Economic loss caused by negligent misstatement

Question 0

Hedley Byrne & Co v Heller

Answer 0

Appellants were advertising agents and in reliance of what Heller said they entered into a contract with them.
They suffered no damage except for pure economic loss.

Courts accepted the possibility of negligently caused pure economic loss.

Courts stated there was a difference between negligent words and negligent conduct (which in turn provide different remedies)

Reid LJ; discussed that reasonable foreseeability was not sufficient as it creates unlimited liability. Therefore extra criteria must be identified.

A duty must be found (negatived by a disclaimer) and whether it is appropriate to apply/impose a duty. Must then go through the rest of negligence; breach, causation and damages.

Developed 3 point test for negligently caused pure economic loss through words.

Question 1

Is there a duty of care to prevent pure economic loss

Answer 1

Yes but the courts very reluctant to find that a duty exists;

• indeterminate liability; infinite number of plaintiffs, reasonable foreseeability is not a sufficient limitation.
• proper roles of contract and tort; contract considered the appropriate area to deal with economic loss, legal redundancy to use tort remedies if contract already covered it.
• liberal democracy and economic approach; the person in the best position to protect themselves against risk, people should be able to pursue their economic interests freely.

Hedley Byrne & Co v Heller = first negligence case on PEL that recognised a duty of care. Developed negligently caused loss through words or conduct with each possessing their own remedies.

Question 2

Test for negligently caused pure economic loss through words

Answer 2

1. The defendant’s voluntary assumption of responsibility (to give advice or information)
2. The plaintiff reasonably relies of the advice or information
   (this is composite; the plaintiff must actually rely and that reliance must be reasonable)
   Be mindful whether it is a professional or social a context.
3. Speaker knew or ought to have known that the plaintiff (listener) relied on the advice.

Question 3

Duty of care for skilled professionals?

Answer 3

Lawyers, doctors, people with a financial interest and other skilled professionals DO owe a DOC.
(MLC v Evatt; Privy Council made negligent misstatement a very narrow issue)

The high court reversed this decision in L Shaddock & Associates v Parramatta City Council when they restated Hedley Byrne v Heller as good law; statement needed to be made in the appropriate professional/service context (not a BBQ). No special skill is required to find that a DOC may exist.

Question 4

MLC v Evatt

Answer 4

Defendant gave advice in an area that he was not specialised in.

High court found that a duty of care existed whether specially skilled or not; speaker spoke as if they were an authority on the matter.

Privy Council reversed this decision; DOC only exists when speaker is professionally skilled or speaker has a financial interest in the advice.

Negligent misstatement became a very narrow issue.

Question 5

L Shaddock & Associates v Parramatta City Council.

Answer 5

HC reconsidered rule in Evatt

Property developer sought advice from council regarding any road widening proposals.
Council returned advice with certificate, encouraging the plaintiff to rely on advice and purchase land.

Council were the only body to provide said advice (accompanied with certificate) thereby creating a DOC.

HC disregarded Evatt decision by finding that no special skill be required. Affirmed the Hedley test; if you take it upon yourself to provide information and it is reasonable that the plaintiff relies and actually does, then a duty of care will be found.

Question 6

When is it reasonable to rely on a statement?

Answer 6

• be mindful of phone calls; who are you speaking to. The speaker may not know who they are speaking to and not voluntarily assumed responsibility. (Exception; phoning or emailing your lawyer)
• duty is fact specific; no categories exist or general propositions.
• If the plaintiff has made a specific request (Shaddock v Parramatta)
• If the defendant is silent or qualifies statement (this is not my area) then it is not reasonable to rely (Tepko)
• if you can source information from a better source it is not reasonable to rely (Tepko)
• if speaker has a financial interest
• when information is volunteered it is only reasonable to rely upon it if the volunteer intends you to rely on it (San Sebastian v The Minister)

Question 7

Tepko

Answer 7

Land developer purchased property that was not connected to the sewerage system.

Enquired at water board for specific advice.

Water board made a disclaimer saying they are not in the business of providing estimates for such work. Eventually gave a high estimate.

Property developer lost investment due to high estimate.

Plaintiff could have sourced accurate information elsewhere so it was not reasonable to rely on the information from the water board (information also given under duress and disclaimer made).

Question 8

San Sebastián v The Minister

Answer 8

When information is volunteered and not requested.

According to Brennan a duty will be found when;

1. If the person is known to have a skill in the area
2. If the person warrants the correctness of the statement
3. If the person invites or induces reliance

Question 9

To whom is the duty owed; the knowledge factor.

Answer 9

knowledge of the existence of the plaintiff (or whether they ought to have known about the existence of the plaintiff)

Limiting principle on duty of care

Direct relationship

• Caparo Industries v Dickman
• Esanda Finance Corporation v Peat Marwick Hungerfords

Question 10

Caparo Industries v Dickman

Answer 10

Audit fact situation; plaintiff is a minority shareholder who buys lots of to stock after audit report released. Company subsequently goes bust.

Do the auditors have a DOC to the plaintiff? No, only to their client, not shareholders.

English case; the defendant must have specific knowledge of the plaintiffs intention to use the information provided.

Further limitation on finding a DOC.

Question 11

Esanda Finance Corporation v Peat Marwick Hungerfords.

Answer 11

Australian audit case.

Appellant used audit report to invest in another company.

Does the auditor owe the financier a duty of care?

Brennan; used San Sebastian test = plaintiff must prove that the information would be communicated (published) to an individual or to a class of people in the plaintiffs position. Duty found.

MCHugh; one must be careful when imposing a duty in auditors for policy considerations;

• expense of auditor will increase
• when you increase negligence liability the courts get jammed with complication financial issues
• who is the best person to determine risk; the commercial entity itself (plaintiffs should have conducted their own audit).