Principles of the law of Tort
Principles of the law of Tort
Negligence
In order to understand the reasons behind the court's decisions regarding negligence involving pure economic loss we first need to know what negligence means. The tort of negligence can be broken down to three main points; is there is a legal duty of care owed by the defendant to the plaintiff? Is there a breach of that duty by the defendant? And finally the damaged suffered by the plaintiff, is it a result from that breach? The case of Donoghue v Stevenson [1932] gives a perfect description of duty of care including proximity and reasonably foreseeable i.e. the neighbour principle. The test for foresee ability is undemanding; it refers to the ability of the reasonable man in the position of the defendant to have foreseen the real possibility of harm occurring to the claimant. Another major factor in discussing this subject of negligence is negligent misstatements, a negligent misstatement can be defined as a representation of fact, carelessly made, which is relied on by the claimant to his disadvantage. Following the development of liability for negligent misstatement is complicated by the fact that many cases deal with the liability for pure economic loss. This doesn't come as a surprise as in most cases, only economic loss is suffered. I shall be exploring the above information in more detail in order to give a relevant and accurate discussion about the liability of negligent misstatements causing pure economic loss.
The main avenue of guidelines for liability for pure economic loss resulting from misstatements began from the case of Derry v Peek 1888 the usefulness of this tort is in the fact that the court relied upon actual proof of fraud rather than 'constructive fraud or neglect. The defendants in this case were found liable in the court of appeal however the decision was overturned by the House of Lords who said there had been no actual fraud in their conduct.
"Fraud was held to consist in the making of a false representation '(1) Knowingly or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false" Statement from Lord Herschell
These are rules which are still used today when trying to distinguish between honest belief in a statement and deceit; this provides information on whether there is liability for negligent misstatements. It is important to distinguish the difference between negligent words and negligent acts, as through many years and many cases there has been a grey area covering the rules governing each. ...
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"Fraud was held to consist in the making of a false representation '(1) Knowingly or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false" Statement from Lord Herschell
These are rules which are still used today when trying to distinguish between honest belief in a statement and deceit; this provides information on whether there is liability for negligent misstatements. It is important to distinguish the difference between negligent words and negligent acts, as through many years and many cases there has been a grey area covering the rules governing each. Negligent acts have always followed a similar pattern as that in Donoghue v Stevenson and have excelled through time whereas, negligent words have a broader meaning and lords have had many a problem distinguishing the right rules to follow.
Using information from the case of Derry v Peek 1888 and other authorities the Court of Appeal insisted that negligent misstatement is a rule that can only be enforced when dealing with economic loss; this gives the courts a good guideline when dealing with such cases. A major case involving negligent misstatement is that of Hedley Byrne v Heller, the House of Lords decided that in principle, a person who gives incorrect or false information, where it is reasonably foreseeable that it will be acted on, could be liable for losses suffered as a result of that reliance. However in this case resulted in the defendant being found not liable, the reason being similar to that of Donoghue v Stevenson i.e. the neighbour principle, the plaintiff had not shown sufficient evidence that there was a special reliance between the two parties. This case doesn't particularly pay attention to pure economic loss but provides information for liability for misstatements.
A big point in all negligence cases is that of proximity more so in the cases of pure economic loss caused by misstatements. There are two major justifications for insisting on proof of proximity in these cases. Firstly the Floodgates concern, whereas in normal negligence cases there are laws limiting the damage that can be recovered, these do not apply in economic loss cases. This means any amount of claimants who decide to rely on advice or information which can be accessed publicly, like financial information, could act upon it in the way the information was intended. If this is done there are innumerable possibilities for the amount of cases for negligent misstatements to be brought against the defendant. The second reason to proof proximity is because economic loss rates low on the scale of protected interests, so the courts take a view that liability should be contained, so it would take a strong case to claim for economic loss.
Building on the "Hedley" case many following cases concerned themselves more on what a "special reliance" is, and in doing so many different decisions have been made. In the case of Chaudhry v Prabhakar 1989 a man was held liable for giving incompetent advice on buying a second hand car. Lord Pearce stated that
"A duty is created by special relationships which, through not fiduciary, give rise to an assumption that care as well as honesty is demanded"
A similar statement came from Lord Browne-Wilkinson he recognised two elements in which a special relationship is made, these being; the defendant's knowledge that harm could arise and the claimants trust in the skill of the defendant. Hedley v Byrne his lordship referred to a special relationship as the 'Equivalent to a Contract'.
The other end of the scale includes the major case of Caparo v Dickman 1990 it was held not to be reasonable for investors to rely on the findings of a company auditor, when the auditor's report was not prepared for their benefit. Lord Bridge gave a description of a general three stage test; 1 Foresee ability of damage, 2 a relationship of proximity, 3 fair, just and reasonable to impose a duty of care in the circumstances. This test being general for all negligence cases, a follow up by Lord Oliver describes situations where the second rule can be manipulated to relate these rules to misstatement cases.
The case of Henderson v Merrett went to expand on the details of misstatements and/or bad advice, Lord Goff suggested that the test of whether it was `fair, just, and reasonable' to impose liability for negligent advice was not a separate test from whether the defendant had assumed responsibility to the claimant. If there was an assumption of responsibility, and it was reasonably foreseeable that the claimant would rely on the defendant's advice, it was automatically fair, just, and reasonable to assume a duty of care.
Leading on from bad advice and misstatements brings me to the subject of Skill or Special knowledge. The knowledge and/or skills of a statement maker are vital in deciding whether or not there is a relationship of proximity between claimant and defendant. For instance if a man asks his friend 'The accountant' to look at some figures of a business in the financial times, which he hopes to invest in and his friend gives him advice leading to him investing in the business. If this advice ended up to be bad and caused a loss for the claimant, the fact that both parties had equal access to the information would mean that 'the accountant' could not be held liable. However, if a contract existed between the two parties i.e. this man had bought the services of the accountant in order to give him advice on investments; this would then provide reasonable belief that an obligation of care is apparent.
The above sections provide many points and a lot of information regarding the rules applied to case of negligent misstatements dealing with pure economic loss. It is clear to see that major cases like Derry v Peek, Hedley v Heller and Caparo v Dickman provide the bulk of the information for such a grey scaled tort.
I declare that I have not exceeded 1500 words and that my word count is approximately 1300
Bibliography
http://law.web-tomorrow.com
www.oup.com
Liability for negligent misstatements - Christian Witting Oxford 2004