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Tort - Pure Economic Loss

Updated on August 12, 2017

Under normal circumstances a duty of care arises when the negligent act of one party leads to the other party incurring some form of physical or pyscological injury or the negligent act of one party had caused damage to the property of the other. However, with the exception of loss caused by negligent mis-statements or defamation, the courts are reluctant to impose a duty of care when the resultant loss is purely financial or purely economic.

In Spartan Steel & Alloys Ltd v Martin (1972) the plaintiffs had a steel producing plant and the defendants were contractors who were employed to do some digging. While the defendants were excavating the grounds close to the plaintiffs plant, they damaged a power supply cable and as a result the power supply to the plaintiffs plant was cut off. The outage lasted for approximately 15 hours which caused damage to the factory’s furnaces and the metals that were being alloyed. The plaintiffs did not own the supply cable and therefore sued in tort for the defendants’ negligence.

The court divided damage into two components, direct and consequential damage. Direct damage was the damage that was caused to the furnace and the damage to the meld. The courts held that the plaintiffs were entitled to claim for direct damage.

The second type of damage was consequential damage or damage that would result from the loss of profits that would be derived from the metals, for example from the sale of the metals, or pure economic loss and the courts held that the plaintiffs were not entitled to claim for the second type of damage or pure economic loss.

The second type of damage was disallowed in Spartan Steel, despite the fact that it was foreseeable that damage to the furnaces and damage to the metals in the meld would lead to some form of loss of profits because of public policy. Power outages were something that happened and to allow the second type of damage would be to open the floodgates i.e. whenever there was a power outage or a power cut anyone who has incurred some form of economic loss as a result of the outage or power cut would be able to sue.

In Caltex Oil v The Dredge Willemstad (1976) the defendants while dredging damaged an oil pipeline that belonged to Australian Oil Refinery Pty Ltd and was used to refine crude oil belonging to Caltex. The dredgers were aware of the pipeline.

In addition to damage to the pipeline a small portion of oil was lost and both Australian Oil Refinery Pty Ltd and Caltex sued for the resultant damage. Australian Oil Refinery Pty Ltd sued for the damage to the pipeline while Caltex sued for the loss of oil. Australian Oil Refinery Pty Ltd was successful.

With regards to Caltex it was held that under normal circumstances they would not be allowed to recover for pure economic loss but were successful in this instance because the dredgers were aware of the oil pipeline.

In Sutherland Shire Council v Heyman (1985) the council approved the plans to construct a house on a slope, subject to the conditions that the council be given notice at proper intervals and that no tenants should be allowed to occupy the house until the council had inspected the house.

A few years after the construction of the house, the plaintiffs purchased the house and once they’d moved in they realized that there was structural damage to the house caused by the inadequate depths of the foundation and the plaintiffs incurred expenses in remedying the damage to the house. The plaintiffs sued the council for failing to carry out their duties diligently.

The plaintiffs were unsuccessful because it was not reasonably foreseeable that economic loss would result from the defendants’ failure to inspect the house.

In order to have any measure of success for a claim arising from pure economic loss the element of foreseeability must be satisfied or complied with. In Caltex Oil v The Dredge Willemstad (1976) for example because the defendants were aware of the pipeline it was foreseeable that damage to the pipeline would cause someone, somewhere some form of loss. In addition to that the public policy element must also be satisfied. i.e. such a claim if allowed would not open the floodgates or lead to an increase in litigation.

In Caparo Industries v Dickman (1990) Caparo industries wished to acquire a company called Fidelity. At the time of the acquisition the report prepared by the auditors did not accurately reflect the financial status of the company and it was much worse than what had been anticipated and as a result Caparo Industries incurred loss.

The plaintiffs (Caparo Industries) sued the defendants for their negligence or for not preparing a report that accurately reflected Fidelity’s status. The plaintiffs claim for pure economic loss was unsuccessful.

© 2017 Kathiresan Ramachanderam and Dyarne Jessica Ward

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