Litigation Notes No. 4

Number 4
28 October 1999

Liability of Statutory Bodies

This case carries a firm warning to statutory bodies
that any provision in their governing legislation purporting
to protect them from liability in tort at common law,
in relation to activities carried out in discharge of
their functions, will be strictly interpreted so as to
afford them no protection beyond that clearly falling
within the coverage of the provision. Where a statutory
body supplies services on a commercial basis, any negligence
on the part of the statutory body which leads to its
customer suffering loss or damage through the partaking
of those services will normally not be protected by an
immunity provision which is expressed only to apply to
loss or damage suffered as a consequence of the exercise
of a function or power of the body.

Puntoriero v Water Administration Ministerial Corporation

High Court of Australia, 9 September 1999
(1999) 165 ALR 337

BACKGROUND TO THE LITIGATION

The plaintiffs were a husband and wife who grew potato
crops on land leased by them in the Riverina area of New
South Wales. The land was irrigated by water supplied by
the defendant, the Water Administration Ministerial Corporation.
The plaintiffs paid the Corporation for the supply of this
water. The Corporation was a statutory body established
under s.7 of the Water Administration Act 1986 (NSW),
stated as being, 'for the purposes of any Act, a statutory
body representing the Crown' (see s.7(2)). The Corporation's
activities were governed by the Irrigation Act 1912 (NSW),
as well as the Water Administration Act.

The plaintiffs sowed a crop of potatoes on their land
in August 1992. In or about November 1992, the crop started
to show effects of poisoning. By December 1992, it was
clear that the crop was ruined. It also became clear at
this time that the cause of the crop's ruin was the presence
in the irrigating waters of a pollutant, a phytotoxic chemical.

The plaintiffs sued the defendant for damages in negligence
in the Supreme Court of New South Wales. At trial, a jury
found that the damage was caused by failure on the part
of the Corporation to exercise reasonable care in testing
the irrigation water supply for pollutants and a failure
to cleanse the water supply of the phytotoxic pollutant.
However, the Corporation claimed that it was immune from
liability in negligence on account of s.19(1) of the Water
Administration Act. Section 19 provided:

'(1) Except to the extent that an Act conferring or
imposing functions on the Ministerial Corporation [i.e.
the Corporation] otherwise provides, an action does not
lie against the Ministerial Corporation with respect
to loss or damage suffered as a consequence of the exercise
of a function of the Ministerial Corporation, including
the exercise of a power:

(a) to use works to impound or control water, or

(b) to release water from any such works.

(2) Subsection (1) does not limit any other exclusion
of liability to which the Ministerial Corporation is
entitled.

(3) No matter or thing done by the Ministerial Corporation
or any person acting under the direction of the Ministerial
Corporation shall, if the matter or thing was done in
good faith for the purposes of executing this or any
other Act, subject the Minister or a person so acting
personally to any action, liability, claim or demand.'

The trial judge ruled that s.19(1) did not confer immunity
from liability on the defendant's failure here. He said
that he saw nothing in the Water Administration Act which
would exclude 'the neighbourly or proximal duty' upon which
the customer of the supplier of water ought to be entitled
to rely. Judgment was entered for the plaintiffs in the
sum of $2,015,219 for damages and interest.

An appeal by the Corporation to the Court of Appeal of
New South Wales was successful. Mason P and Stein JA, Meagher
JA dissenting, held that the supply of irrigation water,
albeit with poisonous pollutants, was an act that the Corporation
was empowered to undertake and therefore protected by s.19(1).
The plaintiffs obtained special leave to appeal to the
High Court. Their appeal to the High Court was allowed,
with the judgment in their favour at first instance being
restored. The High Court (Gleeson CJ, McHugh, Gummow and
Callinan JJ, Kirby J dissenting) held that the immunity
conferred by s.19(1) applied only to an activity of the
Corporation that involved an interference with the rights
of those being supplied with irrigation waters. That was
not the case here where the polluted water was supplied
as the result of a consensual dealing between the plaintiffs
and the Corporation.

THE HIGH COURT'S DECISION

Gleeson CJ and Gummow J, in a joint judgment, said that
s.19(1) was directed to loss or damage suffered as a consequence
of the exercise of a function conferred upon the Corporation
under its governing legislation, not loss or damage which
is suffered as a consequence of a failure to exercise such
a function. Two examples of the exercise of functions were
referred to in s.19(1) itself; first, the use of works
to impound or control water and, secondly, the release
of water from any such works. However, the activities of
the Corporation extended beyond the discharging of public
duties or powers of a public nature. The Corporation was
empowered, among other things, under ss.11 and 12 of the
Water Administration Act, to join in forming joint ventures,
trusts and partnerships and to enter into commercial operations.
The power to enter into such arrangements carries the obligation
to observe and give effect to them. A construction of s.19
that conferred an immunity in respect of loss or damage
arising from breach of the commitments under such commercial
arrangements would stultify the objects of the Water Administration
Act, being a significant deterrent to the entry by others
into commercial relationships with the Corporation. These
considerations supported a 'jealous construction' of s.19(1)
to 'limit what otherwise would be the rights of plaintiffs
and to immunise the Corporation from actions only in respect
of the positive acts in exercise of functions which of
their nature will involve interferences with persons or
property'. The supply of the polluted water in the present
case was not such a positive act. Rather it constituted
inactivity on the part of the Corporation in failing to
take certain steps before supplying the water to the plaintiffs
(i.e. testing the water and cleansing it of any harmful
pollutants detected).

McHugh J expressed views which essentially coincided with
those of Gleeson CJ and Gummow J. He saw his views as shaped
by the statement of general principle contained in a judgment
in Coco v The Queen (1994) 179 CLR 427 to which
he was a party, along with Mason CJ, Brennan and Gaudron
JJ, that statement being (see at p. 437):

'The insistence on express authorization of an abrogation
or curtailment of a fundamental right, freedom or immunity
must be understood as a requirement for some manifestation
or indication that the legislature has not only directed
its attention to the question of the abrogation or curtailment
of such basic rights, freedoms or immunities but has
also determined upon abrogation or curtailment of them.'

McHugh J referred to an earlier part of the same judgment
in Coco where it was said that the presumption was
that 'in the absence of express provision to the contrary,
the legislature did not intend to authorize what would
otherwise have been tortious conduct' (see at p. 436).

Callinan J put the interpretational dilemma posed by a
provision such as s.19 most starkly saying:

'Perhaps there may be two respectable ways of looking
at s.19(1). But the one which pays due regard to the
statutory expectation that the respondent [i.e. the Corporation]
is to act commercially, and is given some limited express
immunities only in its commercial dealings, as well as
extraordinary powers which would be denied to any ordinary
person or corporation, invites the rejection of the untrammelled
operation of the section which the respondent urged upon
the Court.'

Kirby J, in dissent, pointed out that the very number
and variety of functions assigned by the legislature to
the Corporation, combined with the size, scope and operation
of irrigation schemes for which it is responsible throughout
New South Wales would potentially expose the Corporation
to massive liability unless it were protected by a statutory
immunity provision such as s.19. He said it was impermissible
for a court to then construe that provision 'so as, in
effect to erase [it] from the [Water Administration Act]
or to deprive it of real meaning and effect.'

Contact for further information:

For further information about the decision contact Paul
Sykes, Office of Litigation, Tel: (02) 6253 7050, email: paul.sykes@ags.gov.au.

Text of the decision is available through Scaleplus at http://scale/html/highct/0/99/0/HC000460.htm

The Constitutional Status of Territory
Courts

In this matter the High Court considered the constitutional
status of courts in the territories and the nature of
the jurisdiction that those courts exercise.

Re Governor, Goulburn Correctional Centre and Director
of Public Prosecutions (ACT); Ex parte Eastman

High Court of Australia, 2 September 1999
(1999) 165 ALR 171

The case concerned the relationship between Chapter III
of the Constitution (which deals with the judicature) and
s.122 of the Constitution (the territories power). The
particular issue was whether appointments of judges to
the ACT Supreme Court must comply with the requirements
of s.72 of the Constitution. However, resolution of this
issue also has consequences for the validity of decisions
of judicial officers in other territories whose appointments
have not complied with s.72.

The matter was heard by the High Court on 23-25 March
1999 and judgment was delivered on 2 September 1999. The
High Court decided by a 6-1 majority that the appointment
in question to the ACT Supreme Court need not comply with
s.72. It appears that the same majority would also hold
that s.72 does not apply to appointments to any territory
courts created by or pursuant to laws made under s.122
of the Constitution. The decision is therefore of considerable
importance in confirming the basis on which appointments
of judges and magistrates have been made throughout Australia's
territories, internal and external.

BACKGROUND TO THE LITIGATION

The applicant was convicted in the ACT Supreme Court in
1995 of murder and sentenced to life imprisonment. The
judge who presided over the trial had been appointed by
the Executive of the ACT as an acting judge of the ACT
Supreme Court for a limited term of less than one year.

Chapter III of the Constitution, in particular s.71, provides
for the creation by the Commonwealth Parliament of 'federal
courts' which may be invested with jurisdiction over the
matters listed in ss.75 and 76 of the Constitution (called
federal jurisdiction) to exercise the judicial power of
the Commonwealth. Section 71 also refers to 'such other
courts' as the Parliament invests with federal jurisdiction.
Section 72 of the Constitution includes requirements that
a judge of a 'court created by the Parliament' be appointed
by the Governor-General in Council for a term of office
ending when the judge reaches the maximum retiring age
for that court. The appointment by the ACT Executive of
the acting judge in the present case would not have met
the requirements of s.72 of the Constitution if that provision
applied at the time to the ACT Supreme Court.

In Capital TV and Appliances Pty Ltd v Falconer (1971)
125 CLR 591 the High Court held (following its earlier
decision in Spratt v Hermes (1965) 114 CLR 226 concerning
the ACT Court of Petty Sessions) that the ACT Supreme Court
is a territorial court established by exercise of the territories
power in s.122 of the Constitution and is not a court to
which s.72 of the Constitution applies.

The applicant applied to the High Court for a writ of habeas
corpus requiring his release from custody. The applicant
argued that the earlier High Court authorities should
be overruled and that he was entitled to be released
from custody as his trial, conviction and life sentence
were nullities. The applicant's principal argument was
that the ACT Supreme Court is a court created by the
Parliament under Chapter III of the Constitution and
that the appointment by the ACT Executive of an acting
judge for a term of years was invalid as it did not comply
with s.72.

THE HIGH COURT'S DECISION

The High Court by a 6-1 majority (Gleeson CJ, Gaudron,
McHugh, Gummow, Hayne and Callinan JJ; Kirby J dissenting)
upheld the validity of the applicant's trial presided over
by an acting judge of the ACT Supreme Court.

In a joint judgment, Gleeson CJ, McHugh and Callinan JJ
refused to overrule the High Court's earlier decisions
in Spratt v Hermes and Capital TV. Their
Honours decided that s.72 of the Constitution does not
apply to courts created pursuant to laws under s.122 of
the Constitution. They said that this produces 'a sensible
result, which pays due regard to the practical considerations
arising from the varied nature and circumstances of territories' which 'are
all dealt with, compendiously and briefly, in s 122' (165
ALR at 174, paras 7 and 9). It appears from their Honours' judgment
that there is no relevant distinction for this purpose
between a territory that enjoys self-government and legislates
to create a court and a territory that does not enjoy self-government
and for which courts are created directly by Commonwealth
laws.

Gaudron J also decided that s.72 does not apply to the
ACT Supreme Court or to any court created under or whose
existence is sustained by s.122. Thus s.72 did not apply
whether the ACT Supreme Court is treated as a court created
by the Parliament under s.122 or as a creature of the ACT
as a self-governing territory.

Gaudron J drew a distinction from the terms of s.71 of
the Constitution between a 'federal' court created by the
Parliament to exercise jurisdiction throughout the Commonwealth
and a court created under s.122, the jurisdiction of which
is necessarily confined to matters arising in relation
to a territory. Gaudron J decided that it would be consistent
with the reference to 'such other courts' in s.71 for a
court created for a territory under s.122 to be invested
with federal jurisdiction, but limited to matters arising
in relation to the territory.

Gaudron J considered that the ordinary meaning of the
words 'created by the Parliament' in s.72 were apt to include
a court created by the Parliament under s.122 and, were
the question free of authority, that meaning should be
preferred. However, her Honour accepted that there was
a contextual basis for reading down s.72 as applying only
to 'federal' courts created under s.71 of the Constitution
in contradistinction to those courts that may be invested
with federal jurisdiction and, given the previous decisions
of the Court to that effect (Spratt v Hermes and Capital
TV) on which the Parliament has acted, the section 'should...continue
to be read in that way' (165 ALR at 181, para 36). Accordingly,
it follows from her Honour's judgment that appointments
to any territory courts created under s.122, whether directly
by a law of the Commonwealth Parliament or by a law of
a self-governing territory, need not comply with s.72.

The joint judgment of Gummow and Hayne JJ also concludes
that the particular appointment to the ACT Supreme Court
at issue in the present case was valid. Their Honours decide
that the 'preferable construction' of s.72 is one similar
to the approach taken by Gaudron J.

A further ground on which their Honours conclude that
s.72 did not apply is that at the time of the appointment
in question the legislative basis for the ACT Supreme Court
was such that the appointment and remuneration of judges
depended on enactments of the ACT Legislative Assembly.
This meant that it was not a court created by the Commonwealth
Parliament for the purposes of s.72.

Section 52(i)

The Court also decided that the source of legislative
power for the ACT Supreme Court was s.122 and rejected
the applicant's argument that laws for the government of
the ACT are made under s.52(i) (which confers exclusive
power on the Commonwealth Parliament to make laws with
respect to the seat of government). The ACT and the seat
of government are not co-extensive and Parliament must
rely on s.122 for the power to make laws for the government
of the ACT, including a law establishing the ACT Supreme
Court as a court of general jurisdiction in the ACT.

In 1997 the applicant unsuccessfully appealed to the Full
Court of the Federal Court against his conviction. In separate
proceedings he has applied for special leave to appeal
to the High Court against that decision. The application
for special leave was heard by the Full High Court on 25
March 1999 and judgment was reserved. The High Court has
recently advised that the special leave application has
been listed for further argument on 1 February 2000.

Contact for further information:

For further information about the decision contact David
Bennett, Constitutional and Native Title Unit, Office of
Litigation, Tel: (02) 6253 7063, email: david.bennett@ags.gov.au

Text of the decision is available through Scaleplus at http://scale/html/highct/0/99/0/HC000450.htm

Cross-vesting schemes

Key provisions of the cross-vesting schemes have been
held by the High Court to be invalid. The Court overturned
its earlier decision in Gould v Brown (see Litigation
Notes No. 2, 27 May 1998) which by statutory majority
had upheld validity.

Re Wakim; Ex parte McNally/Re Wakim; Ex parte Darvall
Re Brown; Ex parte Amann
Spinks v Prentice

High Court of Australia, 17 June 1999
(1999) 163 ALR 270

BACKGROUND TO THE LITIGATION

These four cases challenged two schemes of mirror legislation
passed by the Commonwealth, the States and the Territories
- the 'general' cross-vesting scheme which applies generally
to civil matters in the participating courts (the Federal
Court, the Family Court, and State and Territory Supreme
Courts), and the Corporations cross-vesting scheme, which
applies only to civil matters arising under the Corporations
Law.

The aspect of the cross-vesting schemes under challenge
was those provisions which enabled the Federal Court and
the Family Court to exercise State or Territory jurisdiction.
It was argued that the following laws were invalid:

  • the provisions of the general cross-vesting scheme
    which enable the Federal Court to hear 'State matters' (the
    two Re Wakim matters); and
  • the provisions of the Corporations cross-vesting scheme
    which enable the Federal Court to make orders under the
    Corporations Law of a State (Re Brown) or the
    Australian Capital Territory (Spinks v Prentice).

The basis of this argument was that ChapterIII of the
Constitution (in ss.75 and 76) sets out exhaustively the
jurisdiction which can be conferred on federal courts such
as the Federal Court and the Family Court, and this 'federal' jurisdiction
cannot be supplemented by cooperative legislative action
between the Commonwealth, the States and the Territories.

THE HIGH COURT'S DECISION

All members of the High Court except KirbyJ accepted that
ChapterIII of the Constitution sets out exhaustively the
jurisdiction which can be conferred on the Federal Court
and Family Court. Therefore, a State could not confer power
on the Federal Court to exercise State jurisdiction, either
under the general cross-vesting scheme (the two Re Wakim matters)
or under the Corporations cross-vesting scheme (Re Brown).
The Court also held this jurisdiction could not be conferred
by the Commonwealth either; in particular, it was not 'incidental' to
the Commonwealth's express powers to establish, and to
confer jurisdiction on, federal courts.

However, the Court held that the Federal Court could exercise
powers under the Corporations Law of the ACT (Spinks
v Prentice). Under s.76(ii) of the Constitution, a
federal court can be given power to hear matters 'arising
under laws made by the Parliament'. The Court held that
the Corporations Law of the ACT, enacted by the Commonwealth
Parliament under s.122 of the Constitution (the territories
power), is such a law.

In the Re Wakim matters, the Court held that, despite
the invalidity of the general cross-vesting scheme, the
Federal Court could hear these matters under its 'accrued
jurisdiction'. (In general terms, the accrued jurisdiction
allows a federal court to hear matters otherwise outside
its jurisdiction which are so bound up with matters within
its jurisdiction that they form part of the one controversy.)
As the matter within jurisdiction (involving a statutory
claim against the Official Trustee in Bankruptcy) was raised
in separate proceedings, this suggests that the Court will
take a broad view of the scope of a federal court's accrued
jurisdiction.

IMPLICATIONS OF THE DECISION

The decision means that federal courts cannot be given
a general power to exercise State jurisdiction. One practical
consequence is that State Corporations Law matters will
generally be heard in State courts rather than the Federal
Court. The decision will also have implications for other
cooperative schemes under which States have purported to
confer jurisdiction on the Federal Court (e.g. the Competition
Code).

STATE VALIDATING LEGISLATION

At the date of this note, all States except for Victoria
have passed legislation to overcome the effect of the decision
in relation to State matters that have already been decided
by a federal court. This legislation will retrospectively
validate decisions of the Federal Court and the Family
Court that were made without jurisdiction, by deeming these
decisions to be decisions of the Supreme Court of that
State.

The legislation will also make provision for matters commenced
in the Federal Court or the Family Court in reliance on
cross-vested jurisdiction to be transferred to the relevant
State Supreme Court. It should be noted this legislation
is itself the subject of constitutional challenge.

Contact for further information:

Further information in relation to these four cases can
be obtained from Graeme Hill, Constitutional and Native
Title Unit, Office of Litigation (02) 6253 7009, e-mail graeme.hill@ags.gov.au.

Text of the decisions is available through Scaleplus at http://scale/html/highct/0/99/0/HC000280.htm

Conferral of Powers of Determination
on Administrative Bodies

The High Court has unanimously upheld the constitutional
validity of the legislative scheme under which the Superannuation
Complaints Tribunal determines complaints against decisions
of trustees of regulated superannuation funds.

Attorney-General of the Commonwealth v Breckler

High Court of Australia, 17 June 1999
(1999) 163 ALR 576

The Commonwealth Attorney-General had appealed to the
High Court against a decision of the Full Federal Court
which ruled that the Tribunal, an administrative body,
invalidly exercised judicial power.

The case is significant in its consideration of the nature
of the powers to determine disputes which may validly be
conferred by Commonwealth laws on administrative bodies.
The Court's reasons suggest mechanisms which would facilitate
the validity of the conferral of powers of determination
on administrative bodies.

BACKGROUND TO THE LITIGATION

The Superannuation Industry (Supervision) Act 1993 ('the
Supervision Act') and the Superannuation (Resolution
of Complaints) Act 1993 ('the Complaints Act') are
part of a legislative scheme for the management and supervision
of certain regulated superannuation funds. The application
of the legislative scheme depends on an election being
made by the trustee of a superannuation fund that the scheme
should apply to the fund. A superannuation fund which elects
that the scheme should apply to it is entitled to concessional
tax treatment.

The Superannuation Complaints Tribunal is established
by the Complaints Act and is intended to provide a mechanism
for the resolution of complaints by members or beneficiaries
of superannuation funds. Under the Complaints Act, the
Tribunal is empowered to conciliate complaints about, and
if necessary review, certain decisions of trustees of superannuation
funds on the grounds that a decision was 'unfair or unreasonable'.

This provides a broader scope to challenge discretionary
decisions of a trustee than would have been available under
the general law including relating to trusts. Section 37
of the Complaints Act provides that, in reviewing a decision
of a trustee, the Tribunal must determine either to affirm
or vary the trustee's decision, set aside the trustee's
decision and substitute its own decision or remit the matter
to the trustee for reconsideration.

By s.41(3) a decision of the Tribunal was 'for all purposes' taken
to be a decision of the trustee. Under the Supervision
Act and the Superannuation Industry (Supervision) Regulations,
it is an offence for a trustee, without lawful excuse,
not to comply with a determination of the Tribunal. Section
315(3) of the Supervision Act empowers a court to grant
an injunction requiring a trustee to give effect to a determination
of the Tribunal. A party may appeal to the Federal Court,
on a question of law, from a determination of the Tribunal.

In March 1998 a Full Court of the Federal Court held that
the Complaints Act invalidly conferred judicial power on
the Tribunal contrary to the separation of powers required
by Chapter III of the Constitution. The Attorney-General
had intervened in the Federal Court and was granted special
leave to appeal to the High Court. The appeal was heard
on 8 December 1998.

THE HIGH COURT'S DECISION

The High Court unanimously decided that the Superannuation
Complaints Tribunal, in making a determination concerning
the distribution of a benefit, was not exercising the judicial
power of the Commonwealth contrary to Chapter III of the
Constitution. Gleeson CJ, Gaudron, McHugh, Gummow, Hayne
and Callinan JJ delivered a joint judgment and Kirby J
delivered a separate judgment upholding validity. The Court
decided that a determination by the Tribunal was an administrative
act and did not bear the character of a 'binding, authoritative
and curially enforceable determination' which would require
that it be made by a court as an exercise of judicial power.

The High Court gave several reasons for this conclusion.
In the first place, the terms of the Trust Deed in question
(clause 1.2) expressly obliged the trustee to observe the
requirements in the legislative scheme. The Tribunal's
determination therefore did not involve the exercise of
judicial power but 'the arbitration of a dispute using
procedures and criteria adopted by the constituent trust
instrument, the existing charter, for the resolution of
certain disputes arising thereunder' (163 ALR at 588, para
43).

Of more general significance, the High Court said that
even without clause 1.2, the legislation was valid. This
was because the application of the provisions of the Complaints
Act, including the determination powers of the Tribunal,
depended on an election by the trustee. In the context
of the present legislative scheme, the availability of
an election of this nature was 'a decisive pointer in favour
of validity' (163 ALR at 588-589, para 44). The Court applied
earlier authority which upheld the validity of laws such
as tax laws which give a person the option of review of
decisions by an administrative body or by a court.

Further, the legislative scheme was valid as it took 'the
existence of a determination by the Tribunal as a criterion
by reference to which legal norms are imposed and remedies
provided for their enforcement' (163 ALR at 589, para 45).
The legislation took the Tribunal's determination as a
factum by reference to which the legislation then conferred
rights and liabilities enforceable by a court. The Tribunal's
determination was given effect through these enforcement
mechanisms which involved an independent exercise of judicial
power.

Finally, the Court noted a consideration which 'although
not necessarily decisive, strengthens the case for validity
which is otherwise made out' (163 ALR at 589, para 46).
This was that the Complaints Act did not purport to give
the Tribunal's determinations a conclusive character which
would prevent collateral challenge. That is, the validity
of a determination could be challenged in proceedings brought
to compel its observance.

Contact for further information:

For further information about the decision contact David
Bennett, Constitutional and Native Title Unit, Office of
Litigation (02) 6253 7063, e-mail david.bennett@ags.gov.au.
For advice on implications of the decision contact Guy
Aitken, Office of General Counsel (02) 6253 7084, e-mail guy.aitken@ags.gov.au.

Text of the decision is available through Scaleplus at http://scale/html/highct/0/99/0/HC000290.htm

Liability for Duty of Care

First, this case stands to be a major authority on
the circumstances that give rise to a duty of care for
pure economic loss. It confirms the extension of the
scope of compensable economic loss, commenced in the
High Court's decision in Caltex Oil (Australia) Pty
Ltd v The Dredge 'Willemstad' (1976) 136 CLR 529.

Secondly, the case revisits the vexed question of what
factors limit the creation of a duty of care, beyond
reasonable foreseeability of loss or damage.

Perre v Apand Pty Limited

High Court of Australia, 12 August 1999
(1999) 164 ALR 606

In particular, following on from the Court's decision
of January 1998 in Pyrenees Shire Council v Day (see
(1998) 192 CLR 330), the usefulness of the notion of 'proximity' in
this area is further questioned. There appears to be a
movement away from 'proximity' as the sole or dominant
determinant, to a consideration of a wider range of factors,
of which 'proximity' is only one. In the end, the shift
seems be towards a determination of a duty of care on a 'case-by-case' or
incremental approach. Starting with Sutherland Shire
Council v Heyman (1985) 157 CLR 424, and in cases during
the Sir Anthony Mason's term as Chief Justice, this approach
was generally disfavoured by the High Court (with the exception
of Sir Gerard Brennan).

BACKGROUND TO THE LITIGATION

The defendant was a producer of potato chips. For the
purpose of enhancing the quality of potatoes for its product,
the defendant provided certain potato seed to one of the
plaintiffs, along with other potato growers who were potential
suppliers of potatoes to it. The planting of this seed
by this plaintiff in certain of its potato fields in South
Australia introduced a plant disease called 'bacterial
wilt'. Before supplying this seed, the defendant had been
aware of the risk of the spread of the disease through
seed, and knew that the best way of avoiding the risk of
the disease was to ensure that only seeds which had been
certified under a Victorian Government testing program
were provided to growers. However, despite this, the defendant
had withdrawn the seed in question from the testing program,
and invited this plaintiff and other growers to plant it.
The defendant also knew that there were potato fields belonging
to other growers in the vicinity of this plaintiff's fields.

A portion of this plaintiff's potato crop was destined
for sale in lucrative Western Australian markets. Regulations
under Western Australian legislation (i.e. Plant Diseases
Act 1914) prohibited the introduction into Western
Australia of either potatoes affected by 'bacterial wilt' disease
or potatoes that were grown, within 5 years of an outbreak
of the disease, within 20 kilometres from crops that were
affected by that outbreak. The other plaintiffs comprised
in outline:

  • 12 individuals owning different potato fields within
    the vicinity of the first plaintiff's fields, and within
    a 20 kilometre radius from them;
  • what (for ease of reference) will be referred to as
    a 'joint venture' which grew potatoes in some or other
    of the fields of the individuals;
  • a company which, as well as growing potatoes in some
    or other of the fields of the individuals, purchased
    all the potatoes grown by the joint venture, and packaged
    and exported those potatoes along with the potatoes grown
    by itself; and
  • a company that owned the facilities and land upon which
    last-mentioned company carried out its operations under
    a tenancy at will.

A large portion of the potato crops involving these plaintiffs
was produced for Western Australian sale.

None of these potato crops was affected by the disease.
The alleged loss suffered by these other plaintiffs was,
in all instances, purely economic, allegedly arising by
operation of the regulations. The packaging and exporting
company claimed loss of income through inability to export
potatoes to Western Australia. The joint venture claimed
for the loss of sales to the packaging and exporting company
that it would have made but for the prohibition on Western
Australian sales. The remaining company, the 'owning' company,
claimed for the loss of its tenancy at will to the packaging
and exporting company (which in the circumstances had to
be terminated) and inability otherwise to use the land
and facilities that had been the subject of that tenancy.
Finally, the individuals either claimed that the value
of their fields had decreased or that they had sold their
fields at a loss.

The Full Court of the Federal Court upheld the primary
judge's finding that the defendant owed a duty of care
to the first plaintiff whose crop became infected with
the disease, but not to the other plaintiffs for their
pure economic loss claims. On appeal to the High Court,
the latter finding was overturned, to some extent, by all
justices presiding (each justice giving a separate judgment).
Five justices allowed the appeals of the 15 plaintiffs
in full, holding that there was a duty of care covering
all headings of loss claimed by each. In relation to the
other two justices, McHugh J found a duty of care on the
part of the defendant to exist in favour of these plaintiffs
only in so far as the losses in relation to the growing,
sale and export of the potatoes was concerned. This led
to his exclusion of the loss of the packaging and exporting
company in relation to the loss attributable to the packaging
and processing sides of its operations and of the whole
of the claim of the 'owning' company. By contrast to all
his colleagues, Hayne J took a much stricter position.
He held that the only duty of care owed by the defendant
in the circumstances to avoid pure economic loss was to
those who were directly affected by the application of
the regulations. Of the other plaintiffs, the only one
to which the prohibition against export into Western Australia
under the regulations applied was the packaging and export
company. He would have allowed its appeal, but dismissed
the appeals of all the others.

All justices, to the extent that they found any duty of
care to avoid economic loss to any of the other plaintiffs,
proceeded on the basis that such duty had been breached.
Under the final order of the Court, concurred in by all
justices who allowed the appeals in full, the case was
remitted to the court at first instance to make further
findings with respect to the loss suffered by these plaintiffs.

THE HIGH COURT'S DECISION

All justices rejected the notion of an exclusionary rule
of liability for economic loss which was subject to exception
only in the case of economic loss consequential upon injury
to person or property or in the case of negligent misstatement
(see Hedley Byrne Co Ltd v Heller Partners [1964]
AC 465). However, several justices indicated that the considerations
which had supported such a rule were still cogent, and,
generally, recognised the force of Cardozo CJ's statement
about the undesirability of exposing defendants to 'liability
in an indeterminate amount for an indeterminate time to
an indeterminate class' (see Ultrameres Corporation
v Touche (1931) 174 NE 441, at 444).

Further, all justices approved the High Court's decision
in Caltex Oil (Australia) Pty Ltd v The Dredge 'Willemstad' (supra).
(That decision had not been followed in a Privy Council
decision, on appeal from the Supreme Court of New South
Wales, Candlewood Navigation Corporation Ltd v Mitsui
OSK Lines Ltd [1986] AC 1 because of a perceived absence
of common reasoning in the judgments.) In Caltex Oil,
the defendants who were responsible for damaging an oil
pipeline on the bed of Botany Bay were held to have a duty
of care to prevent economic loss to the plaintiff who relied
upon the pipeline for oil supplies. It was held that, because
the defendants ought to have realised that the pipeline
was specifically servicing the plaintiff, and was not like
a water main or electric cable serving the public generally,
the defendants should have had the plaintiff in contemplation
as a person who would suffer economic loss if the pipeline
were ruptured. They were held liable for the economic loss
of the plaintiff in the cost of alternative transport for
the supply of the oil pending the repair of the pipeline.

McHugh J, while he did not allow all appeals in their
entirety, provided a succinct statement of principle on
the measure of compensable economic loss. He talked of
a concept of determinacy, pointing out that a potential
liability can be so indeterminate that no duty of care
is owed.

He said that the indeterminancy issue does not require
that the defendant's knowledge be limited to individuals
who are known to be in danger of suffering harm from the
defendant's conduct. A liability can be determinate even
when the duty is owed to those members of a specific class
whose identity could have been ascertained by the defendant.
McHugh J talked of a 'ripple effect' flowing from the loss
of persons within a class who are primarily affected by
the defendant's negligence. He referred to these persons
as 'first line victims'. Those touched by the ripple effect
he referred to as 'second line victims'. McHugh J indicated
that the concept of determinacy would ordinarily support
a duty of care being owed only to the first line victims.

McHugh J went on to point out that the cases where a plaintiff
will fail to establish a duty of care for pure economic
loss are not limited to those where imposing a duty of
care would expose the defendant to indeterminate liability,
but included cases where the imposition of a duty would
interfere with the defendant's legitimate acts of trade
or where there was no vulnerability on a plaintiff's part
to the defendant's conduct (that is where it was reasonably
open to the plaintiff to take steps to protect itself from
risk of the economic loss in question). Gleeson CJ expressed
himself in similar terms on these points.

Other justices approached the scope of compensable economic
loss in negligence from broader perspectives. This raised
the question of what factors limit the creation of a duty
of care, beyond reasonable foreseeability of loss or damage.
On the one hand, Kirby J, emphasising the need for a comprehensive
set of criteria, adopted the three stage test which he
had propounded in Pyrenees Shire Council v Day (supra);
that is:

(i) was it reasonably foreseeable to the alleged wrongdoer
that an act or omission on its part would be likely to
cause harm to the person that suffered damage;

(ii) does there exist between the alleged wrongdoer
and such person a relationship characterised by the law
as one of 'proximity' or 'neighbourhood'; and

(iii) if so, is it fair, just and reasonable that the
law should impose a duty of care upon the alleged wrongdoer
for the benefit of such a person?

This approach is, in effect, a refinement of the so-called 'three
stage' test of Lord Bridge of Harwich in Caparo Industries
Plc v Dickman [1990] 2 AC 605 involving 'foreseeability', 'proximity' and
competing 'policy'. Gaudron J's path of analysis seems
broadly to accord with an application of these tests.

On the other hand, Gleeson CJ and McHugh J regard this 'three
stage' test as inadequate, among other things, pointing
to its over-reliance on the notion of 'proximity' and the
arbitrary nature of the policy assessments involved. Hayne
J appears not to go as far, only drawing attention to some
limitations upon the utility of the test, and the present
need for the law to develop incrementally. Gummow J does
not enter upon detailed discussion of this issue. He, instead,
goes back to Caltex Oil where Stephen J identified certain 'salient
features' of the relationship between plaintiff and defendant
which could combine to create a duty of care, saying that
Stephen J's approach was similar to his own in Hill v
Van Erp (1997) 188 CLR 159 and in Pyrenees Shire
Council of postulating certain 'control mechanisms' for
determining whether a duty of care comes into being. Callinan
J also draws on Stephen J's judgment in Caltex Oil.
Callinan J does accept that 'a sufficient degree of proximity',
as spoken of by Stephen J in Caltex Oil, is a relevant
factor. He does not see it, though, as an all-embracing
determinant, acknowledging the importance of incremental
development of the law in the area of economic loss.

Contact for further information:

For further information about the decision contact Paul
Sykes, Office of Litigation, Tel: (02) 6253 7050, email: paul.sykes@ags.gov.au

ISSN 1329-458X (Print)

ISSN 2204-6542 (Online)

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The material in these notes is provided
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upon for the purpose of a particular matter. Please
contact AGS before any action or decision is taken
on the basis of any of the material in these notes.

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