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Australia – Confusion Approaching Chaos: Developments In Relation To Pure Economic Loss.

2 October, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

Apache Energy Ltd v Alcoa of Australia Ltd [No 2] [2013] WASCA 213

 

WHAT YOU NEED TO KNOW

 

  • Contracting parties may still be exposed to claims for breach of a duty of care to prevent pure economic loss even where their contract does not contain an equivalent duty.
  • In Australia, the applicable principles are not yet settled, and continue to be debated in the intermediate appellate courts.

Background


This matter arose from proceedings commenced by Alcoa of Australia Ltd (Alcoa) for damages resulting from the explosion of a gas pipeline and resulting fire at Varanus Island, Western Australia on 3 June 2008.


Apache Northwest Pty Ltd (Apache Northwest), Harriet (Onyx) Pty Ltd (Harriet) and Kufpec Australia Pty Ltd (together the Sellers) were co-owners of the gas processing and transport facilities at Varanus Island, as well as the licensees of the 12 inch sales gas pipeline (SGL) that ruptured in June 2008. Apache Energy Ltd (Apache Energy) was the operator of the Varanus Island facilities, including the 12 inch SGL.


Alcoa owns and operates three alumina refineries in Western Australia which use significant quantities of natural gas, and had entered into two long-term contracts for the supply of gas with the Sellers and separately with Apache Northwest. The explosion on 3 June 2008 caused a complete cessation of the supply of gas from Varanus Island, including under the Alcoa gas contracts.


Alcoa commenced proceedings against Apache Energy and the Sellers for damages for economic loss for alleged breach of duties of care owed by each of the defendants, for breach of statutory duties and under contract. Relevantly, in relation to its claim in negligence, Alcoa claimed that:

 

  • Apache Energy owed a duty to Alcoa to exercise reasonable care and skill in operating and maintaining the SGL to prevent a rupture of the SGL, and the Sellers (and Apache Northwest separately) owed a duty to Alcoa to exercise reasonable care and skill in supervising, overseeing and/or monitoring the operation and maintenance of the SGL; and
  • each of the alleged duties were duties to avoid pure economic loss being suffered by Alcoa.

Alcoa claims that these duties were breached and that as a result it suffered economic loss by having to acquire alternative energy supplies at a cost exceeding the price payable under the gas contracts. Alcoa’s claims for these increased costs alone are in excess of $100 million.


In July 2011, the defendants applied to the Court for an order that Alcoa’s claims in negligence be summarily dismissed on the grounds that the claims disclosed no reasonable cause of action and were frivolous and vexatious. Le Miere J dismissed the application, and Apache Energy, Apache Northwest and Harriet applied for leave to appeal.

 

Pure Economic Loss


It is well established that in general a person does not owe a duty in tort to another to take care not to cause reasonably foreseeable economic loss. However, the High Court of Australia has recognised that in some circumstances, a duty in tort can arise that will enable a plaintiff to recover pure economic loss. The High Court has confirmed that in order to eliminate the risk of indeterminate liability, it is necessary in cases of pure economic loss for there to be some further control of liability apart from reasonable foreseeability. Further, determining whether a duty to prevent economic loss exists requires a “multi-faceted inquiry’ or ‘salient features” analysis of the relationship between the plaintiff and defendant.


In the 2004 decision in Woolcock, the majority of the High Court expressed the view that “vulnerability” has emerged as “an important requirement in pure economic loss cases”, where vulnerability is to be understood as a reference to an inability on the part of the plaintiff to protect itself from the defendant’s want of care. However, the majority also noted that it was not necessary in that case “to attempt to identify or articulate the breadth of any general proposition about the importance of vulnerability”. McHugh J observed that “confusion approaching chaos has reigned in that branch of the law of negligence concerned with the plaintiff suffering pure economic loss”.


In the 2012 decision in Barclay the High Court considered directly for the first time pure economic loss for negligence between contracting parties. Importantly, the majority in Barclay cited with approval the comments made by the majority in Woolcock regarding vulnerability.


The Decision At First Instance


The appellants advanced three reasons at first instance as to why they said that it was not reasonably arguable that they owed a duty of care to Alcoa to avoid the pure economic loss:

 

  • ‘vulnerability” is a necessary pre-condition for establishing a duty of care to avoid pure economic loss, and Alcoa was not relevantly vulnerable because it could have sought to negotiate the allocation of risk under its gas contracts;
  • the terms and conditions of Alcoa’s gas supply contracts precluded the existence of a duty of care to prevent pure economic loss. Although concurrent duties in contract and tort can arise in certain circumstances, a concurrent duty in tort cannot arise if (as in this case) it relies on obligations or duties created by the express terms of the contract or if its effect would allow the plaintiff to escape contractual limitations or exclusions of liability; and
  • a duty of care to prevent economic loss can only arise in the context of a “special” relationship, and the relationship between the appellants and Alcoa was an ordinary and voluntary commercial relationship.

In dismissing the application, Le Miere J held that the law is not sufficiently certain to hold on a summary judgment application that a plaintiff’s claim must be dismissed if vulnerability is not established. His Honour went on to find that the question of whether Alcoa was in fact vulnerable and whether the specific relationship at issue gave rise to a duty of care needed to be determined in light of the evidence to be adduced at trial. His Honour also held that the contractual matrix was simply one “salient feature’ to be considered in determining whether a duty of care to prevent pure economic loss existed.


The Appeal


The appellants challenged the findings of Le Miere J on appeal, and effectively sought to reassert the arguments made at first instance or variations on those arguments.


The appellants failed on all grounds of appeal.


McLure P (with whom Newnes JA agreed) found that:

 

  • Woolcock is not authority for the proposition that vulnerability is a necessary condition for finding that a duty to prevent pure economic loss exists, and there is no binding authority to that effect. Further, the law is not sufficiently clear for the matter to be determined summarily;
  • Barclay is not authority for the proposition that there can only be a tortious duty to exercise reasonable care and skill if there is a concurrent contractual duty (and, by implication, it is possible that a tortious duty can exist without a concurrent contractual duty); and
  • whilst a duty in tort can be expressly or impliedly excluded or limited by contract, the question of whether a contract can have this effect without an express or implied limitation (and whether the contracts in this case did have that effect) is not amenable for summary determination.

 

Buss JA made similar observations to McLure P in relation to Woolcock and Barclay. His Honour also relevantly found that:

 

  • as to whether the gas contracts precluded the existence of a duty of care, the law in this area remains comparatively new and developing. The contractual matrix is simply one “salient feature” to be analysed in determining whether a duty of care existed, and it was reasonably arguable that the relationship in this case was such that a duty did arise and that it was not excluded or limited by the contracts in question; and
  • the question of whether Alcoa was in fact vulnerable is a matter to be determined at trial, although Buss JA did observe that the effect of Barclay was arguably to establish that the mere possibility of negotiating contractual terms, or the possibility of walking away from such negotiations, does not necessarily foreclose the existence of a duty of care.

Conclusion

 

  • At least in Western Australia, vulnerability is not an exclusive touchstone or precondition for Courts finding the existence of a duty of care to prevent pure economic loss and a broader examination of the circumstances will be required.
  • There is scope for claims for breach of duty to be made despite the existence of a comprehensive contractual matrix, effecting a negotiated allocation of risk.

Post Script


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 [2013] 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.

 

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For further information, please contact:

 

Lucas Wilk, Partner, Ashurst
lucas.wilk@ashurst.com

 

Lawrence Lee, Ashurst
lawrence.lee@ashurst.com

 

Ashurst Dispute Resolution Practice Profile in Australia

 

 

 

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