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The Ripple Effect

Feature Articles

Cite as: December 2011 85(12) LIJ, p.46

The degree of remoteness or reasonable foreseeability of an economic loss is a major component in determining liability for the loss.

By David Seeman

The Victorian Court of Appeal decision in Metrolink Victoria Pty Ltd v Inglis1 (Metrolink) shows that there is a lack of guiding principles as to how loss ought to be categorised at the remoteness stage in tort. The categorisation of loss is an integral aspect of determining liability because its breadth may dictate whether the loss is reasonably foreseeable, or too remote in law.

Metrolink proposes that unless a loss is particularly “unusual”, it ought to be categorised broadly. Since the High Court refused Ryan Inglis special leave to appeal, the decision is a binding commentary on the question of categorisation of loss in a commercial context. The decision is of importance to practitioners in its application to analogous cases as well as its expression of general principles. The decision will also be of interest to motor vehicle insurers, who will have to bear the additional costs of such accidents.

Background

Mr Inglis negligently drove his car into a Metrolink tram. Metrolink sued Mr Inglis in the Magistrates’ Court for the repair costs to the tram and the operational performance penalties (OPPs)2 that it incurred from the Director of Public Transport (the Director) due to the delay in its services. Mr Inglis admitted liability for the collision and paid for the repair costs. However, he refused to pay for the OPPs on the basis that they were too remote in law.

The OPPs were imposed on Metrolink pursuant to a franchise agreement that it had entered with the Director. The franchise agreement contained a master timetable that created an incentive for Metrolink to run its services to schedule. The agreement stipulated that close adherence to the timetable would result in incentive payments to Metrolink, and derogation from the timetable would result in financial penalties. Delays might have financial consequences based on the circumstances of the delay. The agreement outlined a threshold at which delays would result in penalties.

Magistrate’s decision

In determining whether Metrolink could recover the penalty from Mr Inglis, the first step for the magistrate at the remoteness stage was to categorise the kind or genus of the loss. Once the loss was categorised, the next step was to determine whether a reasonable person in the position of the defendant would have foreseen that the plaintiff could suffer that kind of loss from the defendant’s negligence.3

The magistrate categorised the loss as “the reduction of a financial benefit payable by a third party to the plaintiff or the imposition of a financial penalty upon the plaintiff by a third party”. Metrolink’s claim was dismissed on the basis that such a kind or genus of loss was not reasonably foreseeable, and thus too remote in law. The magistrate noted that a reasonable person in the position of the defendant would anticipate that a collision would damage the tram and cause personal injury to passengers and perhaps replacement of the damaged tram, but that the loss in dispute would not be reasonably foreseeable because it was unlikely and far-fetched. Metrolink unsuccessfully appealed to the Supreme Court4 and then appealed to the Court of Appeal.

How should loss be categorised?

The question for the Court of Appeal was restricted to whether the magistrate adopted the correct characterisation of the loss (at [82]). Metrolink argued that the magistrate’s categorisation was unacceptably narrow and that the loss ought to be categorised more broadly as “loss of revenue or income in Metrolink’s commercial operations” (at [45]).

Mr Inglis submitted that the proposed broader categorisation would not sufficiently describe the unusual loss that Metrolink incurred (at [46]). The Court was divided (Redlich and Williams JJA; Neave JA in dissent) as to how the loss ought to be categorised.5

Majority finding

The majority rejected the decisions at first instance and on appeal, and held that a broader categorisation of “revenue lost as a result of the inability to operate the tram service” was appropriate (at [99]), and that the loss was reasonably foreseeable.

The majority relied on the following principles in reaching its conclusion:

  • The categorisation applied should not be so narrow as to require foreseeability of the precise manner in which the particular injury (or damage) came about or of its extent.6
  • The precise damage need not have been foreseen, and it is sufficient if damage of the same kind as occurred could have been foreseen in a general way.7
  • The appropriate categorisation may make reference to the events which form part of the loss, without requiring foresight of the precise concatenation of the events.8

After considering these principles the majority held that “in the ordinary case a broad categorisation of the kind or genus of the loss will be appropriate” (at [92]). It held that such an approach is consistent with the principle that it is not necessary that the exact course of events which produced the injury be predictable, so long as the injury itself was foreseeable.9

The majority view was that decisions such as Doughty v Turner Manufacturing Co Ltd10 and Rowe v McCartney11 involved an unusual injury or an injury arising from an unusual sequence of events. It was held that in such cases it may be useful to specify the category of damage more narrowly than “economic loss” or “physical injury”, so as to require that the tribunal of fact consider whether the damage is reasonably foreseeable (at [95]-[96]). The majority in Metrolink did not consider that the loss was of an unusual kind and therefore it ought not attract a narrow categorisation – there was nothing unusual about the expectation that Metrolink would receive remuneration for its role in operating the tram network, and the penalty/incentive regime under the franchise agreement was part of the manner in which Metrolink’s remuneration was calculated. To require foresight of this would be to require foresight of the concatenation of the circumstance that caused the loss (at [98]).

Minority view

Neave JA viewed Metrolink’s loss differently. Her Honour upheld the magistrate’s categorisation of the loss and held that while the categorisation question is principally one of policy, there is no reason judges cannot “proceed incrementally and cautiously, reasoning by analogy from decided cases” (at [11]).

Her Honour cited Chapman v Hearse12 in support of the proposition that it is axiomatic that a loss may not be too remote simply because a reasonable person could not foresee the precise manner in which it occurred. However, there is no clear distinction between foreseeing a particular kind of loss and foreseeing the precise events causing that loss (Metrolink, at [12]). Ultimately, the category of loss must not be so broad as to encompass any loss, no matter how unusual; nor should it be so narrow as to require foresight of the precise manner of the loss’s occurrence.

Neave JA then held that, when categorising the kind or genus of financial loss consequential on property damage, it is appropriate to take a view that is narrower than the broad categorisation of loss adopted in the area of personal injury. In this case, a broad categorisation would expose a person who negligently damages a tram to an unacceptably broad range of potential liability (at [21]). Her Honour considered the majority’s categorisation as too broad on the basis that “any loss arising as the result of disruption of a contract made with third parties was potentially compensable” (at [22]). Her Honour was of the view that a narrower categorisation did not wrongly require a defendant to have foreseen the precise concatenation of circumstances which brought about the loss, and that such a loss is of quite a different kind from loss of fares or the cost of repairing the tram (at [23]).

Support for the majority approach

The majority’s approach was followed in the 2010 decision of the Queen’s Bench in Network Rail Infrastructure Ltd v Conarken Group Ltd13 (Network Rail). Ackenhead J was faced with similar circumstances to those in Metrolink. The plaintiff, Network Rail Infrastructure (Network Rail), was responsible for the provision of rail infrastructure across parts of England. Network Rail sued two negligent car drivers who damaged infrastructure in separate accidents. The damage interrupted the provision of rail services, which resulted in the plaintiff having to pay train operators (TOCs) more than £1,000,000 for delay fees and other losses. One of the central issues in the case was whether the sums paid to the TOCs were to be categorised as “pure” economic loss or loss consequent on physical damage. The second issue was whether the loss was too remote.

The defendants argued that if the sums paid to the TOCs are of a category of loss that is anything other than loss consequential on physical damage, the loss is not recoverable. They also argued that the defendants could not reasonably foresee that payments would be due to the TOCs for the loss of use, nor that the payments would include incentives. After considering several English authorities, his Honour held that the loss was consequential on physical damage. He held that: “to be recoverable in cases involving physical damage, economic loss can be recovered if it is demonstrably consequential upon the damage. However, an essential quality of the economic loss is that it must be closely associated with the physical damage and the work done to repair or replace the damaged property” (Network Rail, at [47]). Ackenhead J adopted the reasoning of Redlich JA in Metrolink and held that: “it is not necessary for the precise loss or machinery by which the loss is ascertainable to be foreseen or foreseeable . . . there was nothing unusual about the facts that Network Rail would receive payment and revenue for providing the rail track for use by rail companies or that it would lose revenue if it did not provide the track. The fact that schedule 8 provides a somewhat complex formula for determining the value or cost for the non-provision of the rail track is immaterial” (at [62i]).

What is an “unusual” loss?

The majority view in Metrolink requires loss to be categorised broadly unless the loss is “unusual”. The difficulty with this approach is that it is not clear what “unusual” actually means. Many will consider that the OPPs incurred by Metrolink are unusual by virtue of them being unique to the franchise agreement. Ultimately, the categorisation of loss and whether it ought to be recoverable is a question of policy. The Queen’s Bench in Network Rail expressly stated that: “the fact that the loss of use, profit or revenue arises because a contract between the claimant and a third party makes the claimant liable to pay . . . does not stop it being recoverable” (at [57(c)]). While it is true that complex contracting is a part of the modern world, perhaps it is arguable that losses incurred as a result of a contract with a third party, as a matter of policy, ought not be recoverable as against a negligent party where the contracting party has control over when it will suffer loss. As was the case in Metrolink, where the plaintiff can set the threshold at which the penalty is triggered, there are compelling reasons to prevent such parties from being able to pass that loss on to a third party.

Conclusion

It is clear that the difference in approach between the majority and minority in Metrolink is based on differing views as to what constitutes the “concatenation of circumstances” and as to the consequences of potentially extending liability for economic losses.

The decision is authority for the proposition that unless a loss is unusual, a broad categorisation of loss will be appropriate. This is based on the need to only foresee the “type” of loss. The decision is of particular relevance to practitioners who act for transport companies, motor vehicle insurers or drivers. There is little reason the majority decision could not be applied beyond the tram network to other systems where performance penalties are in operation. The recoverability of performance penalties is likely to be litigated further in light of the majority’s confirmation of the right to pass on performance penalties to negligent third parties. Further, the decision may be agitated on the basis of the compelling reasons for a more narrow approach to categorisation of loss, and the perennially unresolved question of whether this type of loss could be regarded as pure economic loss in Australia.



David Seeman is a Victorian barrister practising in common law and commercial law. Before joining the Bar he was a judge’s associate and lawyer at Deacons (now Norton Rose).

The numbers in square brackets in the text refer to the paragraph numbers in the judgment.

1. [2009] VSCA 227.

2. The penalty was agreed to be $10,760.75.

3. Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound) [1961] AC 388.

4. Metrolink Victoria Pty Ltd v Inglis [2008] VSC 10.

5. The Court was also divided on whether the loss was reasonably foreseeable.

6. Hughes v Lord Advocate [1963] AC 837.

7. March v Stramare (E & MH) Pty Ltd (1991) 171 CLR 506, at 535 (McHugh J).

8. Hughes, note 6 above.

9. Hughes, note 6 above, at [858].

10. [1964] 1 All ER 98. The plaintiff worked near a large cauldron which contained hot molten liquid. The cement lid of the cauldron was accidentally knocked into the container. An unexpected chemical reaction occurred which injured the plaintiff. On appeal it was held that the damage was not a foreseeable kind and was different to an injury from a “splash” of the liquid.

11. [1976] 2 NSWLR 72. The plaintiff suffered a persistent and illogical sense of neurotic guilt after considering herself responsible for the paraplegia of the defendant. This responsibility derived from her permitting the defendant to drive her car – which if she had not allowed, would have avoided the accident causing the paraplegia. It was held that this illness ought to be categorised more narrowly than mere psychiatric illness and the tenuous connection between such damage, which is directly connected with the plaintiff’s own conduct and the plaintiff’s abnormal reaction to it, places such damage in a class where such damage is not foreseeable.

12. (1961) 106 CLR 112 at 121.

13. [2010] EWHC 1852.

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