In New South Wales, two disabled people recently sued the doctors who oversaw their births, claiming that had the doctors been more diligent in spotting the likelihood of a disability, their parents would not have had them.[1] At no stage was it contended that the doctors actually caused the disabilities in question.

The claim—thus far in the appeals hierarchy—has been unsuccessful, but more worrying is the mindset it represents. All too often the courts are asked to act as an avenue to welfare rather than compensation. Guy Swain was left a quadriplegic after diving into a sandbank at Bondi Beach—his case against Waverley Council is currently before the High Court.[2] Kerry Melchior sought and was awarded the costs of raising her (perfectly healthy) son Jordan, who was born after a botched sterilisation procedure.[3] Diane Burns sued Hoyts after she was injured trying to sit in a cinema seat that had folded back.[4] And Rosellie Cole, who had a blood alcohol content of 0.238gm per 100ml when she was run over by a four wheel drive, sought compensation from the South Tweed Heads Rugby League Football Club for her injuries.[5] All this serves to create the kind of risk-averse society University of California Professor Aaron Wildavsky warned about some 20 years ago:[6]

 [I]f you do nothing without knowing first how it will turn out, you cannot do anything at all. Risking and living are inseparable. Almost any act may stand convicted when judged by the rule of no trial without prior guarantees against error.

However, weighing against these concerns is a pressing danger that legislators will over-react and remove our access to the law and its remedies. Unchecked recklessness is as concerning as a risk-averse society. Civil lawsuits can be of immense use to the community, compensating victims and deterring potential offenders. In limited circumstances, they can punish offenders.

The challenge then is for the law to compensate and to deter on the one hand; and, on the other, to recognise that sometimes when something goes wrong nobody is to blame. After examining the development of tort law and its problems, I will outline reforms that would effect the necessary balance between plaintiffs’ and defendants’ interests.

The law of tort and its principles

A tort is a civil wrong. Tort law lets citizens seek compensation from one another for wrongs that have been committed. Examples of torts are assault, battery, false imprisonment, interference with goods and negligence. The modern law of negligence comes from the 1932 UK case, Donoghue v. Stevenson.[7] Mrs Donoghue went on a daytrip with a friend who brought along some ginger beer. Unfortunately there was a decomposing snail at the bottom of Mrs Donoghue’s bottle and later she suffered gastroenteritis. Contract law recognised the links between the manufacturer and the retailer, and between the retailer and Mrs Donoghue’s friend. But there was no contract between the manufacturer and the eventual consumer. Negligence was applied to recognise that Mrs Donoghue and the manufacturer had a link of some kind—Lord Atkin introduced the ‘neighbour principle’:[8]

You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law is my neighbour? … [P]ersons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation.

Mrs Donoghue was entitled to a remedy. The manufacturer owed her a duty of care, which it had breached, which in turn caused damage.

Negligence’s evolution and problems

In the last 72 years, negligence has evolved dramatically. Today, Mrs Donoghue’s case would be called a product liability case; other categories include public liability and professional liability. The major development in negligence law has been an ever-widening duty of care. Lord Atkin’s term, ‘reasonably foreseeable’, can be construed broadly, and the scope of those duties is unclear. Duties will exist between a doctor and patient, manufacturer and consumer, between councils and citizens, but to what extent? Should a doctor be obliged to warn a patient of a complication predicted to occur once in every 14,000 operations? In 1992, the High Court of Australia said ‘yes’.[9] Former Oxford law professor Patrick Atiyah wrote of the ‘damages lottery’ created by judges’ increasing willingness to ‘stretch the law’.[10]

Insurance companies struggle to offer affordable insurance when the law is highly unpredictable, when people find it too easy to win claims against one another and when payouts are over-inflated.[11] Up until major government reforms in 2002-03, these three conditions for high insurance premiums were satisfied, imposing a significant cost on the community. NSW Chief Justice Spigelman spoke of the effects on professionals:[12] many doctors retire early, others refuse to perform risky services such as obstetrics, insurers will not give cover to engineers advising on cooling-tower maintenance, building consultants removing asbestos or agricultural consultants advising on salinity. As for local councils, in 2002 the Daily Telegraph listed 50 public events that were either cancelled or likely to be cancelled due to a lack of insurance.[13] These included pony rides, cricket matches and even a ‘wool festival’.

The Australian insurance industry’s underwriting results between 1995 and 2001 are graphed below.[14] The average quarterly result from the period graphed is a loss of $314 million. That is, the insurance industry’s claims expenses were, on average, $314 million greater than the industry’s premium revenue.

The losses should not be blamed entirely on increasing amounts of litigation. Up until its collapse in 2001, HIH under-priced its policies so as to increase market share.[15] The theory was that a company as large as HIH could afford to run its insurance operations at a loss, whilst generating revenue from investments. The effect was that insurance policies were unsustainably cheap. To make matters worse, there were the 11 September 2001 terrorist attacks in New York and Washington, the December 2001 collapse of Enron and the 12 October 2002 attacks in Bali.

Reforming tort law

There are three ways we might try to reform total law to make it more predictable, to balance plaintiffs’ and defendants’ interests, and ensure that payouts are not excessive. The first involves restricting the duty of care owed, the second limits the damages that can be recovered, and the third involves voluntary contracts as an alternative to tort remedies.

The importance of a restricted duty of care

Interestingly, well before the ‘liability crisis’ and government tort reforms of 2002-03, the courts themselves had been bringing matters back to an even keel. In 1998, the High Court held that the Northern Territory Conservation Commission was not negligent when two intoxicated teenagers fell off a cliff and claimed there should have been a warning sign or railing—the risks for the teenagers were obvious.[16] In 1999, Australian High Court Justice McHugh coined the ‘incremental approach’ for establishing a duty of care.[17] The approach says that the law should be inclined against expanding its scope and application; it should do so only incrementally. In 2000, two rugby players were barred from suing the International Rugby Football Board (IRFB) when they were injured in a local competition after a collapsed scrum.[18] In 2002 the High Court held that an indoor cricket facility did not have to display signs warning patrons of the dangers of playing the game.[19] And both Diane Burns’ and Rosellie Cole’s claims (mentioned earlier) were unsuccessful.[20]

Cases where someone trips on a footpath and sues the local council have attracted fierce public criticism. Up until recently, it was likely that the council—or its insurers—would settle the case out of court, avoiding all the costs and hassles of contested litigation, and the very real possibility that they would lose. So just about anyone who fell over would receive ‘compensation’ from councils. But in 2001 the High Court held that councils do not owe a duty of care to pedestrians who trip on an uneven footpath.[21] After all, ‘a highway is not to be criticised by the standards of a bowling green’.[22] One clarification of the duty of care avoided a large amount of future litigation and costs.

These decisions may seem like common sense. But had the legal ‘stretching’ Atiyah identified continued from previous decades, the cases might have been decided differently. A restricted duty of care demands a degree of personal responsibility, without removing access to full compensation for those who are genuinely aggrieved.

Recognising this, state governments—with the exception of South Australia—have included in their tort reforms the same definition of the duty of care owed.[23] The definition incorporates a number of considerations arising from the common law, such as whether a reasonable person in the accused’s position would have taken precautions, the probability that harm would occur if care were not taken, the likely seriousness of the harm, and the social utility of the activity creating the risk of the harm. The definition remains sufficiently broad as to give discretion to judges. Specific to professional liability, state governments—with the exception of Western Australia and South Australia—have legislated that professionals are not negligent if they act according to standard professional practice (the Bolam test).[24] This test was not applied by the High Court in 1992, which found a doctor negligent for failing to warn a patient of a one in 14,000 complication to her surgery, sympathetic ophthalmia, that left her completely blind.[25] Ms Whitaker was blind in one eye before the operation and contended that, had she known of the risk, she would not have gone ahead with the procedure. Dr Rogers produced a number of witness doctors who claimed they also would not have warned Ms Whitaker of the possible complication.

This case is a good illustration of the competing interests raised by professional negligence. On the one hand, it seems unreasonable to expect professionals to go beyond general practice and training. On the other, sometimes there are special cases that demand particular attention and vigilance. Thus the Bolam test has been introduced, but with an ‘out’ clause. Courts are entitled to disregard standard practice if they consider it ‘irrational’ (in NSW, Queensland and Tasmania) or ‘unreasonable’ (in Victoria).

Damages reforms

Along with restrictions on the duty of care owed, state governments have targeted the damages that courts are entitled to award. The most common reform has been the introduction of a general damages threshold. General damages are awarded for non-economic loss, such as ‘pain and suffering’ and ‘loss of the enjoyment of life’. General damages represent 45% of personal injury claims between $20,000 and $100,000, and thus ‘reform to this head of damages would have the greatest impact among the range of tort reforms’.[26]

In Victoria, a person has to be more than 5% impaired—based on a medical table calculating whole-person impairment—before he or she can claim general damages. The Victorian threshold rises to 10% for mental impairment. In New South Wales the general damages threshold is 15%. In Western Australia and Tasmania there are monetary thresholds of $12,000 and $4,000 respectively. In South Australia, a plaintiff either has to be impaired for seven days or incur at least $2,750 in medical expenses. The only state not to impose such a threshold is Queensland, which rates injuries and awards general damages following a table with guideline payouts.

What this means is that defendants are effectively given the right to be negligent, injuring someone up to a given level before any general damages are owed. If the injured person went to a public hospital, or if he or she was treated on a weekend, there would be no other recoverable costs such as medical expenses or lost wages. Only amputees and other seriously injured plaintiffs can be guaranteed that the law will be open to them.

The Productivity Commission has released statistics for court cases in Australia. These indicate, at a general level of analysis, that general damages reforms have contributed to a reduction in the number of civil cases. Claims between $20,000 and $100,000 are heard mostly at a District Court level. The graph below shows the number of civil cases, on a per capita basis, in all Australian courts at that level:[27]

There has been an approximate 30% drop in the number of civil cases in 2002-03.

It is interesting to compare the change in district court cases in Queensland, where general damages are now calculated from a table, and the change in New South Wales, where the strongest threshold (15%) applies:[28]

There was a 26% drop in the number of Queensland District Court cases in 2002-03. In New South Wales, the drop was 56%.

The dramatic reduction in NSW cases raises the question of whether the reforms in that state have gone too far. Do they provide an unreasonable barrier to the law and its remedies? Were Mrs Donoghue—ill from her ginger beer and snail—to lodge her claim in NSW today, it is unlikely that she would receive much (if any) compensation. If Mrs Donoghue’s gastroenteritis was treated in a public hospital there would be no medical expenses; likewise if she was in the workforce she would be ineligible for any lost wages if she was ill on a weekend. General damages would be the principal damages Mrs Donoghue would seek, but since it is unlikely there would be the required amount of whole person impairment, she would be ineligible for those damages too.

The Australian insurance industry is unlikely to complain. It recently announced a significant increase in its profitability. On 29 February 2004, Channel Nine’s Business Sunday reported of ‘the week the insurance sector could do no wrong’.[29] Promina posted a profit of $298 million, more than $100 million above its forecast; QBE made $572 million, more than double the previous year’s result; IAG made a half-year profit of $302 million; and Suncorp’s profit rose by just under 200%[30] In light of these results and plummeting personal injury claims, lawyer Eugene Arocca observed, ‘Everyone has been given a huge financial windfall except the victims.’[31]

Of course, giving victims a huge financial windfall is unsatisfactory as well: there needs to be a balancing of plaintiffs’ and defendants’ interests. In that sense, Queensland’s approach to general damages is preferable. By having a table with guideline payouts, Queensland’s legislators have tackled the twin problems of vagueness in the criteria for general damages on the one hand; and the socially undesirable results of imposing thresholds on the other hand. Importantly, Queensland’s approach works, contributing to a 26% drop in the number of cases.

The value of voluntary contracts

The amount of compensation that tort law will award may be out of line with an individual’s risk profile. With onerous limits such as general damages thresholds, a consumer of a professional service may be happy to pay a higher price for the service, in exchange for a higher level of payout should something go wrong. Or the consumer may prefer to pay the professional a lower fee, and accept a lower level of payout. In this way, individuals could contract for prices and payouts that would be smaller or larger than normally awarded by the courts. They would choose contracts according to their risk profile, for which suppliers would choose different levels of insurance.

In 2002 the Director of the London-based International Policy Network, Julian Morris, advocated the use of such contracts.[32] Morris listed a number of benefits, among which are reduced administrative costs, a better idea of entitlement to a payout, and also a better idea of the actual amount of that payout.[33]

Admittedly, these contracts raise a number of fairness concerns. Professional groups fear that big business might use its ‘financial muscle’ to force professionals to abandon reduced liability given to them by government reforms.[34] Or perhaps monopolies would be created, where doctors, lawyers and financial planners band together and decide to provide a service only when a consumer has agreed in contract to dramatically reduced payouts in the event of an accident? Monopolistic insurers may refuse to insure more junior professionals, unless their clients have surrendered all possible entitlements. And what of gross negligence? Will contracts protect a drunk financial adviser or a doctor who leaves a scalpel inside a patient? Those who fear that big business will bully professionals forget the myriad protections in contract law. Parties are protected by provisions relating to ‘unfair dealing’ and ‘undue influence’. Contracts can be set aside if there is any duress, whether it is physical or economic.[35] Likewise if someone misrepresents their credentials or a state of affairs, inducing another person into a contract.[36] If there is a serious mistake, whether by both parties or just the one, the contract can be made void.[37] And there is the safeguard of unfairness itself or, in legal-speak, unconscionability. A court may decide that a contract is so unfair that to allow its existence or enforcement would be neither right nor reasonable.[38]

These safeguards are very strong—perhaps even too strong. In framing legislation recognising the contracts between service-providers and consumers, parliaments may have to limit some of the above provisions. It is important, however, that there is ample protection for consumers from the kind of monopolistic scenarios discussed above.

As for gross negligence, it should be remembered that a contract is essentially an exchange. Under the kind of contract discussed here, the professional exchanges his or her services for payment and for the consumer’s acceptance of a specified payout should something go wrong, which is in line with his or her risk profile. If a financial adviser is drunk, the client has not received anything approaching the services for which they contracted. The contract would have been breached. Likewise for a doctor who leaves a scalpel inside a patient—the patient could hardly be described as having received medical ‘treatment’.

Contracts provide a mechanism for consumers to choose prices and levels of liability in line with their risk profile. If a business wants the prospect of full compensation from a negligent professional, it will have to pay higher professional fees to enable the professional to pay higher insurance premiums. Professionals who are unwilling to accept uncapped liability will incur lower insurance premiums, and will therefore be able to charge a lower price for their services. Consumers will be able to choose between lower fees and lower liability, or higher fees and uncapped damages if things go wrong. Unfortunately, thus far the potential use of contracts has not received much interest from governments. They have preferred instead to reform current tort laws.

Conclusion

With rocketing insurance premiums and court awards that are out of touch with community expectations, the response from governments across Australia has been mixed in quality. A restricted duty of care is essential to prevent frivolous claims from finding success in the courts. State legislation in this area is to be commended, particularly those reforms establishing that generally professionals acting in accordance with standard professional practice are not negligent (the Bolam test). Jurisdictions which have not implemented the Bolam test should do so.

Reforms implementing general damages thresholds, on the other hand, are unsatisfactory. All too often thresholds give defendants the right to be negligent and to injure someone up to a given level before any liability is owed. The most onerous threshold, seen in NSW, allows for a scary amount of injury. By definition, general damages (awarded for non-economic loss such as ‘pain and suffering’) allow for a large amount of judicial discretion—if governments are concerned that this discretion is being abused, Queensland’s approach of having guideline payouts is the best solution.

Finally, and quite independent of tort law reforms, voluntary contracts provide the perfect mechanism for consumers to choose prices and levels of liability in line with their risk profile. Weaker parties are protected by numerous provisions in contract law—governments should drop their opposition to the use of such contracts and let parties get on with their own individual choices.