Seeds of discontent: the High Court of Australia reins in the duty of care to avoid pure economic loss

Mallonland Pty Ltd v Advanta Seeds Pty Ltd [2024] HCA 25

In an important judgment, the High Court has confined the circumstances in which a duty of care arises to avoid pure economic loss. The judgment also sets the scene for the duty to avoid pure economic loss to be more narrowly confined in future.

A class action of farmers suffered pure economic loss when they purchased sorghum seed manufactured by Advanta Seeds that was contaminated with shattercane seed. After the seeds were planted and the farmers became aware of shattercane growing in their fields, they were forced to stop growing sorghum and remediate the affected fields. The famers did not allege that the contaminated seeds caused them property damage (somewhat curiously), only that they suffered pure economic losses in the form of reduced income and increased cost of working. 

The farmers had no contractual relationship with Advanta, and the bags of seed they purchased from intermediaries were prominently marked by Advanta with a disclaimer of liability and information that the seeds had a ‘minimum purity of 99%’.    

The class action was unsuccessful at first instance and on appeal before reaching the High Court.

All seven justices rejected the farmers’ appeal. Under Australian common law, a duty to avoid causing pure economic loss to third parties can only arise if:

• the defendant has assumed responsibility (expressly or by implication) to take reasonable care to avoid economic loss to the plaintiff; and/or
• the ‘salient features’ test weighs in favour of such a duty being imposed.

It was unanimously held that Advanta had not assumed responsibility to avoid economic loss to the farmers. On the contrary, Advanta has expressly disclaimed such responsibility on its packaging. 

That left only the ‘salient features’ test for the farmers to establish duty. This test first appeared in Caltex Oil (Australia) Pty Ltd and The Dredge Willemstad (1976) 136 CLR 529, and has been applied regularly since then. It requires the court to weigh up a long list of factors, including foreseeability, knowledge, control and vulnerability, to determine whether it is appropriate to impose a duty of care to avoid pure economic loss.

The High Court held that Advanta had no knowledge that these farmers would purchase or plant the seed or that the seed was contaminated. Advanta was not in a position to control the production process to eliminate the risk of contamination (as communicated on the packaging). The farmers also failed to establish that the farmers were in a position of vulnerability because they had a choice not to purchase the seed or to not plant it, if they did not wish to accept the risk of impurity identified on the packaging. The losses were foreseeable, but that was not enough. 

This judgment confirms that a duty of care to avoid pure economic loss will only arise in exceptional circumstances. But it is the separate judgment of Justice Edelman that is of most interest in potentially telegraphing the future direction of the High Court on pure economic loss. His Honour eviscerates the salient features test, noting that it requires the consideration of ‘a potentially unlimited list of factors, without any explanation as to the relative weight of each factor’ which has ‘generated disastrous level of complexity, inconsistency and uncertainty in Australia’. 

Advanta did not challenge Caltex or its progeny, the salient features test. That forensic decision deprived the High Court of the opportunity to kill it off. But Justice Edelman so comprehensively and persuasively discredits the salient features test that we think it likely it will be rejected by the High Court at the next opportunity. 

If so, Australian common law would finally fall back into line with longstanding English common law and the longstanding position in the United States, which is that a duty of care to avoid pure economic loss to a third party can only arise where there was an express or implied assumption of responsibility to do so. For insurers and anyone else with a stake in having a consistent, predictable, rational approach to questions of pure economic loss, that would be very welcome. 

This judgment is also a good reminder of the power of a well drafted disclaimer. For product manufacturers and distributors, a prominently displayed disclaimer in plain English will ordinarily avoid exposure to third parties for pure economic loss (subject to the operation of the Australian Consumer Law).