Assignment I



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Economic Loss Lecture

Assignment I
Huntley and sons run a small family winery which produces reputable wines. Due to Covid 19, Huntley and sons face a new challenge in that their regular suppliers of grapes were unable to do so as most of the workers are under lock down. They decided to procure grapes from an alternative source called Ever Ready Deliveries ltd. However, after the first production, it turns out that the grapes were not of the standard they are used to, and end up with a production that was returned by their regular outlets citing bad sales due to poor quality wines.
Due to heavy losses Huntley and sons suffered, they decide to come to you for legal advice. Advise the company as to whether they have a legal right in this regard to sue.
INTRODUCTION
Huntley and sons a family winery business produces reputable wines. Due to COVID 19 however, their usual suppliers of grapes could not as most of their workers were under lockdown. As an alternative, Huntley and sons sourced for grapes from Ever Ready Delivery Limited who supplied grapes of a standard they were not used to. This led to the first production of wine being returned by their regular outlets citing poor quality wine as the reason for bad sales.
LEGAL ISSUES
Therefore, in order to advise Huntley and sons on whether they have the legal right to sue or not in the case above where they happen to suffer heavy losses due to the lower standard in terms of quality of grapes bought from Ever Ready Deliveries Limited, the author will endeavour first to examine the following legal issues:

  1. Ever Ready Delivery Limited supplied grapes to Huntley and sons which were used for making the returned wine. Can the nature of the existing relationship between Huntley and sons (buyer) and Ever Ready Deliveries Limited (seller) give rise to legal right to sue?

  2. If Ever Ready Delivery Limited supplied grapes that were used for making the returned wine, can the heavy losses made be attributed to them (because of the standard of wine) for claim of compensation?

POSITION OF THE LAW


Commercial agreement or Contract
Under contract law, the formation and enforceability of any commercial agreement or contract require some essential ingredients available. These are offering of something of value, acceptance of the offer, awareness of the rights and obligations, consideration in terms of what the contract provides (be it goods, property, service, money, etc.), capacity to enter into an agreement and understand obligations and consequences therein, and finally legality in reference to contract to be subject to the existing laws (national or international). If a contract lacks any of these elements, then one may not have the legal right to enforce it in a court of law. 1
Economic Loss
Not all foreseeable losses stemming from negligence are recoverable. Economic losses are treated in a significantly different manner than damages for injury or property damage. This is chiefly because of the self-limiting manner of injury and property damage. For example, a negligent driver who creates an accident will only cause so much physical harm – eventually, the cars involved will come to a stop, and no further harm will stem from the driver’s negligence.
Economic damage, however, is far less easy to quantify and can grow out of proportion very quickly. Consider a situation in which a driver takes out an electricity pylon supplying a small village. If economic harm was recoverable, then the driver could be liable for the loss of business of every shop and business run in that village. Perhaps one of those businesses failed to make a sale, which in turn would have given it the ability to invest in a stock that consequently took off, meaning that even a relatively small economic loss could be linked to a huge loss in potential profits. In combination with various economic phenomena like compound interest, our negligent driver has the potential for almost infinite liability. Whilst this might satisfy a desire for absolute justice (indeed, those business owners affected by the power outage are not at fault), this is an untenable situation. No insurer would be able to cover such a loss, and it would consequently become impossible to purchase effective insurance to cover this liability. As such the law places significant limits on the recovery of pure economic losses.
The presiding rule is therefore that pure economic loss is not recoverable - that is, economic losses that cannot be directly traced back to harm to a person or property. However, there exist three primary exceptions to this rule: where the loss is based on physical damage to the claimant’s property, where the negligence act causes a claimant to acquire defective goods or property, or when economic loss stems from negligent misstatement. It should be noted that the ‘usual’ rules of negligence still apply here, so there must still be a duty of care in line with Caparo, a breach of duty, and that breach must have caused the loss.
Economic Loss Due to Physical Damage
Where an economic loss stems from physical damage to a product or equipment, then it is recoverable. This principle is best understood by looking at the leading precedent of Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] 1 QB 27.
Case in Focus: Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] 1 QB 27
The claimant ran a smelting business from its factory, taking scrap metal, and melting it down to purify it. It should be noted that this process took some time and that if interrupted halfway through, the metal would re-solidify, leaving a sub-par product as well as damaging the involved furnaces. The defendants were digging with an excavator nearby when they damaged a cable supplying electricity to the claimant’s factory. This cable was not owned by the claimants. The claimant’s factory consequently had to shut down for 15 hours. As a result, Spartan suffered three harms (and attempted to claim for all three).
1) During the power outage, the factory’s furnaces shut down mid-melt, causing half-processed steel to solidify. This meant that the furnaces were damaged and the steel was unusable. The first harm was therefore the harm caused to the furnace and the damage to the steel.
2) Spartan intended to sell the steel which was damaged by the power outage at a profit. The second harm was therefore the loss of profit because Spartan could not sell it at full price.
3) Spartan claimed that it was unable to process steel during the power outage. Had the power supply been uninterrupted, it would have started another steel melt, which would have brought the factory more profit. The third harm was therefore the loss of profit due to the factory’s non-operation.
The first harm was unproblematic - the contractors were held to have a duty of care to the factory owners which was breached. This resulted in physical harm to the furnaces and the steel and was thus recoverable. This should not be surprising - if a driver negligently drives through a shop window, then they will be held liable for the cost of replacing the shop window and any stock they damaged, and the same principle applies here.
The second harm was also held to be recoverable - although lost profits are an economic harm, it was held that the lost profits were a direct result of damaging the steel. Thus in our above example, the driver would not only be liable for the cost of replacing the damaged stock, but also for the loss of profits on that stock. So, if the stock cost £500 to buy, but would have been sold for £1000, then the driver would be liable for the full amount - £500 costs plus £500 profit.
The third harm was not held to be recoverable. It was purely economic in nature - nothing had directly affected the steel which would be melted in the future, and so this was an attempt to claim a purely economic loss. This would be the equivalent of the shopkeeper claiming for the profits which were lost during time spent repairing the shop and is not recoverable.
Consideration: The distinction made between the different harms in Spartan is important - the rule is that economic loss stemming directly from physical harm is recoverable. You should ask what has been damaged in a given situation, and limit recoverable economic harm to the cost of replacement (or repair) plus lost profits, but only from the damaged property. It should also be noted as a general exception that where a case involves physical harm to a claimant, then lost earnings are recoverable; but this should be considered to be a symptom of tort law’s habit of proactively compensating claimants for personal physical harm, rather than as a part of the law regarding pure economic loss.

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