Class actions - the Esso case
enquires about my attitude (and Jason Soon's) to the Esso case (a class action seeking damages for indirect economic loss flowing from the Longford gas explosion in Victoria. Jason has so far begged off replying (even though it raises obvious economic analysis questions). John Quiggin
has also taken up the invitation to comment on the issue, and his comments are obviously much more economically literate than my own. Here is my response to Teresa (I haven't considered John's material yet):
As I mentioned previously, I am not really a specialist tort lawyer, although obviously I have looked pretty closely at the negligence law reforms because that was an issue that particularly interested me. I don't have any earth-shatteringly profound views on the Esso litigation. I agree with Teresa's observation that there are very significant issues relating to foreseeability, proximity etc. for recovery of indirect economic loss flowing from something like the Longford gas explosion. I have always liked Justice Brennan's poetic observation that "[a]cross the pool of sundry interests, the ripples of affection may widely extend
". He went on to observe that this didn't mean the ripples could be allowed to extend indefinitely; the law has to draw a dividing line somewhere between losses that are recoverable and those that are not (unless we all want to be tied up in endless litigation).
The court will no doubt try to resolve the case in terms of those traditional concepts (i.e. foreseeability etc), while actually (and no doubt quite consciously) asking itself questions about where the risk should fall etc. It is one of those types of case where I think a public choice theory or Coase-type analysis might actually be rather helpful to a judge trying to decide a case which will ultimately set general principles for such litigation in the future. If we accept that competition policy is a good thing (which presumably the ACCC does), then what are the implications for private sector providers of large scale reticulated services like, gas, water and electricity, if the common law is developed to impose extended liability for indirect economic losses from outages? Telstra would be in real trouble with its ADSL broadband service - I have been off the air all day until about 30 minutes ago (although I can't claim I suffered any economic loss). Presumably it means that their insurance premiums will rise astronomically, and they will pass the cost on to customers i.e. the price of gas etc will rise for everyone. On the other hand, if liability is denied, then (leaving aside the immediate effect on the unsuccesssful litigants), presumably the effect will be that rational businesspeople will assess the level of risk they face from outages and, if their business is peculiarly sensitive to them, make emergency provision (as hospitals do for power outages). Of course, whether it is feasible to make provision against the risk of an outage lasting a couple of weeks (which I think Longford resulted in) is another question. What really happens is that larger businesses tend to have their own insurance cover against loss of profit from a range of causes (although whether standard business cover includes indemnity against this sort of risk I don't know), while smaller ones may not be able to afford it. Where the affected business is insured, it becomes a contest between Esso's insurer and the individual business's insurer as to which wears the loss. In many respects it really IS a question of economic analysis, which someone like you, Jason, is much better qualified to muse about than I am.
BTW, there is a quite good forum issue of the Duke Journal of Comparative and International Law
titled "Debates over Group Litigation in Comparative Perspective - What Can We Learn from Each Other?"
. It has lots of useful papers on various aspects of class actions/group litigation, but I can't see anything on a quick glance specifically on indirect economic loss. Hope the above might prove of some use to Teresa.
Update - John Quiggin
reasonably points out:
"The case for corporatisation and privatisation is based on the assumption that the profit motive is the best guide to efficient outcomes. If this is the case, then we will get as much safety and reliability as is profitable. ... Absolute liability is the criterion that prevails, for practical purposes, in the United States, which is the model for private provision of infrastructure services. If we import US institutions like private electricity companies, we must also import the legal institutions, such as aggressive litigation, that keep those companies honest
John's observations prompt a couple of points. First, I would have thought that it was primarily the existence of competition that allows market capitalism to deliver efficient outcomes, rather than the profit motive alone. A private sector monopoly is likely to be every bit as inefficient as the worst government bureaucracy, and much less accountable. That is why natural monopolies should not be privatised. Creating strict liability in a situation of monopoly is essentially pointless, because the costs will simply be passed on to the consumer without the inhibiting factor of competition, and no incentive is created to achieve greater safety.
I don't know whether American law creates strict liability in such situations. However, Australian law never has. In fact until not all that long ago the general rule was against recovery for indirect pure economic loss. The situation is no longer so clear-cut, and the current law is now set out in the High Court's decision in Perre v Apand
in 1999. For anyone interested in this area, most of the judgments are clear and easy to read. Moreover, they do discuss most of the relevant policy issues in a refreshingly frank manner. The strength of the decision is such that it would be very unlikely that the Court would now move to judicially legislating strict liability. Indeed it would arguably be a usurpation of Parliament's role for it to do so. The dividing line between political and judicial power is not always crystal clear, but a decisive step of that sort would have to be taken by Parliament. Personally, I think imposing strict liability would be a fairly blunt instrument. A more rigorous regulatory regime might be a preferable way of achieving greater safety, perhaps with individual criminal sanctions for breach (measures which I understand have recently been considered in Victoria).
Returning to Teresa's initial question, on reflection I don't really think the fact that the Esso
case is a class action raises any fundamentally different issues in relation to recovery for pure economic loss than would be raised by a case involving just a single litigant (although obviously the potential damages amount is multiplied). That is, as long as the established commonality tests for group/class actions have been satisfied, the case will simply be decided by application of the principles set out in Perre v Apand
. They involve, as does negligence generally, some elements of flexibility/indeterminacy, which is one reason why courts remain cautious about imposing tort liability for pure economic loss.
Finally, although I am not familiar with the pleadings or detail of legal issues in the Esso
case, I would imagine that at least some of them are contract rather than tort law questions, because of the supplier relationship between Esso and its gas customers. To that extent, recovery of pure economic loss is normal and uncontroversial. It is only where there is no contractual relationship that the difficult issue arises of where to draw the line in the "pool of sundry interests", between affected persons who may recover damages and those where the "ripples" are deemed to have become too small and widespread. Chief Justice Gleeson explained some of the difficulties in Perre v Apand
"There are at least three considerations which have been, and will remain, influential in restraining acceptance of such a duty of care in particular cases, or categories of case. First, bearing in mind the expansive application which has been given to the concept of reasonable foreseeability in relation to physical injury to person or property, a duty to avoid any reasonably foreseeable financial harm needs to be constrained by "some intelligible limits to keep the law of negligence within the bounds of common sense and practicality". Secondly, to permit recovery of foreseeable economic loss, which may or may not occur in a commercial setting, for any negligent conduct, may interfere with freedoms, controls and limitations established both by common law and statute in many legal contexts. Thirdly, in those cases where the loss occurs in a commercial setting, a third party, C, may suffer financial harm as a result of conduct which is regulated by a contract between A and B. It may be that the consequences of such conduct, as between A and B, are governed and limited by the contract. ... In many jurisdictions there are statutory provisions which govern entitlement to compensation. However, if the matter were at large, how would a court set about identifying, and estimating, the kinds of financial loss which might sound in damages? What kinds of detriment, harm, or disadvantage, would be treated as "financial loss"? The law of tort is a blunt instrument for providing a remedy for many kinds of harm which may be suffered as a consequence of someone else's carelessness, and which are capable of being described as financial."