High Court Rejects Pure Economic Loss Claim

On 7 August 2024 in the case of Mallonland Pty Ltd v Advanta Seeds Pty Ltd [2024] HCA 25, the High Court of Australia dismissed the appeal of Mallonland Pty Ltd against Advanta Seeds Pty Ltd, ruling that the producer did not owe a duty of care to avoid causing pure economic loss to the growers.  This decision was based on the packaging disclaimers and the absence of an assumption of responsibility by the producer.

A. Case Background

Mallonland Pty Ltd and other growers purchased contaminated grain sorghum seed from a distributor authorised by Advanta Seeds Pty Ltd, resulting in economic losses due to reduced income and increased expenditure.

B. Legal Issue

The central issue was whether the producer owed a duty of care to the growers to avoid the risk of pure economic loss caused by hidden defects in the seed.

Arguments for the Duty of Care:

1. Reasonable Foreseeability:  The producer admitted that it was reasonably foreseeable that the growers’ losses would occur in the absence of due care in the production of the seed.
2. Knowledge of Risks:  The producer was aware of the risks of contamination and the potential economic losses that could result from it.
3. Failure to Follow Usual Production Processes:  The producer failed to exercise a reasonable standard of care in roguing (the process of removing inferior or defective plants or seedlings from a crop – in this case removing shattercane plants or seedlings) the early 2010 seed production crop and did not conduct a grow-out of the contaminated seed.
4. Admitted Risk of Harm:  The producer admitted that it knew or ought to have known that not taking reasonable care in its production process would give rise to a risk of harm to growers.

Arguments Against the Duty of Care:

1. Packaging Disclaimer:  The packaging of the seed included disclaimers that stated the product might contain contaminants and that the producer would not be liable for any resulting economic losses.
2. No Assumption of Responsibility:  The producer did not assume responsibility for the growers’ economic losses, as indicated by the disclaimers on the packaging.
3. Vulnerability of Growers:  The Court found that the growers were not vulnerable as they could have chosen not to plant the seed or returned it after reading the disclaimers on the packaging.
4. No Direct Relationship:  The producer did not sell the contaminated seed directly to the growers but supplied it to distributors, which further distanced the producer from the growers.

C. Packaging Disclaimer

The packaging of the seed included disclaimers that stated the product might contain contaminants and that the producer would not be liable for any resulting economic losses.

The packaging of the contaminated grain sorghum seed included a prominent disclaimer on the rear of the bag. The disclaimer was printed with the word ‘WARNING’ next to the headings ‘ATTENTION’ and ‘CONDITIONS OF SALE AND USE’, which were displayed in large bold type.  The disclaimer stated that upon purchasing and opening the bag, the purchaser agreed to be bound by the conditions set out on the bag.  It also advised that if the conditions were not acceptable, the product should be returned in its original condition for a refund.

The conditions included several key points:

1. The purchaser acknowledged that it was their responsibility to ensure the product was fit for its intended use, except for any representations made by the producer’s labelling or official literature.
2. If the product did not comply with its description within recognized tolerances, the producer’s liability would be limited to the cost of replacement or the supply of equivalent goods.
3. The producer would not be liable for any injury, loss, or damage caused by the use of the product, whether due to negligence or otherwise.

The disclaimer aimed to convey that the risk of using the product lay with the buyer and that the producer was not accepting any responsibility for damage or loss caused by negligence on its part.

D. Producer’s Knowledge

The producer was aware of the risks of contamination and the potential economic losses that could result from it.  The producer admitted that before supplying the contaminated seed to the market, it knew of facts that gave rise to risks of economic loss to growers posed by contaminated grain sorghum seed. These facts included:

1. Contamination Risks:  The producer knew that contamination of the seed by an off-type sorghum with shattering characteristics could cause damage to the growers or to the owners of land upon which the seed was planted.
2. Production Processes:  The producer was aware that the production of grain sorghum seed required processes to minimise the risk of contamination by ‘outcross’ (the creation of off-type seeds), identify off-type contamination by reasonable testing, and prevent the supply of contaminated seed as far as reasonably practicable.
3. Previous Contamination:  In 2009, sorghum off-types had been identified in three varieties of commercial grain sorghum that the producer had produced and sold, including MR431.
4. Difficulty in Control:  The producer knew that a sorghum off-type with a shattering characteristic would be more difficult to control or eradicate if such a plant germinated, matured, and dropped seed.
5. Foreseeable Losses:  The producer admitted that it knew or ought to have known that not taking reasonable care in its production process would give rise to a risk of harm to growers who purchased and planted the producer’s grain sorghum seed because that seed might be contaminated with shattercane seed.  The producer further admitted that it was reasonably foreseeable that the eradication of shattercane would mean that the land on which it was located could not be used to its full commercial potential during the eradication period.

Ultimately, it was accepted by the producer that the growers’ losses were reasonably foreseeable in the absence of due care by the producer in the production of the seed.

E. Vulnerability of Growers

The Court found that the growers were not vulnerable because they had options to protect themselves from the risk of economic loss arising from the contaminated seed.  Specifically, the Court noted that the growers had the following options:

1. Option Not to Purchase the Seed:  The growers could have chosen not to purchase the seed, as there was another supplier of grain sorghum seed in Australia.
2. Option Not to Sow the Seed:  The growers could have chosen not to sow the seed once purchased.
3. Return for Refund:  The packaging disclaimer advised that if the conditions were not acceptable, the product should be returned in its original condition for a refund.

The Court also noted that the primary judge doubted the likelihood that a consumer in the growers’ position might extract a warranty from the seller against a defect in the seed that would protect the consumer from suffering consequential economic loss.

F. High Court’s Decision

The High Court concluded that the producer did not owe a duty of care to the growers, and the appeal was dismissed with costs.

G: Judicial Critique

Justice Edelman criticised the ‘salient features’ approach used in this case to determine the duty of care, arguing for a more confined application of this method.

Briefly, the ‘salient features’ approach is a method used by Courts to determine whether a duty of care exists in negligence cases.  This approach involves identifying and weighing various factors or ‘salient features’ of the relationship between the parties to assess whether it is appropriate to impose a duty of care.  In this case, the Court considered several salient features, including:

1. Reasonable Foreseeability:  Whether it was reasonably foreseeable that the growers would suffer economic loss due to the producer’s negligence.
2. Control:  The extent to which the producer had control over the risk of harm to the growers.
3. Vulnerability:  The ability of the growers to protect themselves from the risk of harm.
4. Assumption of Responsibility:  Whether the producer had assumed responsibility for the growers’ economic losses.
5. Proximity:  The closeness of the relationship between the producer and the growers.
6. Indeterminacy:  The potential for the duty of care to lead to indeterminate liability, that is the potential for a duty of care to lead to an unlimited or unpredictable amount of liability for the defendant.  In negligence cases, Courts are cautious about imposing a duty of care that could result in indeterminate liability because it could create an excessive burden on the defendant and lead to unfair outcomes. In this case, the Court considered the risk of indeterminate liability as one of the salient features when determining whether the producer owed a duty of care to the growers.  The Court was concerned that imposing a duty of care on the producer could lead to an unpredictable and potentially unlimited amount of liability for economic losses suffered by a large number of growers.

Justice Edelman criticized the ‘salient features’ approach, arguing that it should be applied more narrowly and confined to cases where it is necessary to determine the existence of a duty of care.

For more information about commercial litigation disputes, contact David Collins in the Mullane & Lindsay litigation team.

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