Relational economic loss

“Relational economic loss” describes the loss flowing from negligent damage to the property of a third party, where the plaintiff is in a contractual or other relationship with that third party. 1 At first glance, the notable similarity between Canadian and Australian jurisprudence on relational economic loss is the lack of cohesiveness and certainty within its appellate courts. In Caltex2 and Norsk3 – both landmark cases delineating the principles in this area of law – a considerable diversity of reasoning within the majority judgements of both the High Court of Australia and the Supreme Court of Canada was evident.

In examining the more recent judgements of Perre4 and Bow Valley5, this paper compares the judicial evolution of both countries in an area described as “the cutting edge of the law of torts.”6 It is suggested that Perre has not satisfactorily remedied the state of Australian law governing pure economic loss. Conversely, while the legal underpinnings of Bow Valley are contentious, on balance, it is argued that its uniform methodological approach promotes a far greater level of clarity and consistency in the law.

Legal Background

Traditionally, there has been no action in tort for purely economic loss – that is, loss not consequent upon personal injury or property damage to the plaintiff. This is known as the exclusionary rule, which before the landmark House of Lords decision in Hedley Byrne was subject only to very limited exceptions.7 The exclusionary rule addresses the potential for economic loss claims to expose defendants to ‘liability in an indeterminate amount for an indeterminate time to an indeterminate class.’8 The need to avoid such “indeterminacy” remains a fundamental tenet of all decisions concerning relational economic loss. The rule also has an economic rationale, in that the plaintiff’s loss in this type of case is generally offset by another party’s gain.9 Since this does not constitute a net economic loss to society, it is inefficient to provide damages for the losers without somehow taxing the gainers.10

The Australian Approach

Caltex was the first case in which Australian courts found an exception to the exclusionary rule in a claim for relational economic loss. The decision has been subject to heavy criticism in other jurisdictions for its apparent failure to provide any clear ratio for determining when such a duty of care will be applicable.11 Despite this lack of unanimity, subsequent Australian cases have provided little clarification as to the scope of potential liability for relational economic loss.

The High Court in Perre was unanimous in finding in favour of the plaintiff, however the complexity of the case was heightened considerably by all seven justices handing down separate judgements. Commentators have strongly denounced this lack of uniformity, given that Perre was seen by many as an opportunity to clarify the uncertain state of the law. As Dietrich opined, “there is much to be said for… an emphasis within the judiciary on handing down concurring… judgements, at least in those cases in which all are agreed in the outcome.”

McHugh J in Perre recognised the practical difficulties associated with the decision, stating “the effectiveness of the law as a social instrument is seriously diminished when legal practitioners believe they cannot confidently advise what the law is or how it applies to… diverse situations of everyday life.13 However, he qualified this statement by acknowledging “the certainty achieved by stare decisis should not always trump the need for desirable change in the law.”14 With due respect to McHugh J’s statements, the desirable state of the law was subject to extensive debate in Caltex. That case was thus the appropriate vehicle for methodological diversity. Conversely, most commentators – even members of the judiciary itself 15- were in agreement that by the time of Perre the law was in desperate need of clarification.

Although there are clear divisions in the High Court as to the methodological questions to be asked in cases of relational economic loss, it has been suggested that this simply ‘disguise the broad similarity of reasoning underlying the judgments in Perre.’16 Indeed, it is possible to conclude that most or all members of the High Court consider:

1. The test of foreseeability alone to be insufficient to establish a duty of care.

2. Caltex to be correctly decided and thus the starting point for the duty of care issue in relational economic loss.

3. There must be an acknowledgement of policy considerations such as indeterminate liability and unreasonable infringements on the autonomy of the defendant.

4. Other factors – such as the vulnerability of the plaintiffs, commercial or physical propinquity and the defendant’s identification of the plaintiff either individually or as a member of an ascertainable class – to be relevant considerations in determining whether a duty is owed.17

Despite the identification of these common factors, it appears the main shortcoming of the Perre judgement is the inability of its justices to draw them into a methodological approach to be applied in later cases. This was highlighted scathingly in Metal Roofing18, where Bailey J described the present state of the law as “disgraceful.” 19 Speaking of Perre, he criticised the lack of basic guiding principles to assist with resolution and predicted an area fraught with uncertainty for future litigants.

The Canadian approach

In contrasting the Australian position, Feldthusen asserted (prior to Bow Valley) that Canada “has a well-developed set of rules to govern the recovery of pure economic loss and a virtual absence of any rationale to support them.”20 He describes the search for a unifying rule that can be applied to all cases concerning pure economic loss as a “futile enterprise”.21 It was this view that led him to categorise the different types of economic loss and formulate his own methodology in recognising a duty of care. The Supreme Court of Canada later adopted this approach22, now recognising five distinct categories of pure economic loss – of which relational economic loss is one.

In Norsk, McLachlin J23 flexibly applied the two-step test of liability formulated by Lord Wilberforce in Anns.24 She referred to the first stage enquiry in terms of “doctrinal considerations”, with policy or “pragmatic considerations”25 being taken into account at the second stage. Although nominally, this involves one less step of analysis than propounded by Kirby J in Perre, in substance it is not dissimilar as the “first step requires a consideration of two factors – namely the foreseeability of the plaintiff and… a sufficiently proximate relationship between the defendant and plaintiff.”

Put simply, McLachlin J imposed liability in Norsk because the parties27 were in a ‘joint venture’ with one another. Her judgement was criticised primarily because this made the potential scope of recovery dangerously wide. Bow Valley addressed this issue by applying a very restrictive view of what constituted a ‘joint venture’ – namely that it must be a contractual relationship.28 In ruling against recovery for the plaintiffs, the judgment indicates that Canadian law regarding relational economic loss now resembles the restrictive English approach.29

Regardless of how the merits of Canadian jurisprudence are viewed, the unanimity reached by the Supreme Court in Bow Valley at least provides clear guidelines as to how economic loss should be approached. Significantly, Bow Valley was achieved only five years after Norsk revealed considerable differences in approach within the court. Bow Valley demonstrates, in contrast to the divergent judgments of Perre, that it is possible to adopt a generally applicable methodology governing all negligence cases; whilst at the same time recognising that there may be different categories of pure economic loss for which different factors may be particularly relevant.30 Feldthusen attributes the development of the law in Bow Valley to the judicial methodology of Norsk, which precipitated a “frank and detailed exchange between McLachlin and La Forest JJ about the case for and against liability, quite apart from practical concerns.”31

Conclusion

The Canadian methodological approach provides legal practitioners and lower courts with far more guidance and direction than the current position of the High Court. Given the high cost of litigation, the lack of certainty in relational economic loss has made Australian courts virtually inaccessible. Although great respect must be given to the autonomy of individual judgements, when this undermines the very function of the court itself, a compromise must be made. While the doctrine of stare decisis remains central to our legal system, the High Court has a duty not only to decide the case at hand, but also to provide guidance for subsequent claims. As Dietrich remarks – “if the highest appellate court does not provide such guidance, where should it come from?”32

the Bow Valley case differed from other relational loss cases in that it was based on a breach of the manufacturers duty to warn rather than direct damage to property.

Canadian courts have frequently applied a flexible analysis of this test32 in determining whether to extend a duty of care in a given case.

The recent case of Bow Valley (contractual relational economic loss) has seen Canada refine its methodological approach to ascertaining the existence of a duty of care in relational economic loss situations. In contrast, the separate judgements of Perre have confused this area of law in the High Court. While this methodological diversity may have been appropriate in Caltex – the first case in Australia to consider relational economic loss – the position needed to be clarified in Perre.

This was achieved in Bow Valley and, consequently, the current position in Canada regarding relational economic loss is preferable. While it is more restrictive than the Australian position, it provides legal practitioners and lower courts with guidance and direction. Given the high cost of litigation, the current Australian position has made the courts virtually inaccessible. While respecting the autonomy of individual judges, as Dietrich persuasively remarked, “if the highest appellate court does not provide such guidance, where should it come from?”