RAA-GIO Insurance Ltd v O'Halloran

SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
RAA-GIO INSURANCE LTD v O'HALLORAN & ORS; AUSTRALIAN KITCHEN INDUSTRIES P/L v O'HALLORAN
[2007] SASC 245
Judgment of The Full Court
(The Honourable Justice Duggan, The Honourable Justice Nyland and The Honourable Justice Kelly)
4 July 2007
TORTS - NEGLIGENCE - LIABILITY FOR OTHERS' NEGLIGENCE - OTHER PERSONS
INSURANCE - INSURANCE COMPANIES - OTHER INSURANCE BUSINESS
Respondent O'Halloran held insurance policy with first appellant RAA-GIO – policy provided cover for any legal liability respondent may incur in respect of any accident resulting to damage to property - policy subject to exclusions - whether first appellant liable to indemnify respondent for liability incurred by respondent - respondent was employee of tenant in building which was damaged by fire caused by him - respondent on casual visit to building at time of fire - whether first appellant could rely on exclusion in policy applicable where insured's activities for which indemnity sought arose out of "use" of building - meaning of phrase "arising out of" considered - whether facts within further exclusion relating to claims "arising out of or in connection with a business, profession or occupation of the Insurer".
Held: policy exclusions do not apply and respondent entitled to be indemnified by first appellant. Appeal by first appellant dismissed.

TORTS - NEGLIGENCE - ESSENTIALS OF ACTION FOR NEGLIGENCE - WHERE ECONOMIC OR FINANCIAL LOSS - CARELESS ACTS OR OMISSIONS
Second appellant leased a part of the premises and was franchisor of a business which was carried on from the premises - whether second appellant had and subsequently lost proprietary or possessory rights to property as a result of the fire – whether second appellant entitled to recover damages for loss that arose out of its proprietary or possessory interest in the property – whether second appellant was particularly vulnerable to pure economic loss in the circumstances – Held: no loss arose from an interference with any proprietary right the second appellant might have had. No such vulnerability existed to permit a claim for pure economic loss. Appeal by second appellant dismissed.
Candlewood Navigation Corporation Ltd v Mitsui O.S.K. Lines Ltd [1986] AC 1; Dickinson v The Motor Vehicle Insurance Trust (1987) 163 CLR 500; Elliott Steam Tug Co. Ltd v The Shipping Controller [1922] 1 KB 127; Hadfield v Health Insurance Commission (1987) 15 FCR 487; Government Insurance Office of New South Wales v R J Green & Lloyd Pty Ltd (1966) 114 CLR 437; Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2003) 216 CLR 515, applied.
Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad" (1975) 136 CLR 529; Hill v Van Erp (1997) 188 CLR 159; Perre v Apand Pty Ltd (1999) 198 CLR 180; Re AMP United Insurances Limited (1996) 1 ANZ Insurance Cases 61-326; Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241; Leigh and Sillivan Ltd v Aliakmon Shipping Co Ltd [1986] AC 785, discussed.

RAA-GIO INSURANCE LTD v O'HALLORAN & ORS; AUSTRALIAN KITCHEN INDUSTRIES P/L v O'HALLORAN
[2007] SASC 245
Full Court: Duggan, Nyland and Kelly JJ

DUGGAN J. This litigation arises out of a fire which caused considerable damage to an office building and warehouse (the office building) situated at the corner of Rundle Street and The Parade, Kent Town. The fire caused damage to the offices of a number of businesses which were operated from the premises. The proprietors of some of these businesses took action in the District Court to recover loss and damage due to the fire.
Pursuant to orders made for the conduct of the actions, the trial judge heard evidence and argument on certain preliminary issues which were presented in the form of four questions to be answered by the court. The present appeal is against rulings made by the trial judge in response to the questions asked of him.
The trial judge made findings as to the cause of the fire and the circumstances surrounding it. It is appropriate to summarise those findings.
At the time of the fire Bocksoffice Pty Ltd (“Bocksoffice”) conducted an advertising agency on the ground floor of the office building. The respondent, Kent O’Halloran, was an employee of Bocksoffice. He was supplied with a key card so as to allow him access to the building if he wished to work after hours.
On Friday 22 September 2000 Mr O’Halloran went to Rundle Street in the city with some acquaintances. He had dinner at a restaurant in the area and, in the course of the evening, he met Anna Bryant who was a friend of one of his companions. Mr O’Halloran and Ms Bryant spent some time together during the evening and Mr O’Halloran asked her if she would like to go to his residence at Payneham to watch television. She agreed.
Mr O’Halloran had parked his car near to where he worked and the couple walked towards the car. As they walked past the office building, Mr O’Halloran asked Ms Bryant if she would like to see where he worked. She said she would and they entered the premises through a rear door. Mr O’Halloran used his key card to gain entry. He then disarmed the alarm which was installed in that part of the office building leased by Bocksoffice. The time was 12.42 am.
Mr O’Halloran and Ms Bryant each went to the toilet in the premises and he then showed her around Bocksoffice’s work areas. They each smoked a cigarette in the office of the principal of the business. They then butted their cigarettes in a coffee mug. The trial judge found that Mr O’Halloran tipped the cigarette butts into a waste paper bin in his office.
The couple left the premises after Mr O’Halloran set the alarm at 1.08 am. They then drove to Mr O’Halloran’s residence.
Approximately 15 minutes after they left the alarm was set off. Police officers who arrived at the offices at 1.47 am saw flames inside the building. The trial judge found that the fire was caused by the cigarette butts which Mr O’Halloran had tipped into the waste paper bin.
As has been pointed out, the owners of some of the other businesses in the office building took action against Mr O’Halloran alleging that they suffered loss and damage as a result of his negligence.
Mr O’Halloran claimed that if he incurred liability for damage caused by his negligence, he was entitled to be indemnified under either or both of two insurance policies. The first of these policies was issued by RAA-GIO Insurance Ltd (“RAA”) and the second by QBE Mercantile Mutual Insurance (“QBE”).
The questions for determination as preliminary issues were as follows:
1Whether the fire that occurred on 23 September 2000 at 66 Rundle Street, Kent Town was caused or contributed to by the negligence of Mr O’Halloran?
2If yes to question 1, whether Mr O’Halloran is entitled to indemnity for any liability he incurs as a result of that negligence under the RAA Policy?
3If yes to question 1, whether Mr O’Halloran is entitled to indemnity for any liability he incurs as a result of that negligence under the QBE Policy?
4If yes to question 1, whether Mr O’Halloran’s then employer, Bocksoffice, is vicariously liable for Mr O’Halloran’s negligence?
The following answers were given by the trial judge to the questions:
1      Yes, except that Mr O’Halloran did not owe a duty of care to Kitchen Industries.
2      Yes.
3      No.
4      No.
There are two appeals against the judgment of the trial judge. RAA has appealed against the finding in answer to question 2 that Mr O’Halloran is entitled to indemnity under the RAA policy for any liability he incurs as a result of the fire.
The other appeal is by Australian Kitchen Industries Pty Ltd (“AKI”) which leased a part of the office building at the time of the fire and was a franchisor of a business which was carried on from the premises pursuant to a franchise agreement with DIY Products Pty Ltd (DIY). AKI alleges that it lost expected franchise fees and profits as a result of the fire. In the alternative, it claims that it lost the value of its leasehold interest in the premises. The trial judge was of the view that AKI’s claim was for pure economic loss for which Mr O’Halloran was not liable. AKI appeals against that finding.
The RAA policy
The RAA policy indemnified Mr O’Halloran for loss or damage to the “Property Insured” which was his residence. In addition, the policy provided cover for legal liability which Mr O’Halloran might incur in respect of any accident resulting in bodily injury or damage to property. Mr O’Halloran claims that he is entitled to indemnity under this part of the policy for any liability he might incur as a result of the fire.
There are a number of exclusions to the cover for legal liability, but only two are relevant to the present case. The insurer is not liable for claims:
(a)arising out of the ownership, possession or use by the Insured of any land or buildings other than those Buildings described in the situation shown in the Certificate.
. . . . . .
(d)arising out of or in connection with any business profession or occupation of the Insured or of any other person indemnified by this Policy other than that of Landlord.
Exclusion (a)
It is not in dispute that the claims by the plaintiffs in the actions which have been commenced did not arise out of the ownership by Mr O’Halloran of land or buildings; nor was it argued on appeal that they arose out of the possession of such. However, according to the argument, exclusion (a) applies; the insurer is not liable to indemnify because the activities of Mr O’Halloran in the building at the relevant time arose out of the “use” by him of the office building.
It is convenient to consider first the phrase “arising out of”. In the judgment of the court in Dickinson v The Motor Vehicle Insurance Trust[1] their Honours held:
The test posited by the words “arising out of” is wider than that posited by the words “caused by” and the former, although it involves some causal or consequential relationship between the use of the vehicle and the injuries, does not require the direct or proximate relationship which would be necessary to conclude that the injuries were caused by the use of the vehicle: State Government Insurance Commission v Stevens Bros Pty Ltd [2].
See also Government Insurance Office of New South Wales v R J Green & Lloyd Pty Ltd[3].
[1] (1987) 163 CLR 500 at 505.
[2] (1984) 154 CLR 552 at pp 555, 559.
[3] (1966) 114 CLR 437.
This interpretation is equally applicable to the two exclusion clauses under consideration. In the circumstances of the present case there must be some element of causal or consequential relationship between the claims by the plaintiffs and the use by Mr O’Halloran of the office building. As has been pointed out, the main issue in dispute is whether it can be said that there was a relevant “use” by him of the building.
There is a broad sense in which the noun “use” can be employed. The Oxford English Dictionary defines this meaning of the word as:
The act of employing a thing for any (esp. a profitable) purpose; the fact, state or condition of being so employed … .
However, to invest the word “use” in the exclusion clause with this broad meaning would limit in an unreasonable way the scope of the cover. The exclusion would apply in circumstances where there was no more than a tenuous connection between the accident on the one hand and the land or a building on the other. For example, a visit to the retail premises of a third party for the purpose of shopping would suffice to provide the necessary element of use.
There is another narrower meaning of the word which is appropriate in the context of the policy. In Black’s Law Dictionary (2004) “use” is defined as:
The application or employment of something; esp., a long-continued possession and employment of a thing for the purpose for which it is adapted, as distinguished from a possession and employment that is merely temporary or occasional.
This meaning of the word “use” is more readily identifiable with the words “ownerships” and “possession” associated with it in the phrase under consideration. They import the concept of a status associated with the land or building which involves an element of control. This, in turn, is more in keeping with exclusion (a) which is concerned with liability for a claim directly associated with the building as opposed to an act of negligence which is of a transient nature and has no connection with the exercise of any right of control associated with the building and exercisable by Mr O’Halloran.
The argument for RAA stressed the fact that Mr O’Halloran was an employee of Bocksoffice and had a key card with which he could gain entry. He was permitted to use the premises after hours for his work. However, Mr O’Halloran’s presence at the office on this occasion was not associated with his work. In my view, it cannot be said that he was exercising any right which was in any sense relevant to exclusion clause (a).
Exclusion (d)
Exclusion (d) relates to claims “arising out of or in connection with any business profession or occupation of the Insurer”.
RAA places particular reliance on the phrase “in connection with”. It is argued that this phrase does not require a causal connection between the claims and Mr O’Halloran’s occupation and that the circumstances give rise to a connection by reason of the fact that Mr O’Halloran was an employee on his employer’s premises at the time.
The phrase “arising out of” has been discussed already. However, according to the argument, the alternative phrase “in connection with” used in exclusion (d) is less demanding.
It is true that the words “in connection with” have a wide scope: Re AMP United Insurances Limited[4]. However, as Davies J said in Hadfield v Health Insurance Commission[5]:
Expressions such as “relating to”, “in relation to”, “in connection with” and “in respect of” are commonly found in legislation but invariably raise problems of statutory interpretation. They are terms which fluctuate in operation from statute to statute … The terms may have a very wide operation but they do not usually carry the widest possible ambit, for they are subject to the context in which they are used, to the words with which they are associated and to the object or purpose of the statutory provision in which they appear.
[4] (1996) 1 ANZ Insurances Cases 61-326.
[5] (1987) 15 FCR 487 at 491.
Exclusion (d) requires an appropriate nexus between the subject matter of the claim made by the third party against the insured and the insured’s business profession or occupation. Mr O’Halloran was not engaged in the performance of any duty associated with his occupation at the time of the negligent act which caused the fire. The fact that he was in the building where his office was located for a purpose completely unrelated to his occupation cannot provide the necessary link between the claim and that occupation. In the circumstances of the case, the claims cannot be said to arise out of or in connection with Mr O’Halloran’s occupation. It follows that exclusion (d) does not apply.
In my view, the trial judge was correct in finding that Mr O’Halloran is entitled to be indemnified under the RAA policy in respect of liability he incurs as a result of the fire.
The appeal by AKI
The trial judge found that AKI’s claim was for pure economic loss and that the case could not be brought within the principles which would permit recovery of damages for such loss. AKI challenges the finding that this was a correct classification of its claim and that, in any event, it was entitled to recover the losses which it claims.
In order to deal with this argument it is necessary to have regard to the manner in which AKI pleaded its case.
According to the statement of claim, AKI acquired assets of Atkins Group Pty Ltd (“Atkins”) pursuant to an asset sale agreement. As part of the agreement, AKI had assigned to it Atkins’ interest as lessee of space in the office building. It also had assigned to it the benefits of a franchise agreement concerned with the retailing of products such as kitchen units and wardrobes. In this respect, AKI took over Atkins’ role as franchisor of a business of which DIY was franchisee. DIY operated in that area of the office building which was leased from the owner of the office building by AKI following the assignment by Atkins. The fit-out of this space in the building was financed by DIY.
It is pleaded in para 15 of the statement of claim of the plaintiff AKI that, as a consequence of the fire:
15.1DIY Products Pty Ltd was unable to operate the franchise business and the plaintiff thereby suffered loss comprising loss of franchise fees, and loss of gross profit due to reduction in turnover totalling $189,000.
15.2In addition or in the alternative lost the value of its lease hold interest in the premises.
The plaintiff seeks judgment in the sum of $189,000 plus interest and damages for “loss of value of the leasehold interest”.
AKI argues that its claim can be characterised as a claim for damages to a proprietary interest in the premises with consequential economic loss and, alternatively, a claim for pure economic loss.
The trial judge did not refer to the first basis of the claim in his reasons for judgment. However, he addressed the claim based on pure economic loss in the following passage:
At the time of the fire Kitchen Industries leased a part of the building and was the franchisor of a business carried on from the premises pursuant to a franchise agreement with DIY Products Pty Ltd. It had an expectation that it would receive franchise fees upon the continuing operation of its franchisee. They were calculated according to the turnover of the franchisee. Accordingly, what Kitchen Industries alleged it lost by the fire was its expected franchise fees and loss of gross profit due to a reduction in turnover. Alternatively, Kitchen Industries alleged it lost the value of its leasehold interest in the premises.
Kitchen Industries claimed losses were for pure economic losses. I do not consider that it has been proved that the relationship between Kitchen Industries and Mr O'Halloran fall into that special category of case such that a relationship of proximity and a consequent duty of care exists in respect of pure economic loss. Nothing in their relationship could be characterised as an assumption of responsibility on the one part and known reliance on the other (see Woolcock Street Investments Pty Ltd v CDG Pty Ltd & Anor (2003) 216 CLR 515).
Accordingly, I am not satisfied that the circumstances of Kitchen Industries’ interest in the premises at 66 Rundle Street, Kent Town and its claimed losses were such that it was owed a duty of care by Mr O’Halloran.
The claim based on possessory or proprietary right
It is not pleaded in the statement of claim that AKI suffered any physical damage to property owned by it. However, according to the argument, AKI had possessory rights which arose from the lease. Mr Wells QC, for AKI, submitted that his client had a proprietary interest which was affected by the fire. He said AKI suffered economic loss because it was prevented from earning profits through its franchise.
Mr Wells referred to authority which he said supported his argument that AKI was entitled to recover damages for loss which arose out of its proprietary or possessory interest in the office space.
In Leigh and Sillavan Ltd v Aliakmon Shipping Co Ltd[6] the plaintiffs contracted to buy a quantity of steel coils to be shipped from Korea to the United Kingdom. The goods were loaded onto the defendant ship owners’ vessel, but were damaged due to bad stowage. This was the fault of the time charterers of the vessel, although the captain had the power to intervene in the stowage. The buyers brought an action against the ship owners claiming breach of contract and breach of duty. The claim was unsuccessful. Lord Brandon said at 809:
My Lords, there is a long line of authority for a principle of law that, in order to enable a person to claim in negligence for loss caused to him by reason of loss of or damage to property, he must have had either the legal ownership of or a possessory title to the property concerned at the time when the loss or damage occurred, and it is not enough for him to have only had contractual rights in relation to such property which have been adversely affected by the loss of or damage to it.
[6] [1986] A C 785.

See also Candlewood Navigation Corporation Ltd v Mitsui O.S.K. Lines Ltd[7].
[7] [1986] A C 1.
Mr Wells also drew attention to a passage in the judgment of Mason J in Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad”[8]:
The common law has exhibited a marked reluctance to allow recovery of pure economic damage sustained as a result of negligence. Before Hedley Byrne & Co Ltd v Heller & Partners Ltd[9] in the long line of cases that commenced with Cattle v Stockton Waterworks Co.[10] no plaintiff succeeded in recovering economic damage which was not consequential upon physical damage – see Simpson and Co. v Thomson[11]; Société Anonyme de Remorquage à Hélice v Bennetts[12]; Chargeurs Réunis Compagnie Française de Navigation à Vapeur v English & American Shipping Co.[13]. It was otherwise if the plaintiff had a proprietary or possessory interest in property: in that event he could recover consequential financial loss (The Okehampton[14]; Elliott Steam Tug Co. Ltd v The Shipping Controller[15].) (emphasis added)
[8] (1975) 136 CLR 529 at 584.
[9] [1964] A C 465.
[10] (1875) L R 10 QB 453.
[11] (1877) 3 App Cas 279.
[12] [1911] 1 K B 243.
[13] (1921) 9 Ll L R 464.
[14] [1913] P 173.
[15] [1922] 1 K B 127.
However, although there can be no doubt that a claim for loss can arise from such an interest, the success of the claim in circumstances such as the present case will depend upon the nature of the nexus between the proprietary or possessory interest and the basis of the claim in negligence.
In Caltex Oil Jacobs J said at 599:
Because economic loss commonly arises out of the loss of the benefit of a contract with a third party, and because the loss of the benefit of a contract with a third party is not a kind of injury which of itself gives rise to a duty of care, there has been a tendency of late to express the principle to be that in an action for negligence by a physical act or omission economic loss is not recoverable. Such an expression is incorrect because in every case it is necessary to go further and to examine how the so-called economic loss arises. If it arises in a way which can only be characterized as the loss of the benefit of a contract with a third party it will not be recoverable. However, if it arises out of a physical effect on the person or property of the plaintiff, it will not be irrecoverable simply because it is economic loss. (emphasis added)
The distinction between proprietary or possessory rights on the one hand and contractual rights on the other was the subject of comment by Scrutton LJ in Elliott Steam Tug Co. Ltd v Shipping Controller[16], in a passage which was quoted with approval by the Privy Council in Candlewood Corporation:
At common law there is no doubt about the position. In case of a wrong done to a chattel the common law does not recognize a person whose only rights are a contractual right to have the use or services of the chattel for purposes of making profits or gains without possession of or property in the chattel. Such a person cannot claim for injury done to his contractual right: see on this point the judgment of Blackburn J in Cattle v Stockton Waterworks Co.[17], where a contractor making a tunnel on K’s land claimed against a wrongdoer to K’s land, whose wrong made his contract less profitable, and was held not entitled to recover. It is for this reason that underwriters cannot sue directly a wrongdoer against property they have insured, but must proceed in the name of the assured, as explained by Lord Penzance in Simpson v Thomson[18]. It is for this reason also that charterers under a charter not amounting to a demise do not and cannot sue in the Admiralty Court a wrongdoer who has sunk by collision their chartered ship. The same principle was applied by Hamilton J in Remorquage à Hélice (Société Anonyme) v Bennetts[19], to prevent the owner of a tug suing the wrongdoer who had sunk his tow, whereby he had lost the benefit of his contract of towage.
[16] [1922] 1 K B 127 at 139.
[17] (1875) L R 10 QB 453.
[18] (1877) 3 App Cas 279, 289.
[19] [1911] 1 K B 243.
In my view, AKI cannot succeed in the present matter by claiming that it is entitled to be compensated for damage to a proprietary right with respect to that part of the office building occupied by DIY. The true nature of its claim is the injury to its rights under the franchise agreement. The damage claimed arises out of the interference by Mr O’Halloran with DIY’s ability to carry out its role as franchisee thereby reducing the profit which AKI would otherwise receive pursuant to the franchise agreement. It is not correct to speak of that loss as arising from an interference with any proprietary right which AKI might have had with respect to the premises.
The point is further illustrated by the decision in Candlewood Corporation. In that case a third party caused damage to a ship which was on time charter. The time charterer claimed against the third party for the cost of repairs, the amount by which the hire had been reduced and compensation for time lost by reason of a union ban. The time charterer was also the owner of the ship. In their advice their Lordships said[20]:
Counsel’s first submission was that the time charterer, being also the owner of the Ibaraki Maru, had a reversionary interest in her and that this reversionary interest was enough to give him a title to sue for damages arising out of physical injury to the ship. This submission was made to the judge, but not decided by him, as he based his decision in favour of the time charterer on other grounds. In the opinion of their Lordships this submission is not well-founded because the first plaintiff’s claim is made exclusively in respect of losses which it suffered as time charterer. It suffered no loss as owner of the Ibaraki Maru. If for some reason it had suffered loss in its capacity as owner, say because the bareboat charterer had failed to repair the damage to the vessel caused by the collision, it might perhaps have been entitled to recover such loss. That is a question which does not arise in this case, and their Lordships express no concluded view upon it. In their view the fact that the time charterer was also the owner of the Ibaraki Maru is, in the circumstances of this appeal, irrelevant.
[20] At 18.
It follows that AKI’s claim falls to be considered as a claim for pure economic loss and not as a claim based on its interest as lessee.
Pure economic loss
The alternative submission on behalf of AKI is that AKI has a valid claim even if its case is restricted to pure economic loss. Mr Wells reminded the court that, according to recent authority, claims for such loss are not restricted to cases of negligent misstatement or cases involving assumption of responsibility and known reliance. He submitted that the present case rested on the notion of vulnerability and reference was made to Perre v Apand Pty Ltd[21].
[21] (1999) 198 CLR 180.
In Woolcock Street Investments Pty Ltd v CDG Pty Ltd[22] Gleeson CJ, Gummow, and Hayne and Heydon JJ summarised the more recent developments in claims involving pure economic loss in the following passage:
Claims for damages for pure economic loss present peculiar difficulty. Competition is the hallmark of most forms of commercial activity in Australia. As Brennan J said in Bryan v Maloney[23]
"If liability were to be imposed for the doing of anything which caused pure economic loss that was foreseeable, the tort of negligence would destroy commercial competition[24], sterilize many contracts and, in the well-known dictum of Chief Judge Cardozo[25], expose defendants to potential liability 'in an indeterminate amount for an indeterminate time to an indeterminate class'."
That is why 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.
In Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad"[26], the Court held that there were circumstances in which damages for economic loss were recoverable. In Caltex Oil, cases for recovery of economic loss were seen as being exceptions to a general rule, said to have been established in Cattle v Stockton Waterworks[27], that even if the loss was foreseeable, damages are not recoverable for economic loss which was not consequential upon injury to person or property. In Caltex Oil, Stephen J isolated a number of "salient features" which combined to constitute a sufficiently close relationship to give rise to a duty of care owed to Caltex for breach of which it might recover its purely economic loss[28]. Chief among those features was the defendant's knowledge that to damage the pipeline which was damaged was inherently likely to produce economic loss[29].
Since Caltex Oil, and most notably in Perre v Apand Pty Ltd[30], the vulnerability of the plaintiff has emerged as an important requirement in cases where a duty of care to avoid economic loss has been held to have been owed. "Vulnerability", in this context, is not to be understood as meaning only that the plaintiff was likely to suffer damage if reasonable care was not taken. Rather, "vulnerability" is to be understood as a reference to 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[31]. So, in Perre, the plaintiffs could do nothing to protect themselves from the economic consequences to them of the defendant's negligence in sowing a crop which caused the quarantining of the plaintiffs' land. In Hill v Van Erp[32], the intended beneficiary depended entirely upon the solicitor performing the client's retainer properly and the beneficiary could do nothing to ensure that this was done. But in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords[33], the financier could itself have made inquiries about the financial position of the company to which it was to lend money, rather than depend upon the auditor's certification of the accounts of the company.
In other cases of pure economic loss (Bryan v Maloney is an example) reference has been made to notions of assumption of responsibility and known reliance. The negligent misstatement cases like Mutual Life & Citizens' Assurance Co Ltd v Evatt[34] and Shaddock & Associates Pty Ltd v Parramatta City Council [No 1][35] can be seen as cases in which a central plank in the plaintiff's allegation that the defendant owed it a duty of care is the contention that the defendant knew that the plaintiff would rely on the accuracy of the information the defendant provided. And it may be, as Professor Stapleton has suggested[36], that these cases, too, can be explained by reference to notions of vulnerability. (The reference in Caltex Oil to economic loss being "inherently likely" can also be seen as consistent with the importance of notions of vulnerability.) It is not necessary in this case, however, to attempt to identify or articulate the breadth of any general proposition about the importance of vulnerability. This case can be decided without doing so.
[22] (2004) 216 CLR 515 at 529.
[23] (1995) 182 CLR 609 at 632.
[24] See per Lord Reid in Dorset Yacht Co v Home Office [1970] AC 1004 at 1027.
[25] Ultramares Corporation v Touche 255 NY 170 at 179 (1931) [174 NE 441 at 444].
[26] (1976) 136 CLR 529.
[27] (1875) LR 10 QB 453.
[28] Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529 at 576-578. See also Hill v Van Erp (1997) 188 CLR 159 at 233-234; Pyrenees Shire Council v Day (1998) 192 CLR 330 at 389 [168]; Perre v Apand Pty Ltd (1999) 198 CLR 180 at 254 [201] per Gummow J.
[29] (1976) 136 CLR 529 at 576.
[30] (1999) 198 CLR 180.
[31] Stapleton, Comparative Economic Loss: Lessons from Case-Law-Focused ‘Middle Theory’”, (2002) 50 UCLA Law Review 531 at 558-559.
[32] (1997) 188 CLR 159.
[33] (1997) 188 CLR 241.
[34] (1968) 122 CLR 556; (1970) 122 CLR 628; [1971] AC 793.
[35] (1981) 150 CLR 225.
[36] (2002) 50 UCLA Law Review 531 at 558-559.
Mr Wells submitted that Mr O’Halloran was aware, or ought to have been aware, that a leasehold interest in the premises would have been of some value to the holder and that damage to the premises would impair that interest in the premises thus causing loss. He pointed out that AKI belonged to a well-defined and closed class of plaintiffs, namely, the owner and lessees of the damaged premises. He said that Mr O’Halloran was not pursuing any commercial or trading interest which should be free of burden and that AKI was vulnerable in that it had no means to protect itself from the consequences of Mr O’Halloran’s negligence. It was argued that, as a result of these circumstances, AKI was entitled to pursue a claim based solely on economic loss.
As their Honours pointed out in the passage in Woolcock set out above, a claim for damages for pure economic loss cannot be established simply by proving a negligent act, reasonable foreseeability and causation. It is true that AKI claims the matter went further and that it was vulnerable to economic loss in the circumstances. However, the nature of such vulnerability is not apparent from the pleadings or the evidence led before the trial judge.
In Woolcock the court understandably refrained from an attempt to provide a general definition of vulnerability in this context. However, the examples of Perre and Hill v Van Erp provide illustrations of the circumstances in which vulnerability will be relevant. In Perre, the plaintiffs were:
in a very exceptional and vulnerable position in which they had no opportunity of protecting themselves by a contractual term or condition.[37]
[37] Woolcock Street Investments v CDG Pty Ltd (2004) 216 CLR 515 per Callinan J at [222].
Although vulnerability was not specifically referred to in Hill v Van Erp, it was held that the defendant, a solicitor, was in breach of the duty of care owed to an intended beneficiary of a will to use reasonable care in its preparation. The intended beneficiary was dependent upon the solicitor and could not be expected to control the performance of his duties. Esanda is also instructive in that it provides an explanation as to why there was no relevant vulnerability in that case. Woolcock serves the same purpose.[38]
[38] 216 CLR at [31].
In Woolcock McHugh J was of the view that vulnerability in the context of that case:
means not that the plaintiff was exposed to risk but that by reason of ignorance or social political or economic constraints, the plaintiff was not able to protect him or herself from the risk of injury.[39]
In the same case Kirby J stated[40] that, in his view, the concept was wider and extended:
to those who, like the plaintiffs in Perre, might be carrying on a profitable economic enterprise but who are exposed to an insidious risk by the acts of others about which they were unaware and against which they could not reasonably protect themselves.
[39] 216 CLR at [80].
[40] 216 CLR at [168].
It is clear from these authorities that, in order to play a crucial role in providing an exception to the general rule in relation to claims for economic loss, vulnerability must be more than the ordinary risk of exposure to damage from negligent acts. No such vulnerability was pleaded or established in the present case.
In my view the appeals by both appellants should be dismissed.
NYLAND J. I agree that the appeal by both appellants should be dismissed for the reasons expressed by Duggan J. I have nothing further to add.
KELLY J: I would dismiss the appeals. I agree with the reasons of Duggan J.

[2007] SASC 245

4 July 2007

Key Legal Topics

Areas of Law

Insurance Law

Legal Concepts

Negligence

Causation

Exclusions in Insurance Policies

Adverse Possession