On March 4 2010, the Court of Appeal handed down its judgment in Shell UK Limited v Total UK Limited.1 Shell’s appeal concerned whether pure economic loss may be recovered in negligence.  

On December 11 2005, a number of explosions and fi res occurred at the Buncefi eld oil storage terminal in Hertfordshire. The damage at Buncefi eld which followed the incident extended to fuel storage and pipeline facilities that were used by Shell to distribute and supply aviation fuel and ground fuel to its customers in Southeast England.  

Shell had a part benefi cial interest in these facilities and the land on which they were situated. The legal title was vested in two service companies. The service companies held these assets on trust for Shell, BP, Total and Chevron - the participants - who between them also owned the entire issued share capital of the service companies.  

The service companies were non-trading vehicle companies whose role was to undertake, through appointed agents, the management, operation and maintenance of the fuel storage and pipeline facilities on the participants’ behalf. The service companies charged the participants a notional tariff, which did not include a profi t element for themselves.  

As a result of the incident Shell suffered loss through its inability to supply aviation fuel and ground fuel to its customers (except in reduced volumes or at increased cost).  

Shell brought its claim in negligence, in addition to other claims, to recover this loss.  

Pure economic loss  

English law has traditionally refused to allow recovery for pure economic loss - as opposed to economic loss consequent on damage to property - in negligence. This pragmatic exclusion has been emphasized in two cases of the highest authority.

In Candlewood Navigation Corp Ltd v Mitsui OSK Lines Ltd,2 Lord Fraser approved the following extract from the judgment in Elliot Steam Tug Co Ltd v Shipping Controller,3 in which Lord Justice Scrotton held:  

“At common law there is no doubt about the position. In case of a wrong done to a chattel the common law does not recognize a person whose only rights are a contractual right to have the use or services of the chattel for purposes of making profi ts or gains without possession of or property in the chattel. Such a person cannot claim for injury done to his contractual right.”  

In Leigh & Sullivan v Aliakmon Shipping Co Ltd4 Lord Brandon reaffi rmed the exclusionary rule:  

“[T]here is a long line of authority for a principle of law that, in order to enable a person to claim in negligence for loss caused to him by reason of loss of or damage to property, he must have had either the legal ownership of or a possessory title to the property concerned at the time when the loss or damage occurred, and it is not enough for him to have only had contractual rights in relation to such property which have been adversely affected by the loss of or damage to it.” Certain limited exceptions to the exclusionary rule have been recognized by the courts - for example, as regards negligent misstatement, as set out in Hedley Byrne v Heller,5 or general average expenditure, as set out in The Greystoke Castle.6  

First instance decision  

At first instance, Shell contended that it was entitled to recover its loss under one of the following grounds:  

  • It was entitled to immediate possession of the damaged assets  
  • The claim fell within one of the exceptions to the exclusionary rule  
  • The exclusionary rule is no longer good law.  

Justice Steel held that Shell’s claim in respect of each of these grounds failed.  

Court of Appeal decision  

At appeal, Shell submitted that the decision in The Aliakmon had not intended to rule out a claim by an equitable owner that had joined the legal owner to the proceedings. Shell relied on the following passage from the judgment:  

“There may be cases where a person who is the equitable owner of certain goods has also a possessory title to them. In such a case he is entitled, by virtue of his possessory title rather than his equitable ownership, to sue in tort for negligence anyone whose want of care has caused loss of or damage to the goods without joining the legal owner as a party to the action: see, for instance, Healey v Healey [1915] 1 KB 938. If, however, the person is the equitable owner of the goods and no more, then he must join the legal owner as a party to the action, either as co-plaintiff if he is willing or as co-defendant if he is not. This has always been the law in the fi eld of equitable ownership of land and I see no reason why it should not also be so in the fi eld of equitable ownership of goods.”  

Total submitted that Shell’s view of this passage was too simplistic on two grounds. First, the words ‘legal ownership’ would not have been used earlier in the judgment in The Aliakmon if benefi cial ownership, together with the legal ownership, was enough. Second, the point of requiring the legal owner to be a party to the action was to enable recovery to be made for physical loss or damage to the goods, not to enable a claim forpure economic loss in negligence suffered by the benefi cial owner that it would never be able to mount on its own behalf.  

The Court of Appeal considered that Steel had “understandably relied on The Aliakmon to dismiss Shell’s claim”, but held that The Aliakmon did not resolve the issue between Shell and Total. There was therefore no directly applicable authority and the question was open to the court to determine. The court therefore reversed the fi rst instance judgment and in so doing has provided authority for equitable owners to bring claims in negligence for pure economic loss, provided that the legal owner has been joined.  

In reaching its decision, the court considered that it would have been “legalistic to deny Shell a right to recovery by reference to the exclusionary rule”, and confessed that it was infl uenced by “the impulse to do practical justice”.  

Comment  

The Court of Appeal’s decision provides authority for equitable owners being entitled to bring claims in negligence for pure economic loss provided the legal owner has been joined. It is diffi cult to reconcile this decision with the leading case on the exclusionary rule, The Aliakmon. This is unlikely to be the fi nal word on the matter and further guidance from the Supreme Court is expected.