TOPIC 5: DUTY OF CARE PROBLEMS: ECONOMIC LOSS 3- MISSTATEMENTS AND ADVICE

Topic 5 Overview 1. Introduction 2. Typical Scenarios 3. Policy Concerns 4. The Modern Law 4.1 Two Party Cases –Direct Dealings (i). Origins of Liability in England- Hedley Byrne (ii). Australia- ‘The Barwick Test’ – MLA v Evatt and Tepko (iii) Unrequested Statements to the ‘World at Large’ – San Sebastian 4.2 Three Party Cases – Indirect Relationships (i) Example 1- Negligent Audit Reports (ii) Example 2- Negligent Solicitors and Disappointed Beneficiaries 5. Alternative Statutory Remedies- The Australian Consumer Law (1) Introduction Last week we examined cases of ‘relational’ economic loss. This week, we turn to cases in which pure economic loss results from negligent misstatements, or advisory services. Not many cases have recently been litigated to High Court level in this category, which has left the relevant duty of care principles in some state of uncertainty and disarray. One important reason for this is that it is now often easier for plaintiffs to rely upon a statutory cause of action for misleading or deceptive conduct under the Australian Consumer Law (ACL) than to sue for negligence (see Section 5 below). Liability under the statute has the advantage of being strict. However, there are still instances in which plaintiffs may need to rely on the law of negligence – for example, where they suffer loss as a result of relying on statements that have not been made in the course of a defendant’s trade or commerce, as, for example, where a person relies on a statement made by a public authorit. We do not consider the statutory cause of action in any detail on this course. You will study it elsewhere. You should nonetheless be aware of its existence by way of background context. As in previous weeks, try this week to identify the criteria that courts apply in determining the duty question and the reasons why courts are restrictive in their approach. Where uncertainties persist, try to reach a view as to how best they might be resolved. (2) Typical Scenarios Typical examples of negligent misstatements and advisory services that we come across this week include: negligent information or advice given by solicitors to their clients; careless credit-references supplied by banks to commercial parties in respect of the creditworthiness of a customer with whom the commercial parry is dealing; negligent reports by company auditors on the state of company finances, which are relied upon by shareholders, creditors or investors; careless reports or certifications made by environmental consultants regarding the state of land that a person is considering purchasing; and negligent advice or certifications offered by governmental regulatory or planning authorities, the inaccuracy of which results in disastrous investment decisions by property purchasers. A particular high-profile example in recent years of negligent misstatement is that of those credit-rating agencies who carelessly accorded AAA credit ratings to what turned out to be very high-risk and in practice worthless commercial products that had been purchased as investments by Municipal Councils (see the Amro case in section 4.2(i) below. You will come across a variety of examples drawn from these different categories in these materials. (3) Policy Concerns Of the various policy concerns we examined in Topic 3, the ones most commonly expressed in the cases are those regarding indeterminate or disproportionate liability. Since information is readily transmissible by one party to another and can ‘ripple outwards’, the giving of a single piece of careless information or advice has the potential to cause economic losses indirectly to potentially very large and uncertain classes of plaintiff that may foreseeably rely upon it. The possible economic effects of imposing very high liabilities on advisors in such cases (higher prices for professional advice, or the withdrawal of advisory services about some matters from the market altogether) are sometimes regarded as explaining the need to keep 1 Reading BCLT pp 485-501 or B&D (5th edn) 431-443 *Tepko Pty Ltd v Water Board (2001) 206 CLR 1 (HCA) know the facts and read esp pp 16-17, 22-27 and 44-55. Recommended Further Reading: *K Barker, “Negligent Misstatement in Australia— Resolving the Uncertain Legacy of Esanda’ Ch 13 in Barker, Grantham and Swain (eds), The Law of Misstatements (Hart Publishing, 2015) (available on blackboard) Bishop, ‘Negligent Representation through Economists’ Eyes’ (1980) LQR 360 liability within containable and predictable boundaries (see the article by Bishop, listed above under recommended further reading). Note, however, that indeterminate and disproportionate liability are not the only concerns that judges refer to in this context. They are also wary of imposing duties of care where this might unduly impinge upon a person’s liberty to speak (especially on social occasions) and they are wary of imposing a tortious duty of care upon an advisor where this might potentially conflict either with the duties he or she owes a client (see eg the Badenach case, below), or with the way in which a statutory regime regulates his or her duties and responsibilities (Caparo Industries v Dickman). Courts have also recently expressed the concern that plaintiffs should take reasonable steps to protect their own economic interests (vulnerability), although, as usual, they are not very helpful in explaining why this should be the case. Notes and Questions: To what extent are courts in the following cases in the materials concerned about: 1. Indeterminate (uncertain) liability? 2. Disproportionate (excessive) liability? 3. Defendant autonomy (freedom to speak) 4. Conflicts between an advisor’s duties to plaintiffs (on the one hand) and their clients (on the other)? 5. Plaintiff vulnerability (reasonable obligations of self-protection)? (4) The Modern Law – When is a Duty Owed? For the purposes of exposition, these materials divide the cases into two-’ and ‘three-party’ cases. This division is one of convenience (the cases do not make the same distinction explicitly) but the approach to duty is both more straightforward and more certain in two-party cases on the current law than it is in the (more difficult and apparently more uncertain) ‘threeparty’ type of case. Consider why this might be the case. For a full and detailed consideration of the state of the modern Australian law, which argues that the same, basic approach ought to be taken in both two and three party cases, see K Barker, ‘Negligent Misstatement in Australia— Resolving the Uncertain Legacy of Esanda’ (available on blackboard). (1) Two-Party Cases: Direct Dealings In the two-party case, D provides information or advice directly to P, who relies upon it to his or her financial detriment. In most cases, the information or advice has been requested by D, but not always. Sometimes, it may have been volunteered. It is in this context that the possibility of liability for pure economic loss caused by negligent misstatement was first recognised in the UK in the seminal case of Hedley Byrne v Heller [1964] AC 46 (extracted below). Prior to this point in time, liability for economic loss caused by inaccurate statements had been recognised in only 3 situations: (i) Where D’s statement was fraudulent - Derry v Peek (1889) 14 App Cas 337; (for a modern eg, see Tresize v NAB (2005) 220 ALR 706. According to Derry v Peek, actions for fraud (the tort of deceit) require proof that D knew either the statement to be false, did not believe it to be true, or appreciated that there was a risk of it being false, but reckless proceeded regardless). Fraud is hard to prove because it involves a degree of subjective dishonesty. (ii) Where D and P were in a contract: Le Lievre v Gould [1893] 1 QB 491. This covered most situations in which P paid D to provide the statement or advice, doing so under an agreement. It did not, however, cover cases in which the advice was gratuitously provided. (iii) Where D and P were in a Fiduciary relationship (Nocton v Lord Ashburton) [1914] AC 932. A fiduciary relationship is a special relationship of trust in which one party undertakes to act in the interests of another, giving rise to obligations of protection on the part of the fiduciary toward a vulnerable party. Typical examples of fiduciary relationship are those between a bank and its customer, or between a solicitor and his or her client. Such relationships are usually also contractual as well, but they do not need to be. For example, a trustee owes fiduciary obligations to the beneficiaries of a trust, but there is no contract between them. The result was that there was no apparently no liability (outside the United States at least) for honest but merely careless misstatements outside of recognised contractual or fiduciary relationships. This position changed first in England and then in Australia. 2 D P (i) Origins of Liability in England - Hedley Byrne Hedley Byrne v Heller [1964] AC 465 (HL) The plaintiff, a firm of advertising agents, sought a credit-reference from the defendant bank in respect of one of the bank’s customers, a firm called Easipower. The plaintiff wished to know whether or not Easipower was likely to be able to pay the value of the advertising services that the plaintiff was providing to it. The defendant, after some hesitation, provided a guarded reference to the plaintiff via the plaintiff’s own bank, indicating that Easipower was ‘respectably constituted’ and ‘good for normal business engagements.’ In fact, Easipower was, to the defendant’s knowledge, the subsidiary of a company that was at the time in liquidation. The reference was accompanied by a disclaimer of responsibility for the statement’s accuracy. Easipower was ultimately unable to pay the plaintiff, who suffered pure economic loss as a result. The plaintiff sued the defendant bank on the basis that it had relied on the reference and the latter had been made negligently. The House of Lords (Lords Reid, Morris, Hodson, Devlin and Pearce) dismissed the claim on the basis that the defendant’s disclaimer of responsibility was sufficient to negate any liability, but it nonetheless went on to consider whether (and when) in principle a duty of care could arise. The Court suggest that such a duty might arise outside of contract or existing categories of fiduciary relationship where there was a ‘special relationship’ between the parties. Lord Reid: Apart altogether from authority, I would think that the law must treat negligent words differently from negligent acts. … The most obvious difference between negligent words and negligent acts is this. Quite careful people often express definite opinions on social or informal occasions even when they see that others are likely to be influenced by them; and they often do that without taking that H. L. (E.) care which they would take if asked for their opinion professionally or in a business connection…. Another obvious difference is that a negligently made article will only cause one accident, and so it is not very difficult to find the necessary degree of proximity or neighbourhood between the negligent manufacturer and the person injured. But words can be broadcast with or without the consent or the foresight of the speaker or writer. It would be one thing to say that the speaker owes a duty to a limited class, but it would be going very far to say that he owes a duty to every ultimate " consumer " who acts on those words to his detriment… So it seems to me that there is good sense behind our present law that in general an innocent [non-fraudulent] but negligent misrepresentation gives no cause of action. There must be something more than the mere misstatement. I therefore turn to the authorities to see what more is required. The most natural requirement would be that expressly or by implication from the circumstances the speaker or writer has undertaken some responsibility, and that appears to me not to conflict with any authority which is binding on this House…. Lord Haldane did not think that a duty to take care must be limited to cases of fiduciary relationship in the narrow sense…. He speaks of other special relationships, and I can see no logical stopping place short of all those relationships where it is plain that the party seeking information or advice was trusting the other to exercise such a degree of care as the circumstances required, where it was reasonable for him to do that, and where the other gave the information or advice when he knew or ought to have known that the inquirer was relying on him. I say " ought to have known'' because in questions of negligence we now apply the objective standard of what the reasonable man would have done. … A reasonable man, knowing that he was being trusted or that his skill and judgment were being relied on, would, I think, have three courses open to him. He could keep silent or decline to give the information or advice sought: or he could give an answer with a clear qualification that he accepted no responsibility for it or that it was given without that reflection or inquiry which a careful answer would require: or he could simply answer without any such qualification. If he chooses to adopt the last course he must, I think, be held to have accepted some responsibility for his answer being given carefully, or to have accepted a relationship with the inquirer which requires him to exercise such care as the circumstances require. Notes and Questions: 1. Was either of the potential objections to imposing liability for negligent misstatement mentioned by Lord Reid a concern on the facts? 2. Technically, everything the House of Lords said about the possibility of a duty of care in this case was obiter, since the claim failed anyway on account of the disclaimer. This has not prevented the case being taken to be a foundational case, second in significance only to Donoghue v Stevenson. It was clearly influential in the subsequent development of the Australian law. 3. Lord Morris (with whom Lord Hodson agreed at 514) described the required special relationship in terms similar to Lord Reid, saying (at 497, 503) 3 ‘..other special relationships….where it is plain that the party seeking information or advice was trusting the other to exercise such a degree of care as the circumstances required, where it was reasonable for him to do that, and where the other gave the information or advice when he knew or ought to have known that the inquirer was relying on him “Leaving aside cases where there is some contractual or fiduciary relationship, there may be many situations in which one person voluntarily or gratuitously undertakes to do something for another person and becomes under a duty to exercise reasonable care. …if in a sphere in which a person is so placed that others could reasonably rely on his judgement or his skill or on his ability to make careful inquiry, a person takes it on himself to give information or advice to,e or allows his information or advice to be passed on to another person who, as he knows or should know, will place reliance on it, then a duty of care will arise” What are the key elements of the ‘special relationship’ required to give rise to a duty, according to Lords Reid, Morris and Hodson? How close is this relationship to the idea of a ‘fiduciary’ one of trust and confidence? 4. Most writers have assumed that if there had been no disclaimer of responsibility, the defendant would have been found to have owed a duty of care on the facts, but this view has rightly been challenged, because only Lord Hodson seems to have expressed a definite view on this matter, and he actually suggested (at 512-3) that no duty would have arisen. We therefore do not actually know what the Court would have decided, had no disclaimer been made. 5. Another false assumption commonly made is that Hedley Byrne was the first ever case in which it was said that there could be liability for a merely negligent statement without there also being a contract or a fiduciary relationship. Not so! The Americans got there a lot earlier, in 1922, in the case of Glanzer v Sheppard (1922) 135 NE 275 (NY), where the defendant was held liable to a purchaser of goods for inaccurately overstating their weight and so causing the purchaser to pay the seller too much for them. (ii) Australia- The “Barwick” Test The Australian approach to the duty question in two party cases is that which was developed by Barwick CJ in the following case. It is known as the ‘Barwick test.’ It is similar to that developed by Lord Reid in Hedley Byrne, in so far as it focuses on three elements that are required to make up a sufficient special relationship to give rise to a duty of care: trust, knowledge and reasonable reliance. As you read the following judgment, consider carefully what is meant by each of these elements and consider the circumstances in which His Honour thought they would be satisfied. *Mutual Life & Citizens Ltd v Evatt (1968) 122 CLR 556 (HCA) at 571-3; [1971] AC 793 (PC) The plaintiff was shareholder in the defendant insurance company. He was interested in buying shares in one of the defendant’s associated companies (a company in the same group as the defendant) and requested information and advice regarding the associated company’s financial position. The defendant, which had access to relevant information, told the plaintiff that the associated company was financially stable and that his investments would be safe. The plaintiff, in reliance on these assurances, purchased shares in the associated company. The information turned out to be false and the plaintiff brought a claim in negligence for its economic losses. The defendant sought to strike out the claim by way of a demurrer. The High Court refused to strike out the claim, holding that it was arguable that a duty of care was owed by the defendant. This decision was later reversed on appeal by the Privy Council, but the Privy Council’s decision has itself since been considered by both English and Australian Courts to have been wrong and the original decision of the High Court of Australia to be correct. The following extract is from the highly influential judgment of Barwick CJ in the High Court. Read it carefully, because it is the foundation of most of the modern Australian law and contains lots of subtleties! Barwick CJ: In considering the principal question which this appeal raises, I have derived great assistance from their Lordships' speeches in Hedley Byrne & Co Ltd v Heller & Partners Ltd, above: but I do not think that a discussion in these reasons of their Lordships' several approaches to that question, though in the result it did not really fall for decision, is an appropriate course… for me to follow. It is sufficient, in my opinion, that, with unfeigned gratitude and respect, I have had the benefit of the reasoning of those speeches, reasoning which I have most carefully considered and which as will appear has had considerable influence in the formation of the views I am about to express… I think it is quite clear that the relationship of proximity, adequate for compensation of injury caused by physical acts or omissions, would be inappropriate in the case of utterance by way of information or advice which causes loss or damage. The necessary relationship in that connexion must needs be more specific…. Proximity is not enough. The relationship needs to be specific and special. Is there…such a radical difference between physical acts or omissions and the utterance of words by way of information and advice, injury and damage or loss and damage being caused in each case, that the concept of a duty of care arising by law out of a specific relationship should not be as appropriate and reasonable in connexion with such an utterance as it is in connexion with physical acts or omissions? I have been unable to find any such radical difference between the performance of physical acts or omissions and an utterance by way of information and advice as would require the common law to deny a cause of action in the case of the latter whilst conceding it in the case of the former. Of course, as I mentioned earlier, the general relationship of proximity which has been found appropriate in the case of physical acts or omission, is clearly not appropriate in the case of utterances by way of information or advice. But none the less, it seems to me that the concept of a duty to be careful in the utterance of words is as appropriate in the regulation of human affairs in a society as is a duty of care in the case of physical acts or omissions. In each case of course the duty would spring out of some relationship and the cause of action depend on loss and damage causally related to the breach of the duty. And in each case, in my opinion, the duty would be imposed by law and not arise out of any consensual or unilateral assumption of the duty. Even though proximity is not as applicable for misrepresentations, there is still of a duty of care in representations. 4 …[O]f course there must be significant differences between the nature of the relationships out of which a duty of care in utterance can be said to arise and the nature of those relationships out of which a duty of care in relation to acts or omissions springs. Also there must be a much greater number of occasions in connexion with the utterance of words which will not give rise to any duty than is the case with physical acts or omissions. Discussion and communication upon a social occasion when no legal relationships could possibly be in contemplation or utterances on matters of no serious or business import are instances of such occasions. But even on social occasions legal responsibility for acts or omissions may not arise as, for example, in the case of some physical acts or omissions in the course of a sport or pastime: see Rootes v Shelton (1967) 116 CLR 383, and there are other occasions and situations in which legal liability will not be attracted, cf Balfour v Balfour (1919) 2 KB 571 and Rose and Frank Co v J R Crompton & Bros Ltd (1925) AC 445. There are always going to be differences between physical acts/omissions and representations, both in nature and number of occasions. But there are still different scenarios where physical acts are less likely to be negligent, like during sports, just like for representations, like during social settings. Yet granted these differences, I am unable to see any reason why a duty of care in uttering words may not arise out of some particular relationship. That incorrect information or advice can cause loss and damage cannot, I think, be denied. I agree with respect with Lord Devlin in Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964) AC 465 when he observes upon the grave defect there would be in the common law if recovery permitted in the case of physical acts or omissions were denied in the case of information and advice given with a lack of due care: see (1964) AC, at p 516 of the report. In my opinion, the common law is not so defective. After a great deal of consideration, I am clearly of opinion that a duty of care in utterance can arise out of some relationships, which for want of a more precisely designated genus can be called "special". Even though there are differences between physical and representations, there would be a grave error if recovery were not permitted in the case of negligent information. A duty can arise out of “special” relationships. The critical question, however, undoubtedly is what are the relationships, or, rather, what are the elements of the relationship out of which a duty of care will arise, that is, will be imposed by law. As in the case of negligent acts, the relationship, though for emphasis as well as for lack of suitable nomenclature styled "special", ought not to be, and quite possibly cannot be, expressed in or confined to fixed and labelled categories. For my own part, I would prefer that no such attempt be made. Rather I would seek to state what seem to me to be the necessary elements or features of a relationship out of which the duty of care will arise. All else will be elucidated in the course of time as particular facts are submitted for consideration in cases coming forward for decision. He is seeking to find the necessary elements out of the “special” relationship where a duty will arise. However, in the case of utterance, though the duty will arise out of circumstances which create the requisite relationship, there is one distinguishing feature to which I ought to advert, a feature which is not present or rather certainly not universally present in the case of the relationships which give rise to a duty of care in the case of physical acts or omissions. The information or advice will be sought or accepted by a person on his own behalf or on behalf of another identified or identifiable person or on behalf of an identified or identifiable class of persons. The person giving the information or advice must do so willingly and knowingly in the sense that he is aware of the circumstances which create the relevant relationship. He must give the information or advice to some identified or identifiable person in the given circumstances of the implications of which he is, or ought to be, aware. The identity and position of the recipient of the utterance form part of the relevant circumstances. It is this seemingly "bilateral" aspect of the necessary relationship which, it seems to me, inclines the mind to the use of the expression "assumption of responsibility" to describe the source of the duty of care and to the employment of concepts of consensus and contract, in the explanation of the emergence of the duty of care in utterance. But, though the willingness of the speaker to give or the giving of the information or advice can be described as an acceptance of the duty to be careful in the sense that having in the circumstances a choice to speak or to remain silent, or perhaps to speak with reservation (a matter to which I will later revert), the speaker elects to speak and thus by his voluntary act attracts the duty to be careful both in preparing himself for what he says and in the manner of saying it, yet, in my opinion, the resulting cause of action is tortious and in no sense arises ex contractu, or by reason of any consensus, or any assumption of responsibility by the speaker. The duty of care, in my opinion, is imposed by law in the circumstances. The information: a. Must be sought or accepted by P or an identified someone on their behalf, and b. The person giving the advice must be aware, or ought to be aware, of this expected standard of care which creates the relationship By electing to speak when given an option to stay silent, they are voluntarily attracting a duty to be careful. Because it is so imposed, I doubt whether the speaker may always except himself from the performance of the duty by some express reservation at the time of his utterance. But the fact of such a reservation, particularly if acknowledged by the recipient, will in many instances be one of the circumstances to be taken into consideration in deciding whether or no a duty of care has arisen and it may be sufficiently potent in some cases to prevent the creation of the necessary relationship.