1. Characterize the Harm – Pure economic loss
Negligence does not entail liability unless the defendant owed the plaintiff a duty of care. It is necessary to firstly characterize the harm caused to the plaintiff in order to apply the correct test to establish that the defendant did indeed owe the plaintiff a duty to take reasonable care. With the expansion of the scope of duty of care since the 1960’s it is now possible to claim compensation for pure economic loss resulting from the defendant’s negligence.
Pure economic loss occurs when the plaintiff suffers a financial loss in the absence of any physical or property damage due to the negligence of the defendant. In Sutherland Shire Council v Heyman, the High Court determined that the plaintiff had suffered pure economic loss as a result of the financial losses suffered when it was discovered that the building work on the plaintiff’s house was defective.
Additionally, in Perre v Apand, the plaintiff suffered pure economic loss based on the lost opportunity to sell potatoes in a particularly profitable market.
2. Reasonable Foreseeability
For a duty of care to be established, the risk posed to the plaintiff or a class of people to which the plaintiff belongs must have been reasonably foreseeable. The original concept of foreseeability was articulated by Lord Atkin in Donoghue v Stevenson when he introduced the ‘neighbor principle’:
You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law is my neighbour? The answer seems to be—persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.”
The role of foreseeability has developed since its conception by Lord Atkin; however it remains a central element in the test for establishing a common law duty of care. Modern cases focus on the concept of reasonableness. The inquiry involves considering what a reasonable person in the position of the defendant would have foreseen as potential risks associated with his or her behaviour. It is not necessary for the plaintiff to show the precise manner in which the harm was occasioned was foreseeable, merely that they fall into a class of persons that could have been harmed as a foreseen consequence of the defendant’s actions or omissions.
Consideration must be given to the ‘expense, difficulty and inconvenience of taking alleviating action and other conflicting responsibilities which the defendant may have had.’
3. Proximity/Special relationship – ‘Salient feature’
While reasonable foreseeability of harm is required, it has long been recognised by the authorities that mere foreseeability of purely economic loss is not sufficient in itself to give rise to a duty to take care.
To apply a duty of care for mere foreseeability that a person might suffer a financial loss would extend liability in negligence beyond acceptable bounds and could stifle commercial activity.
Thus, in the early authorities a duty of care to avoid causing another pure economic loss required a ‘relationship of proximity’ between the parties in addition to the foreseeability of harm.
The doctrine of proximity ‘involves the notion of nearness or closeness’, and had the effect of limiting what was reasonable foreseeable.
Bryan v Maloney was a case decided according to the doctrine of proximity.
That case considered, under the law of negligence, whether a builder who constructs a house for the then owner owes a prima facie duty to a subsequent owner of the house to exercise reasonable care to avoid foreseeable damage such as the decrease in value of the property based on unknown latent defects.
In the case of Bryan v Maloney, the Court held that the builder did owe a duty to subsequent purchasers and reaffirmed that a sufficiently proximate relationship between a plaintiff and a defendant would be indicated by factors such as the plaintiff’s reliance, the defendant’s assumption of responsibility; or the presence of a contractual relationship between the defendant and a third party and whether it was reasonable in all the circumstances for the plaintiff to rely on the knowledge of the defendant.
However, the doctrine of proximity was decisively rejected in this country by the High Court decision in Sullivan v Moody.
Accordingly Bryan v Maloney remains good law in the sense that it has not been overruled by the Court.
However it is of no authority in relation to modern cases because it was decided according to the doctrine of proximity which is no longer followed.
The courts have rejected the notion of proximity and have instead proceeded on incremental basis according to established case law and precedent.
In Caltex Oil, Stephen J identified a number of ‘salient features’ that combined to establish a sufficiently close relationship to give rise to a duty of care.
Chiefly among these was the defendant’s knowledge that to damage the pipeline was inherently likely to cause pure economic loss to parties relying directly on its use and their knowledge and means of knowledge of where the pipeline was, their use and who used them.
Many cases have developed the list of salient factors approach. However, the multifactorial approach should not be treated as a list of factors, all of which must have application in a particular case. Rather, it provides a list of factors that should be considered, as potentially relevant, depending on the kind of case before the court.
In recent times there has been a development of the need for vulnerability in order to establish a duty of care was owed. Indeed vulnerability seems to have replaced proximity as the touchstone. Vulnerability is characterised as the plaintiff’s inability to protect itself from the consequences of a defendant’s want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant.
The NSW Court of Appeal has just handed down a decision on pure economic loss in The Owners -Strata Plan No 61288 v Brookfield Australia Investments Ltd  NSWCA 317, which appears to suggest that at least in the view of that Court, vulnerability is a requirement for the existence of a duty of care to prevent pure economic loss.
In Perre v Apand the plaintiff could do nothing to protect themselves from the economic consequences to them of the defendant’s negligence in sowing a crop which cause the quarantining of the plaintiff’s land.
However, in Essanda Finance Corporation Ltd v Peat Marwick Hungerfords, the financer could itself have made more inquiries about the financial position of the company to which it was to lend money, rather than depend on the auditor’s certification of the accounts of the company.
Indeterminacy of liability is a factor that will ordinarily defeat a claim that the defendant owed a duty of care to persons such as the plaintiff.
Indeterminacy arises when the defendant would not be able to determine how many claims might be brought against him or her or what their general nature might be.
However, it was considered in Woolcock that indeterminacy would not be a significant issue in cases of economic loss suffered by the subsequent purchaser of a commercial building that becomes defective by negligent construction.
Liability is restricted to the builder and the claimants would be limited to either the first purchaser of subsequent purchasers.
Autonomy of the individual
The common law regards individuals as autonomous, able to make their own choices and be held responsible for those choices.
As long a person is legitimately protecting or perusing his or her social or business interests, the common law will not require that person to be concerned with the effect his or her conduct on the economic interests of other persons.
And this is so regardless if that person knows his or her actions will cause loss to another person.
What is considered the legitimate pursuit of ones interest? Competitive acts are not prohibited as long as they fall outside the ambit of one of the economic torts. However, competitive behaviour will not be acceptable if it amounts to deceit or duress.
Defendant’s knowledge of the risk and its magnitude
To impose a duty of care, the likelihood in succeeding is much greater if the defendant actually knew of the risk and its magnitude.
Whether the defendant was aware of risk and its magnitude depends on the facts of the case.
In Woolcock McHugh stated: ‘It would be a rare case where those involved in the construction of the commercial premises would not be aware of the risks arising from particular defects and their potential magnitude.’
The inference was irresistible that, as consulting engineers asked to inspect the building, that they would fully understand the magnitude of the damage that the owner of the building would suffer if the risk would eventuate.
Other relevant policy considerations cited in Woolcock Investments include– responsibility to control third parties, outflanking the law of contract, flood gates arguments, lack of measureable standard of care and circumventing the policy of limitation legislation. In Perre v Apand the question of insurance was a relevant salient factor.
4. Exclusion clauses
However, the speaker may provide information with a clear qualification that he will accept no responsibility for his statement or state that it was given without the reflection and enquiry a careful answer would require. In such circumstances, a duty of care might not be established if the defendant has excluded liability for any inaccuracy in the information or advice provided.
Whether an exclusion clause applies is a matter of construction and the contractual rules of incorporation must be considered. In Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd no duty of care arose because the information or advice was given “confidentially” and “without responsibility”. The House of Lords were unanimous that this disclaimer prevented any duty of care from arising.
This decision is important because it indicates there can be no duty of care imposed upon a person who, in voluntarily advising, effectively disclaims responsibility.