31 May 2005

"Pure" economic loss: is the law any clearer yet?

By Mark van Brakel, Terry Palmer

A duty can exist even when the defendant has no knowledge of the individual claimant - it is enough if the claimant is a member of an ascertainable class whose identity could have been ascertained by the defendant. A contract between the claimant and person who has suffered physical loss may indicate that the defendant owed a duty of care to the claimant not to cause pure economic loss.

In a recent decision of the Supreme Court of Queensland in Fortuna Seafoods Pty Ltd v The Ship "Eternal Wind" [2005] QSC 4, Justice Douglas had cause to consider one of the most vexing issues in the modern law of negligence: when will a duty exist to protect another person from pure economic loss? This article examines whether his decision can assist us to identify when such a duty will exist. Understanding the scope of such duties is essential to properly understanding potential liability for such loss.

"Pure" economic loss in Australia law

Australian law has always treated negligence claims for "pure" economic loss, actions in which the claimant has lost money but not been physically injured, as different to other kinds of negligence claims. Australian courts have traditionally been reluctant to allow recovery of such claims, concerned that allowing such claims could expose defendants to indeterminate liability.

Although it is now established that Australian law will allow claims for pure economic in some circumstances, the legal basis for distinguishing between those claims which will be allowed and those that will not is yet to be fully explained by the courts. Consequently, each decision of a superior court touching on this issue is eagerly anticipated in the hope that such decisions may clarify the law.

The facts

The Fortuna Seafoods case arose from a collision between a fishing vessel, the Melina T, and a motor bulk carrier, Eternal Wind, off Noosa Heads in Queensland. The Melina T was owned by a company called Fortuna Fishing, a company controlled by the Rowley family. The Rowley family also controlled another company called Fortuna Seafoods. While Fortuna Fishing owned and operated fishing vessels, Fortuna Seafoods sold the fish caught by Fortuna Fishing.

Both Fortuna Fishing and Fortuna Seafoods sued the Eternal Wind for loses sustained as a result of the collision. There was no dispute that the collision was caused by the Eternal Wind's negligence. The claim brought by Fortuna Fishing was settled before trial. However, the Eternal Wind defended the claim brought by Fortuna Seafoods. Although the Eternal Wind accepted that Fortuna Seafoods had suffered economic loss, she denied that she was liable for that loss and argued that she did not owe Fortuna Seafoods a duty to protect it from pure economic loss.

Existence of a duty of care

Justice Douglas considered that the authorities established that to succeed in its claim Fortuna Seafoods would need to show that:

  • The harm it suffered was reasonably foreseeable;
  • The defendant had knowledge (actual or imputed) that damaging the Melina T was likely to cause economic loss to those who relied directly upon her use;
  • This was not a case of indeterminate liability;
  • The defendant knew or had the means of knowing that Fortuna Seafoods was a member of an ascertainable class of vulnerable persons who were unable to protect themselves from harm;
  • The imposition of a duty would not impair the legitimate pursuit by the defendant of her own commercial interests; and
  • The damage suffered flowed from the occurrence of activities within the defendant's control.

Justice Douglas said that the real issue to be decided was whether the defendant knew or had the means of knowing that Fortuna Seafoods was a member of an ascertainable class of vulnerable persons who were unable to protect themselves from harm. He had little difficulty satisfying himself of the other matters identified commenting, amongst other things, that:

  • Foreseeability of harm posed no problem and that if a fishing vessel is sunk it requires little imagination to expect that those who profit from processing and arranging the sale of its catch may suffer loss; and
  • This was not a claim for indeterminate liability as Fortuna Seafoods was a "first line victim" whose lose was ascertainable.

Means of knowledge

The argument before Justice Douglas was heavily influenced by an earlier decision of the Queensland Court of Appeal in Christopher v MV "Fiji Gas" (1993) Aust Torts Rep 81-202. In that case, decided before the High Court's landmark judgment in Perre v Apand (1999) 198 CLR 180, the Court of Appeal rejected a claim for lost income made by the crew of a damaged fishing vessel. The Court considered that the owner did not have means of knowledge of the persons injured because there was no evidence that the owner of the Fiji Gas knew the crew of the damaged vessel as individuals as opposed to a general class.

However, Justice Douglas found that the law had changed since the decision in the Fiji Gas case. He said that in Perre v Apand the High Court has accepted that it was sufficient if the injured persons were members of a specific class whose identity could have been ascertained by the defendant. He said that, in the absence of evidence to the contrary, he was prepared to infer that the owner or master of the Eternal Wind could have discovered that Fortuna Seafoods was related to Fortuna Fishing and would have been injured by any damage to the Melina T.

Ascertainable class

In the Fiji Gas case, the Court had also found that the crew were not part of an ascertainable class. There was some suggestion in that case that the Court's decision might have been different if the crew, which had not entered into a contract of employment with the ship's owner, had been engaged in a joint venture with the ship's owner at the relevant time.

In this case Fortuna Seafoods sought to distinguish the Fiji Gas case arguing that, unlike the crew in that case, it belonged to a class of "common ventures", persons engaged in a "common venture" with a person whose property is physically damaged and who suffers loss because of that relationship.

Justice Douglas noted that claims by joint venturers had been treated as recoverable in Canada. He said however that whether a contractual relationship amounted to a joint venture was too ill-defined in Australian law to form the basis of determining whether or not a duty of care existed. He said that he was satisfied that the existence of a contractual relationship between Fortuna Seafoods and Fortuna Fishing was sufficient to find that a duty existed. He distinguished the Fiji Gas case from the case before him on the basis that in the former case no such contract had existed.

Vulnerability

In Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 78 ALJR 628, the High Court found that the engineers who designed the foundations of a building did not owe a duty of care to a subsequent purchaser of the building. The High Court considered that the subsequent purchaser was not ‘vulnerable' to the designers' negligence because that purchaser could have protected itself by obtaining a warranty as to the state of the foundations from the vendor.

In this case the defendant argued that Fortuna Seafoods was not vulnerable to the loss claimed as it could have obtained an indemnity from Fortuna Fishing against the consequences to it of any loss to Fortuna Fishing's vessels. However, as the defendant had never been pleaded such a case and no evidence had been adduced to support such a contention, Justice Douglas was not prepared to find that such an indemnity could have been obtained.

What does the Fortuna Seafoods case mean?

This case illustrates how, as result of the recent decisions of the High Court, injuring one company in a small group of companies may expose someone to liability to other members of that group of companies. As a result the potential liability of defendants has been expanded and defendants should ensure that they are appropriately insured.

Related Knowledge

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