Introduction

Pure economic loss may arise in cases where there is no physical damage but loss has been caused by a negligent statement, rather than a negligent action. A claimant's pure economic loss resulting from a defendant's carelessness can only give rise to a claim in Negligence if a duty of care is established.

Until 1964, the common law position was that there was no remedy for a negligently false statement in Negligence.

Hedley Byrne rule

The common law position was significantly changed by this House of Lords decision. It created an exception to the general rule that pure economic loss could not be recovered in tort if caused by negligent statements.

The Hedley Byrne rule states that a duty of care is owed if there is a special relationship between the claimant and defendant. A special relationship arises if there is an assumption of responsibility by the defendant (if the defendant knows the claimant is relying on their special skill) and the claimant reasonably relies on the defendant's statement.

Application

The Hedley Byrne decision has been applied in a number of cases.

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

  Facts:

  The plaintiff agreed to guarantee her husband's loan application, by signing a second mortgage on her house. The bank clerk, employed by the defendant, advised the plaintiff of the implications of signing the mortgage. However, the clerk inadequately explained the document and failed to highlight that signing meant the plaintiff was liable for informed all her husband's past, present and future borrowings. Shortly after the mortgage was signed the marriage broke up. Despite being aware of the marriage breakdown the defendant made further loans to the husband. When the mortgage was redeemed the plaintiff was left with very little money from the sale of the house.

  Issue:

  Was a duty of care owed?

  Held:

  A duty of care was owed as the bank clerk had taken it upon himself to advise the plaintiff, it was reasonably foreseeable that she would rely on the advice and he should have made sure it was complete and correct.

• Chaudhry v Prabhakar [1989] 1 WLR 29

  Facts:

  The plaintiff asked the defendant, a friend who claimed to be knowledgeable about cars, to help her purchase a vehicle. The plaintiff bought a car after the defendant recommended a car which he stated had not been in any accidents. The car had visible damage and the defendant had not enquired about the cause. The car was in fact unroadworthy, due to a previous accident.

  Issue:

  Was a duty of care owed?

  Held:

  Court of Appeal found that a duty was owed by the defendant as he knew the plaintiff had relied on his advice, on the basis of his claim that he was knowledgeable about cars.

The decision in Chaudhry v Prabhakar [1989], has been criticised as it seems to contradict dicta in Hedley Byrne that suggested a duty could only arise where the advice was sought and given in a business context.

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

  Facts:

  The plaintiff spent money on extensive refurbishment of their guest house, after being negligently informed by an environmental health officer, employed by the defendant, that the premises would be shut down if the work was not carried out.

  Issue:

  Was a duty of care owed?

  Held:

  A duty of care was owed. It was reasonable for the plaintiffs to rely on the advice of the environmental health officer, who was in a position of authority.

Therefore, the case law followed the Hedley Byrne rule and found that a special relationship, would give rise to a duty of care in relation to negligent statements.

Refining the rule

The criteria for establishing a special relationship has been further defined by the House of Lords.

• Caparo Industries v Dickman [1990] 2 AC 605

  Facts:

  The plaintiff bought shares in a company, Fidelity, in order to make a successful takeover bid. The plaintiff relied on Fidelity's accounts prepared by the defendant auditors. The accounts showed that Fidelity were making a profit but in fact the company was making a loss. The plaintiff made a loss as they bought the shares for an excessively high price.

  Issue:

  Was a duty of care owed?

  Held:

  The House of Lords found that the defendants did not owe a duty of care to the plaintiff because the necessary special relationship could not be established.

  A defendant will have assumed a responsibility towards the plaintiff and a special relationship established if the following four stage test is satisfied:
  The adviser knew the purpose for which the advice was required.
  The adviser knew that the advice would be communicated to the advisee, either specifically or as a member of an ascertainable class.
  The adviser knew that the advisee was likely to act on the advice without further independent inquiry.
  The advice was acted on by the advisee to his detriment.

The courts have tended to narrowly construe the requirement that the adviser knew the purpose for which the advice was required.

• James McNaughton v Hicks Anderson [1991] 2 QB 295

  Facts:

  The plaintiff was negotiating with a third party about a takeover bid. The third party instructed the defendant, their accountants, to prepare accounts as quickly as possible. The plaintiff relied on the accounts which were carelessly drawn up to make a bid. The plaintiff subsequently made a loss.

  Issue:

  Was a duty of care owed?

  Held:

  The Court of Appeal found that the defendant did not owe a duty of care to the plaintiff. There was insufficient proximity for a special relationship as the defendant did not know the accounts would be sent to the bidder for the particular transaction.

• Morgan Crucible v Hill Samuel [1991] Ch 295

  Facts:

  The plaintiffs were bidding to take over a third party company, to whom the defendants were advisers. During the bidding process a number of negligent representations were made, which led to the plaintiff making a loss.

  Issue:

  Was a duty of care owed?

  Held:

  The defendants did owe a duty not to negligently mislead the plaintiff. There was sufficient proximity because the plaintiff's identity and the nature of the transaction were known.

Extending the rule

The exception seems to have been extended in some specific circumstances, where the Hedley Byrne and Caparo requirements have not been satisfied.

• Henderson v Merrett Syndicates Ltd [1995] 2 AC 145

  Facts:

  The plaintiffs made substantial losses through investing in Syndicates, negligently managed by the defendants.

  Issue:

  Was a duty of care owed?

  Held:

  The House of Lords found a duty of care existed as the defendant had negligently performed a professional service. Furthermore, damages could be recovered for a negligent omission in the performance of a professional service which led to pure economic loss.

• Spring v Guardian Assurance plc [1995] 2 AC 296

  Facts:

  The plaintiff was not employed due to a negligent reference provided by the defendant, his previous employer, to a third party (prospective employer).

  Issue:

  Was a duty of care owed?

  Held:

  The House of Lords found that a duty of care was owed. The case is not a traditional Hedley Byrne case, as the defendant did not provide the plaintiff with advice which he relied upon.

  However, Lord Goff reasoned that the scope of the Hedley Byrne rule could be extended, as the decision was originally based on the fact that the defendant had assumed responsibility for the plaintiff's economic welfare. Therefore, he put forward that the plaintiff in this case had entrusted his affairs to the defendant tasked to write the reference.

• White v Jones [1995] 2 AC 207

  Facts:

  The defendant, a solicitor, was asked to prepare a will, but negligently failed to do so before the testator died. The plaintiffs would have been beneficiaries had the will been completed.

  Issue:

  Was a duty of care owed?

  Held:

  The House of Lords found that the defendant's assumed responsibility to the testator could be extended to the plaintiffs.

Therefore, the courts have extended the Hedley Byrne rule, based on the assumption of responsibility, beyond the original scope of negligent statements and have included negligent provision of services. The reasoning for these extensions have been varies however, there seems to have developed two tests for establishing a special relationship either: the Hedley Byrne and Caparo principles in negligent statement cases or the broader assumption of responsibility test in relation to the provision of services.

Disclaimers

The most common defence to a claim to recover damages for pure economic loss caused by a negligent statement is that a valid disclaimer exists. This defence was relied upon in Hedley Byrne. However, there are now statutory limitations on defendant's attempting to exclude liability for negligence.

• Unfair Contract Terms Act 1977

  S1: Scope of Part I

  S(1): For the purposes of this Part of this Act, 'negligence' means the breach -
  S(1)(b): of any common law duty to take reasonable care or exercise reasonable skill (but not any stricter duty);
  

  S1(3): In the case of both contract and tort, sections 2 to 7 apply (except where the contrary is stated in section 6(4)) only to business liability, that is liability for breach of obligations or duties arising -
  S1(3)(a): from things done or to be done by a person in the course of a business (whether his own business or another's); or
  

  S2: Negligence liability

  S2(1): A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence.

  S2(2): In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness.

  S2(3): Where a contract term or notice purports to exclude or restrict liability for negligence a person's agreement to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk.

  S11: The 'reasonableness' test

  S11(3): In relation to a notice (not being a notice having contractual effect), the requirement of reasonableness under this Act is that it should be fair and reasonable to allow reliance on it, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen.

  S11(5): lt is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does.

  S14 : Interpretation of Part I

  In this Part of this Act -
  'business' includes a profession and the activities of any government department or local or public authority;
  'negligence' has the meaning given by section 1(1);
  'notice' includes an announcement, whether or not in writing, and any other communication or pretended communication; and
  'personal injury' includes any disease and any impairment of physical or mental condition.

Therefore, the limitations of a purported disclaimer under UCTA 1977 applies only to business liability (s.1(3)). Under s.2(2) UCTA 1977, liability for other loss, such as pure economic loss, can only be excluded if it satisfies the reasonableness test, set out in s.11 UCTA 1977.

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

  Facts:

  The conjoined cases involved plaintiffs who were house buyers who suffered pure economic loss. The houses were negligently valued by the defendants, who were surveyors employed by third parties, the mortgage lenders. The defendants argued that disclaimers exempted them from liability.

  Issue:

  Were the disclaimers valid?

  Held:

  The House of Lords found that the defendants owed a duty of care to the plaintiffs as they were proximate third parties. The UCTA 1977 applied as the valuations were provided in the course of business. The courts found that the disclaimers were unreasonable.

  Lord Griffiths highlighted the following factors as important in determining whether a disclaimer is reasonable:
  Did the parties have equal bargaining power?
  Would it have been reasonably practicable to obtain the advice from an alternative source taking into account considerations of costs and time?
  How difficult is the task being undertaken for which liability is being excluded?
  What are the practical consequences of the decision in relation to the parties' ability to bear the loss involved, especially with regard to insurance?