Recovering indirect economic loss

Maria Cull, from law firm Herbert Smith, analyses recent court rulings relating to industry and the environment

As yet another oil tanker breaks up and pours its cargo into the sea, some of the litigation ensuing from the spill from the Sea Empress has confirmed a worrying precedent for many of those who have suffered as a result of this accident.

In the case of Alegrete Shipping Co Inc v International Oil Pollution Compensation Fund 1971 and others, RJ Tilbury and Sons (Devon) Limited (2002 EWHC 1095 (Admiralty), the court looked at the distinction between claims from those who suffered direct economic loss from the spill and those who suffered indirect economic loss caused from the contamination.

The court concluded that those suffering indirect or 'relational' loss were unable to claim from the International Oil Pollution Compensation Fund 1971 (the Fund). The same broad rules apply to any claim under common law where the polluting activities of a third party interfere with business activities.

The fund is part of an international regime of liability and compensation for oil pollution damage caused by oil spills from tankers. Under the regime, the owner of a tanker is liable to pay compensation up to a certain limit for oil pollution damage following an oil spill.

If that amount does not cover all the admissible claims, further compensation is available from the Fund if the damage occurs in a state that is a member of one of the IOPC Funds.

The case

The case centres around a company, Tilbury, based in Exmouth which had half of its business based on the processing of whelks purchased from fishermen on the Welsh coast in the area where The Empress ran aground. The Fund was defending the action on the grounds that it has an obligation to meet all claims above the owner's limit subject to the Fund's own means.

Following the spillage, a fishing ban was imposed. As a result of these restrictions, Tilbury claimed to have lost profits of £643,557 that it would otherwise have made from selling the processed whelks on the Korean market. It based its claim on s 153(1)(a) schedule 4 of the Merchant Shipping Act 1995, which provides that "the owner of the ship shall be liable for any damage".

Tilbury argued that the damage included foreseeable loss and that this was loss caused by contamination resulting from the escape of oil is recoverable from the Fund in principle.

The decision

The court considered the decision in Landcatch v IOPF (1999) concerning claimants who reared salmon smolts. Their primary market of fish farms collapsed when a ban on their operation was imposed following an oil spillage from The Braer.

The claim failed by the application of the 'pragmatic rule' against secondary or relational claims. Landcatch made it clear that although there is strict liability under the relevant act, the test of remoteness - loss is too remote if secondary, relational or indirect - applies to claims under the act.

Tilbury had sought to distinguish Landcatch because Tilbury had pre-existing contracts with both the fishermen and the customers of the company, whereas in the Landcatch case there were no such concluded contracts.

This was disregarded as it was held that both cases concerned claims for loss of profits that the companies expected to make.

The court concluded that the losses sustained directly by fishermen were recoverable from the Fund, but losses indirectly caused - losses sustained by those that supplied, or were supplied by the fishermen - were not.

Implications for business

The above principles dealing with the recoverability of relational economic loss apply equally to common law claims in negligence and nuisance.

For example, where a company negligently cuts an electricity company's supply line, which means that a steel company has to shut down its factory while the line is repaired, the steel company could not claim for the loss of profits it suffered, but it could recover for the damage to machinery that was incurred as a result of the sudden loss of power.

The courts consistently limit the possibility of recovery for economic loss, but do allow recovery for physical damage to property.

Claimants are therefore left to rely upon any contractual arrangements that may have been made to recover or limit economic loss.

Consequently, when negotiating contracts for the supply of goods or services, it is important for the recipient under the terms of the contract to consider appropriate remedies should the supplier fail to perform.

Equally, the supplier should seek to incorporate appropriate limitations on its obligations to address situations where performance is frustrated by the actions of a third party.



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