Caltex Oil (Australia) Pty Ltd & Anor v The Dredge Willemstad & Anor
136 CLR 52911 ALR 227
(Judgment by: MANSON J)
Caltex Oil (Australia) Pty Ltd
Australian Oil Refining Pty Ltd
v. The Dredge Willemstad
Decca Survey Australia Ltd
Judges:
Gibbs J
Stephen J
Mason J
Jacobs J
Murphy J
Subject References:
Negligence
Shipping and Navigation
Judgment date: 9 December 1976
SYDNEY
Judgment by:
MANSON J
The common law has exhibited a marked reluctance to allow recovery of pure economic damage sustained as a result of negligence. Before Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] AC 465 in the long line of cases that commenced with Cattle v. Stockton Waterworks Co. (1875) LR 10 QB 453 no plaintiff succeeded in recovering economic damage which was not consequential upon physical damage - see Simpson and Co. v. Thomson (1877) 3 App Cas 279 ; Societe Anonyme de Remorquage a Helice v. Bennetts [1911] 1 KB 243 ; Chargeurs Reunis Compagnie Francaise de Navigation a Vapeur v. English & American Shipping Co. (1921) 9 Ll LR 464 . It was otherwise if the plaintiff had a proprietary or possessory interest in property: in that event he could recover consequential financial loss (The Okehampton (1913) P 173 ; Elliott Steam Tug Co. Ltd. v. The Shipping Controller [1922] 1 KB 127 ).
How Morrison Steamship Co. Ltd. v. Greystoke Castle (Cargo Owners) [1947] AC 265 stood in this scheme of things is a question which has been much debated. Certainly the celebrated example given by Lord Roche (1947) AC, at p 280 of the owners of freight who incurred expense in making alternative transport arrangements when the lorry by which their goods were carried was damaged by the negligence of another indicated that there was no absolute rule inhibiting the recovery of pure economic damage for negligence. On the other hand Lord Simonds (1947) AC, at pp 304-307 invoked the earlier decisions in support of the view that pure economic damage will not ground an action in negligence. However, in Hedley Byrne [1964] AC 465 three members of the House of Lords regarded Greystoke Castle [1947] AC 265 as an instance of recovery of damages for pure financial loss.
None the less before Hedley Byrne [1964] AC 465 the influence of the early cases was strong and it seems to have been generally considered that financial loss not consequential upon property damage could not be recovered. For the most part the cases concerned a claim by a plaintiff that he suffered a loss or lost a profit under a contract because the defendant's negligent conduct damaged or destroyed property of the other contracting party thereby putting an end to the contract or rendering it unprofitable. Yet the cases were thought to establish a general principle relating to the recovery of pure economic damage. This was because the judgments emphasized the far-reaching consequences which would flow if financial loss arising under a contract, divorced from any property damage suffered by the plaintiff, could be compensated in damages for negligence and because Blackburn J. in Cattle (1875) LR 10 QB, at p 458 drew a distinction between financial loss caused by negligence and that caused by malicious intention, asserting that in the former case it was not sufficiently proximate and direct for the law redresses "only the proximate and direct consequences of wrongful acts".
Whether the refusal of relief in these cases was based on the absence of a duty of care (a concept by no means fully developed at the time of Cattle (1875) LR 10 QB, at p 457 ) or remoteness of damage is perhaps not entirely clear. But Blackburn J.'s remarks which I have quoted and those of Hamilton J. in Bennetts (1911) 1 KB, at pp 247-249 , quite apart from the observations of Lord Simonds in Greystoke Castle (1947) AC, at pp 300-308 , indicate that remoteness was thought to be the true foundation of the decisions.
It was to be expected that the speeches in Hedley Byrne [1964] AC 465 , by acknowledging that a plaintiff who sustains financial loss, which is not consequential upon physical damage, as a result of a negligent misstatement, a view confirmed for Australia by Mutual Life & Citizens' Assurance Co. Ltd. v. Evatt (1970) 122 CLR 628 ; [1971] AC 793 , would open the way to liability for pure economic damage sustained in consequence of negligent conduct. So far the expectation has been disappointed.
The English decisions since Hedley Byrne [1964] AC 465 have not given much encouragement to the plaintiff who suffers pure economic damage through negligent conduct. No claim for pure financial loss has yet succeeded - see The World Harmony (1967) P 341 ; Weller & Co. v. Foot and Mouth Disease Research Institute [1966] 1 QB 569 ; Electrochrome Ltd. v. Welsh Plastics Ltd. [1968] 2 All ER 205 ; British Celanese Ltd. v. A. H. Hunt (Capacitors) Ltd. (1969) 1 WLR 959 ; [1969] 2 All ER 1252 ; Margarine Union G.m.b.H. v. Cambay Prince Steamship Co. Ltd. [1969] 1 QB 219 ; S.C.M. (United Kingdom) Ltd. v. W. J. Whittall & Son Ltd. [1971] 1 QB 337 ; Spartan Steel & Alloys Ltd. v. Martin & Co. (Contractors) Ltd. [1973] 1 QB 27 . To these cases there should be added a reference to French Knit Sales Pty. Ltd. v. N. Gold & Sons Pty. Ltd. (1972) 2 NSWLR 132 , where Asprey and Hardie JJ.A. thought that financial loss is not recoverable if it is not consequential upon property damage.
Elsewhere claims for financial loss not consequential upon property damage have succeeded. In Seaway Hotels Ltd. v. Cragg (Canada) Ltd. (1959) 21 DLR (2d) 264 the plaintiff was awarded damages for loss of earnings when the defendant negligently severed a cable carrying power to the plaintiff's hotel, thereby compelling it to close its restaurant and bar and depriving it of rent. In Rivtow Marine Ltd. v. Washington Iron Works (1973) 40 DLR (3d) 530 the plaintiff obtained damages compensating it for the loss of earnings which it sustained by reason of the defendants' failure to give prompt notice of a defect in a crane which resulted in the plaintiff's vessel being out of commission at the height of the fishing season so that the defect could be remedied. Had the notice been given earlier the crane could have been repaired without significant loss of earnings. In the United States fishermen successfully recovered damages reflecting their loss of earnings due to the pollution of fishing grounds by reason of the defendant's negligent spillage of oil (Union Oil Co. v. Oppen (1974) 501 F (2d) 558 ).
Although the English decisions have not favoured the plaintiffs they contain statements which acknowledge in varying degree the right to recover pure economic damage caused by negligent conduct. Broadly speaking, three competing views have been expressed. First, a majority of the Court of Appeal has expressed the view that pure economic damage due to negligence is recoverable where it is "truly consequential", to use the words of Lord Denning M.R. in Spartan Steel (1973) 1 QB, at pp 38-39 or "immediate", as Lawton L.J. put it (1973) 1 QB, at p 47 . Illustrations, according to Lord Denning, are the banker who in reliance on a reference lays out money which is lost (the Hedley Byrne [1964] AC 465 situation) and the owner of goods who suffers pure financial loss when the lorry on which they are carried is damaged by the negligence of another (Lord Roche's example in Greystoke Castle [1947] AC 265 ). Winn L.J. who with Lord Denning formed the majority in S.C.M. (United Kingdom), took a more restricted view. He said (1971) 1 QB, at p 352 :
"...it is far more satisfactory in a sociological sense, and is in accordance with the present law, to say that apart from the special case of imposition of liability for negligently uttered false statements, there is no liability for unintentional negligent infliction of any form of economic loss which is not itself consequential upon foreseeable physical injury or damage to property."
The second approach was that expressed by Edmund Davies L.J. in his dissenting judgment in Spartan Steel. His Lordship rejected the notion that liability for financial loss due to negligence should depend on the occurrence of damage to the plaintiff's property and said (1973) 1 QB, at p 45 :
"... an action lies in negligence for damages in respect of purely economic loss, provided that it was a reasonably foreseeable and direct consequence of failure in a duty of care."
Later, his Lordship said (1973) 1 QB, at p 46 :
"I should perhaps again stress that we are here dealing with economic loss which was both reasonably foreseeable and a direct consequence of the defendants' negligent act. What the position should or would be were the latter feature lacking (as in Weller & Co. v. Foot and Mouth Disease Research Institute [1961] 1 QB 569 ) is not our present concern. By stressing this point one is not reviving the distinction between direct and indirect consequences which is generally thought to have been laid at rest by The Wagon Mound [1966] AC 388 ."
Earlier, in Ministry of Housing and Local Government v. Sharp [1970] 2 QB 223 , at p 278 Salmon L.J. had said:
"... the existence of a duty to take reasonable care no longer depends upon whether it is physical injury or financial loss which can reasonably be foreseen as a result of a failure to take such care." See also Dutton v. Bognor Regis Urban District Council, per Sachs L.J. [1972] 1 QB 373 , at p 403.
The third approach was that taken by Widgery J. in Weller (1966) 1 QB, at p 587 , where his Lordship said that the earlier cases were to be explained on the footing that "the plaintiff was regarded as being outside the scope of the defendant's duty to take care". His Lordship went on to say of Hedley Byrne (1966) 1 QB, at p 587:
"What the case does not decide is that an ability to foresee indirect or economic loss to another as a result of one's conduct automatically imposes a duty to take care to avoid that loss.
In my judgment, there is nothing in Hedley Byrne [1964] AC 465 to affect the common law principle that a duty of care which arises from a risk of direct injury to person or property is owed only to those whose person or property may foreseeably be injured by a failure to take care. If the plaintiff can show that the duty was owed to him, he can recover both direct and consequential loss which is reasonably foreseeable, and for myself I see no reason for saying that proof of direct loss is an essential part of his claim. He must, however, show that he was within the scope of the defendant's duty to take care."
In Margarine G.m.b.H. (1969) 1 QB, at pp 250-251 , Roskill J. expressed his agreement with the judgment of Widgery J. in Weller (1966) 1 QB, at p 587.
These competing views differ in approach and content. The first, that of Lord Denning M.R. and Lawton L.J., treats the issue as one of proximity of damage and confines the recovery of financial loss to cases in which it is "truly consequential" or immediate. The third, that of Widgery J., treats the issue as one to be resolved in terms of the existence of a duty of care and suggests that if physical damage is foreseeable the plaintiff can recover property damage and financial loss so that if there is a breach of duty of care based on the foreseeability of property damage to the plaintiff, the plaintiff can recover financial loss even if he suffers no property damage. The second approach, that taken by Edmund Davies L.J., does not claim to be comprehensive because it asserts no more than that financial loss which is foreseeable and direct is recoverable and leaves for future decision the question whether financial loss which is foreseeable but not direct is recoverable.
Liability for damage sustained in consequence of negligence may be treated as a duty of care problem, or alternatively, as a problem of proximity of damage - see, for example, King v. Phillips [1953] 1 QB 429 and Atiyah, "Negligence and Economic Loss", Law Quarterly Review, vol. 83 (1967), pp. 259-260. The earlier cases, as I have already observed, appear to have discussed liability for financial loss in terms of proximity and remoteness of damage rather than as a duty of care problem.
However, since those cases were decided the foreseeability test has emerged as the chief determinant of the existence of the duty of care (Donoghue v. Stevenson [1932] AC 562 ) and as the principal, perhaps the exclusive, criterion of proximity of damage (Overseas Tankship (UK) Ltd. v. Morts Dock & Engineering Co. Ltd. (The Wagon Mound) [1961] AC 388 ). In The Wagon Mound it was held that direct damage sustained in consequence of a negligent act could not be recovered unless it was also damage of a kind that was a reasonably foreseeable consequence of the defendant's negligent act. All that the case actually decided was that directness was not a sufficient test of liability, not that it was not a necessary test of liability. But the opinion of the Board, delivered by Viscount Simonds rejected the notion that there was "one criterion for determining culpability (or liability) and another for determining compensation" and approved the statement of Lord Russell of Killowen in Bourhill v. Young [1943] AC 92 , at p 101 that the foreseeability test was relevant not only to the question of remoteness of damage but also in testing the existence of a duty of care (1961) AC, at p 421 . In The Wagon Mound their Lordships concluded by saying (1961) AC, at p 426 :
"... the essential factor in determining liability is whether the damage is of such a kind as the reasonable man should have foreseen.... Thus foreseeability becomes the effective test."
The Wagon Mound [1961] AC 388 dealt with property damage caused by negligent conduct, not economic damage caused by negligent words. When liability for economic damage due to negligent misstatement arose for consideration the foreseeability concept was not accepted as an exclusive or comprehensive test. In Hedley Byrne [1964] AC 465 the argument that a duty of care to avoid financial loss arose whenever such loss was a reasonably foreseeable consequence of a misstatement was decisively rejected. And in the more recent English cases to which I have referred the similar argument that a duty of care to avoid financial loss as a result of negligent conduct arises whenever such loss is reasonably foreseeable has also been categorically rejected. It has been otherwise in the latest cases of negligent misstatement resulting in economic loss. In Dutton [1972] 1 QB 373 and Ministry of Housing and Local Government v. Sharp [1970] 2 QB 223 the existence of a duty of case was decided by reference to the foreseeability principle, although in Dutton [1972] 1 QB 373 the existence of a duty of care could also be supported by reference to the special character and duty of the authority.
All this indicates that in England the foreseeability test which seemed to emerge after the decision in The Wagon Mound [1961] AC 311 as the ultimate touchstone of liability in negligence, has not been accepted as an exclusive criterion of liability for economic damage. There are a number of reasons which tend to support this conclusion. Some of them have to do with the various types of financial loss which are denoted by the expression "economic damage" and with the wide variety of circumstances in which financial loss may be sustained. I may suffer financial loss because I lose a profit or the benefit of expenditure under a contract the performance of which is affected due to the negligence of another. Or my business may be adversely affected by supervening circumstances attributable to the negligence of another (Weller [1966] 1 QB 569 ). Or I may be put to additional expense because I have been deprived of a service or facility through another's negligence. In many of these cases the loss will be foreseeable, though the degree of its connexion with the negligence will vary.
The factors inhibiting a general right of recovery based on a notion of foreseeability have been discussed in Hedley Byrne (1964) AC, esp at pp 482-483, 534, 536-538 and the later English cases, as well as in the earlier judgments of Blackburn J. in Cattle (1875) LR 10 QB, at p 458 , Lord Penzance in Simpson and Co. v. Thomson (1877) 3 App Cas 279 and Hamilton J. in Bennetts [1911] 1 KB 243 . There is no occasion for me to repeat them. In addition, instructive examinations have been made of the underlying policy considerations relevant to the problem - see Atiyah, "Negligence and Economic Loss" loc. cit.; L. L. Stevens, "Negligent Acts Causing Purely Financial Loss: Policy Factors at Work" University of Toronto Law Journal, vol. 23 (1973), p. 431.
The principal disadvantage of the foreseeability test as an exclusive criterion of liability for financial loss is that it would impose on an individual defendant a liability "in an indeterminate amount ... to an indeterminate class", in the words of Cardozo C.J. in Ultramares Corporation v. Touche (1931) 174 NE 441, at p 444; 74 ALR 1139 , at p 1145 . A minor act of negligence may put out of action a public utility or facility, e.g. a power station or bridge, which serves a large community, with the result that a large class of persons may sustain financial loss thereby. Yet to adapt the words of Viscount Simonds in The Wagon Mound (1961) AC, at p 422 , "it does not seem consonant with current ideas of justice or morality that for an act of negligence, however slight or venial", the actor should be made liable for all the foreseeable consequences in terms of financial loss. As The Wagon Mound clearly demonstrates, the law of negligence must balance against the interest of the injured party in recovering compensation the interest of the wrongdoer in avoiding subjection to a liability disproportionate to his negligent conduct.
On the other hand, economic damage is, no less than property damage, a very real detriment. Now that the recovery of economic damage not consequential upon property damage is recognized in the case of negligent misstatements, there is no sound reason for accepting the traditional rule that only financial loss which is consequential upon property damage can be recovered. The traditional rule is not only at odds with Hedley Byrne, it is based on an absolute distinction between property damage and economic damage which is difficult to justify (see Hedley Byrne (1964) AC, at pp 517, 538 ).
The problem is to yield compensation to the individual who suffers financial loss not necessarily consequential upon damage to his property when that loss is closely connected with the failure to take care and yet at the same time to deny compensation "in an indeterminate amount ... to an indeterminate class", in particular, to a large class of persons whose loss arises because their use of a public utility or facility has been interrupted.
Of the competing criteria which have been proposed there are those which are founded on a concept of proximity between the damage sustained and the negligence. This concept is variously expressed and the various expressions involve different shades of meaning. But in the ultimate analysis they seek to say that economic damage is recoverable when it is sufficiently proximate to the negligence, whether the word "proximate" is selected or one of its alternatives "direct", "immediate" or "consequential", words which were thought to have been banished by The Wagon Mound [1961] AC 388 . This approach marks a return to pre-Wagon Mound thinking and the notion of proximity and remoteness echoed in Cattle (1875) LR 10 QB 453 and the succeeding cases. It restores the dichotomy between culpability and compensation and is at odds with the philosophy which underlies The Wagon Mound [1961] AC 388 and Hedley Byrne [1964] AC 465 , namely that liability for damage is ultimately to be resolved by reference to the existence of a duty of care and breach of that duty.
All this indicates that a more acceptable path to the solution of the problem is to be found through the duty of care. This approach was pursued in Weller [1966] 1 QB 569 where it was held that a defendant is liable for economic damage sustained by a plaintiff whose person or property is at risk according to the foreseeability test. The adoption of this approach would expand the area in which economic damage may be recovered, yet in limiting recovery to cases in which physical damage can be foreseen, the approach makes recovery conditional upon the fortuitous circumstance that financial loss was suffered by a person who could have recovered had he sustained physical damage. The test is one which effectively narrows the class of plaintiffs eligible to recover financial loss. It achieves this object by reference to the long-established general criterion of the existence of a duty of care framed restrictively in that it is based on the foreseeability of physical damage only. Although it is more liberal than the old notion of recovery of financial loss which is consequential upon physical damage it is founded on a concept of the duty of care which confines it to those who may suffer foreseeable physical damage.
It is preferable, then, as Mr. P. P. Craig suggests in his illuminating article, "Negligent Misstatements, Negligent Acts and Economic Loss" Law Quarterly Review, vol. 92 (1976), p. 213, that the delimitation of the duty of care in relation to economic damage through negligent conduct be expressed in terms which are related more closely to the principal factor inhibiting the acceptance of a more generalized duty of care in relation to economic loss, that is, the apprehension of an indeterminate liability. 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. This approach eliminates or diminishes the prospect that there will come into existence liability to an indeterminate class of persons; it ensures that liability is confined to those individuals whose financial loss falls within the area of foreseeability; and it accords with the decision in Rivtow (1973) 40 DLR (3d) 530 .
On the facts of the present case (which are comprehensively narrated in the reasons for judgment of Stephen J.) the dredge and Decca were aware of the situation of the pipeline, that it carried oil or petroleum products and that it linked the A.O.R. refinery and the Caltex terminal at Banksmeadow on the other side of Botany Bay. They should have known, if they did not know, that the pipeline carried refined petroleum products from the refinery to the terminal and that the oil was used by Caltex in its business operations as an oil company. Moreover, they should have foreseen, as the primary judge found, that negligence on their parts resulting in a severance of the pipeline would involve not only loss of oil from the pipeline but an interruption in supply which would necessitate the expense of making alternative transport and delivery arrangements, which included the expense of modifying the terminal.
In these circumstances both the dredge and Decca owed a duty of care not only to the owner of the pipeline but to Caltex whose oil, as Stephen J. in his reasons for judgment demonstrates, was flowing through the pipeline. It was a duty to take reasonable care to avoid damage, whether physical or financial, as might result from negligent navigation of the dredge in the vicinity of the pipeline. This duty was breached and Caltex sustained economic damage in the form of the expenditure to which I have referred and which by agreement amounted to $95,000.
Decca sought to avoid liability in this amount by submitting that the primary judge should have found that there was no evidence that Decca navigational system was in use at the relevant time or that, if it was in use, it was not the effective cause of the damage. I would reject this submission for the reasons given by Stephen J.
In the result, in my opinion the two appeals by Caltex should be allowed and it should recover judgment in each of the actions against the dredge and Decca in the agreed amount of damages.
With respect to the appeals by Caltex and A.O.R. in connexion with the entry of judgment against Captain Henneman I likewise agree with what Stephen J. has to say on this topic. I would accordingly dismiss these appeals.