Tort Law for Finance

Question 1

What is the Tort of Negligence?

Answer 1

A failure by one party to exercise reasonable care and skill in performing a particular duty, resulting in harm or loss to that party.

Donoghue v Stevenson [1932] UKHL 100.

Question 2

In Finance, what is the Commercial Purpose of pursuing a claim in the Tort of Negligence?

Answer 2

To recover a purely economic loss.

P. 475.

Hedley Byrne v Heller [1964] AC 465.

Question 3

What are the Elements of the Tort of Negligence?

Answer 3

1. Establish the existence of a duty of care.
2. Establish this duty’s scope.
3. Establish that this duty was breached by the Defendant.
4. Establish the Claimant’s reliance upon this duty.
5. Establish that the duty’s breach caused the loss suffered by the Claimant.
6. Establish the loss’s foreseeability from the breach.

P. 475.

Question 4

How is the Existence of a Duty of Care determined?

Answer 4

By observing what could reasonably be inferred from the Defendant’s conduct given the context as a matter of fact and of fairness and public policy.

P. 476; HM COCE v Barclays Bank [2006] UKHL 28.

Question 5

What constitutes Reasonableness?

Answer 5

That which may be expected from the ordinary skilled person exercising and professing to have [a] special skill.

P. 483; Bolam v Friern Hospital [1957] 1 WLR 582.

Question 6

Does acting in accordance with Common Practice constitute Reasonable Care and Skill?

Answer 6

Yes, unless the practice is, “inherently negligent,” or alternative action could have neutralized a foreseeable risk.

P. 483; Edward Wong v Johnson Stokes [1984] AC 296.

Question 7

What are the Three Tests for Determining the Existence of a Duty of Care?

Answer 7

• The Threefold Test.
• The Incremental Test.
• The Assumption of Responsibility Test.

HM COCE v Barclays Bank [2006] UKHL 28.

Question 8

What is the Assumption of Responsibility Test?

Answer 8

A test of:
* “Whether the Defendant voluntarily assumed responsibility for what he said and did vis-à-vis the Claimant, [who thereafter showed reliance]; or
* Is to be treated by the law as having done so.”

HM COCE v Barclays Bank [2006] UKHL 28, at [24].

Question 9

What constitutes a Voluntary Assumption of Responsibility?

Answer 9

“A conscious, considered, or deliberate decision on the part of the Defendant,” to assume a particular role or duty vis-à-vis the Claimant.

Manchester Building Society v Grant Thornton [2021] UKSC 20, at [70].

Question 10

Is the Assumption of Responsibility Test applied Objectively or Subjectively?

Answer 10

Objectively.

HM COCE v Barclays Bank [2006] UKHL 28, at [5].

Question 11

What is the Threefold Test?

Answer 11

A test of whether:
* “The Claimant’s loss was a reasonably foreseeable consequence of the Defendant’s actions or omissions;
* The Claimant-Defendant relationship was one of sufficient proximity; and
* It [is] fair, just, and reasonable to impose a duty of care on the Defendant towards the Claimant.”

P. 478; Caparo Industries v Dickman [1990] 2 AC 605, at [617]-[618]

Question 12

In the Threefold Test, what constitutes Sufficient Proximity?

Answer 12

“A measure of control over, and responsibility for, the situation giving rise to the loss.”

P. 479; Sutradhar v Natural Environment [2006] UKHL 33, at [38].

Question 13

When is it Unnecessary to demonstrate the ‘Fair, Just, and Reasonable’ criterion?

Answer 13

When there is a demonstrable voluntary assumption of responsibility by the Defendant.

P. 479; Henderson v Merret Syndicates [1995] 2 AC 145, at [180]-[181].

Question 14

What is the Incremental Test?

Answer 14

An adjunctive test that states new legal categories of negligence should be developed, “incrementally and by analogy with established categories.”

In other words, it’s not really a test.

P. 480; Sutherland Shire Council v Heyman [1985] 157 CLR 424, at [481].

Question 15

How is the Scope of a Duty of Care determined?

Answer 15

By observing the:
* Relevant facts;
* Contractual terms;
* Parties’ relationship; and
* Nature of the responsibilities the Defendant owes to the Claimant.

P. 482; Springwell v JP Morgan Chase [2010] EWCA Civ 1221.

Question 16

What constitutes Reasonable Reliance?

Answer 16

Actual reliance upon the Defendant’s actions where it is reasonable for the Claimant to do so.

P. 483; Hedley Byrne v Heller [1964] AC 465.

Question 17

What constitutes Causation?

Answer 17

Effecting the Claimant’s loss as a direct consequence of the breached duty.

P. 484-485; Torre Asset v RBS [2013] EWHC 2670 (Ch).

Question 18

What constitutes a Foreseeable Loss?

Answer 18

A loss that one reasonably anticipates would arise from the breached duty.

Textbook, P. 484-485; Wagon Mound (No. 1) [1961] AC 388.

Question 19

What are the Four Distinctions of Mental State relevant to liability for the making of False Statements?

Answer 19

• Rational Genuine Belief (Innocent Misrepresentation): The Defendant made the false statement believing it was true on reasonable grounds.°
• Irrational Genuine Belief (Negligent Misrepresentation): The Defendant made the false statement believing it was true on unreasonable grounds.°°
• Indifference (Fraudulent Misrepresentation): The Defendant made the false statement without knowing or caring if it was true or false.°°°
• Dishonesty (Tort of Deceit): The Defendant made the false statement knowing it was false.°°°°

° Spice Girls v Aprilia [2002] EWCA Civ 15, at [68].
°° Howard Marine v Ogden & Sons [1978] QB 574, at [11].
°°° Peekay Intermark v Banking Group [2006] EWCA Civ 386, at [56].
°°°° Derry v Peek (1889) 14 App Cas 337, at [16]-[18].

Question 20

What is the Tort of Deceit?

Answer 20

A deliberate misrepresentation of facts by one party to another, consequently causing them harm or loss.

P. 491.

Derry v Peek (1889) 14 App Cas 337.

Question 21

What are the Elements of the Tort of Deceit?

Answer 21

1. The Defendant owed the Claimant a duty of care regarding the accuracy of its statements.
2. The Defendant made a false statement of fact.
3. The Defendant either knew it was false, did not believe it was true, or was reckless as to its veracity.
4. The Defendant intended for the Claimant to act upon the statement.
5. The Claimant acted in reasonable reliance upon the statement.
6. The Claimant consequently suffered harm.

Derry v Peek (1889) 14 App Cas 337, at [16]-[18].

Question 22

In the Tort of Deceit, what Standard is used to judge Dishonesty?

Answer 22

The subjective standard of the Defendant’s mental state, judged against the objective standard of a reasonable and honest pereson.

Royal Brunei v Tan [1995] 2 AC 378, at [389].

Question 23

What constitutes Reasonable Reliance?

Answer 23

Reliance following a reasonably thorough investigation of the statement’s truth.

Smith v Eric Bush [1990] 1 AC 831, at [18]-[19].

Question 24

What are the Remedies in Tort of Deceit?

Answer 24

• Damages.°
• Rescission.°°

° Derry v Peek (1889) 14 App Cas 337, at [20].
°° Doyle v Olby [1969] 2 QB 158, at [173]

Question 25

What is Fraudulent Misrepresentation?

Answer 25

A misrepresentation of facts by one party, who neither knows nor cares about of the facts’ truth, to another, consequently causing them harm or loss.

Peekay Intermark v Banking Group [2006] EWCA Civ 386, at [56].

Bear in mind that, under Peekay, the burden of proof in cases involving experienced investors is more exacting.

Question 26

What are the Elements of Fraudulent Misrepresentation?

Answer 26

1. The Defendant owed the Claimant a duty of care regarding the accuracy of its statements.
2. The Defendant made a false statement of fact.
3. The Defendant made the false statement without knowing or caring if it was true or false.
4. The Defendant made the statement to induce the Claimant to contract.
5. The Claimant acted in reasonable reliance upon the statement.
6. The Claimant consequently suffered harm.

P. 493.

§2(1) – Misrepresentation Act 1967; Derry v Peek (1889) 14 App Cas 337, at [60].

Question 27

What are the Remedies for Fraudulent Misrepresentation?

Answer 27

• Damages.
• Rescission.

§2(1) – Misrepresentation Act 1967.

Question 28

What constitutes Inducement?

Answer 28

The playing of a real and substantial part of the Claimant’s decision to contract. Such a role a need not be sole or decisive, only material.

P. 495.

Avon Insurance v Swire Fraser [2000] 1 All ER at [14]-[18].

Question 29

What constitutes a Correct Statement?

Answer 29

One which is substantially, even if not entirely, true.

With v O’Flanagan [1936] Ch 575, at [579].

Question 30

Can a Disclaimer prevent a Claim of Fraudulent Misrepresentation?

Answer 30

No.

§3 – Misrepresentation Act 1967.

Question 31

Can a Disclaimer prevent a Claim of Negligent or Innocent Misrepresentation?

Answer 31

Yes, but only if it satisfies the Reasonableness Test.

This point encompasses Non-Reliance Clauses.

§11(1) – Misrepresentation Act 1967.

Question 32

What is the Reasonableness Test?

Answer 32

An assessment of whether a clause is fair and reasonable in all the circumstances of the case.

§3-§4 — Unfair Contract Terms Act 1977.

Considerations include: (a) bargaining power; (b) notice of the clause; (c) clarity of the clause; (d) availability of information regarding the contract’s subject matter; (e) availability of insurance for the liability sought to be limited; (f) availability of alternative clauses; (g) any other relevant circumstances, such as inclusion in the master agreement.

Question 33

Can correcting a Misrepresentation Prevent a Claim in Misrepresentation?

Answer 33

Only if the Defendant concretely shows the Claimant discovered the truth before execution. Constructive notice will not suffice.

For more, see the Contract Law for Finance deck.

Redgrave v Hurd [1881] 20 ChD 1, at [181].

Question 34

What is Negligent Misrepresentation?

Answer 34

A false statement of facts by one party, who believed in their truth without reasonable grounds, to another, consequently causing them harm or loss.

§2(2) – Misrepresentation Act 1967.

Question 35

What is Negligent Misstatement?

Answer 35

A false statement of fact by one party to another, to whom it owes a duty of care, and who it consequently causes harm or loss for its reasonable reliance.

Question 36

What are the Elements of Neligent Misrepresentation?

Answer 36

1. The Defendant owed the Claimant a duty of care regarding the accuracy of its statements.
2. The Defendant made a false statement of fact.
3. The Defendant made the false statement believing it was true on unreasonable grounds.
4. The Claimant acted in reasonable reliance upon the statement.
5. The Claimant consequently suffered harm.

§2(1) – Misrepresentation Act 1967.

Question 37

What is the Standard of Care in a Claim of Negligent Misrepresentation?

Answer 37

The standard of an honest and reasonable person.

Smith v Eric Bush [1990] 1 AC 831, at [26].

Question 38

What are the Remedies for Negligent Misrepresentation?

Answer 38

• Damages.
• Rescission.

§2(1) – Misrepresentation Act 1967.

In some cases, rectification may be ordered by the court.

Question 39

What are the Elements of Negligent Misstatement?

Answer 39

1. The Defendant owed the Claimant a duty of care regarding the accuracy of its statements.
2. The Defendant made a false statement of fact.
3. The Claimant acted in reasonable reliance upon the statement.
4. The Claimant consequently suffered harm.
5. The Claimant’s harm was foreseeable.

Hedley Byrne v Heller [1964] AC 465, at [27].

Question 40

What is the Standard of Care in a Claim of Negligent Misstatement?

Answer 40

That of a reasonable person with the knowledge, skill, and expertise of the person making the statement under those circumstances.

Hedley Byrne v Heller [1964] AC 465, at [27].

Question 41

How is the Duty of Care in a Claim of Negligent Misstatement distinct?

Answer 41

• The Claimant-Defendant relationship must be of sufficient proximity; and
• It must be fair, just and reasonable to impose a duty of care in the circumstances.

Caparo Industries v Dickman [1990] 2 AC 605, at [29].

Question 42

In Negligent Misstatement, what entails a Relationship of Sufficient Proximity?

Answer 42

An arrangement such that the Claimant’s reliance, by extension its harm, is a foreseeable outcome of the Defendant’s statement.

Examples include professional advisors, commercial counterparties, etc.

Caparo Industries v Dickman [1990] 2 AC 605, at [25].

Question 43

What are the Remedies for Negligent Misstatement?

Answer 43

• Damages.
• Rescission.

§2(1) – Misrepresentation Act 1967.

Question 44

What is Innocent Misrepresentation?

Answer 44

A misrepresentation of facts by one party, who honestly believed in their truth with reasonable grounds, to another, consequently causing them harm or loss.

Question 45

What are the Elements of Innocent Misrepresentation?

Answer 45

1. The Defendant owed the Claimant a duty of care regarding the accuracy of its statements.
2. The Defendant made a false statement of fact.
3. The Defendant made the false statement honestly believing it was true on reasonable grounds.
4. The Claimant was induced to contract pursuant to the statement.
5. The Claimant consequently suffered harm.

Question 46

What are the Remedies for Innocent Misrepresentation?

Answer 46

• Damages.
• Rescission.

§2(1) – Misrepresentation Act 1967.

Question 47

What is the Defence of Contributory Negligence?

Answer 47

An argument that leverages the Claimant’s own responsibility for any loss that arose to reduce the damages payable by the Defendant.

§1(1) – Law Reform (Contributory Negligence) Act 1945.

The degree of reduction is left to the Court’s discretion. This defence does not apply to claims of fraud or deceit.

Question 48

Can a Party owe similar Duties in Tort and Contract concurrently?

Answer 48

Yes.

Henderson v Merrett Syndicates [1995] 2 AC 145, at [184]-[194].