Chapter 4: Professional advice and negligent misstatement Flashcards
Which case set out a new approach to the law of negligent misstatement?
Hedley Byrne & Co Ltd v Heller & Partners Ltd (1963)
Facts of ‘Hedley Byrne & Co Ltd v Heller & Partners Ltd (1963)’
The claimant, an advertising agency, acted for E Ltd.
The claimant requested information from E Ltd’s bank on the creditworthiness of E Ltd.
The bank gave favourable references but included a disclaimer (exclusion clause) saying the information was given without responsibility.
The claimant extended credit to E Ltd and lost money when the company went into liquidation.
The claimants sued the bank for negligence.
Held in ‘Hedley Byrne & Co Ltd v Heller & Partners Ltd (1963)’
The bank’s disclaimer was adequate to exclude a duty of care.
The HOL went on to consider whether there could ever be a duty of care to avoid causing loss by negligent misstatement where there was no contractual or fiduciary relationship.
They decided that the bank was guilty of negligence, having breached the duty of care, because a ‘special relationship’ existed.
had it not been for the exclusion clause they would have been held liable.
(It is likely that the clause would nowadays have fallen foul of the UCTA 1977).
What is the meaning of a ‘special relationship’?
For an action in negligent misstatement to succeed there must be a special relationship. The consideration outlined in the Nicholas H case will still be relevant.
What three elements must be considered to identify if there is a special relationship between the parties?
Was the defendant in the business of giving professional advice?
Was the advice given in a business context rather than a social context?
Did the defendant know (or should have known) that the claimant in particular would rely on the advice?
What happens when there is no special relationship?
There is no duty of care.
Special relationship with regards to audit.
Unless the defendant had prior knowledge that a certain bidder would rely on the statement made, no duty of care would exist.
The duty is owed to the shareholders as whole and not individual bidders.
Which case is the concept of special relationship been redefined in?
Caparo Industries Plc v Dickman & Others (1990)
Facts of ‘Caparo Industries Plc v Dickman & Others (1990)’
C, a shareholder in Fidelity, bought more shares in the company after receiving the audited accounts. He later made a takeover bid.
After the takeover C sued the auditors alleging that the audited accounts had been misleading.
C said that the auditors owed a duty of care to investors and potential investors as they should have been aware that bidders might rely on the accounts.
Held in ‘Caparo Industries Plc v Dickman & Others (1990)’
The court set out various criteria which had to be fulfilled in order to give rise to a duty of care.
When the court applied these criteria to the Caparo case they found that the auditors of a public company owe no duty of care to the public at large who rely on accounts when purchasing shares in a company nor was any duty owed to individual shareholders who purchase additional shares.
What are the four criteria set out which had to be fulfilled in order to give rise to a duty of care?
The standard test of foreseeability applied.
The concept of proximity limits the duty.
It is necessary to look at the purpose for which the statement in made, the statement maker’s knowledge of the person relying on the statement and the type of transaction in which it is used.
Whether it is just and equitable that a duty of care should be imposed so that imposing it would not be contrary to public policy.
Facts of ‘James Macnaughton Papers Group Ltd v Hicks Anderson & Co (1991)’
The claimant company were looking to take over another company.
The chairman of the target company had requested the auditors drew up draft accounts for him to use during negotiations.
He allowed the claimant to view these accounts and following this an agreement was reached for the terms of the takeover.
Held in ‘James Macnaughton Papers Group Ltd v Hicks Anderson & Co (1991)’
The accounts were drawn up specifically for the chairman, not for the use of the claimant.
In addition, they were labelled as draft accounts.
As such no duty of care was owed.
When is there a specific relationship with advice given over financial statements?
If advice is given or financial statements prepared for a specific purpose, then a duty of care is owed to those who are relying on them for that specific purpose.
Morgan Crucible v Hill Samuel Bank Ltd (1991)
Facts of ‘Morgan Crucible v Hill Samuel Bank Ltd (1991)’
MC made a bid for X Ltd.
X Ltd issued circulars containing profit records and forecasts recommending that its shareholders reject the bid.
MC increased its bid and on the board of X Ltds.’s recommendation the bid succeeded.
MC discovered the issued circulars grossly overstated the profits and X Ltd was in fact worthless.
MC sued X Ltd, their bank, directors and accountants for negligence in respect of the circulars.
