Lecture 4 Flashcards
What was Livent Inc.’s primary business?
a) Investment Banking
b) Live Theatre Productions
c) Real Estate Development
d) Stock Brokerage
Answer: b) Live Theatre Productions
Which of the following is NOT one of the professional responsibilities discussed in the lecture?
a) Contractual duty
b) Fiduciary duty
c) Political duty
d) Duty of care in tort
Answer: c) Political duty
A contractual duty is primarily owed to:
a) The public
b) The client under the contract
c) Any third party who relies on the professional’s work
d) The government
Answer: b) The client under the contract
Which of the following best describes a fiduciary duty?
a) A duty arising from a contract
b) A duty owed in tort law
c) A duty based on a relationship of trust and confidence
d) A duty imposed by statutory law
Answer: c) A duty based on a relationship of trust and confidence
The case of Donoghue v Stevenson (1932) is significant because:
a) It introduced the concept of product liability
b) It established that negligent acts can be actionable without a contract
c) It clarified the definition of fiduciary duty
d) It ruled that auditors cannot be held liable for misstatements
Answer: b) It established that negligent acts can be actionable without a contract
What legal doctrine was established in Hedley Byrne v Heller (1964)?
a) Negligent misrepresentation can give rise to financial loss liability
b) Professional liability is only applicable under contractual duty
c) Fiduciary duty applies only to accountants
d) Financial advisors are immune to negligence claims
a) Negligent misrepresentation can give rise to financial loss liability
In Hedley Byrne v Heller, what key element was introduced for imposing liability?
a) Privity of contract
b) Special relationship
c) Strict liability
d) Absolute duty
Answer: b) Special relationship
What are the four criteria for a special relationship in negligent misstatement cases?
a) Proximity, causation, intent, and reliance
b) Skill, knowledge, reliance, and reasonableness
c) Causation, damages, strict liability, and foreseeability
d) Recklessness, reliance, intent, and misrepresentation
b) Skill, knowledge, reliance, and reasonableness
The case Caparo Industries plc v Dickman (1990) introduced which legal test?
a) The three-part test for duty of care
b) The fiduciary obligation test
c) The contractual liability test
d) The foreseeability test
Answer: a) The three-part test for duty of care
Which of the following is NOT a requirement under the Caparo test?
a) Foreseeability of harm
b) Proximity between parties
c) A written contract
d) Fairness, justice, and reasonableness
Answer: c) A written contract
c) A written contract
In Hercules Managements Ltd v Ernst & Young (1997), why were auditors NOT held liable?
a) The audit was flawless
b) Auditors owed duties only for oversight, not for investment decisions
c) Investors failed to prove reliance on the audit
d) Auditors were protected under statutory law
Answer: b) Auditors owed duties only for oversight, not for investment decisions
Why is the concept of indeterminate liability important in professional negligence cases?
a) It prevents professionals from being sued indefinitely by an unlimited number of people
b) It ensures that liability always extends to all third parties
c) It allows unlimited claims for negligent misstatements
d) It does not apply to financial professionals
Answer: a) It prevents professionals from being sued indefinitely by an unlimited number of people
What is the primary purpose of an audit report?
a) To help individual investors make personal decisions
b) To provide a general overview of the economy
c) To assist the shareholders in overseeing management
d) To determine stock market prices
Answer: c) To assist the shareholders in overseeing management
The case Earl v Lubbock (1905) initially ruled that:
a) A negligent act is not actionable without a contract
b) Any professional negligence is automatically actionable
c) Auditors must always compensate investors
d) Fiduciary duties apply to all professions
Answer: a) A negligent act is not actionable without a contract
What role does the reasonable foreseeability test play in negligence cases?
a) It determines whether the plaintiff’s harm was predictable based on the defendant’s actions
b) It requires an express contract between the parties
c) It applies only in cases of fraud
d) It is irrelevant to professional services
Answer: a) It determines whether the plaintiff’s harm was predictable based on the defendant’s actions
What does the phrase “liability to an indeterminate class” refer to?
a) The risk of professionals being liable to an unlimited number of claimants
b) A legal defense that prevents liability
c) The expansion of strict liability in professional services
d) A requirement for contract enforcement
Answer: a) The risk of professionals being liable to an unlimited number of claimants
In the Caparo test, which element is most subjective in court rulings?
a) Fair, just, and reasonable
b) Proximity
c) Foreseeability
d) Causation
Answer: a) Fair, just, and reasonable
What distinguishes a fiduciary duty from a duty of care?
a) Fiduciary duty requires acting in the best interest of the client, not just avoiding harm
Answer: a)
What distinguishes a fiduciary duty from a duty of care?
a) Fiduciary duty requires acting in the best interest of the client, not just avoiding harm
Answer: a)
In the Caparo test, which element is most subjective in court rulings?
a) Foreseeability of harm
b) Proximity between parties
c) Fair, just, and reasonable consideration
d) Breach of duty
Answer: c) Fair, just, and reasonable consideration
What distinguishes a fiduciary duty from a duty of care?
a) Fiduciary duty is owed only when there is a written contract
b) Duty of care requires avoiding harm, while fiduciary duty requires acting in the best interest of the client
c) Duty of care applies only in criminal cases, whereas fiduciary duty is always civil
d) Fiduciary duty is owed to shareholders, while duty of care is owed only to direct clients
Answer: b) Duty of care requires avoiding harm, while fiduciary duty requires acting in the best interest of the client
What principle is used to limit professional liability for third parties who rely on misstatements?
a) Proximity test
b) Foreseeability principle
c) Indeterminate liability
d) Business necessity rule
Answer: c) Indeterminate liability
Why did Hedley Byrne v Heller not hold the defendant liable despite establishing negligent misstatement liability?
a) There was no special relationship between the parties
b) The financial loss was not reasonably foreseeable
c) The defendant included a disclaimer in the financial advice
d) The plaintiff failed to prove reliance on the statement
Answer: c) The defendant included a disclaimer in the financial advice
How does Deloitte v Livent differ from Hercules v Ernst & Young regarding auditor liability?
a) In Deloitte v Livent, auditors were found liable because their audit was relied upon for management oversight, while in Hercules v Ernst & Young, the audit was used for investment decisions
b) Hercules v Ernst & Young found the auditors liable, whereas Deloitte v Livent ruled in favor of the auditors
c) Deloitte v Livent was about contract law, while Hercules v Ernst & Young was about tort law
d) In Hercules v Ernst & Young, there was direct fraud by the auditors, unlike in Deloitte v Livent
Answer: a) In Deloitte v Livent, auditors were found liable because their audit was relied upon for management oversight, while in Hercules v Ernst & Young, the audit was used for investment decisions
- What is the main concern in imposing unlimited auditor liability?
a) Professionals would be reluctant to provide any opinions
b) It would make financial reporting more complex
c) Auditors would pass all liability onto their clients
d) It would lead to unreasonably high fees for audits
Answer: a) Professionals would be reluctant to provide any opinions
