The Legacy of Sir Harry Gibbs on the Jurisprudence of Purely Economic Loss

Abstract

The resolution of claims in tort law for purely economic loss has been described as the most difficult and challenging in the common law, not least because of the range of relevant policy factors.

Sir Harry Gibbs’s lasting contribution to this vexed area of the law was the articulation of a principle providing a workable methodology across the spectrum of varied circumstances of purely economic loss.

Introduction

There are parallels in the contribution to the law of tort by the two eminent jurists, namely, Lord Atkin and Sir Harry Gibbs (hereafter referred to as Gibbs J) but it is the latter’s contribution that is the subject of this article. Their early links to Queensland is of historical note only, and there are no coincidences of time as their respective, lasting contributions to tort law, occurred some 44 years apart. The parallel or similarity in their respective contributions was the formulation and articulation of overarching principles providing a methodology for determining duty of care in any circumstance and which satisfied a range of policy issues.

Lord Atkin’s articulation of the neighbourhood principle was in the context of physical damage, whereas Gibbs J’s formulation was propounded 44 years later in the context of purely economic loss.

Below is a discussion of Gibbs J’s contribution.

The Search for a Principle in Purely Economic Loss Claims

The twin requirements propounded by Lord Atkin of reasonable foreseeability, and a close and direct relationship between defendant and plaintiff,[i] provided a principled methodology for resolving the duty question in the vast majority of physical damage cases. This was so, since the physical consequences of negligence were usually immediate, and spent at a single remove from the negligent act.

This was not so with purely economic loss which could occur at several removes (the ripple effect) from the negligence, and to a vast number of persons. The apprehension of opening a limitless number of claims was, and still underpins the cautious approach of courts to a novel finding of duty of care in claims for purely economic loss.

Cardozo C J’s statement that purely economic loss claims could expose defendants ‘to liability in an indeterminate amount for an indeterminate time to an indeterminate class’[ii] gave impetus to a clear policy that defendant tortfeasors should not be subject to a vast number of claims from an unascertained class of plaintiffs suffering purely economic loss. It was both unjust and unreasonable that a single act of negligence might require the defendant to meet an unlimited number of claims for economic loss.

The development of the exclusionary rule in the UK, denying any recovery for purely economic loss was an overreaction, and while providing certainty in the law, denied to economic victims of negligence any compensatory justice, even in circumstances where there was no threat of indeterminate liability to the defendant.

The retreat from the exclusionary rule which occurred in Hedley Byrne,[iii] applied only to negligent statements causing purely economic loss to an identified and intended user of the statement for a known purpose. There was no reason in justice to draw a distinction between negligent statements and negligent acts, if compensating the victim or victims, would not expose the defendant to indeterminate liability to an unascertained class.

Consequently, if the law was to progress to allow recovery for purely economic loss caused by negligent acts, as well as statements, it was necessary to provide a principle or methodology which would negate any duty of care to an indeterminate, unascertained class, but would facilitate recovery only to an individual or limited and ascertainable class of persons.

This was the task presented to Gibbs J in the High Court of Australia in the now celebrated decision of Caltex.

Gibbs J’s Formulation in Caltex

Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad”[iv] concerned the fracture of a pipeline owned by a third party. The pipeline carried oil to the plaintiff’s terminal. The fracture of the pipe by the negligent act of the defendant caused purely economic loss to the plaintiff resulting from extra costs associated with alternate means of transporting the oil.

This case therefore squarely raised the issue of potential recovery by a plaintiff of relational economic loss at one remove from the direct effect of the defendant’s negligence, namely damage to property (pipeline) not owned by the plaintiff.

The test of neighbourhood or proximity propounded by Lord Atkin, which was intended as a control mechanism on reasonable foreseeability, was that you owed a duty of care only to “persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected…”.[v] The difficulty was in purely economic loss claims of determining who is so closely and directly affected that the defendant ought reasonably to have them in contemplation. Was the answer to this question to be determined as a value judgment, or a policy decision by individual judges on the facts of a particular case? No guidance or principle on what was a sufficiently close and direct relationship that the defendant ought to have had the plaintiff or plaintiffs in contemplation, was available.

For instance, if a canal was closed by a shipping accident caused by a negligent navigator, was the navigator in such a close and direct relationship to the general users of the canal, that the defendant ought to have had them in contemplation as likely to suffer economic loss? Similarly, if a contractor negligently severed a powerline thereby depriving a large commercial area of power for a substantial period, were all those suffering economic loss in their businesses, persons who were so closely and directly affected that they ought to have been in the defendant’s contemplation?

Was there a principle that could fill out the content of Lord Atkin’s neighbourhood test, providing a workable solution to the question of what was a sufficiently close and direct relationship that the defendant ought to have had the victim or victims in contemplation.

It was here that Gibbs J (as he then was) in Caltex formulated and articulated what has subsequently become known as the “known plaintiff” test which provided an answer to the broad question posed by the Atkinian statement of proximity.

Gibbs J stated:

“In my opinion it is still right to say that as a general rule damages are not recoverable for economic loss which is not consequential upon injury to the plaintiff’s person or property. The fact that the loss was foreseeable is not enough to make it recoverable. However, there are exceptional cases in which the defendant has knowledge or means of knowledge that the plaintiff individually, and not merely as a member of an unascertained class, will be likely to suffer economic loss as a consequence of his negligence, and owes the plaintiff a duty to take care not to cause him such damage by his negligent act”[vi]

Gibbs J continued:

“In the present case [the defendants] knew that the pipeline led directly from the refinery to Caltex’s terminal. They should have known that, whatever the contractual or other relationship between Caltex and A.O.R. might have been, the pipeline was the physical means by which the products flowed from the refinery to the terminal. Moreover, the pipeline appeared to be designed to serve the terminal particularly (although no doubt it would have been possible for it to serve other persons as well) and was not like a water main or electric cable serving the public generally”[vii] [the parenthesis is mine].

Gibbs J having formulated the “known plaintiff” test then applied that test to Lord Atkin’s statement of proximity.

Gibbs J concluded:

“In these circumstances [the defendants] should have had Caltex [the plaintiff] in contemplation as a person who would probably suffer economic loss if the pipes were broken”[viii] [the parentheses are mine].

The achievement of Gibbs J’s principle in Caltex was to provide a basis for recovery of purely economic loss by a limited and ascertainable class of persons, and thereby preventing an indeterminate liability.

The Utility and Application of Gibbs J’s Principle

For nearly 50 years, Gibbs J’s formulation in Caltex has provided a prima facie test for duty of care across a varied range of claims for purely economic loss. Discrete categories of economic loss, caused both by negligent acts and statements, can be identified. It is intended below to briefly highlight some of these categories.

Public Utilities and Bridge Cases

The “known plaintiff” test from Caltex has exceptionally allowed recovery for purely economic loss caused to an identified individual or limited group of individuals suffering economic loss from negligent interference with the supply of electricity. For instance, where the power supply was to a specific individual only, or a small group of identifiable individuals which was known, or ought to have been known to the defendant.

The “known plaintiff” test has also been applied in situations of negligently caused damage to bridges, where the plaintiff was known to the defendant as a specific user of the bridge (although not the owner of the bridge). [see eg the Canadian National Railways[ix] case in the Supreme Court of Canada]

Noteworthy is the fact that Gibbs J’s test has not facilitated recovery to an unascertained class of plaintiff suffering economic loss as a result of a general downturn in commercial activity caused by the closure of a bridge or other public utility (eg power supply).

Disappointed Beneficiary Cases

In these cases the negligence of solicitors, under their contract with the client testator, has caused a will to fail and thereby deprived plaintiff beneficiaries of their financial inheritance. The application of the Gibbs’ principle allowed recovery, since the solicitor had knowledge or means of knowledge of the specific beneficiaries under the failed will (see eg White v Jones[x] in the House of Lords).

Relational Loss to the Plaintiff by injury to a Third Party

Instances of this category, where the “known plaintiff” principle has been utilised, are negligently caused injuries to, for example, employees with resultant economic loss to the plaintiff employer from loss of services of these injured employees. A relationship of proximity, sufficient for liability, has been found where the defendant knew, or ought to have been aware, that the injured third parties were key employees of a known employer (see Barclay v Penberthy[xi] in the High Court of Australia).

Negligent Misstatement

Gibbs J’s principle has been utilised to allow recovery of economic loss, beyond the Hedley Byrne situation of an intended user of negligent advice or information for a specific purpose, to a known user (though not the intended recipient). The “known plaintiff” test, for instance, has allowed recovery to a plaintiff mortgagor who was a known user (known to the defendant) of the defendant valuer’s negligent valuation supplied to a mortgagee building society. (see Smith v Bush[xii] in the House of Lords).

The above is not an exhaustive list of the categories across which the Gibbs’ principle has been applied, but they exemplify the utility of his jurisprudence in purely economic loss claims.

Conclusion

The aim of the above writings is to give due recognition to the contribution of Gibbs J in the vexed area of purely economic loss.

His formulation of a workable principle, capable of meeting the need of compensatory justice, while also preventing an indeterminate liability to defendants, has assisted courts for almost half a century in resolving differing circumstances of purely economic loss.

Despite more recent inroads of pure policy decisions by courts (eg use of vulnerability) in purely economic loss cases, Gibbs J’s principle has, and will continue to provide guidance in resolving such claims.

[i] Donoghue v Stevenson [1932] AC 562 at 580

[ii] Ultramares Corporation v Touche (1931) 174 NE 441; (1931) 255 NY 170

[iii] Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465

[iv] [1976] HCA 65; (1976) 136 CLR 529

[v] Donoghue v Stevenson [1932] AC 562 at 580

[vi] Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad” [1976} HCA 65 at para 36

[vii] Ibid at para 37

[viii] Ibid

[ix] Canadian National Railway Co v Norsk Pacific Steamship Co Ltd [1992] 1 SCR 1021

[x] White v Jones [1995] 2 AC 207

[xi] Barclay v Penperthy [2012] HCA 40; (2012) 246 CLR 258

[xii]Smith v Bush [1990] 1 AC 831

*LLB, LLM, PhD (Barrister-at- Law)