The duty not to inflict pure economic loss
18 The relationship between a plaintiff and defendant giving rise to a duty of care not to cause economic loss was the subject of extensive discussion in Perre v Apand Pty Limited [1998] HCA 36; (1999) 198 CLR 180. Gleeson CJ observed (at 198 CLR 192) that "there is no general rule that one person owed to another a duty to take care not to cause reasonably foreseeable harm" commenting that the "consequences of such a rule would be intolerable" although "there are circumstances in which the law recognises the duty of care such as will permit recovery of pure economic loss" (citing Caltex Oil (Australia) Pty Limited v The Dredge "Willemstad" (1976) 136 CLR 529 and Hedley Byrne & Co Pty Ltd v Heller & Partners Ltd [1964] AC 465. His Honour referred to three fundamental policy considerations tending to restrain acceptance of the existence of such a duty of care in particular categories of case and then went on to say (ibid at 193) -
"If there once was a bright line rule which absolutely prevented recognition of a duty of care in any case where the negligent conduct of one person caused financial loss to another, not associated with injury to the other's personal property, and which assigned claims to recover such loss to the field of contract rather than tort, the line gave way in an area where there is a clear potential for carelessness to cause financial harm: negligent misstatements made to a person who, to the knowledge of the maker of the statement, relies upon the advice or information provided. However, there is no convincing reason why conveying advice or information should be treated as the solitary exception to an otherwise absolute exclusionary rule."
19 Gleeson CJ went on to consider a number of unsatisfactory solutions which were discussed in Kaparo Industries Plc v Dickman [1990] 2 AC 605, citing with approval the speech of Lord Oliver of Aylemerton as follows (ibid at 194) -
"In Kaparo , Lord Oliver emphasised that, in this field of discourse, the mere foreseeability of possible damage, without some further control, (which he summarised as 'proximity', after explaining what he meant by that term), would not be useful as the test of liability…At the same time, however, his Lordship made it clear that 'in some cases the degree of foreseeability is such that it is from that alone that the requisite proximity can be deduced'…In relation to the giving of advice or information, questions of reliance and actual foresight and the possibility of harm, (or, what is the same thing, the foresight that a reasonable person would have), are closely related. Moreover, knowledge (actual, or that which a reasonable person would have) of an individual, or an ascertainable class of persons, who is or are reliant, and therefore vulnerable, is a significant fact in establishing a duty of care.
Vulnerability can arise from circumstances other than reliance. In Caltex , the obvious vulnerability of a specific plaintiff was influential in a number of judgments…This was not merely an arbitrary method of solving the problem of potentially indeterminate liability. It was an application of what Lord Oliver later discussed as the idea that in a given case, the degree (and nature) of foreseeability may have an important bearing on whether there is a duty of care."
20 His Honour went on to agree with the reasons given by Gummow J for concluding there was a duty of care, emphasising that the internal communications of the respondent specifically acknowledged that there was a need for care so as not to damage the interests of other persons, who are not neighbours but who were within specified distance of the potentially risky conduct as showing "actual foresight of the likelihood of harm, and knowledge of an ascertainable class of vulnerable persons".
21 Gaudron J commenced her judgment with a description of the relationship between the parties as pleaded in the statement of claim. Her Honour observed that "given the present stage of development [of the law as to liability for economic loss] different approaches have been advanced as to the way in which claims for which there is no legal precedent should be dealt with" (198 CLR at 197). Her Honour briefly mentioned the various approaches propounded in Anns v Merton London Borough Council [1975] AC 728, Sutherland Shire Council v Heyman (1985) 157 CLR 424, Hawkins v Clayton (1988) 164 CLR 539, Murphy v Brentwood District Council [1991] 1 AC 398 and in particular, the judgment of Kirby J in Pyrenees Shire Council v Day (1969) 192 CLR 330 at 419-420 where his Honour advocated a three-staged test now generally applied in England, namely foreseeability, the existence of a relationship between the parties of "proximity" or "neighbourhood" and a consideration of policy to determine whether it is "fair, just and reasonable" to impose the duty of care in question. Her Honour was sceptical about the utility of attempting to propound a general touchstone in this area of the law, preferring a more empirical and incremental approach from developing case law, citing as an example the category of negligent misstatement. Her Honour went on to say that it seemed "possible to discern another category for which the circumstances that attract a duty of care can now be articulated" (ibid at 199). Her Honour said (ibid at 200) -
"It is in the area of legal rights that, in my view, there is to be discerned a second discreet category of liability for pure economic loss. Indeed, in some situations, the existence of the duty of care with respect to another's legal rights may be so obvious as to pass without argument. [Her Honour then cited Bennet v Minister of Community Welfare (1992) 176 CLR 408, especially per McHugh J at 427, Hawkins v Clayton (1988) 164 CLR 539, especially her Honour's judgment at 594, Hill v Van Erp (1997) 188 CLR 159 where, respectively, the legal rights involved were that of a named executor to obtain probate and that of a beneficiary to receive a testamentary gift where a solicitor had failed to ensure that the will in this respect was effective. Her Honour went on as follows.]
The main difference is that, in those cases, the right involved was a right peculiar to the plaintiff. In this case, the rights involved are general rights, namely, the right to sell potatoes in the Western Australian market and the right to use one's land and equipment for the production of potatoes for that purpose …
The consideration that the legal rights involved in this case are rights which attach to members of a class rather than to an individual is, to my mind of no significance. There is no principle basis on which a distinction can be drawn between rights which are peculiar to an individual plaintiff and to those which adhere to a plaintiff as a member of a particular case. And that is so even if the members of that class cannot be identified with complete accuracy.
Although it would not be strictly accurate in this case to describe the respondent as being in a position of control, its relationship with the appellants is closely analogous to that which obtains where one person is in a position to control the exercise or enjoyment by a legal right of another person. ..
In my view, where a person knows or ought to know that his or her acts or omissions may cause the loss or impairment of legal rights possessed, or enjoyed or exercised by another, whether as an individual or as a member of a class, and that latter person is in no position to protect his or her own interests, there is a relationship such that the law should impose a duty on the former to take reasonable steps to avoid a foreseeable risk of economic loss resulting from the loss or impairment of those rights."
22 The right which I have posited as possibly inhering in the plaintiff, namely to practice in the profession of his choice is controlled by a number of features, one of which might be the demonstration to the satisfaction of the College that he has the necessary medical competence. It is not quite the right to which Gaudron J referred but seems to me at least capable of being regarded as analogous to it or sufficiently similar to give rise to the relationship which her Honour held to exist.
23 The judgment of McHugh J (commencing 198 CLR at 203), following a brief discussion of the factual and legal background to the appeal, identified what his Honour called the "demise of proximity as a unifying theme identifying cases in which the law has considered the question of the duty of care on a defendant whose act or omission a plaintiff has suffered pure economic loss" and, as his Honour observed (198 CLR at 210) proximity has not been entirely abandoned as a factor in determining duty, though it "may no longer be the talisman for determining a duty of care". His Honour then went on (198 CLR 210 ff) to discuss some other attempts, especially in England, to formulate an appropriate test identifying, in particular, what his Honour described as "three defects" in the Kaparo formulation. His Honour also considered that "this court should [not] accept that a defendant should owe a duty of care merely because its conduct may defeat or impair 'a precise legal right' of the plaintiff in circumstances where the defendant is in a relationship with the plaintiff and in a position to control the enjoyment of that right." His Honour considered that imposing "duties of care in such situations would extend the liability of defendants, perhaps massively" pointing out that many cases of this kind were "simply cases of transfers of wealth …[with] often no net loss of social wealth". However, his Honour considered he did not need to pursue this argument in the case at hand since the plaintiff "no doubt had a right to trade, and that is a right that in various circumstances the law will protect [citing authorities which I omit]…but not by imposing duties of care on others simply because they are in a position to control the enjoyment of the plaintiff's right to trade". Noting, however, that the "exclusionary rule of the common law" no longer applies in Australia, at least strictly, and the need for predictability in the law, he concluded that, "until a unifying principle again emerges…the best solution is to proceed incrementally from the established cases and principles" (198 CLR at 217). His Honour went on to say (omitting references) -
"[94] In my view, given the needs of practitioners and trial judges, the most helpful approach to the duty problem is first to ascertain whether the case comes within an established category. If the answer is in the negative, the next question is, was the harm which the plaintiff suffered a reasonably foreseeable result of the defendant's acts or omissions? A negative answer will result in a finding of no duty. But a positive answer invites further inquiry and an examination of analogous cases where the courts have held that a duty does or does not exist…The law should be developed incrementally by reference to the reasons why the material facts in analogous cases did or did not find a duty and by reference to the few principles of general application that can be found in the duty cases.
[95] Further, I think that, so far as possible, the reasons for upholding or denying a duty in particular cases should be regarded as principles to be applied in determining whether a duty exists in case within that category. Such reasons will reflect policies that the courts have recognised as relevant in determining the duty issue. In some cases, they will be so decisive in determining duty that they can be applied as rules or principles in other case.
[96] The present case is not one falling within any categories of liability hitherto recognised. The Canadian Supreme Court has adopted the categorisation of cases of pure economic loss proposed by Professor Feldthusen ( Winipeg Condominium Corporation No 36 v Bird Construction Co. [1995] 1 SCR 85 at 96/97]:
1. The independent liability of statutory public authority;
2. Negligent misrepresentation;
3. Negligent performance of a service;
4. Negligent supply of shoddy goods or structures;
5. Relational economic loss.
[97] The present case was not within any of these categories. It is perhaps possibly closest to the last category…
…
[99] [McHugh J mentioned other cases of relational economic loss, which did not apply - and do not apply here - and said]…The present case is therefore novel in terms of the categories. But that does not mean that no duty of care was owed to the Perres. "The categories of negligence" said Lord McMillan, "are never closed" ( Donoghue v Stevenson [1932] AC 562 at 619). The issue of duty must be decided by reference to the few general principles that appear to govern all cases of pure economic loss.
…
[100] In determining whether the defendant owed a duty of care to the plaintiff, the ultimate issue is always whether the defendant in pursuing a course of conduct that caused injury to the plaintiff, or failing to pursue a course of conduct which would have prevented injury to the plaintiff, should have had the interest or interests of the plaintiff in contemplation before he or she pursued the or failed to pursue the course of conduct…That issue applies whether the damage suffered is injury to person or tangible property or pure economic loss… if the defendant should have had those interests in mind, the law will impose a duty of care. If not, the law will not impose a duty.
…
[103] Nevertheless, when a court is satisfied that the economic loss suffered by the plaintiff was reasonably foreseeable by the defendant, that no question of indeterminacy of liability arises and that the defendant was not legitimately protecting or pursuing his or her social or business interests, it will often accord with community standards and the goals of negligence law, as an instrument of corrective justice, to hold that the defendant should have had the plaintiff's interests in mind when engaging or refusing to engage in a particular course of conduct. However the common law in its desire to give effect to the autonomy of each individual does not generally require a person to act as if he or she were "my brother's keeper". That is particularly so when a defendant would have to take affirmative action to save a person from suffering harm.
[104] What is likely to be decisive, and always of relevance, in determining whether a duty of care is owed is the answer to the question, "how vulnerable was the plaintiff to incurring loss by reason of the defendant's conduct?" So also is the actual knowledge of the defendant concerning that risk and its magnitude. If no question of indeterminate liability is present and the defendant, having no legitimate interest to pursue, is aware that his or her conduct will cause economic loss to persons who are not easily able to protect themselves against that loss, it seems to accord with current community standards in most, if not all cases, to require the defendant to have the interests of those persons in mind before he or she embarks on that conduct.
[105] The principles concerned with reasonable foreseeability of loss, indeterminacy of liability, autonomy of the individual. Vulnerability to risk and the defendant's knowledge of the risk and its magnitude are, I think, relevant in determining whether a duty exists in all cases of liability for pure economic loss. In particular, other policies and principles may guide and even determine the outcome. But I do not think that a duty can be held to exist in any case of pure economic loss without considering the effect of the application of these general principles."
24 McHugh J then went on to analyse these elements and apply them to the issues in Perres. I do not think it is necessary for me to summarise that part of his Honour's judgment. It is sufficient I think to notice that there appears to be an arguable case, at least, that the application of the criteria identified by McHugh J to the plaintiff's case here suggests that the College might owe a duty of care to him to conduct its examination of him in a fair and proper manner.
25 The judgment of Gummow J commenced with a brief summary of the facts and an extensive discussion of the various approaches of the common law from time to time to the problem of imposing a duty of care not to cause economic loss, including a mention of the civil law position. His Honour also concluded that no satisfactory general formula had been developed to answer this question in a way which avoided "the necessity for examination of the particular facts" (198 CLR at 253), commenting, "That this is so is not a problem to be solved; rather, as Priestley JA put it in Avenhouse v Hornsby Shire Council (1998) 44 NSWLR 1 at 8] 'it is a situation to be recognised'. His Honour did not think that "the imposition of a fixed system of categories...in which damages in negligence for economic loss may be recovered" would assist in the emergence of a coherent body of precedents" (ibid at 254) preferring the approach taken by Stephen J in Caltex Oil, in which his Honour "isolated the number of 'salient features' which combined to constitute a sufficiently close relationship to give rise to a duty of care owed to Caltex for breach of what it might recover [quaere for] its purely economic loss (Caltex Oil (1976) 136 CLR 529 at 576-577), though there should be an "allowance for the operation of appropriate 'control' mechanisms". Gummow J analysed the facts in the case, concluding that the defendant knew or ought to have known of the plaintiffs' vulnerability to the activities which it proposed to undertake and the consequences of not preventing an outbreak of bacterial wilt disease in property adjacent to that of the plaintiffs which would, because of the special requirements of the law of Western Australia, cause severe adverse consequences to the plaintiffs. His Honour noted that the plaintiffs would not have appreciated the risk which they were exposed by the defendant's conduct and were unable to protect themselves from that risk. Subject to irrelevant qualifications, his Honour concluded (198 CLR at 260) that these characteristics when taken together, brought the parties "into such close and direct relations as to give rise to a duty of care owed by [the defendant] for breach of which purely economic loss may be recovered".
26 Kirby J commenced his judgment by noting that the question of liability in negligence for financial loss unconnected with physical injury was vexed, observing, "the law is in a state of development…[which] is unfortunate for everybody" (198 CLR at 263). After discussing a number of proposed solutions, which his Honour found for various reasons to be unsatisfactory his Honour returned to his reasons in Pyrenees Shire Council v Day (1998) 198 CLR 330 at 419-420; (see also Romeo v Conservation Commission (1998) 192 CLR 431 at 476) where his Honour made the suggestion that the following three questions should be asked -
"1. Was it reasonably foreseeable to the alleged wrongdoer that particular conduct or an omission on its part would be likely to cause harm to persons who have suffered damage or a person in the same position?
2. Does there exist between the alleged wrongdoer and such person a relationship characterised by the law as one of "proximity" or "neighbourhood"?
3. If so, is it fair, just and reasonable that the law should impose a duty of a given scope upon the alleged wrongdoer for the benefit of such a person?"
27 His Honour then analysed a substantial field of authority, concluding that this approach, which had been established by Caparo, represented the most useful and appropriate "methodology which is universal to the tort of negligence and appropriate to the particular subcategory of negligence where the breach in question has occasioned pure economic loss" (198 CLR at 286). His Honour's analysis of the circumstances of the case led him to conclude that the defendant was under a legal obligation to observe care to prevent damage to the plaintiff's interests both from the risk inherent in its activities, the nature of which…[the defendant] actually foresaw or which were reasonably foreseeable" (198 CLR at 291) and "action based on the tort of negligence lies to enforce that duty for approved breach which results in damage [which]…is not excluded merely because the damage suffered…was purely economic loss."
28 Following a detailed discussion of the facts, Hayne J considered the utility of such notions as proximity and fairness as indicators of liability and the problem of indeterminate liability as a counter indicator of the existence of a duty. I trust that I am not disrespectful in passing over other discussions linked with this issue to move to what seems to me to be the nub of his Honour's judgment (198 CLR at 307) -
"[350] Approaching the matter…by asking what would have been the position if the conduct had been engaged in deliberately…is not inconsistent with the case in which a duty of care to avoid pure economic loss has been found to exist. Three kinds of cases will serve to make good that proposition. First, if a misrepresentation causing economic loss is made with knowledge of its falsity rather than negligently, the party making the representation in liable for deceit…Secondly, if the dredge in Caltex Oil had deliberately set out to break the pipeline it would have been liable for procuring breach of existing contracts for supply or transport of the hydrocarbons carried in the pipeline. Thirdly, if the solicitor in Hill v Van Erp had intentionally sough to depart from her client's instructions, she would have been guilty of various forms of professional misconduct. The examples could be multiplied.
For these reasons I consider that the respondent did owe a duty to some of the appellants to take care not to cause them economic loss. To impose a duty is not to create an indeterminate liability and does not make conduct cautious, that is conduct that would not be unlawful or tortious if done deliberately."
29 His Honour then considered to which of the appellants the duty of care was owed. This discussion is not material to the problem in this case.
30 Callinan J, following an extensive discussion of authority following Caltex, stated (198 CLR at 325) -
"And it must be accepted that this is an area of the law in which the courts should move incrementally and very cautiously indeed. It is not yet possible to identify a bright line of demarcation between those cases of pure economic loss in which damages are recoverable and those in which they are not. The law is still developing in a somewhat piecemeal fashion that Stephen J predicted in Caltex (1976) 136 CLR 529 at 576…
[406] I now turn to a consideration of the factors which in combination I think relevant in this case and which establish the sufficient degree of proximity, foreseeability, a special relationship, determinacy of relatively small class, a large measure of control on the part of the respondent and special circumstances justifying the compensation of the appellant's for their loss "
31 Callinan J referred to the defendant's effective control of the particular operation which caused the financial loss to the plaintiffs who were, his Honour concluded, members of a determinate class, referred to the geographical and commercial propinquity between the operations of the parties that the spoke "in a real sense" of proximity (198 CLR at 327), the devastating consequences of the foreseeable risks which arose because the defendant was undertaking an experiment in the use of particular seed, the powerlessness of the plaintiffs to abate or prevent the occurrence of the loss to which they were subjected, the lack of any statutory or regulatory regime otherwise able to govern or control the defendant's activities and that what happened to the plaintiffs "was not the result of merely legitimate, competitive, commercial activity" (198 CLR 328). Callinan J also noted that the "imposition of liability…would not impose an impediment in the way of ordinary commercial activity in the potato industry and that what the defendant "did went considerably beyond careless inadvertence and resulted from conscious decisions carrying with them obvious risks" (ibid at 329) and observed -
"One of the major touchstones in a case of this kind will always be reasonableness…or as it has sometimes been put, proportionality…I do not regard the damages which are likely to be available to the appellants as being unfair, or unreasonable, or disproportionate in all the circumstances of the case."