Pure economic loss – status quo remains ‘for now’

by Kate Tilley

An elephant or a mule? That was the question barrister Gareth Beacham KC pondered in his analysis of the High Court decision in Mallonland v Avanta Seeds.

Mr Beacham told the AILA Conference that the judgement, handed down on 7 August 2024, meant the “salient features” approach to determining pure economic loss remained the status quo – for now.

He warned the industry to keep “a weather eye on the next economic loss case to see what the High Court decides”.

“The hunt is on and ‘salient features’ could be the prey,” he said.

Mallonland was a class action taken by a group of sorghum farmers who purchased seeds from a distributor authorised by Avanta Seeds. The seeds were found to be contaminated with shattercane seed, a related plant but one that vigorously competes with sorghum and is hard to eradicate.

The issue for the High Court of Australia (HCA) was whether the producer owed the growers a duty to take reasonable care in its seed production process to avoid the risk the growers would sustain pure economic losses because of a hidden defect – the presence of shattercane seed within the bags of sorghum seed.

The HCA rejected the growers’ appeal, deciding no duty of care was owed.

Caption: L-R Gareth Beacham KC with Kevin Holyoak (Callinan Chambers).

Extensive disclaimer

Each 20kg bag of seed contained an extensive disclaimer which said, in part: “Do not open this bag until you have read and agreed with all the terms on this bag. If, before opening the bag, these conditions are not acceptable to you, the product should be returned in its original condition to the place of purchase immediately, together with proof of purchase, for a refund. The product contained in this bag is as described on the bag, within recognised tolerances.”

Six HCA judges’ reasoning in dismissing the appeal was that: “The facts fall far short of identifying a relationship between the producer and the growers that would lead to the existence of a duty to take reasonable care when producing the grain sorghum seed to avoid causing the growers pure economic loss of the type claimed.”

On the packaging, the producer “legitimately and clearly delimited the nature of the product it made available to the market”. The product had a minimum purity of 99 percent, but not 100 percent.

Justice Edelman agreed with the other six HCA judges’ reasoning to dismiss the appeal but provided more detail on the “salient features” approach in a separate judgement, saying: “We should not attempt to breed from a mule.”

He said the Mallonland appeal arose from attempts to propagate from the 1976 HCA decision in Caltex Oil (Australia) Pty Ltd v The Dredge ‘Willemstad’.

Before Caltex, a duty of care could be owed to a plaintiff if the duty was (1) based on an objective assumption of responsibility, by an express or implied undertaking by the defendant to the plaintiff or a class of persons of which the plaintiff is a member, or (2) imposed by law.

Salient features

Justice Edelman said Caltex purported to recognise a new species of duty of care that imposed an abstract duty to take care not to expose a person to loss, independently of a right to person or property, in circumstances involving undefined “salient features”.

Justice Edelman said while the “salient features” approach had been strongly criticised, in Mallonland the producer did not challenge Caltex or its progeny. The judge therefore agreed with the application of the salient features approach by his fellow HCA judges and their conclusion the appeal must be dismissed.

He considered two additional matters:

• The absence of any assumption of responsibility by the producer.
• How the recognition of a duty of care to avoid exposing another to “pure” economic loss in circumstances of “salient features” had given rise to “the highly unsatisfactory state of the present law with the effect that, until Caltex and its progeny are challenged or rationalised, a duty of care based on ‘salient features’ must be confined as narrowly as possible”.

Mr Beacham said Justice Edelman’s judgement outlined his views on why Caltex – “the mule” – should not have happened.

Arguments over economic loss “tend to resemble the blind men and the elephant parable, but perhaps the sighted man, the HCA, has got it wrong”, he said.

In the traditional parable, six blind men touch different parts of an elephant and have completely different perceptions of what the animal looks like, illustrating that humans are all affected by their own perceptions and biases – blinded by narrowmindedness. In the parable, a sighted man then explains to the blind men that each was partly right and partly wrong, which Mr Beacham says has parallels to the law of negligence for economic loss.

Parties’ relationship

“Is the elephant a mule that should have been left alone?” Mr Beacham said. “Property damage and personal injury are legitimately protected by law, but economic loss is not necessarily something the law should step in to protect.”

He said prior cases had identified the difficulty in establishing a duty in pure economic loss. It required a careful examination of the nature of the relationship between the parties.

In Mallonland, the HCA found:

• The possible risk of shattercane contamination was insufficient to impose a duty.
• The producer’s knowledge of the potential risk fell short of knowledge that would impose a duty.
• Control of the production process was not absolute.
• Growers could have protected themselves by making an informed choice to not take the risk and return the seed for a refund.
• The absence of indeterminacy was not a positive reason to find a duty.

The HCA majority judgement said: “A consequence of the general rule is that damages for pure economic loss are not recoverable if all that is shown is that the defendant’s negligence was a cause of the loss and the loss was reasonably foreseeable.

“That is, reasonable foreseeability is a necessary but not sufficient criterion for the existence of a duty of care to avoid causing pure economic loss. Furthermore, indeterminacy of liability, in the sense that the defendant’s liability cannot be realistically calculated, will ordinarily deny the existence of such a duty of care.”

Mr Beacham said the HCA “is not interested in expanding the scope of pure economic losses” but keen instead to clamp down on any potential expansion.

“Whatever might come along after ‘salient features’ is ‘put down’ is unlikely to expand the areas in which a duty of care to avoid economic loss will arise,” he said.

Mallonland Pty Ltd v Advanta Seeds Pty Ltd [2024] HCA 25 (7 August 2024)

Mallonland Pty Ltd & Anor v Advanta Seeds Pty Ltd [2023] QCA 24

High Court appeal documents; Notice of filing

Photo credit: AILA 2024 Conference photos supplied warringtonphotography.com.