Law- Negligence

A negligent misstatement or careless statement causing physical damage is actionable in negligence, as is a fraudulent statement causing economic loss in the tort of deceit. It was only in Hedley Byrne v Heller [1963] where the defendant bank falsely and negligently gave its opinion that a company was financially sound that a careless statement causing pure economic loss was held actionable by the House of Lords. The courts system develops incrementally as new cases are heard. Hence, this essay will focus on one aspect of tort law- the claim for economic loss, which was first demonstrated in the Hedley Byrne case and how it has led to other decisions of the courts in subsequent cases.

The facts of the Hedley Byrne case are that the claimant was an advertising company that was offered work by a small company with whom they had no previous dealings. It sought a reference from the company’s bank which was prepared without any checks being made into the current state of finances. In reliance upon the bank’s reference, the claimant carried out work for the company which then went into liquidation before any payment was made. The claimant sought to recover its losses from the defendant bank on the basis of its negligent misstatement. The legal principle which also led to the development of the courts is that the House of Lords held that there were circumstances in which a person could be liable in tort of losses caused by a statement which he made if he did not take sufficient care to ensure that his statement was accurate or if he did not make it clear that he had taken no steps to ensure its accuracy.

The Hedley Byrne case opened new area for tortuous liability. The House of Lords imposed strict limitations upon the situations that would give rise to liability. First, a special relationship must exist between the parties before there is a possibility of liability for negligent misstatement that causes economic loss. Lords Delvin and Morris argued that as long as the relationship is “equivalent to contract”, the relationship should be recognised, and hence liability of the defendant proven. The significance of this case therefore lies in its general approach to the question of how the existence of a duty of care ought to be established in general.

The relationship will exist if one party exercises skill and judgement and the other party acts in reliance of this skill and judgement
The person making the statement must possess skill in relation to the particular statement made and should realise that the other party will act in reliance upon the statement
The party to whom the statement is made must have acted in reliance with that statement in circumstances where it was reasonable for him to rely upon the statement

Examples of “special relationship” under Hedley Byrne v Heller include that between an environmental health inspector and ...

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The relationship will exist if one party exercises skill and judgement and the other party acts in reliance of this skill and judgement
The person making the statement must possess skill in relation to the particular statement made and should realise that the other party will act in reliance upon the statement
The party to whom the statement is made must have acted in reliance with that statement in circumstances where it was reasonable for him to rely upon the statement

Examples of “special relationship” under Hedley Byrne v Heller include that between an environmental health inspector and the owners of a guest house in Walton v North Cornwall District Council [1997].

Problems have arisen with Hedley Byrne duties of care as statements, whether oral or written, are often passed on and can easily reach an “indeterminate class”. The question arises as to how far proximity can extend.

In the 1990s, in order to prevent the defendant being held liable to a large amount of potential claimants, the House of Lords re-examined the Hedley Byrne principle. In Caparo v. Dickman [1990], a case which was in contrast to Smith v. Bush, and “tightened the rules”. Under Caparo v Dickman, the defendant must be aware that his statement will be communicated to the plaintiff either as an individual or as a member of an identifiable class and in connection with a specific transaction.

The Caparo case considered the liability of an auditor for financial loss suffered by investors. However, it also set out the three pints which a court must consider to establish whether a duty of care exists. Lord Bridge said that “the defendant giving advice was fully aware of the nature of the transaction which the plaintiff had in contemplation, knew that the advice would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice in deciding whether or not to engage in the transaction in contemplation”

The House of Lords held that no duty of care was owed by the defendant, since the primary purpose of the account was not for guidance of personal investment. The “Caparo test” was introduced included the three principles of

Reasonable foresight of harm
Sufficient proximity of relationship, which was established in the earlier 1964 Hedley Byrne case
That is fair, just and reasonable to impose a duty

It stated that a duty of care in misstatement would only arise when the person making the statement is fully aware of the purpose of it; that acting on the advice given in the statement without further independent research is reasonable in the circumstances; and that this is to the advisee’s detriment. The test was applied in Morgan Crucible Co, Plc v. Hill Samuel Bank [1991], where the defendant was held liable since the claimant had satisfied all three aspects of the test.

The courts have also developed the principles from the Hedley Byrne case in Smith v Eric S Bush [1989]. The plaintiffs were intending to buy houses and each applied for a mortgage. The prospective lenders had the properties in question valued, in the first case by an independent firm of valuers and in the second case by an employee of the council. The cost of the valuations fell on the applicants, but no privity of contract existed between applicant and valuer. The valuation in the second case was not shown to the applicant, but he assumed that if the council were prepared for to grant the loan then the house must surely be all right.

This led the courts to question the proximity of the respective applicants. The House of Lords extended the Hedley Byrne liability to proximate third parties.

The subsequent developments the courts have untaken since the 1964 Hedley Byrne case can be seen in Home Office v Dorset Yacht Co [1970]. The facts of the case are that the borstal boys were imprisoned on an island where boats were moored but were unskilled in sailing; it was likely that they would take a boat and damage it. The principle in this case is that a special relation must be established to raise a duty of care where the defendant has a right of control over the third party.

After the Caparo case in 1990, the fourth rule was set out in Hedley Byrne- that other party knew, or ought to have known, the purpose for which the defendant required the advice or information.

More recently, the courts have additionally to the requirement of reliance, emphasised the notion of assumption of responsibility by the defendant. In Henderson v Merrett Syndicates Ltd [1994], the House of Lords held that the doctrine of assumption of responsibility could apply to anyone rendering a professional service. There could therefore be liability for negligent misstatement regardless of whether or not there was a contractual relationship between the parties, provided the victim could also show reliance on the advice.

In 1995, the case of White v Jones showed a solicitor drawing up a new will, splitting the testator’s estate between the two plaintiffs. He negligently failed to do this by the time the testator died. The estate was later passed in accordance with the testator’s wishes expressed in a previous will. The plaintiff sued for negligence. It was held that the solicitor had assumed a special relationship between them, creating a duty of care. Thus, he had to indemnify them for their loss. This is extended Hedley Byrne case of liability to proximate a third party.

While the courts have declined to impose liability for a statement made on special occasion, liability may be imposed where the victim has no means of checking the information. It must be clear that the answer is important and relevant enough for the plaintiff to rely on. For example, in Chaudhry v Prabhker [1988], a knowledgeable friend was held to owe a duty of care in relation to negligent advice about a car given to the claimant, who knew nothing about cars.

In conclusion, the development of negligent misstatement derives from the case Hedley Byrne v Heller that sets out the rule that the claimant can succeed if a special relationship exists between claimant and defendant. Also, actionable negligent misstatement occurs when the claimant relied on defendant’s advice or information. The courts will decide if a special relationship exists by asking a few questions, in the Caparo case, it is “Did the defendant know or ought defendant to have known why the claimant required advice or information?” thus setting out the three principle tests to establish if a duty of care was present and further developed negligent misstatement. The other question the courts will ask is “Did the defendant assume responsibility to give advice or information”. This was founded in Henderson v Merrett Syndicates. Therefore, it is not easy to bring an action against someone who carelessly says something as precedence takes place evidently in the UK courts.

1554 words

References

A Level Law Textbook by Penny Booth, Jean Holden, Gordon Mcleish, Jill Spencer

Tort Law by Sue Hodge

Tort Law Express by Emily Finch, Stefan Fafinski

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