Introduction

• pure economic loss may be caused by a negligent statement
• claimant's (C) pure economic loss resulting from defendant's (D) carelessness only recoverable in Negligence if duty of care established
• common law position until 1964: no remedy for negligently false statement in Negligence

  Candler v Crane Christmas & Co [1951] 2 KB 533

  Facts:

  • plaintiff (P) lost money on investment after relying on D's carelessly compiled audit reports

  Issue:

  • could pure economic loss be recovered?

  Held:

  • P had no cause of action: no contractual or fiduciary relationship between parties

Hedley Byrne rule

• common law position significantly changed by House of Lords decision, creating exception to general rule that pure economic loss not recoverable

  Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465

  Facts:

  • Ps extended credit for third party (Easipower) on basis of creditworthiness reference provided by Ds, Easipower's bank
  • reference was innocent but negligent misrepresentation & Easipower went out of business & P suffered pure economic loss

  Issue:

  • does duty of care apply to statements that cause pure economic loss?

  Held:

  • lower courts: pure economic loss could not be recovered as D did not owe P duty of care
  • House of Lords: duty of care was owed, as special relationship between P & D
  • special relationship: arises if D assumes responsibility (if D knows P is relying on their special skill) & P reasonably relies on D's statement
  • however, Ds used effective disclaimer of liability, so losses were not recoverable

Application

• Hedley Byrne rule has been applied in a number of cases

  Cornish v Midland Bank plc [1985] 3 All ER 513

  Facts:

  • P agreed to guarantee husband's loan application, by signing second mortgage on her house
  • bank clerk, employed by D, advised P negligently of implications of signing mortgage (P would be liable for husband's past, present & future borrowings)
  • marriage broke down & D continued to make loans to husband
  • when mortgage redeemed P left with very little money from sale of house

  Issue:

  • was a duty of care owed?

  Facts:

  • duty of care was owed: clerk had taken it upon himself to advise P, reasonably foreseeable she would rely on advice & he should have ensured was complete

  Chaudhry v Prabhakar [1989] 1 WLR 29

  Facts:

  • P asked D, a friend who claimed to be knowledgeable about cars, to help her purchase vehicle
  • P bought car on D's recommendation & statement it had not been in any accidents
  • car was unroadworthy due to previous accident

  Issue:

  • was a duty of care owed?

  Facts:

  • Court of Appeal: duty was owed, D knew P relied on his advice, on basis of his claims
  • criticised: seems to contradict dicta in Hedley Byrne, which suggested duty could only arise where advice sought & given in business context

  Welton v North Cornwall District Council [1997] 1 WLR 570

  Facts:

  • P spent money refurbishing their guest house after environmental health officer, employed by D, negligently stated premises would be shut down if work not carried out

  Issue:

  • was a duty of care owed?

  Facts:

  • duty of care was owed: reasonable for P to rely on advice of person in position of authority
• case law followed Hedley Byrne rule & found that a special relationship, would give rise to a duty of care in relation to negligent statements.

Refining the rule

• criteria for establishing special relationship further defined

  Caparo Industries v Dickman [1990] 2 AC 605

  Facts:

  • P made loss on shares in third party, after relying on accounts negligently prepared by third party's auditors (D)

  Issue:

  • was a duty of care owed?

  Facts:

  • House of Lords: no duty of care, as no necessary special relationship established
  • D will have assumed responsibility towards P & special relationship established if:
    adviser knew purpose for which advice was required
    adviser knew advice would be communicated to advisee (specifically or as member of ascertainable class)
    adviser knew advisee likely to act on advice without further independent inquiry
    advice was acted on by advisee to his detriment
• courts tended to narrowly construe requirement that adviser knew purpose for which advice was required

  James McNaughton v Hicks Anderson [1991] 2 QB 295

  Facts:

  • P negotiating with third party about takeover bid & third party instructed D, their accountants, to prepare accounts as quickly as possible
  • P relied on D's carelessly prepared accounts to make bid & suffered pure economic loss

  Issue:

  • was a duty of care owed?

  Facts:

  • Court of Appeal: no duty of care owed: insufficient proximity for special relationship as D did not know accounts would be sent to bidder for particular transaction

  Morgan Crucible v Hill Samuel [1991] Ch 295

  Facts:

  • Ps bidding to takeover third party company & Ds were advisers to third party
  • during bidding process negligent representations were made, leading P to make pure economic loss

  Issue:

  • was a duty of care owed?

  Facts:

  • duty owed: not to negligently mislead P, was sufficient proximity because P's identity & nature of transaction known

Extending the rule

• exception extended in specific circumstances, where Hedley Byrne & Caparo requirements not satisfied

  Henderson v Merrett Syndicates Ltd [1995] 2 AC 145

  Facts:

  • Ps made substantial losses through investing in Syndicates, negligently managed by Ds

  Issue:

  • was a duty of care owed?

  Facts:

  • House of Lords: duty of care owed: D negligently performed professional service
  • damages could be recovered for negligent omission in performance of professional service which led to pure economic loss

  Spring v Guardian Assurance plc [1995] 2 AC 296

  Facts:

  • P not employed due to negligent reference provided by D, P's previous employer, to third party (prospective employer)

  Issue:

  • was a duty of care owed?

  Facts:

  • House of Lords: duty of care owed: not traditional Hedley Byrne case (D did not provide P with advice which he relied upon)
  • however, Lord Goff reasoned scope of Hedley Byrne rule could be extended (as decision originally based on D assuming responsibility for P's economic welfare) similarly P in this case had entrusted his affairs to D

  White v Jones [1995] 2 AC 207

  Facts:

  • D, solicitor, asked to prepare will but negligently failed to do so before testator died
  • Ps would have been beneficiaries had will been completed

  Issue:

  • was a duty of care owed?

  Facts:

  • House of Lords: D's assumed responsibility to testator could be extended to Ps
• courts extended Hedley Byrne rule (based on assumption of responsibility) to include , beyond negligent provision of services
• reasoning for extensions varies but now seems 2 tests for establishing special relationship either: Hedley Byrne & Caparo principles in negligent statement cases or broader assumption of responsibility test if negligent provision of services

Disclaimers

• most common defence: valid disclaimer exists (as relied upon in Hedley Byrne) but now statutory limitations

  Unfair Contract Terms Act 1977

  S1: Scope of Part I

  • S(1) : defines 'negligence' as breach of (b) any common law duty to 'take reasonable care or exercise reasonable skill'
  • S1(3) : applies to business liability only

  S2: Negligence liability

  • S2(1): no notice can restrict liability for death or personal injury resulting from negligence
  • S2(2): notice must satisfy reasonableness test to restrict other loss or damage
  • S2(3) person's agreement to or awareness of notice does not indicate his voluntary acceptance of any risk

  S11: The 'reasonableness' test

  • S11(3) it should be fair & reasonable to allow reliance on non contractual notice, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen
  • S11(5): burden of proof lies with party seeking to rely on exemption clause

  S14: Interpretation of Part I

  • 'notice': announcement (written or unwritten) & other communication or pretended communication
  • 'personal injury': any disease & any impairment of physical or mental condition
• limitations apply only to business liability (S1(3) UCTA 1977)
• liability for pure economic loss only be restricted if disclaimer satisfies reasonableness test (S2(2) UCTA 1977)
• reasonableness test requires disclaimer to be fair & reasonable & places burden on D to prove (S11 UCTA 1977)
• further guidance on the reasonableness test

  Smith v Eric Bush and Harris v Wyre Forest DC [1990] 1 AC 831

  Facts:

  • conjoined cases: Ps were house buyers who suffered pure economic loss
  • Ds, surveyors, employed by third party (mortgage lenders) negligently valued properties
  • Ds sought to rely on disclaimers, exempting liability

  Issue:

  • were the disclaimers valid?

  Held:

  • House of Lords: Ds owed duty of care to Ps (as sufficiently proximate third parties)
  • UCTA 1977 applied as valuations provided in course of business & disclaimers were unreasonable
  • Lord Griffiths factors in determining whether disclaimer is reasonable:
    did parties have equal bargaining power?
    would it have been reasonably practicable to obtain advice from alternative source (taking into account costs & time)?
    how difficult is task being undertaken for which liability is being excluded?
    what are practical consequences of decision in relation to parties' ability to bear loss involved (with regard to insurance)?