High Court affirms utility of disclaimers in limiting producers' duty of care

Lessons for producers as growers' class action fails 5 min read

In a recent decision with ramifications for producers' and manufacturers' class action risk,¹ the High Court has found that a sorghum seed producer, Advanta Seeds, was not liable to growers for economic loss resulting from their purchase of contaminated seed bags.

The decision provides useful guidance on the sometimes-vexed question of whether a person owes a duty of care to another to avoid causing economic loss, and when a clearly worded disclaimer can affect the answer to that question.

In this Insight, we examine the decision and consider its potential implications for other product liability claims and the strategies producers can adopt to help mitigate their risk.

Key takeaways

• In Australia, many product liability claims are able to be brought under the Australian Consumer Law (the ACL). The ACL creates a basic set of guarantees for consumers who acquire goods, including a guarantee that goods will be of 'acceptable quality', and provides a statutory right to bring a claim for damages if those guarantees are breached.
• However, negligence claims continue to be advanced in certain product liability cases—particularly those where the end user falls outside of the statutory definition of a 'consumer' in the ACL and has no direct contractual relationship with the producer (and so cannot bring a claim for beach of contract). The Mallonland decision highlights the difficulties that plaintiffs can face in this scenario, where the damages they seek to recover reflect pure economic loss—ie loss not consequential upon injury to a person or property.
• In Mallonland, the High Court affirmed the general rule that damages for pure economic loss in negligence are not available in Australia. To displace that general rule, there needs to be a special factor at play—either in the form of an assumption of responsibility by the defendant to the plaintiff, or having regard to the 'salient features' of the relationship between the parties. This entails a highly fact-specific analysis.
• The Court also affirmed that producers can negate or limit an assumption of responsibility by clear words or conduct directed to a particular person or class. This means that disclaimers—eg that a product has certain features, or that a producer is not assuming liability for certain risks—can be a potent tool for producers in mitigating their risk of liability in negligence to end users.
• To make effective use of a disclaimer, it is important that producers ensure it is displayed prominently and expressed in plain terms that potential purchasers will understand clearly. It is also critical that producers ensure they do not act inconsistently with a disclaimer on which they seek to rely.

Background

The Mallonland appeal arose out of a class action that a group of sorghum growers commenced in the Supreme Court of Queensland. The basis for the claim was that the growers had purchased sorghum seed produced by Advanta that was contaminated with the seed of another plant known as 'shattercane'. Shattercane is genetically related to sorghum, but is not itself useable for grain as its seed-head shatters on harvesting—spreading seed widely and growing vigorously to the detriment of sorghum. To prevent the shattercane from further disrupting their businesses, the growers were required to stop growing sorghum and remediate the affected fields. They incurred significant costs in doing so, and had to allow the affected fields to lie fallow or plant less remunerative crops in them.

As the growers had purchased the seeds from distributors, they were unable to bring a claim in breach of contract against Advanta. It is also likely that they could not claim under the ACL (eg, for breach of the consumer guarantees) because they did not fall within the statutory definition of a 'consumer'.² This left them to advance a claim in negligence.

Importantly, the front of each seed bag contained the following specifications:

Minimum Germination                        85%

Minimum Purity                                   99%

Maximum Other Seeds                        0.1%

Minimum Inert Matter                         0.5%

Further, on the rear of each bag, in prominent display, were the following 'Conditions of Sale and Use':

CONDITIONS

You agree that:

– You acknowledge that, except to the extent of any representations made by [the producer's] labelling of the product in this bag or made in [the producer's] official current ... literature, it remains your responsibility to satisfy yourself that the product in the bag is fit for its intended use;

– If the product in this bag does not comply with its description, within recognised tolerances, the liability of [the producer] will be limited, at [the producer's] option, solely to the cost of replacement of the product or the supply of equivalent goods or the payment of the cost of replacing the goods or of acquiring equivalent goods;

– [The producer] will not be liable to you or any other person for any injury, loss or damage caused or contributed to by [the producer] (or its servants or agents), directly or indirectly arising out of or related to the use of the product in this bag, whether as a result of their negligence or otherwise[.]

The parties' contentions

By the time the appeal reached the High Court, the issues in dispute had narrowed considerably. Advanta had accepted that the growers' losses were reasonably foreseeable. It also did not dispute the trial judge's findings that it had failed to meet the standard of care of a reasonable producer, and that this failure had caused economic losses to the growers.

The sole question on appeal was whether the courts below were right to find that Advanta did not owe the growers a duty of care to avoid the risk of economic loss by reason of hidden contamination in the bags of seed. In making those findings, the courts below—and Advanta on appeal—placed significant weight on the 'Conditions of Sale and Use' (which they referred to as a 'disclaimer'), and the fact that those conditions:

• were clearly drawn to the purchasers' attention, with a heading in large bold type;
• stated that the product was 'as described on the bag, within recognised tolerances'. As noted earlier, the bag described the product as having a 'Minimum Purity' of 99% and 'Maximum Other Seeds' of 0.1%. The trial judge accepted that the contaminated seed conformed to those specifications;
• included a number of specific conditions, among them, that the risk of using the product lay with the buyer, and that Advanta was not accepting any responsibility for damage or loss caused by negligence on its part; and
• stated that the bag must only be opened if the buyer had read and agreed with the conditions on it, and the buyer should return the bag for a refund if the conditions were not acceptable.

Against this, and in support of such a duty, the growers placed significant weight on the following matters:

• the reasonable foreseeability of the risk of economic loss if Advanta did not take reasonable care in seed production;
• Advanta's knowledge of that risk;
• Advanta's capacity to control that risk through careful production processes;
• the growers' vulnerability, in the sense that they could not protect themselves from the consequences of a want of reasonable care in the production of the seed;
• that the growers were not an indeterminate class (as the intended consumers of the product); and
• that recognition of the alleged duty of care would not give rise to legal incoherence.

The growers also relied on a number of historical decisions, including the seminal case of Perre v Apand,³ in which the High Court held that an importer of potato seed owed a duty of care to various entities that sustained economic losses as a result of the defendant's careless supply of diseased seed.

Overview of the High Court's decision

The High Court ultimately found for Advanta, rejecting the growers' contention that it owed them a duty of care to avoid causing pure economic loss of the type claimed. In doing so, the plurality (comprising Chief Justice Gageler and Justices Gordon, Steward, Gleeson, Jagot and Beech-Jones) took the opportunity to restate a number of the key principles governing liability in this area. In summary:

• The general rule in Australia is that damages are not recoverable in negligence for pure economic loss (ie, for loss not consequential upon injury to person or property).
• If damages for pure economic loss are to be recoverable, it is necessary—but not sufficient—for the defendant's negligence to be a cause of the loss, and for the loss to be reasonably foreseeable.
• In addition, there must also be some other element, namely an assumption of responsibility by the defendant to the plaintiff, or 'salient features' of the relationship between the parties sufficient to justify the imposition of a duty of care.

The disclaimer

Like the courts below, the plurality placed considerable weight on the packaging of the seeds. In particular, on the question of whether there had been an assumption of responsibility by Advanta, the plurality held that this could be negated or limited by words or conduct directed to the relevant person or class (ie in this case, by the disclaimer).

According to the plurality, it was beside the point that Advanta could not impose a contract on end users via its packaging. The relevance of the packaging was not that it 'merely disclaims legal liability'; rather, by the packaging, Advanta clearly communicated that it was 'positively not assuming the responsibility which is at the core of the alleged duty of care'.

Further, the High Court held that the packaging 'legitimately and clearly delimited the nature of the product that [Advanta] made available to the market'—ie one that was not 100% pure (but only 99%) and could contain 0.1% 'maximum other seeds'.

Other factors pointing away from a finding of a duty of care

After dealing with the issue of the disclaimer, the plurality addressed the other reasons or 'salient features' why the growers had alleged Advanta owed them a duty of care. In finding against the growers, the plurality considered it significant that:

• While Advanta knew that if it did not take reasonable care in its production processes growers would suffer economic loss, it did not know:
  • that the seed it placed onto the market for sale was contaminated; or
  • that lack of care in the production of the contaminated seed would or could cause economic loss of the magnitude that the growers suffered.

  The plurality considered that Advanta's knowledge 'was far distant from the kind that has been identified in other cases as supporting the case for finding a duty of care to avoid economic loss'.

• Advanta's capacity to control the risks of seed contamination by careful production was not absolute (as the packaging suggested).
• There was no finding of conduct or words on Advanta's part that might have conveyed to buyers that the seed was uncontaminated, or different from its description on the bags.
• The growers were not vulnerable in the relevant sense, and were able to protect themselves. On receipt of the seed, they could make 'an informed choice to plant or not to plant seed that might not be free from contamination'.

As can be seen, the 'salient features' analysis is highly fact specific.

Implications for other product liability cases

There are two key takeaways from the High Court's decision.

First, it highlights the general reluctance of Australian courts to find that a duty of care to avoid causing economic loss exists in novel cases (ie, those outside established categories). On one view, the High Court has returned to a more orthodox or conservative approach in recent years, with this decision able to be seen as a retreat from arguably 'high water mark' cases such as Perre v Apand and Dovuro Pty Ltd v Wilkins⁴ (noting that in Dovuro, the seeds were also labelled 'minimum 99% purity').

While this should provide some relief to producers, the outcome may be of limited significance in many product liability cases. This is because, where the purchaser is a 'consumer', as defined, claims can be brought under the ACL, where there is no presumption against recovery of economic loss (and in fact a statutory right to recover damages where a relevant consumer guarantee is breached).

Second, the decision confirms that clear statements that a product has certain features, or that a producer is not assuming liability for certain risks, may be relevant (or indeed determinative) in resolving whether a producer is liable in negligence to end consumers. Care needs to be taken, however, in how these statements are expressed. In this case, it was significant that purchasers were provided with clear information in 'plain words' about the nature of, and scope for, impurities in the seed product, allowing them to make an informed choice: it was not simply a case of the producer attempting to disclaim its legal liability by agreement.

Similar issues can arise in claims for breach of the consumer guarantees under the ACL. Subject to limited exceptions, it is not possible to contract out of the consumer guarantees.⁵ However, the test for whether goods are of 'acceptable quality' under section 54 of the ACL turns on what 'a reasonable consumer fully acquainted with the state and condition of the goods' would regard as acceptable having regard to a number of specified matters. Those include 'any statements made about the goods on any packaging or label on the goods' and 'any representation made about the goods by the supplier or manufacturer of the goods'. The ACL further provides that—if the only reason or reasons why goods are not of acceptable quality were specifically drawn to the consumer’s attention before purchase—the goods are taken to be of acceptable quality.⁶ Accordingly, clear disclosure in plain words about the nature of the goods being supplied can be effective in relieving producers from liability in a range of circumstances, and can be a potent tool for producers in mitigating their risk.