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Negligent misstatement

Previous: Public Bodies

When a statement of advice is to be given by one person to another, Lord Reid suggests that the adviser has 3 courses of action. They can refuse to answer, they can answer with qualification, or they can answer without qualification. In the latter case, if the person relies upon the statement, liability may result is the statement was made negligently. This is known as a case of negligent misstatement.

Policy concerns

Before we proceed to examine any cases, there are a few policy concerns associated with these types of cases, which must be considered.

  • Causation – In any negligent misstatement, the loss is due to the claimant’s acts, not the advice giver’s, therefore there must be reliance
  • “Fear of liability in an indeterminate amount for an indeterminate time to an indeterminate class” – words are more volatile than deeds, therefore we must not attach too much importance to them
  • Free riding – negligent misstatement claims can undermine contractual consideration, as in riding upon free advice, there is no consideration; this could be seen as unacceptable

Before Hedley Byrne

The case which recognised liability for negligent misstatements is that of Hedley Byrne v Heller & Partners Ltd [1964]. Prior to this case, it was necessary to show recklessness in a deceit claim. In Candler v Crane, Christmas & Co [1951] for example, accountants were ruled not to owe a duty of care in disclosing accounts to third parties, despite the possibility being created in Pasley v Freeman [1789]. Controversially, Lord Denning’s dissenting judgment suggested that if the accountants knew of the reliant transactions which would take place due to their advice, there could be a duty. This opinion became the law in Hedley Byrne v Heller & Partners Ltd.

Hedley Byrne and beyond

The Hedley Byrne v Heller & Partners Ltd [1964] principle is that when one person relies on the skill or assistance of another, and the advice givers knows that this reliance will likely occur, a duty of care will arise over the advice being given. There must be a special relationship and then reasonable reliance.

This principle has since been extended by the cases of White, Henderson and Barclays Bank.

In White v Jones [1995], it was ruled that liability does not have to be explicitly assumed, it may be done so impliedly; in this case by inducing reliance when taking responsibility for a task. In Henderson v Merrett Syndicates [1995], it was again established that taking responsibility for a service creates a duty of care under the Hedley Byrne principle. However, it was further established that the exact statement giving rise to this duty of care does not need to be pinpointed, an ‘overall’ duty can be assumed; while it was also allowable to have concurrent contractual and tort claims.

A special relationship

For an economic loss claim to succeed, there must be a special relationship; a provider of information cannot owe a duty under Hedley Byrne to anyone who uses that advice without their knowledge. In the cases of Mutual Life and Citizens’ Assurance Co Ltd v Evatt [1971, Australia] and Chaudry v Prabhakar [1989] (car buying), it was suggested that duties of care can even arise in social contexts, where advice is given gratuitously. This may not amount to free riding. Below are a number of different groups of people where cases have been bought to attempt to establish special relationships such that negligent misstatement claims might succeed.

Company auditors

The most common claim initially appeared to regard reports of accounts on companies. For example, if an accountant negligently audits a company and that audit is published in a newspaper, is the accountant liable to every person who loses money in reliance of the newspaper’s advice? Although we usually rely on this case to establish a duty of care in a wide variety of situations, the case of Caparo Industries v Dickman [1990] involved a claim like this. It established that when there is a relationship of reliance between the adviser and advisee, 4 factors must be considered:

  • Purpose – was the advice given for a known purpose at the time is was given?
  • Communication – did the adviser know the advice would be communicated to a specific person or member of ascertainable class?
  • Reliance – did the adviser know that the advice would likely be acted on without independent enquiry?
  • Action – did the claimant rely on the advise to their detriment?

On the facts of Caparo, the claim failed as it did not satisfy the above test. However, this judgment was not without its controversy. Did it penalise small investors who could not afford their own independent audit, or did is penalise the auditor as while the cost was borne by the client of the auditor, the benefits of the audit could be enjoyed for free by others?

The following year, in James McNaughton Paper Group v Hicks Anderson [1991], the Caparo criteria was narrowed, with an exhaustive criteria of 6 points.

  1. The purpose of the advisor creates a duty of care without wider applicability (it seems)
  2. The purpose for which the statement was communicated; was it designed for reliance or just information?
  3. The relationship, if not the direct advisee; was it intended?
  4. The size of the class of advisees – in the interest of protecting against disproportionate liability
  5. The knowledge of the advisor; was reliance known
  6. The reliance by the advisee; should he have used his own judgment too?

Company directors

Generally, company directors are not liable to clients of their companies for negligent misstatement. In Trevor Ivory Ltd v Anderson [1992, New Zealand], it was said that the director was no liable to his liquidated company for advice given prior to the liquidation as he had not assumed personal responsibility. This was confirmed in the UK in Williams v Natural Life Health Foods Ltd [1998], where the director was even credited in the brochure whose advise caused loss, yet was not liable outside of the then liquidated company. It was said, however, in Standard Chartered Bank v Pakistan National Shipping Corporation [2002] that fraud could induce personal liability for directors.

Company Employees

Is is quite concerning that while directors appear not liable in their actions, company employees can be, as was illustrated by Merrett v Babb [2001], in which a surveyor was said to have taken personal responsibility in carrying out a survey for the company’s client.

Tenders

Throughout our commonwealth, opposing views are present on the liability of ‘tender makers’. In Canada, makers of specifications are liable to those who submit tenders, due to the economic inefficiency which would be involved otherwise. This can be seen by the case of Edgeworth Construction Ltd v Lea [1976, Canada]. Whereas, in New Zealand, a builder had to stand the cost of a negligent specification himself, making a loss on the project in Turton v Kerslake [2000, New Zealand].

Pre-contractual representations

If a negligent statement is made during negotiations which causes loss when a contract is agreed, the loss bearer may have a claim for damages, as case the case in Esso Petroleum Co Ltd v Mardon [1976]. Here, the lessor estimated a fuel throughput which was ~300% of the resulting throughput. The lessor owed a duty upon this fact. In Howard Marine v Ogden [1978], a material fact, the capacity of ships, was also incorrect so liability was assumed. This is now one of the few areas which is partly covered by statute, namely the Misrepresentation Act 1967, where a duty is owed where a proceeding contract is made for statements which the negligent party did not believe to be true when negotiating the contract. Therefore in Edgeworth construction Ltd v Lea, for example, the Act would not apply (neglecting jurisdiction) as a proceeding contract was not formed between the surveyor and Edgeworth Construction.

There may be a s 2 duty from the Misrepresentation Act 1967 and a Hedley Byrne duty concurrently, the former only distinct as it requires a proceeding contract.

Miscellaneous additions

To add a few more examples, in Smith v Eric S Bush [1989], a valuer owed a duty in a valuation for the purpose of reliance; a purchaser could not rely on a valuation provided for different purposes for the bank in Scullion v Bank of Scotland [2011] and there was no duty to keep a website of recommended contacts up to date in Patchett v Swimming Pool & Allied Trades Association [2009]. Prior to McFarlane v Tayside Health Board, liability could not be incurred for failing to advise on the potential reversal of a vasectomy, as in the case of Goodwill v British Pregnancy Advisory Service [1996]. McFarlane would now cover this though.

Disclaimers

Subject to giving reasonable notice and not violating the Unfair Contract Terms Act 1977, liability can be disclaimed to prevent negligent misstatement claims. Hedley Byrne itself is a good example of this; the claim failed due to liability being disclaimed, though had it not been, it is likely that the claim would have succeeded. It was deemed that the disclaimer was effective as the claimants had been given reasonable notice of it. The Unfair Contract Terms Act 1977 provides that liability for personal injury from negligence cannot be restricted in s 2(1), while any other exclusions must be reasonable in s 2(2).

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