Case Commentary Company Law Directors' Duties and Liabilities Negligence Singapore Tort Law

Pure Economic Loss and the Direct Liability of Company Directors In the Law of Tort [Company Law] [Tort Law]

An examination of the recent Singapore High Court decision in NTUC Foodfare Co-operative Ltd v SIA Engineering Co Ltd and another [2017] SGHC 250, and a consideration of the recoverability of pure economic loss in an alternative scenario.

Introduction

Until the English House of Lords’ decision in Hedley Byrne & Co Ltd Appellants v Heller & Partners Ltd [1964] AC 465, the established English legal position was that a claimant relying on the tort of negligence was not entitled to recover pure economic loss.

Pure economic loss is described, by the learned authors of Clerk & Lindsell on Torts (20th Edn, Sweet & Maxwell, UK, 2010) at [1-42], as:-

“…economic loss to the claimant which does not result from any physical damage to or interference with his person or tangible property.

Till today, English jurisprudence on when pure economic loss may be recoverable in the law of the tort of negligence remains unclear, with the English Courts generally adopting an incremental approach premised on a “case by case” basis in determining whether pure economic loss is recoverable.

The Legal Position in Singapore

In Singapore, the legal position – at least as a matter of principle – is clearer. In the Singapore Court of Appeal decision in Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR(R) 100 (“Spandeck“), the Court held – not only that  pure economic loss was recoverable in certain situations – but that the legal test to be applied in determining recoverability of such loss was no different than that imposed in determining whether a duty of care arose in negligence.

In this respect, [69] to [72] of the Court’s decision in Spandeck bear reproduction:-

69 We respectfully agree that there is no justification for a general exclusionary rule against recovery of all economic losses and indeed, this is already the position the Singapore courts have taken, following Ocean Front. In this connection, we would also note that the Singapore cases which have allowed claims for pure economic losses have all been related to the economic value of the land. Indeed, for the condominium cases, as we have considered above at [51], the common property was intended to be for the enjoyment of the condominium owners and, by purchasing the condominium units, each owner was also effectively purchasing a share of the common property, as contemplated by the statutory regime on strata titles. For this reason, the MC may be regarded as the alter ego of the owners of the condominium units. Without the artificial but necessary interposition of the MC, there would have been a direct contractual relationship between the developers and the condominium owners. This very close relationship between the developers and the MC alleviates any fear of indeterminate liability owing to the nature of pure economic losses. Although the Singapore decisions on pure economic loss have been largely restricted to such situations, we are of the view that there is no reason not to extend liability for pure economic loss to other situations, provided that the issues of indeterminate liability and policy can be adequately dealt with. In this connection, the incremental approach would provide a necessary safeguard against the unintended consequence of indeterminate liability as well as discourage arbitrariness in determining liability.

70 However, the question then is whether we should continue to adopt a different test for cases of pure economic loss, as distinguished from cases of physical damage. In our opinion, quite apart from the doctrinal untidiness of having two applicable tests, depending on the nature of the damage (ie, the “two-stage process” in Ocean Front for cases of pure economic loss and the three-stage test in Caparo for cases of physical damage), this approach does not, in fact, address the concerns which prompted the more restrictive approach for some, but not all, cases of pure economic loss.

71 As such, in our view, a single test is preferable in order to determine the imposition of a duty of care in all claims arising out of negligence, irrespective of the type of the damages claimed, and this should include claims for pure economic loss, whether they arise from negligent misstatements or acts/omissions. In cases of physical damage, there is usually no difficulty with regard to a control mechanism to prevent indeterminate liability. However, the adoption of a single test would serve to constrain liability even in those extremely rare cases where physical damage might possibly result in indeterminate liability. It may well be that there are policy considerations in restricting recovery for pure economic loss in certain situations, but this in itself does not make it necessary for a wholly different approach in the form of a separate test altogether.

72 Ultimately, a single test to determine the existence of a duty of care for all claims of negligence would do well to eliminate the perception that there are, at once, two or more tests which are equally applicable. While it may be that all these tests could yield the same result, their serial applicability diminishes the desirability of having a general principle that can provide a coherent, consistent and reliable way of determining or recognising a duty of care. We now turn our attention to considering what the single applicable test may be.”

[emphasis added]

Consequently, pure economic loss is recoverable in the tort of negligence provided the damage suffered was (1) factually foreseeable; (2) there exists sufficient legal proximity between the parties for a duty of care to arise; and (3) a breach of that duty has occurred; and (4) there are no policy considerations as to why the duty of care in question ought not to be imposed.

A Voluntary Assumption of Responsibility Coupled With Reasonable Reliance

The recent, unreported High Court decision of NTUC Foodfare Co-operative Ltd v SIA Engineering Co Ltd and another [2017] SGHC 250 (available online at Singapore Law Watch here), is the most recent pronouncement on the distinction between consequential loss (which is generally recoverable in the tort of negligence, subject to the principles of remoteness) and pure economic loss, and the circumstances in which the latter is recoverable.

After considering the legal test in Spandeck and the legal position in other cases and jurisdictions, Justice Debbie Ong remarked at [31]:-

It was not argued before me whether the concepts recognised in these cases should play a part in the proximity inquiry in Singapore’s Spandeck framework. But a point of commonality is that in Singapore, there is no general rule excluding recovery of pure economic loss if it can be shown that, taking into account all the circumstances, the parties were in a proximate relationship and the concern over the ensuing potential indeterminate liability for an indeterminate amount to an indeterminate class is adequately addressed. It has been said that the twin indicia of voluntary assumption of responsibility and reasonable reliance are in many cases “the best – and most practical – criteria for establishing whether or not there is proximity between the claimant and the defendant from a legal standpoint”: Andrew Phang, Cheng Lim Saw and Gary Chan, “Of Precedent, Theory and Practice – The Case for a Return to Anns” [2006] Sing JLS 1 at 47 (cited in Sunny Metal & Engineering Pte Ltd v Ng Khim Ming Eric [2007] 1 SLR(R) 853 at [63]).

[emphasis added]

Although the facts of the decision itself are not remarkable, the Judge’s comments concerning legal proximity – reproduced above – bear reproduction.

Justice Debbie Ong’s observations echo those of Lord Steyn in the House of Lords’ decision in Williams and Anor v Natural Life Health Foods Ltd [1998] 1 WLR 830 (“Williams“) where the House unanimously held that a company director could – in theory – be held directly liable to a claimant in the tort of negligence in respect of pure economic loss suffered by the claimant by reason of the director’s negligence.

Direct Liability of Company Directors?

The facts in Williams may be set out in brief compass; the claimant was a franchisee who had allegedly relied on certain projections made by the franchisor’s director, in entering into a franchise agreement.

When those projections eventually turned out to be incorrect, the franchisee brought an action in tort of negligence against both the corporate franchisor and the individual director who had made the negligent statements.

At 835, 836 and 837 of Williams, Lord Steyn commented as follows:-

The touchstone of liability is not the state of mind of the defendant. An objective test means that the primary focus must be on things said or done by the defendant or on his behalf in dealings with the plaintiff. Obviously, the impact of what a defendant says or does must be judged in the light of the relevant contextual scene. Subject to this qualification the primary focus must be on exchanges (in which term I include statements and conduct) which cross the line between the defendant and the plaintiff. Sometimes such an issue arises in a simple bilateral relationship. In the present case a triangular position is under consideration: the prospective franchisees, the franchisor company, and the director. In such a case where the personal liability of the director is in question the internal arrangements between a director and his company cannot be the foundation of a director’s personal liability in tort. The inquiry must be whether the director, or anybody on his behalf, conveyed directly or indirectly to the prospective franchisees that the director assumed personal responsibility towards the prospective franchisees.The touchstone of liability is not the state of mind of the defendant. An objective test means that the primary focus must be on things said or done by the defendant or on his behalf in dealings with the plaintiff. Obviously, the impact of what a defendant says or does must be judged in the light of the relevant contextual scene. Subject to this qualification the primary focus must be on exchanges (in which term I include statements and conduct) which cross the line between the defendant and the plaintiff. 

That brings me to reliance by the plaintiff upon the assumption of personal responsibility. If reliance is not proved, it is not established that the assumption of personal responsibility had causative effect

The test is not simply reliance in fact. The test is whether the plaintiff could reasonably rely on an assumption of personal responsibility by the individual who performed the services on behalf of the company. To that extent I regard what La Forest J. said in Edgeworth’s case as consistent with English law.”

[emphasis added]

The observations by Justice Ong and Lord Steyn bear remarkable similarity insofar as both jurists placed emphasis on whether (a) the alleged tortfeasor had assumed personal responsibility for the loss suffered by the claimant; and (b) whether the claimant’s reliance on the tortfeasor’s misstatements was reasonable.

Although Justice Ong’s observations were made in the context of considering the legal test of proximity under Spandeck, the fact remains that legal proximity is usually the most difficult – and therefore critical – element to prove in a negligence claim.

Conclusion

The decision in NTUC Foodfare Co-operative Ltd v SIA Engineering Co Ltd and another [2017] SGHC 250 serves as a timely reminder that only consequential loss flowing from the tort of negligence – subject to the principles of remoteness of damage – are recoverable; pure economic loss cannot be recovered unless the legal test in Spandeck is met.

Further, although the legal test imposed is the same, the Singapore Courts are likely to apply it in a much stricter, incremental approach in claims involving recovery of pure economic loss.

In this author’s view though, the interesting aspect of this case lies in the fact that personal assumption of responsibility, coupled with reasonable reliance, may form the basis of an action in the tort of negligence which has the practical effect of circumventing the corporate veil – provided the appropriate factual matrix exists.

It will be interesting to see if a court would be prepared to hold a director personally liable for a claimant’s pure economic loss by reason of the director’s negligent misstatements, notwithstanding that those statements were made on behalf of a company.

11 October 2017

*The contents of this article represent the views and observations of the author alone from a Singapore law perspective and are subject to copyright protection under the laws of the Republic of Singapore (as may from time to time be amended). No part of this article may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed and/or broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of the author.

Please note that whilst the information in this article is correct to the best of the author’s knowledge and belief at the time of writing, it is for academic reference, does not constitute legal advice and is only intended to provide a general guide to the subject matter. It should therefore not be treated as a substitute for specific professional advice for and/or in respect of any particular course of action as such information may not suit your specific business, operational and/or commercial requirements. You are therefore urged to seek legal advice for your specific situation. All the author’s rights are expressly reserved and nothing herein shall be construed as a waiver thereof.

 

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