Economic Loss: Negligent Misstatement Flashcards
Types of cases?
- Negligent misstatement where a person asks for information and I give it to you. Simple two party case.
- Three party case. Information to B, but somehow that information is then passed on by that person to someone else and the third party relies on that information. The circumstances in which a DOC is owed is more complex because of worries of indeterminate liability and ripple effect.
Typical Scenarios
- Building Surveyors’ reports
2. Environmental Consultants’ reports (Charben)
Typical Scenarios: Banks Giving Negligent Misstatements
Hedley Bryne v Heller.
Sometimes a person might ask banks for credit references in relation to customers, if they turn out to be incorrect, then some third party is going to end up potentially worse off.
Typical Scenarios: Public Bodies
- Inaccurate certifications / cost statements published to individual members of the public (Shaddock, Tepko)
- Change in public development plans? (San Sebastian)
Typical Scenarios: Auditor’s Reports
Esanda
Audit of company affairs to state a balance of the companies liabilities so shareholders can hold the company accountable for the way the company is being run.
This type of case: although report is commission for the company and relied upon by shareholders, the information is very broadly avaialble.
Might be available to people wanting to invest in the company.
What happens if auditor has massively overstated the assets of the company?
What happens to share price? Goes down, so shares might not be worht it anymore. Hence significant economic loss.
However, generally, the auditor does not owe a DOC to people who rely on the information provided. This is because the purpose for which the report is given is not actually for investment decision by investors, but rather to allow shareholders to make decisions about management of the company.
Policy Concerns?
1. Indeterminate liability
Indeterminate liability can be easily transmitted from one person to the next.
Excessive liability for D. McHugh J in Esanda just calls it Uncertainty.
Nature of concern for auditors and the like. Concerned with social repercussions on advising. The repercussions could be reduction in the availability of advisory services, services may become expensive and even if advisors continue to advice, the quality of the service may go down because they may be too careful.
Also the information that auditors and the like, the profit margins compared to the social benefit they give are small.
Uncertainty of class/liability. It may be inappropriate to impose liabilities that they can’t calculate realistically in advance. Otherwise they don’t know how much insurance to get.
Policy Concern: Autonomy
If you impose a duty, it affects their freedom of speech (Hedley Bryne : they were worried about imposing liability on people for what they say in formal contexts. When we might think it’s alright to make them careful in what they say in professional contexts, we don’t want these to spread out to people or parties or whatever).
- Coherence with statutory frameworks (Caparo) - what if the process is required under statute. Courts are then concerned that a report which is required under statute for one purpose may give rise to liability where it is used by people for a different purpose.
- Alternative means of protection (Esanda, Per McHugh J)
What other means the person might take to protect themselves from the information received. You could seek independent advice before you invest. Where you’re dealing with economic interests, this is relevant.
When is a DOC owed in a two-party case: Direct dealings?
D is guilty of fraud which comes under Tort of Deceit
Before Hedley Bryne.
Derry v Peek:
1. Proof of dishonesty on the part of the advisor. (so either the advisor knew the information was false or suspected that it was).
So a DOC is owed in these circumstances
When is a DOC owed in a two-party case: Direct dealings?
Contractual relationship between the two parties.
Before Hedley Bryne.
Le Lievre v Gould (1893).
If I pay you for advice, you’re under a duty to make sure the information is true.
Under tort, advisor has to take reasonable care when giving advice. Not necessarily make sure the information is 100% correct. Where else in a contract, you need to be a party to the contract.
When is a DOC owed in a two-party case: Direct dealings?
Fiduciary relationship
Before Hedley Bryne.
Where P can show that they were in a fiduciary relationship where there is:
1. Trust; and
2. Confidence.
E.g. Solicitor and client, doctor and patient, parent and child.
So where one party sacrifices their own interests to the other. So it’s as if it was for the other party, thereby setting aside their own interest in respect of any transactions entered into.
Quite often this involves a contract. But point is, even if NO CONTRACT, if there is this relationship, the obligation of D extends to protect their interests as well. Nocton v Ashburton.
Candleer v Crane Christmas
Before Hedley Bryne
Denning LJ was of the view that in this case there should be liability for purely giving careless advice which is relied on by someone else.
This was affirmed in Hedley Bryne v Heller
Hedley Bryne v Heller
D was a bank. It was a credit reference case.
P advertising agent thinking whether it should advance credit to one of it’s cusomters requests D for bank info.
P not in contractual or fiduciary relationship.
D provides credit worthniess of customer and said credit good for most business arrangements. Obviously, this wasn’t the case.
P relied on that advice but the clients turn out to have no money at all so they couldn’t be sued for goods and services.
P sues D bank for negligence and P’s financial loss as having relied on the advice of D.
HOL held: No DOC.
In this case, it was special because there was a disclaimer that when the bank gave the advice, it gave the advice without responsibility. This prevented any DOC arising.
However They said had it not been for this disclaimer, HOL would have imposed a DOC.
HOL said in addition reasonable foreseeability, the following needed to be achieved:
1. A special relationship of some sort beyond the mere foreseeability of harm.
Their lordships cahracter this in different ways but similar terms.
The relationship that existed was one of reliance of would be, where there was trust.
Features of a relationship that could give rise to a DOC:
1. Reasonable reliance on that skill/special judgment by P
2. D knows or ought to know that P was going to or will rely on that advice.
3. Lord Reid said voluntary relationship of reasonable trust and confidence.
4. In circumstances where there is an express or implied assumption of responsibility.
In this case, the bank weren’t under an obligation to provide information but voluntarily did so, and in doing so, brought themselves under the obligation.
The Australian Approach to Duty: The “Barwick” Test
MLA v Evatt
P shareholder asked D insurance company specifically for information of associate companies with the view to make investment decision.
The information provided was carelessly made and was inaccurate.
Held: DOC Owed.
Decision made by the HC.
Justice Barwick talked about special relationships. He says there’s a need for a special relationship.
The relationship must be:
1. A voluntary and bilateral relationship
2. Trust and reasonable reliance:
D realises or ought to realise that P will rely in connection with a matter of business or serious consequence. So maybe not in a social context, but still a possibility.
P reasonably relies on the advice.
In his judgment there was no suggestion that there can never be a duty unless the advice is asked for. So basically there could be a possibility where the D volunteers but was not asked, if it was reasonable to rely on that advice.
So the three factors:
- Relationship of trust and reliance
- Defendant has actual or constructive knowledge : i.e. knew or ought to have known P will rely in connection with a matter of business or serious consequence on that advice.
- P reasonably relies on that statement
Applications of the “Barwick Test”
Shaddock v Parramatta City Council
P planning on buying house. Through solicitor, made a phone call to council to see whether there was any road schemes in the area he was planning to buy.
Defendant city council made two representations:
1. 1 over the phone, an oral representation saying that there were no such plans
2. Via a certificate or plants indicating to P that they did not include any roadside scheme.
P relied on oral representation and certificate in purchasing property.
Turns out council does have plans for roads which makes P’s investment a bad one.
P sues.
Held: City Council is liable.
Why? Wasn’t a professional advice giver.
The courts distinguished here between oral statements and written certificates.
It was not reasonable to rely on an oral assurance by someone who’s identity you DON’T EVEN KNOW.
But the written certificate was reliable.
Tepko v Water Board
Most recent Aus HC on Negligent Misstatement
Reaffirms Barwick approach.
P is a developer with big development plans.
P relies upon bank for it’s finance.
Lender bank was financing the whole operation.
It made substantial loans to P.
Bank got cold feet because P defaulted on some repayments on the loan.
Lender bank had to decide whether it was going tot advance any more money to the developer.
P tries to get info from D (Water board) of costs.
So the information here was specifically requested.
D refused to give it. P developer was persistent and well connected. It approach a number of ministers and tried to get ministers to gt info out of D.
D water board under pressure from minsiters, gave an estimate that the costs of connetion would be $2.5 mil.
Info passed to minister who passed to P.
P then shows bank.
Bank says that’s alot of money, and withdraws financing from P.
P then losses a vast amount of money.
Turns out the assessment was an overestimate.
P sues water board because it was careless.
Financial loss was clearly foreseeable. But this isn’t enough.
Held: By majority after applying Barwick that no DOC owed.
Reasons:
- P had gone gone somewhere else to get financial advice about costings. P relied upon those as well. It was not reasonable for P to rely on the estimate because it had obtained it’s own independent costings and relied upon this.
- Not reasonable to rely on estimate becuase it was an ESTIMATEE. Estiamtes aren’t generally regard as particularly accurate.
- Price was reluctantly given. If advice is given reluctantly, obviously less likely to rely on it.
- D had insufficient knowledge that estimate was going to be used by P in that way. P had kept quiet about the purpose for that estimate. The bank knew that it was for some financial reason, but didn’t know the specific use. Majority says that you must know about the use of the information and it has to be relatively specific. “whether you knew or ought to have known that the information is going to be used in THAT transaction.
