Economic Loss:
The Floodgates

P. s.James*

The Mineral Transporter, I Muirhead v. Industrial Tank Specialities Ltd.2 and The
Aliakmon3 have again raised the hoary conundrum concerning the limits of liability
for economic loss. It merits an airing.

Let us start with some well-known facts. Cattle contracted to construct a tunnel
for Knight. This tunnel was to be under an embankment. Due to the negligence of
the defendant water authority, water leaked from their pipe and the embankment
and the land around were flooded. This made it more difficult than it would
otherwise have been for Cattle to make the tunnel and he thus lost profit on his
contract to the tune of £26. Cattle claimed this loss from the defendants.4 At the
trial at the Leeds Assizes before Amphlett B. judgment was given for the plaintiff.
On appeal this decision was reversed. Blackburn]. in his judgment transformed a
mouse into an elephant. After tentatively making the revealing suggestion that had
Knight sued in his own name he could have recovered the £26 as trustee for the
plaintiff, he decided against Cattle. This he did in a significant way. He started
with the proposition that "in the present case the objection is technical and against the
merits, and we should be glad to avoid giving it effect ... " Then why not avoid this?

The answer to that question has set the cat among the legal pigeons ever since.
It is necessary - though the reader will be familiar with it - to cite what

Blackburn J. then went on to say:
" ... But if we did so we should establish an authority for saying that in such a
case as that of Rylands v. Fletcher the defendant would be liable, not only to an
action by the owner of the drowned mine, and by such of his workmen as had
their tools or clothes destroyed, but also to an action by every workman and

• Professor P S James, formerly Chairman of the Law School, University of Buckingham.
1. Candlewood Navigation Corp. Ltd. v. Mitsui O.S.K Lines Ltd. : The Mi'leral Transporter, The Ibaraki

Marn [1986] A.C. 1 (P.c.).
2. [1985] 3 All E.R.705 (C.A.).
3. Leigh (5 Sillavan Ltd. v. Aliakmon Shipping Co. Ltd. [1986] 2 All E.R.145 (H.L.).
4. Cattle v. Stockton Watenvorks Co. (1875) L.R.10 QB.453.
5. Italics mine.

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person employed in the mine, who in consequence of its stoppage made less
wages than he would otherwise have done. Many similar cases to which this
would apply might be suggested. It may be said that it is just that all such
persons should have compensation for such a loss, and that if the law does not
give them redress it is imperfect. Perhaps it may be so. But, as has been
pointed out by Coleridge J. in Lumley v. Gye, courts of justice should not
'allow themselves, in pursuit of perfectly complete remedies for all wrongful
acts, to transgress the bounds which our law, in a wise consciousness of its
limited powers, has imposed on itself, of redressing only the proximate and
direa consequences of wrongful acts'."

So these are the reasons why in a case in which had Knight sued as trustee
Cattle would have recovered. If, as he did, he proceeded at common law he could
not. A difference of procedure hardly affects the equities; and equities, in the
broad sense of the word, Blackburn J. unblushingly admitted that there were. His
decision appears to proceed upon two grounds. First, that it would open
"floodgates" to allow recovery in a case like Rylands v. Fletcher6 if the workmen
could recover for more than the loss of their tools and their clothes; 7 second, that
recovery must be limited to the "proximate and direa consequences of wrongful aas". 8

It is apprehended that the second ground of decision was the relevant statement
of principle9 though, almost in fear and trembling, perhaps, one may be permitted
the opinion that Blackburn]. applied it wrongly to the facts of the case. But it is the
first ground, the "floodgates" ground, that demands immediate attention. Before,
however, considering the "policy" (or lack of it) that underlies the "floodgates"
argument one must pass to the House of Lords decision in Simpson C5 Co. v.
Thomson 10 which gives to it a concrete form which has since been slavishly adhered
to. Briefly, in Simpson's Case a Mr. Burrell owned two ships, A and B; B negligently
collided with and sank A. The plaintiff underwriters paid Mr. Burrell for the loss
of A and then sought to recoup themselves against him as the owner of B. Had
some third party owned B there would have been no doubt their claim could have
been satisfied by resort to subrogation; 11 but the House of Lords denied the claim
by resort to the specious argument that since, technically, there could be no

6. (1868) L.R.3 H.L.330.
7. Note that there is no actual mention of the.distinction between economic and physical loss. Had

that distinction been drawn between the loss of wages on the one hand and of tools on the other a
"flood" might still arise if the tools were unique and irreplaceable and their loss entailed permanent
loss of work.
8. It must be remembered that Coleridge J.'s rhetoric about the "floodgates" was uttered in Lumley

v. Gye (1853) 2 E.B.216 where, as the sole dissenter, he stood alone in guarding them. They were
opened and, of course, no disasters followed.
9. One respectfully agrees with Edmund-Davies L.J. in Spartall Steel alld Alloys Ltd. v. Martill

(COlitractors) Ltd. [1973] QB. 27 that "proximity" was the nub of the decision.
10. (1877) 3 App. Cas. 279.
11. Once more, as in Cattle's Case, equity will succour where.common law will not.

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ECONOMIC LOSS: THE FLOODGATES

subrogation because Mr. Burrell could not sue himself1z ergo there could be no
claim by the plaintiffs because (unassisted by subrogation) they could have no
direct right of action. Why not?

At the risk of boring the reader it is now necessary to repeat the well-known
passage in Lord Penzance's speech in Simpson's Case. He said:

"This proposition 13 virtually affirms a principle which your Lordships will do
well to consider with some care, as it will be found to have a much wider
application and signification than any which may be involved in the incidence
of a contract of insurance. The principle involvedI4 seems to me to be this -
that where damage is done by a wrongdoer to a chattel not only the owner of
that chattel, but all those who by contract with the owner have bound
themselves to obligations which are rendered more onerous, or have secured
to themselves advantages which are rendered less beneficial by the damage
done to the chattel, have a right of action against the wrongdoer although they
have no immediate or reversionary property in the chattel, and no possessory right by
reason of any contrad attaching to the chattel itself, such as by lien or
hypothecation. IS This, I say is the principle involved in the Respondents'
contention." 16

Lord Penzance then proceeded to conjure up all sorts of horrid possibilities if
the "principle" were not adhered to. Take the case of the wrongdoer who destroys
property which the owner has contracted to supply to a third party. It would, it
seems, be awful if the latter could recover.17 Or the case of the man who injures
someone whose doctor, for a yearly fee, has agreed to treat him. The doctor should
have no claim for his extra expense. Or the case of the actor who is disabled so that
his manager suffers loss. Could the manager recover?I8 "Such instances", Lord
Penzance continued, "might be indefinitely multiplied giving rise to rights of
action ... which might be both numerous and noveL"

This is the "floodgates" argument of which Lord Edmund-Davies has said:

12. The argument was that since Mr. Burrell could not sue himself there were no "shoes" to stand in.
Logical, but hardly sensible. Equity, through subrogation, recognizes that underwriters have a right: to
deny that right because the machinery (subrogation) cannot logically be operated is to mistake the
adjectival for the substantive, the shadow for the substance: see "The Fallacies of Simpson v. Thomson",
(1971) 34 M.L.R.149.
13. Name]y, the suggestion that the underwriters could have a direct right of action at common law.
14. But was it? Why cast the net so wide?
15. Of course this is cast in the negative, but the time-worn shibboleth has now become "on]y those
who own or possess the damaged property can sue for consequent economic loss." Why Lord Penzance
let in the lienor is unclear: the latter's possessory interest is nothing but a piece of machinery for
protecting his contractual right - e.g. the repairer's right to his pay.
16. Italics mine.
17. It would seem to be only just. The owner suffers no loss, he has his money, assuming risk and
property have passed.
18. In terms of proximity probably he should not; unless, at least, the wrongdoer was aware of the
relationship. Likewise the doctor. Such a position may be distinguished from Cattle's Case where the
water authority should have been aware of the tunnelling.

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"My Lords, the experiences of a long life in the law have made me very
familiar with the "flood-gates" argument. I do not of course suggest that it
can invariably be dismissed as lacking cogency; on the contrary it has to be
weighed carefully, but I have often seen it disproved by later events. It was
urged when the abolition of common employment was being canvassed, and it
raised its head again when the abolition of contributory negligence as a total
bar to a claim in negligence was being urged. And, even before my time, 19on
the basis of conjecture later shown to be ill-founded, it provided a fatal
stumbling block to the plaintiffs claim in the "shock" case of Viaoria Railways
Commissioners v. Coultas (1883) 13 App. Cas. 222, where Sir Richard Couch
sounded the "floodgates" alarm in stirring words ... ,,20

With respect, it is thought that this comment is justified. When the "floodgates"
have been opened21 it does not appear that the apprehended disasters ever have
occurred; rather, under careful judicial control,22 new remedies have been
afforded where they were needed. But what requires to be noted is that there are
two different aspects of the "floodgates" argument: the one lacking merit, the
other to some extent respectable. The first of these aspects appears in Lord
Penzance's speech: it is that the opening of the "gates" will give rise to a deluge of
new kinds of claims,23 both "numerous and nove]"; a fear which has been so often
expressed. That is one side of the coin; but it has always been the philosophy of the
far-sighted judge that "if men will multiply injuries actions must be multiplied too;
for every man that is injured ought to have recompense.,,24 Had the judges not
accepted new fields of liability and ploughed up old ones25 the law of torts, from

19. His Lordship could, and should, have added the most significant refutation of the "numerous and
novel" ("floodgates") "alarm". In Winterbottom v. Wright (1842) 10 M. & W. 109 Lord Abinger feared
to venture upon new fields: he denied the claim upon the ground that "we ought not to permit a doubt
to rest upon this subject, for our doing so might be the means of letting in upon us an infinity of actions."
Alderson B. was of opinion that "The OIl1ysafe rule is to cOIzjillethe right to recover to those who mter into the
contract; if we go one step bryond that ... " all sorts of terrible things could happen. The point of the case
was, of course, that where a contractual right was broken an injured party who was not the contractor
could not sue. Since Donoghue v. Stevmson [1932] A.C.552 these cautionary cries are one with Nineveh
and Tyre; and few, except, perhaps typically, Scrutton L.J. in Farrv. BulleTS [1932] 2 K.B.606 have seen
reason to complain about the opening of these "floodgates".
20. McLoughlin v. O'Brian [1983] A.C.410.
21. As in DOIlOghuev. Stevmson.
22. Instance the cautious development of the rule in Lumley v. Cye.
23. Lord Penzance's fear of preposterous claims was really a 11011 sequitur: no more was needed than to
decide Simpsoll 's Case on the merits - and such a decision need not Ilecessarilyhave led to his frightening
conclusions.
24. Ashby v. White (1703) 2 Ld.Raym. 938, 955; per Lord Holt. Where would the law be without its
creative judges? Its Mansfields, its Atkins, its Dennings, its Marshalls and its Holmes's?
25. Some judges set their faces against this impious practice. But where should we have been if Coke
had done so? An example of the attitude is to be found in Lord Brandon's speech in TheAliakmon, supra
n.3, at p.154: his Lordship reads Lord Wilberforce's celebrated statement in Alms v. Mertoll Londoll
Borough Council [1978] A.C. 728, 751-2 as suggesting ("stare decisis") that policy, once settled, cannot
be changed. With respect, Lord Wilberforce seems to say no such thing. Ifhe had he would have been
flying in the face of Donoghue v. Stevmsoll, to mention only the most famous case by which the fields
have been reploughed.

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the invention of trespass onwards, would never have developed.
The second aspect of the "floodgates" argument, which is equally familiar, lies

in the fear of extension of liability beyond the limits which a defendant may be
expected to bear; "liability to an indeterminate amount for an indeterminate time
to an indeterminate class".26There is undoubtedly some force in this argument; it
is probably what Blackburn J. had in mind when, in Cattle's Case, he referred to the
workmen and their wages. Some control mechanism is undoubtedly needed to
prevent such a result.

The courts are now casting about to find an effective mechanism.27 Three
candidates for the task hold the field. First, a rather unpopular candidate,
proximity or "reasonable foresight";28 second, Lord Penzance's rule of thumb
(much to the fore); third, what one may call the "loss/reliance" mechanism. Use of
analogy might suggest a fourth possibility: but we will come to that later.

Bearing in mind that we are concerned with "economic" loss, let us now
consider these mechanisms.

First: "reasonable foresight". The danger about this is that, at least on the face
of it, and in a special sense, ultimately, it may impose too much liability. One can
reasonably foresee all kinds of things. For instance if one lets loose a virus likelyto
affect cattle the owner of an auctioneer's business miles from the point of release
may suffer loss by reason of markets being closed.29 Again, if, as an accountant,
one makes a careless mis-statement in an account the document may fly far and
wide and get into the hands of all sorts of people who may incur loss in reliance
upon it. Or, again, if one negligently cuts off electric power supply factories in an
entire neighbourhood may have to stop work and thereby lose profit.30 And so on.
Thus, on the face of it "foresight" cannot promote a policy which seeks to limit
liability: rather the reverse. On the other hand, at the risk of being accused of
teaching one's grandmother to suck eggs, one must remind the reader that, as
Lord Atkin formulated it, it is of its kind a restriaive principle. True, Lord Atkin
starts "you must take reasonable care to avoid acts or missions which you can
reasonably foresee would be likely to injure your neighbour" but he continues with
the vital gloss ... "who, then, is my neighbour? The answer seems to be persons so
closely and direaly31 affected by my act that I ought reasonably to have them in
contemplation "We come back to Coleridge J. and the "proximate and
direct. ,,33

26. Ultramares Corpn. v. Touche 174 N.E. 441; 255 N.Y. 170 (1931); per Cardozo C.J,
27. See, above all, Caltex Oil (Australia) Pty. Ltd. v. Dredge Willemstad (1976) C.L.R.529.
28. Let it not be forgotten, however, that this was the mechanism employed by Blackburn]. in Cattle's
Case.
29. Weller (5 Co. v. Foot (5 Mouth Disease Research Institute [1966] 1 QB. 569.
30. S.C.M. (UK) Ltd. v. w.;. Whittall (5 Son Ltd. [1971] 1 QB.337; Spartan Steel (5 Alll!J's Ltd. v.
Martin (Cotllractors)Ltd. [1973] QB.27.
31. Numerous recent dicta have suggested that the test of "directness" is outmoded. In face of Lord
Atkin's universally accepted criterion of "directness" it is hard to see how this can be.
32. Donoghue (or MtAlister) v. Stroenson [1932] A.C.562, 580.
33. Supra n.8.

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To the same effect is Lord Wilberforce in Anns v. Merton London Borough:" ...
one has to ask whether as between the alleged wrongdoer and the person who has
suffered damage there is a sufficient relationship of proximity ... ,,34

So that in fact here we have a control mechanism, but the question is how
effectively it can be operated. One can only embark upon attempting an answer to
this question by bearing in mind that there can never be any such thing as an
absolutely "correct" application of principle to a particular fact situation: that is
what the diversity and wealth of opinion in the Digest was all about. What is
"restrictive" to one person may to another be the reverse. But if we take the cases
of the auctioneer, the accountant and the negligent power-cutter already put, it
may be agreed that the remoter consequences were not proximate; and this form of
control mechanism may, in such situations, be made to work. That is the negative
side of the picture. But what about the positive one? If "proximity" ceases at a
given point what (and this is the normal way the Atkin formula is looked at) should
it include? It is thought that, even in the case of economic loss, it ought to include
all really close situations and that it would envisage the case of the time charterer
who loses hire and profit when another ship negligently damages his ship. It is
thought that the relationship between the errant ship and the time charterer is
sufficiently close and direct. And yet, as will appear, by reference to the Penzance
rule and stare decisis, in The Mineral Transporte?5 the Judicial Committee decided
the reverse. And again, one would emphatically have thought that the buyer of a
cargo to whom the risk but not the property has passed ought to have a claim
against a negligent shipowner who damages the cargo. Every shipowner knows that
there may be people in the buyer's position. But again, relying upon Lord
Penzance and stare decisis the House of Lords in The Aliakmon36 have finally denied
such a claim. Reliance in these decisions is placed upon Lord Wilberforce's
caution that "foresight" must give way to "policY"j37 how far the "floodgates"
doctrine (at its worst) and stare decisis are matters of "policy" is questionable. Both
deny the need for a readiness to consider change which is inherent in a healthy
legal system.

So what of the "foresight" principle as a control mechanism? Generally
speaking, it is believed that it would of itself, if sensibly applied, be sufficient to
control the incidence of economic loss: it would to a large extent narrow it, but to
some extent, too, it would widen it. There is, however, one important reservation:
the principle provides no safeguarlin Blackburn J.'s case of the workmen in the
drowned mine: although Blackburn J. clearly did not, it would be legitimate to

34. (]978] A.c.n8, 75]-752.
35. Supra n.l. It remains remarkable, however, that an enlightened House of Lords in Morrison s.s.
Co. Ltd. v. Greystoke Castle (] 947] A.C. 265 allowed general average contributors a direct claim against a
negligent ship. It is not overlooked that those who dislike it have made attempts to explain this decision
away.
36. Supra n.3.
37. In Anns, at pp.75]-752.

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regard them as "proximate" to the defendant, and yet as a matter of policy the
incidence of liability might be too great for the defendant to bear. Blackburn J.
clearly did think that. We will seek to answer this problem at a later stage.

We will now pass to the second form of control mechanism, the Penzance
doctrine itself. As we have seen, this amounts to the proposition that liability is to
be controlled by the principle that economic loss can only be recoverable if it
follows upon physical injury to person or to property: step outside this and give a
claim to a person who has, for example, a merely contractual interest in the person
or property involved and the "floodgates" will open. It has, however, already been
remarked that (pace Lord Penzance) this "flood" is not a necessary consequence:
indeed, other control mechanisms are available - in particular the proximity
doctrine which is restrictive and is capable38 of being very restrictively applied.

So let us now consider the credentials of the Penzance doctrine. To start with,
inasmuch as it does, if it does,39 originate in Cattle's Case40 it boasts an
unpromising pedigree: "in the present case the objection is technical and against
the merits.,,41 Moreover, its history is beset with doubts: in espousing it in Elliott
Steam Tug Co. Ltd. v. The Shipping Controller 42 Scrutton L.J. said" ... the common
law rightly or wrongly does not recognize a right to sue for injury to a merely
contractual right." Further, the stark distinction between physical loss on the one
hand and economic loss on the other is far from clear-cut. If my car is negligently
damaged I am complaining about the cost of repair: an economic loss. If, as the
result of a carelessly performed sterilization operation a woman has a child, the
major loss of which she complains is economic - the cost of bringing up the
child.43 And, indeed, as has often been remarked, all legal injury is economic in
that it is remediable by damages.44

Further, as the cases show, the distinction between physical and economic loss
brings us to the ridiculous point that if the same plaintiff suffers economic loss
arising out of a physical injury and also similar economic loss (but not arising from

38. For instance it has been argued that the cargo owner puts himself outside the bounds of proximity
to the shipowner by taking upon himself the contractual risk vis-a-vis the seller. Of course the proximity
rule, like any other, may be applied capriciously. It should be added that we are not concerning
ourselves here with problems arising from exclusion clauses and the operation of the Hague Rules.
39. As was suggested above, a careful reading of Cattle's Case reveals that the decision did not rest
upon Lord Penzance's proposition but upon proximity.
40. (1875) L.R.IO QB.453.
41. BlackburnJ.'s exordium in Cattle's Case.
42. [1922] 1 K.B. 127, 140. And in La Societe Anonyme de Remorquage a Helice v. Bennetts [1911] 1
K.B.243, 249 Hamilton J. had his doubts ... "I can understand that the law might regard any
interference by the defendant with the plaintiffs' contractual chances with a third party as a ground of
action in their favour." Certainly. What about Lumley v. Gye?
43. Emeh v. Kensington and Chelsea and Westminster Area Health Authority [1985] QB.1012.
44. There is absolutely no clear line of distinction. In Junior Books v. Veitclli Co [1983] A.C.520 Lord
Roskill treated the loss as "economic"; in Tate fS Lyle Ltd. v. Greater LO/IiMn Council [1983] 2 A.C.509
Lord Templeman treated the Veitchi loss as physical. Which of their Lordships was "right"? So too,
the subsidence cases like Dutton v. Bognor Regis United Building Co. Ltd. [1972] 1 QB. 373 have been
treated as falling within either category. Nobody is to blame: the distinction is unsound.

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physical injury) in consequence of the same wrongful act he can recover under the
one head but not under the other.4S Here inconsequent resort is had to the
"floodgates". It is argued that to allow the latter claim might give rise to a flood of
actions; as, for instance, in a case like Spartan Steel (5 Alloys Ltd. v. Martin
(Contraaors) Ltd.46 where a negligently severed electric cable might, by stoppage of
power, cause loss of profits to all the factories in the neighbourhood. This
argument is, however, only relevant if, once again, one assumes that the Penzance
doctrine is the only form of control mechanism: whereas in fact the proximity
principle could supply an answer. Further, just the same argument could apply to
physical, rather than economic, damage. Where explosions are concerned it can be
far flung.47 Indeed, this fact glaringly underlies the statutory limitations imposed
upon the amount of liability in maritime and aviation law, to which we will return.

Apart from these considerations, however, how far does the Penzance rule
achieve sensible and just results? It has been suggested above that in the case of
the time charterer48 and the case of the buyer to whom the risk, but not the
property, has passed49 it flies in the face of the proximity principle only to be
defended by the cry of stare decisis.so But what about the case where a negligent
ship runs down a ship in towS1 and the Penzance rule denies the tug owner his lost
towage? If there ever was proximity it is here and it is thought that the layman
would say that the tug owner ought to recover: moreover, a decision in his favour
would not open any "floodgates". What about the case of a passenger who loses
profits as the result of delay in a voyage caused by a collision? Penzance denies him
recovery,S2 but it is thought that he would feel that his lawful expectations had

45. Spartan Steel andA/luys Ltd. v. Martin (Contractors) Ltd. [1973] QB. 27 (C.A.) - where, of course,
the defendant having negligently severed a power cable a "melt" in the plaintiffs furnace was damaged
through lack of power and they lost profit on other "melts" which, through lack of power, they were
unable to process. The decision was that the plaintiffs could recover in respect of the damaged melt
both for the damage and for loss of profit - but the purely "economic" loss of profit on the other
"melts" was irrecoverable. To the same effect is Muirhead v. Industrial TallkSpecialities Ltd [1985] 3 All
E.R. 705 (C.A.), where a fish farmer suffered loss due to a defect in an electric pump. He was allowed
to recover from the manufacturer in respect of the physical loss of some lobsters and the loss of profit
thereon; but not for costs and loss of profit generally. The distinction between physical injury and
economic loss in such circumstances is "technical and against the merits". A blemish, one would have
thought, in our law of a kind which we would have thought archaic and risibile had we met it in the Law
of the Twelve Tables. Lord Roskill in Veitchi 's Case, supra n.44, indicates that Spartatl Steel may require
reconsideration by the House of Lords: it certainly needs to be reconsidered.
46. Ibid.
47. See, e.g., The Grandcamp [1961] Lloyd's Rep. 504.
48. Cand/wood Navigation Corp. Ltd. v. Mitsui O.s.K. Lines: The Mineral TratlSporter [1986] A.C.1.
49. Leigh r.s Sil/avan Ltd. v. Aliakmon Shipping Co Ltd: The Aliakmon [1986] 2 All E.R. 145 (H.L.).
Disapproving a dictum of Sheen J. in The Nea Tyhi [1982] 1 Lloyd's Rep. at p.612 and overruling the
decision of Lloyd J. in ShijfiJhrt und Koh/en GmbH v. Chelsea Maritime Ltd: The Irene's Success [1982] 1
All E.R. 218. But see the powerful dissent of Goff L.J. and the doubts of Oliver L.J. in the Court of
Appeal: The A/iakmon [1985] 2 All E.R. 44.
50. A cry particularly dear to commercial lawyers; yet there is no reason why commercial law, above
all, should be static.
51. La Societe Anonyme de Remorquage a Helice v. Bennetts [1911] K.B. 243.
52. See The Minera/ Transporter, supra nA8, at p.19: per Lord Fraser.

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been denied by some mysterious technicality. And so one might continue. It is
submitted that as a control mechanism the Penzance doctrine is not only
suspiciously technical but also too restrictive.

Now let us turn to another control mechanism which is gaining ground. This
has a respectable pedigree. It is the very mechanism that founded the law of
contract through the medium of assumpsit. It is the notion of loss by the plaintiff
caused by reliance upon the defendant. It is now becoming clear that purely
economic loss will be remedied where it arises from such reliance upon the
defendant's words53 or deeds,54 provided, at least, that there is a relationship
between the parties "equivalent to contract".55 Where misrepresentation is
concerned there is nothing new in such a notion; there could never be recovery for
fraud unless the plaintiff had relied upon the fraudulent statement. But where
deeds, other than misrepresentations, are involved a difficulty which is, perhaps,
more than semantic arises. What is meant by "reliance"? One gets no guidance
from the speeches of Lords Fraser and Roskill in Veitchi's Case,56 but on a broad
reading it seems to mean that the plaintiff must "look to" the defendant to
safeguard his interests. Lord Roskill instances the case of the buyer who looks to
the seller's, rather than the manufacturer's, skill and judgment under s.14(3) of the
Sale of Goods Act; in which case "reliance" appears to mean little more than the
second proposition, that the situation must be "equivalent to contract". Yet, as
Robert Goff L.J. has suggested, "reliance" can mean something else; for, as he
points out "every motorist relies on every other motorist in the vicinity to drive
carefully",57and in this sense the reliance concept becomes subsumed within the
concept of negligence itself - and if this were so the way would be open for much
wider liability than either Hedley Byrne or Veitchi's Case envisage.

As far as the law now goes, however, it would seem that the purely economic
loss is recoverable under this control mechanism where there is a situation
"equivalent to contract" and reliance in the first of the senses just mentioned. Why
this restriction should be placed upon economic, as opposed to physical, loss is not
explained. It may arise from the fortuitous fact that in Hedley Byrne and Veitchi a
contractual framework was involved. But awkward questions call for answers. If a
manufacturer puts water into a ginger beer bottles8 which reaches me as the
ultimate consumer why should I have no remedy against him while, by contrast, I
would have a claim if he let a snail into the bottle and I were to contract a minor
attack of gastritis?s9The answer seems to be that in the case of defective goods the

53. Hedley Byrne (5 Co. Ltd. v. Heller (5 Partners Ltd. [1964] A.C. 465.
54. Junior Books v. Veitchi (5 Co. [1983] A.C. 520.
55. Hedley Byrne at p.529, per Lord Devlin.
56. Supra n.54.
57. Muirhead v. Industrial Tank Specialities [1985] 3 All E.R. 70S, 714.
58. The interesting suggestion raised by Stamp L.J. in Dutton v. Bognor Regis United Building Co.
[1972] 1 QB. 373, 414-415.
59. In Donoghue v. Stevenson the injury almost fell into the de minimis category.

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situation between plaintiff and manufacturer is not "equivalent to contract"; but
nor is it in the case of the snail. 60 Or is the truth that there is an inarticulate
premise that there is something more worth a remedy where physical loss is
concerned than where economic loss is?61 Unless this inarticulate distinction can
be justified and made articulate in the form of a principle (which, it is submitted, it
cannot) there seems little reason why the "neighbour" principle should not apply
to economic as much as to physical loss. Which suggests the need for an advance
in the former field beyond the "equivalent to contract" situation.

In this context it is important to note that in Hedley Byrne Lord Devlin himself
said "I regard this proposition62 as an application of the general conception of
proximity. Cases may arise in future in which a new and wider proposition quite
independent of any notion of contract will be needed. ,,63 This points to the desirability
of easing the "floodgates" beyond the reliance/contract bar towards some wider
concept of proximity. That, it is thought, is something that needs to be done. But
the question is "What wider concept?" An answer was boldly supplied by an
eminent Chancery judge64 in Ross v. Caunters65 (where a legatee lost her legacy on
account of a solicitor's negligence): proximity should be defined in the context by
reference to the Atkin test itself - and recovery by the legatee thus permitted
despite the absence of physical damage or any question of contract or reliance, in
the sense of "looking to" the solicitor. And in Ministry of Housing and Local
GflVernment v. Sharp66 the Court of Appeal took a similar bold step.

Is that the correct conclusion? If, as has been remarked above, the Atkin
principle is regarded as restrictive rather than permissive in that it is confined to
direaly foreseeable consequences it seems, on the face of it, to provide as good an
answer to the "floodgates" as any. No perfect mechanism can ever be devised and
what is "proximate,,67 in the Atkinian sense in relation to a given fact situation is
always an open question: that is what the administration of justice is about. But it is
suggested that it is desirable to raise the "floodgates" above the level of the
Penzance or Veitchi tests and that these "policy" mechanisms are not

60. Though one might perhaps interpose that there is just as much of a contractual framework
between consumer and manufacturer as there was between plaintiff and sub-contractor in Veitchi's
Case.
61. It is worth refuting the ridiculous sllggestion often made that economic loss should be
irrecoverable because recovery is inhibited by the philosophy of the "market place". Of course it is
where business competition is concerned - and that goes back to the Gloucester Grammar School Case
(1410) Y.s. 11 Hen.4, fo.47, pl.21 - but not all economic loss arises in the course of competition.
62. Namely, the "equivalent to contract" proposition.
63. [1964] A.C., at pp.530-531.
64. Megarry V.-c.
65. [1980] Ch.297.
66. [1970] 2 QB. 223.
67. In Caltex Oil (Australia) Ply. Ltd. v. Dredge Wi//emstad (1976) 136 C.L.R. 529 the High Court of
Australia, while apparently refusing to adopt the Atkin test simpliciter, allowed recovery for economic
loss caused as the result of damage to a third party's pipeline upon the basis of what they regarded as a
restricted definition of "proximity" or "propinquity". But it is thought that the facts fitted the Atkin
fonnula.

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"considerations which ought to negative, or to reduce or limit the scope of the
duty.,,68

So far, so good. But there is one kind of "flood" that "proximity" cannot
control. The case, already referred to, of the lost wages of Blackburn ].'s miners.
In such a case there is close proximity between the "drowner" of the mine and the
workers: their presence and the loss of their wages could be readily foreseen and
the loss of the wages was a direct result of the "drowning". Yet Blackburn]. clearly
had it in mind that such losses were greater than anyone defendant could be expected to
bear. Some mechanism other than proximity is therefore needed to meet such a
case. There is one possible, pragmatic, "floodgate" to hand. The problem of
overwhelming loss is no stranger to the law: it is met by a number of statutes. In
particular both in maritime and in aviation law statute and international convention
limit the amount of liability. This is plain, and essential "policy". Is it beyond the
powers of a legal system which grapples with the problem of comparative fault in
contributory negligence and solves the difficulties of bankruptcy and liquidation to
devise a method of limiting the amount of liability by limiting the amount of claims
where the loss is too great for one defendant to bear?

68. Anns v. Merton London Borough Council [1978] A.C. 728, 751-752: per Lord Wilberforce.

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