CASE EXTRACT
6.3 Negligent misstatement .1 The origins of liability
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ACTIVITY
Self- assessment questions
1. What exactly is a ‘pure economic loss’?
2. Why are the courts more willing to accept an economic loss caused by a negligently made statement than one resulting from a negligent act or omission?
3. Why were judges in later cases nervous about the judgment in Junior Books?
4. What is the difference between physical damage to property and the cost of repairing de- fects in property?
5. How would the courts now prefer a claimant to recover compensation for an economic loss?
6. Why did the judges in Murphy decide not to overrule Junior Books?
KEY FACTS
Pure economic loss Case
The courts have always been reluctant to allow liability for ‘pure economic loss’, since it is felt that it is more to do with contract.
Spartan Steel v Martin [1973]
Although claims have been successful where there has been a risk also to health.
Dutton v Bognor Regis UDC [1972]
And the position on economic loss was drastically relaxed as the result of Lord Wilberforce’s two- part test.
Anns v Merton LBC [1978]
And in a ‘near contractual’ relationship between the two parties.
Junior Books v Veitchi [1983]
Later judges were unhappy with Anns and the two- part test and these were eventually overruled (but not Junior Books).
Murphy v Brentwood DC [1990]
The principle in Murphy has been followed in subsequent cases.
Department of the Environment v Thomas Bates & Sons Ltd [1990]
It appears that the more appropriate remedy for the damage is a claim against the claimant’s own insurance.
Marc Rich & Co v Bishop Rock Marine Co Ltd [1995]
6.3 Negligent misstatement
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That action for economic loss caused by reliance on a negligently made statement should be available was reaffirmed even more recently, although not without some funda- mental disagreement being expressed.
CASE EXAMPLE
Candler v Crane Christmas & Co [1951] 2 KB 164
Accountants negligently prepared a company’s accounts and investors then lost money. In the absence of a contractual relationship or fraud the court was not prepared to declare the exist- ence of a duty of care.
Lord Denning, dissenting, felt that there should be a duty of care to the investor and to:
JUDGMENT
‘any third party to whom they themselves show the accounts, or to whom they know their employer is going to show the accounts so as to induce them to invest money’.
The House of Lords eventually accepted this dissenting judgment a long time after- wards, and initially only in obiter.
CASE EXAMPLE
Hedley Byrne v Heller and Partners Ltd [1964] AC 465
An advertising company was approached with a view to preparing a campaign for a small company, Easipower, with whom they had not previously dealt. The advertisers then did the most sensible thing in the circumstances and approached Easipower’s bank for a credit refer- ence. The bank gave a satisfactory reference without checking on their current financial stand- ing and the advertisers produced the campaign. They then lost money when Easipower went into liquidation. They sued the bank for their negligently prepared advice. They failed, because the bank had included a disclaimer of liability in the credit reference. Nevertheless, the House of Lords, approving Lord Denning’s dissenting judgment in the last case, held that such an action should be possible, and this has subsequently been accepted as law.
Lord Reid explained the basis for imposing liability:
JUDGMENT
‘A reasonable man, knowing that he was being trusted or that his skill and judgement were being relied on, would, I think, have three courses open to him. He could keep silent or decline to give the information or advice sought: or he could give an answer with a clear qualification that he accepted no responsibility for it or that it was given without that reflection or inquiry which a careful answer would require: or he could simply answer without any such qualifica- tion. If he chooses to adopt the last course he must, I think, be held to have accepted some responsibility for his answer being given carefully, or to have accepted a relationship with the inquirer which requires him to exercise such care as the circumstances require.’
The interesting point of the court’s approval of the principle in the case is that they were holding that such a duty could apply despite there being no contractual relationship,
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and despite the fact that, in effect, they were accepting that they could impose liability for an economic loss.
As a result the House of Lords laid down strict guidelines for when the principle could apply.
(i) There must be a special relationship between the two parties – based on the skill and judgement of the defendant and the reliance placed upon it.
(ii) The person giving the advice must be possessed of special skill relating to the type of advice given – so the defendant ought to have realised that the claimant would rely on that skill.
(iii) The party receiving the advice has acted in reliance on it – and in the circumstances it was reasonable for the claimant to rely on the advice.
The subsequent case law has in general followed, but also in some cases added to, these requirements.
The basis of the specific duty has also been identified in the case law.
In Smith v Eric S Bush [1990] 1 AC 831 HL Lord Templeman identified:
JUDGMENT
‘The duty of professional men “is not merely a duty to use care in their reports. They have also a duty to use care in their work which results in their reports.” ’
6.3.2 The criteria for imposing liability
A special relationship
The precise meaning of ‘special relationship’ was never really examined in Hedley Byrne and so it has become an area for judicial policy making. The original leaning was towards a narrow interpretation that would then only include a relationship where the party giving the advice was in the business of giving advice of the sort in question.
However, it has since been suggested that a business or professional relationship might in general give rise to the duty if the claimant is genuinely seeking professional advice.
CASE EXAMPLE
Howard Marine & Dredging Co Ltd v Ogden & Sons Ltd [1978] QB 574
Dredging took a lot longer because the hirers of the barges had misstated the payload weight to the party hiring them. It was accepted that the relationship, while a standard business one, could give rise to a special relationship for the purposes of imposing a duty.
A purely social relationship should not normally give rise to a duty of care, but has done when it has been established that carefully considered advice was being sought from a party with some expertise.
CASE EXAMPLE
Chaudry v Prabhaker [1988] 3 All ER 718
A woman asked her friend, who, while not a mechanic, had some experience of cars, to find her a good second- hand car that had not been in an accident. When it was later discovered that the car advised on had been in an accident and was not completely roadworthy, the friend advising on its purchase was successfully sued.