Pure economic loss: Will you reap what you sow?

Marsh v Baxter [2015] WASCA 169

WHAT YOU NEED TO KNOW

• Negligence claims for pure economic loss are rare and available in only limited circumstances. When such claims do arise, the outcome is likely to be highly fact-sensitive.
• By a majority, the WA Court of Appeal held a farmer harvesting his GM crop did not owe a neighbouring organic farmer a duty of care in relation to the risk of organic decertification from GM incursions. The majority recognised GM farmers' freedom to pursue their legitimate commercial and agricultural interests in harvesting and considered the relevant organic farming practices "abnormally sensitive".

Introduction

The Western Australian Court of Appeal's recent decision in Marsh v Baxter [2015] WASCA 169 has received extensive media coverage against a background of an ongoing debate about the coexistence of genetically modified (GM) and organic farming. Marsh is also of broader interest for its consideration of recovering damages for pure economic loss in negligence actions. The split decision highlights the continuing uncertainties in applying the relevant principles in this area to novel factual situations. These issues might soon be further considered as an application for special leave to appeal the decision has been filed in the High Court.

Background

Mr Marsh and Mr Baxter owned neighbouring farms in Kojonup, Western Australia. Most of Marsh's property was certified as organic by a wholly-owned subsidiary (NCO) of the National Association of Sustainable Agriculture Australia Ltd (NASAA), an accredited body under Australia's export protection scheme. The certification was governed by an agreement between Marsh, his wife and the NASAA parties (NASAA Contract), which incorporated the NASAA Organic Standard (NASAA Standard).

Soon after a prohibition on cultivating GM canola was removed, Baxter sowed a herbicide resistant GM canola crop in two of his paddocks close to Marsh's property. Marsh had previously warned Baxter that any GM canola blown onto his property would imperil his organic certification. Before harvesting of the crop, Marsh also notified Baxter of the potential legal consequences if GM organisms entered his property, provided him extracts from the NASAA Standard, published notices in local newspapers that his property was a "GMO Free Area" and erected signs along the property's boundaries to similar effect.

Although Baxter had previously harvested his canola crops by direct heading, he harvested the GM canola crop by swathing (an alternative harvesting method). Before the swathes were collected, wind blew GM canola onto Marsh's property. There would have been no windborne incursion of GM canola if the crop was direct headed. Baxter claimed swathing had several advantages over direct heading, including better seed yields and weed control. Marsh noticed the canola swathes on his property and notified NASAA, which inspected the property and later decertified approximately 70% of the property pursuant to the NASAA Contract.

The Marshes sued Baxter in negligence and nuisance, claiming damages for loss suffered in selling crops and livestock as conventional produce at lower prices than the same crops and livestock would have achieved as "certified organic". The negligence claim alleged Baxter failed to take reasonable care to ensure his GM canola was not blown or carried onto Marsh's property.

Pure Economic Loss

The GM canola blown onto Marsh's property did not physically damage any persons, animals or land. It was entirely benign and in no way dangerous or toxic. Accordingly, the Marshes' claims in negligence and nuisance were not for any personal injury or property damage, but for pure economic loss.

A plaintiff in a negligence action can recover pure economic losses in only limited circumstances. In cases falling outside the recognised categories, the issue is determined based on the "salient features" of the parties' relationship. Particular importance is placed on the plaintiff's "vulnerability", in the sense of a plaintiff's inability to protect itself from economic loss arising out of the defendant's conduct.

Trial decision

Martin J assumed that the Marshes both had standing to sue in nuisance, but ultimately rejected their claim. His Honour similarly rejected their negligence claim, concluding that the contended duty of care was conceptually misconceived and any vulnerability was self-inflicted by the Marshes in entering into the NASAA Contract. He also held that NCO had inappropriately and erroneously invoked the NASAA Standard in decertifying parts of the property. This, not the swathing harvest methodology, was the legal cause of the Marshes' economic loss.

The Appeal: majority opinion

In dismissing the Marshes' appeal, Newnes and Murphy JJA held that farmers deciding how to harvest their crop stood in a different position to other parties held liable in negligence for pure economic loss. In making that decision, a farmer would not ordinarily be required to contemplate the decision's effect on neighbouring farmers' economic interests. The salient features of the relationship between the particular farmers also did not justify imposing the pleaded duty of care on Baxter. In particular, the Marshes were not vulnerable in the relevant sense in relation to the risk of withdrawal of certification. The Marshes would not necessarily have remained at risk of decertification under the NASAA Contract if they had taken available preventative measures (including planting trees for natural screening and inspecting for incursions).

Their Honours also emphasised that Baxter's decision to swathe his crop was done in the legitimate pursuit of his own interests for sound agricultural and financial reasons. This not only supported the conclusion that Baxter did not owe the Marshes the alleged duty of care, but was also relevant in determining that Baxter did not breach any such duty at any rate. Given these findings were sufficient to decide the appeal, their Honours left open the causation issues related to the proper construction and application of the NASAA Contract given NASAA was not a party to the litigation.

In relation to the nuisance claim, the majority judgment held that the organic farming operations were abnormally sensitive because the presence of any GM material on the Marsh farm might result in decertification under the NASAA Contract. Baxter was not obliged to limit his farming activities so as to not interfere with that use of the land. The incursion of GM canola swathes was also not an unreasonable interference with the Marshes' use and enjoyment of the property.

The Appeal: dissenting opinion

President McLure would have upheld the claims in nuisance and negligence. Her Honour's reasons include a detailed analysis of the NASAA Contract, NASAA Standard and their interaction with the regulatory framework for exporting organic produce. On that basis, she rejected characterisations of the Marshes' organic farming practices as idiosyncratic and hypersensitive. Instead, those practices under the NASAA Standard served "mainstream agricultural and economic values", as reflected by the practices conforming with audited standards under the Commonwealth regulatory regime. In that respect, her Honour also noted the organic industry contributed $1.276 billion to the Australian economy in 2013. In contrast to the majority, the President considered that direct harvesting of the GM canola would have caused no appreciable prejudice to Baxter's interests. Having regard to these factors, her Honour found that the GM canola escape from Baxter's farm constituted a private nuisance.

The President also held Baxter was required, but failed, to exercise reasonable care to avoid or minimise the risk to the Marshes of pure economic loss from windborne transfers of GM canola between the farms. Baxter's duty arose because of, among other things, the Marshes' vulnerability to the risk of pure economic loss given the properties' physical proximity and Baxter's knowledge of that risk. By swathing, Baxter breached this duty given direct heading had no appreciable prejudice to his interests, the risk of windborne incursions of GM canola and the significant financial ramifications of decertification. For her Honour, the decertification by NCO was based on reasonable grounds and did not breach the NASAA Contract. Consequently, it did not break the chain of causation between Baxter's negligence and the Marshes' loss.

Conclusion

The Court of Appeal accepted the Marshes' negligence claim was novel and fell to be determined by reference to the established principles regarding pure economic loss. It was in the application of those principles to the facts that the members of the Court of Appeal differed. It remains to be seen whether the High Court will grant the Marshes special leave to appeal.