Tort - Negligent Misstatements

Front 1

Negligent Misstatements - Introduction

Back 1

The effects of statements more difficult to ascertain or control than those of actions – especially when they are repeated to third parties.

Because their foreseeability is harder to measure, a distinct body of law has developed for negligent misstatements.

Front 2

The law pre-Hedley Byrne

Back 2

The generally accepted position was that negligent statements causing economic loss gave rise to a duty of care only where they were made in the context of (a) a fiduciary relationship, or (b) a contract.

Front 3

Hedley Byrne v. Heller (1964)

Back 3

Facts: Pl company requested a credit reference from the Def bank in relation to one of the Def’s clients. The purpose of the request was to establish the viability of a transaction between the Pl and the client. The Def negligently misstated the situation, but included a disclaimer in the statement.

Decision: a duty of care exists where (a) there is a “special relationship” between the parties (b) the recipient relies upon it, and (c) the maker of the statement can foresee the recipient’s reliance upon it.

This three-stage test covers the classic areas of proximity (the special relationship), and foreseeability and causation (the 2 reliance rules).

However, the major question arising from the decision is: what constitutes a “special relationship”? Proximity was clear in Hedley Byrne, but what about other aspects of banking?

Front 4

TE Potterton v. Northern Bank (1993)

Back 4

Pl received a cheque from a customer, drawn on the Def bank. The cheque did not clear because his overdraft facility was insufficient to meet his current liabilities.

The bank returned the cheque with a note suggesting there was a mere technical problem.

O’Hanlon J. held that this amounted to a negligent misstatement (whereas ordinarily, providing no explanation means a bank is not liable for cheques which do not clear).

Front 5

Voluntary Assumption of Responsibility

Back 5

In Hedley Byrne and much case law since then, the courts have pointed out the voluntary assumption of responsibility on the part of the Def; Quill says this is misleading – the voluntary assumption does not relate to a conscious choice to take on the duty, but merely the the choice to make the statement at all.

Front 6

Securities Trust v. Hugh Moore & Alexander (1964)

Back 6

HC approved Hedley Byrne, and applied it to a company situation. Held that the relationship between a company and its shareholder was close enough to create a duty, whereas that between the company and people with a beneficial interest in shares was not close enough, where the company was unaware of the interest.

Front 7

Bank of Ireland v. Smith (1966)

Back 7

Kenny J. held that the relationship between auctioneer and purchaser was not, of itself, sufficient to give rise to a duty in respect of all statements concerning the property, as the auctioneer could not be expected to antipate that all statements would lead to reliance. However, later case law provided situations where reliance was found.

Front 8

Gayson v. AIB (2002)

Back 8

An informal, off-the-cuff statement was held not to create a duty, because reliance was not foreseeable.

Front 9

McAnarney v. Hanrahan (1993)

Back 9

The auctioneer of a leasehold interest told a prospective purchaser that the freehold would be available for approx. £3000, without having enquired. In fact, the owner charged £40,000 and later accepted £30,000 for the freehold interest. Costello J. held that volunteering specific information of clear relevance to the purchaser created a duty.

Front 10

Spring v. Guardian Assurance (1995)

Back 10

HL found a duty to exist on a former employer toward a fomer employee in respect of a reference presented to a prospective employer, despite the fact that the statement is not made to the employee himself. This suggests a slight departure from the “special relationship” into a situation where all surrounding circumstances must be considered in terms of negligent misstatements.

Front 11

Spring v. Guardian Assurance (1995)

Back 11

HL found a duty to exist on a former employer toward a fomer employee in respect of a reference presented to a prospective employer, despite the fact that the statement is not made to the employee himself. This suggests a slight departure from the “special relationship” into a situation where all surrounding circumstances must be considered in terms of negligent misstatements.

Front 12

Caparo v. Dickman (1990)

Back 12

Pl invested in a company on the basis of accounts prepared by the Def auditors; Pl alleged that the accounts were inaccurate due to negligence on the Def’s part, and that it caused the Pl economic loss.

HL interpreted Hedley Byrne restrictively: (a) the special relationship required the Def to have knowledge of the Pl either personally or as a member of an identifiable class; (b) foreseeability required that the purpose of making the statement was connected with a specific transaction or type of transaction. On this basis, the Pl’s action failed.

This approach has been criticised as too restrictive to Pls who rely on negligent misstatements.

Front 13

Kelly v. Haughey Boland (1989)

Back 13

Pl alleged that the Def auditors were negligent in drawing up accounts of a company which the Pl took over, leading to significant losses in the running of the company.

Lardner J. held that a duty of care did exist both in respect of (a) accounts drawn up when Def knew of the take-over bid, and (b) accounts drawn up previously, when a take-over bid was reasonably foreseeable.

However, the Pl failed to bring sufficient evidence to show that the accounts were misleading.

Front 14

Wildgust v. Norwich Union (2001)

Back 14

Irish: Pl and his wife took out life insurance from the Def; the insurance was assigned to a bank from which the Pl had a commercial loan; the direct debit failed, the bank contacted the Def and was incorrectly told that an alternative payment had been set up, the policy lapsed, and the Pl became aware of all of this only later. The bank would have paid the premium to maintain the policy, but had been mis-informed about its status. When the Pl’s wife died, the Def refused to pay out.

Morris P. found for the Def, because the Pl should not be able to recover for a misstatement (a) not made to him, (b) of which he had no knowledge, and (c) on which he did not rely.

The broader implication is that a Pl will never succeed here for a misstatement made to a third party (unlike in the UK: see Spring above). Quill argues that this is unfair.

Front 15

Recent Jurisprudence - observations

Back 15

The Irish authorities may be read as more balanced and less restrictive than the Caparo approach.

Recent cases have shown great judicial caution in extending the principles of negligent misstatement leading to economic loss, and have sometimes caused confusion because of their failure to separate out the issues of liability.

NB: The broader picture in Wildgust: Morris P. applied the three-stage duty of care test, and the case was decided on the third limb of the test. This places negligent misstatement squarely inside the negligence criteria, albeit with special conditions. Note that Morris P. did not adopt the overly-resrictive interpretation of “special relationship” and foreseeability from Caparo, so Irish law is arguably more just to Pls in these cases.