The Victorian Court of Appeal considers the test of reasonable foreseeability

Metrolink Victoria Pty Ltd V Inglis [2009] VSCA 227

Metrolink Victoria Pty Ltd (Yarra Trams) was successful in a recent Court of Appeal matter that will shape the future application of the test of reasonable foreseeability in our courts and redefine the range of losses recoverable from tortfeasors.

Yarra Trams operates its services pursuant to a franchise agreement with the State Government. The agreement contains an incentive scheme by which Yarra Trams is paid for its close adherence to a master timetable, and penalised for deviations from it.

Yarra Trams successfully argued that the losses under the incentive scheme were recoverable from the respondent, who by his negligent driving had caused a motor vehicle accident resulting in damage to a tram and significant delays to the tram network. Prior to the commencement of the proceeding in the Magistrates' Court, the respondent had admitted negligence and paid for the costs of repairing the damaged tram. The respondent denied liability for and refused to pay the contractual losses sustained by Yarra Trams on the basis that they were not reasonably foreseeable and therefore too remote at law.

The respondent was successful in the Magistrates' Court and on appeal to the Supreme Court. However, on 2 October 2009, the decision below was overturned by the Court of Appeal majority comprising Justices Redlich and Williams (with Neave JA dissenting). In considering whether the loss suffered by Yarra Trams pursuant to the incentive scheme was recoverable from the respondent, the majority held the following:

The test for remoteness of damage is that established by The Wagon Mound and more recently applied by the Victorian Court of Appeal in National Australia Bank Ltd v Nemur Varity Pty Ltd, namely, whether the damage claimed is "of such a kind or genus that a reasonable person should have foreseen". The application of the test requires two processes. Firstly, the court must identify the particular kind or genus to which the loss belongs. Secondly, the court must determine whether a reasonable person in the position of the defendant ought to have foreseen loss of that particular kind or genus.

The Court of Appeal (including the dissenting Neave JA) accepted that the categorisation of the type or genus of loss was a question of law as the categorisation involves questions of policy, precedent and reasoning by analogy, all of which are inconsistent with the role of a tribunal of fact.

The majority then determined that the Magistrate's categorisation of the kind or genus of loss ("the reduction of a financial benefit payable by a third party to the plaintiff or the imposition of a financial penalty upon the plaintiff by a third party") was so narrow as to require foreseeability of the precise manner in which the loss came about. That position was contrary to strong precedent which rejected the need to foresee "the concatenation of the circumstances which caused the loss". The majority instead stated that the courts should favour a broad categorisation of the type or genus of loss except where the damages claimed were so uncommon that public policy demanded a more confined approach.

The majority stated that, "…[i]n the modern world, however, complexity of contracts, and the provisions of items such as key performance indicators and other performance targets, could hardly be said to be unusual." Accordingly, there was no reason for policy considerations to interfere with the recovery of losses under the franchise agreement, which losses Redlich JA broadly defined as "revenue lost as a result of the inability to operate the tram service." Having categorised the loss in such a way, the majority found that the loss was real and not far-fetched or fanciful - "it is in fact highly likely, or at least a real risk, that the disruption of the provision of any service might result in a loss of revenue to the person who is responsible for the provision of that service."

The decision is undoubtedly of enormous financial benefit to Yarra Trams and other public transport operators conducting their services under contracts with the State Government, including those companies that have been granted the tram and rail franchises from 1 December 2009. However, the decision is likely to have far broader implications for companies operating under incentive regimes, or where measured performance indicators can result in quantifiable losses under a services contract. The decision also reflects the laws understanding of the increasing complexity of business dealings - a complexity of which the reasonable person is now certainly aware.