia). There was a Western Australian regulation that prevented importing any potatoes that were grown within a 20 km radius of an outbreak of bacterial wilt for a period of five years.

NB: Except for Sparnon, no one’s crops had been infected by bacterial wilt.

  • Issue:
  • DOC owed to all plaintiffs (growers, processors and exporters) Gleeson CJ, Gaudron, McHugh, Gummow, Kirby, Hayne and Callinan JJ
    • McHugh J concluded that a DOC was owed to the growers but not the processors
    • Gleeson CJ agreed with the reasoning of Gummow J
    • Gummow J applied a salient features approach
    • Gaudron J used precise legal rights approach (criticised by other members of the High Court)
    • Kirby J applied the Three-Stage Caparo Test (reasonable foreseeability; proximity; fair, just and reasonable)
    • Callinan J applied factors (such as knowledge)
  • McHugh J’s judgment
    • [94] – Should use an incremental approach (this will give some certainty for practitioners and judges
    • Circumstances of Perre v Apand are novel
    • Indeterminacy (starting at [106])
    • [107]: ‘It is not the size or number of claims that is decisive in determining whether potential liability is so indeterminate that no duty of care is owed. Liability is indeterminate only when it cannot be realistically calculated.’
      • Not the number (there can be a large number) – we have to be able to identify who should fall within an ascertainable class)
  • Can we determine who should fall within the class?
  • Extent of liability (can we quantify liability)
    • Read the sections about knowledge, vulnerability (could not self-protect from being restricted from importing to WA), legitimate business enterprise, law of contract, insurance
  • NB: Indeterminate liability is an important policy issue in economic loss
  • [142] ‘The class’ – closely consider what McHugh J says under the heading ‘The class’
    • The potato growers within the 20 km radius was distinct from the other potato growers (could consider them a class – therefore, ascertainable
    • Regulation No. 3 – processors unascertainable