#6915 - Torts B Extended Pure Economic Loss (Negligent Statements) - Torts Law

Pure Economic Loss Caused By Negligent Statements

General Principles

• Tort of negligence did not traditionally allow for any recovery for pure economic loss

• Pure economic loss: loss that was NOT consequential or did not follow from injury to the person or property of the P

• Consequential losses have always been compensated. In relation to property damage, also awarded

• When there is no physical injury or damage to the Plaintiff, the court had refused to award damage. They wanted to prevent a third party obtaining a benefit when there may be a contract involved

Negligent Misstatement

• Problem of compensating for ‘mere words’ in circumstances where there is pure economic loss. (Negligent misstatement)

  • Reluctant to impose a duty which could expose defendants to a potential liability

  • We value competition and in these circumstances should the courts penalise one who makes a gain at the sacrifice of another (‘personal autonomy’)

• ‘in an indeterminate amount for an indeterminate time to an indeterminate class’ (Ultramares Corporation v Touche (1931) 255 NY 170(174 NE 441) per Cardozo J)

• ‘.... the correct view is that, just as liability for negligent misstatement is but an instance of liability for negligent acts and omissions generally, so the treatment of the duty of care in the context of misstatements is but an instance of the application of the principles governing the duty of care in negligence generally.’San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340

• Since San Sebastian, negligent misstatement now considered to be just another instance of liability for negligent acts and omissions under Australian law

• Framework for establishing duty of care:

  • Reasonable foreseeability is necessary but not sufficient

  • Additional features must also be present

  • Similarity and difference to standard salient features approach

• Key principles:

  • Certainty or indeterminacy

  • Autonomy

  • Vulnerability

  • Coherence

Hedley Byrne v Heller [1964] AC 465

• First case to accept that the making of a statement that caused PEL could give rise to liability under tort of negligence

• Facts:

  • P was an advertising agency who consulted D about whether one of its customers was credit worthy because it was contemplating entering into a contract with the customer

  • Bank gave written advice: it was considered good for its ordinary business arrangements. Disclaimer: made it clear advice was issued ‘without responsibility on part of bank’

  • Customer was unable to pay its debts

  • P made claim in negligence although it was neither a customer or potential customer of D

• Held:

  • Duty of care could arise for a negligent misrepresentation (as opposed to a fraudulent one)

  • But on the facts, liability would not be imposed because of the existence of a disclaimer

• Legal status of the relationship, whether it be contractual, fiduciary or confidential, was not the sole determinant of the existence of duty. Liability for negligent misstatement could only be imposed if the following factors were present:

  1. Voluntary undertaking by the D of responsibility for the statements giving rise to the claim in negligence (per Lord Devlin)

  2. Reasonable reliance by the P on the negligent misstatement (per Lord Reid)

  3. Circumstances and nature of the transaction (per Lord Pearce)

1. Voluntary undertaking by the D of responsibility Per Lord Devlin

• The duty of care may arise where the parties are in a special relationship (eg equivalent to contract) and the P reasonably relies on the D’s special skill.

• Outside of contractual or fiduciary duties, the parties must have a ‘special relationship’ in order to give rise to a duty of care in relation to pure economic loss caused by statements.

• A ‘special relationship’ might be continuing or specific to a particular transaction (ad hoc). Examples of a continuing special relationship: solicitor and client; banker and customer; financial advisers and their clients.

• The assumption of responsibility on the part of the person making the statement can be either express or implied.

• Disclaimer of responsibility meant that there was no undertaking of the responsibility for the reference given by the D.

2. Reasonable reliance by the P on the negligent misstatement Per Lord Reid

Lord Reid introduced the notion of reasonable reliance. Held that a special relationship giving rise to a duty of care where:

• you have a person of special skill who undertakes to apply that skill for the purposes of assisting another who relies upon such skill (irrespective of contract).

• If the person is so placed that others could reasonably rely upon his judgment or his skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his information or advice to be passed on to, another person who, as he knows or should know, will place reliance on it.

3. Circumstances and nature of the transaction Per Lord Pearce

• For a duty of care to be imposed in this situation then that had to exist a special relationship and whether such relationship would be said to exist would ‘depend on the circumstances of the transaction.’

• For example, words expressed on a social, informal or causal occasion will not attract a duty.

• To recognise such a duty, it would normally involve a business or professional transaction whose nature makes clear the gravity of the inquiry and the importance and influence attached to the answer.

• On facts, most important circumstance for Lord Pearce was the form of inquiry and of the answer. Both were stated to be without liability.

Approach taken in Australia

Adopted in a modified form in Australia

Mutual Life & Citizens Assurance v Evatt (1968) 122 CLR 556 (MLC v Evatt)

• Facts:

  • P had an insurance policy with MLC

  • He sought advice with a planned investment in a subsidiary company of MLC’s

  • P request information about it’s financial stability

  • Acting in reliance of statement my MLC that company was financially stable

  • P invested in company but suffered financial loss

• Held:

  • Privy Council overturned HC decision

  • PC held that bank didn’t claim to possess a special skill

  • Judgment by Barwick has remained influential in relation to negligent misstatements:

  • “It seems to me .... that whenever a person gives information or advice to another .... upon a serious matter ... and the relationship of the parties arising out of the circumstances is such that ... the speaker realizes or ought to realize that he is being trusted ... to give the best of his information or advice as a basis for action on the part of the other party and it is reasonable in the circumstances for the other party ... to act upon that information and advice. The speaker, choosing to give the information or advice in the circumstances, comes under a duty of care both to utilize with reasonable care the information and sources of information at his disposal and to employ with reasonable care what capacity he has for judgment in relation to the matter and to exercise reasonable care in the expression of what he is prepared to convey by way of information of advice” per Barwick CJ

Barwick CJ formulation accepted by High Court in later case of Esanda Finance v Peat Marwick Hungerfords (1977) 188 CLR 159

San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340

• Facts:

  • Property developers sued NSW public planning authorities and local council relied on advice from council to plan

  • Had relied on documents

• Held:

  • D held no duty because the information was subject to alternation, variation and revocation.

  • ‘The existence of an antecedent request for information or advice certainly assists in demonstrating reliance...However such a request is by no means essential... The Court went on to say that the ‘maker of a statement may come under a duty to take care through a combination of circumstances or in various ways, in the absence of a request by the recipient... He [the author] may warrant the correctness of what he says or assume responsibility for its correctness. He may invite the recipient to act on the basis of the information or advice, or intend to induce the recipient to act in a particular way. He may actually have an interest in the recipient so acting.’

Must the defendant be in the business of giving advice of the kind provided?

Overview of case law:

• Hedley Byrne: no but it points to whether a ‘special relationship’ exists

• MLC v Evatt (HCA): no as per Hedley Byrne (majority) but see Privy Council: yes – the D must be in the business of giving advice of the kind provided (majority)

• Hill v Van Erp (1997) 188 CLR 159, having a special skill is important but not determinative in deciding whether P’s reliance on D’s statement was reasonable or not

Other Examples

Apart from relationships which are broadly speaking contractual or equivalent to contract (eg Hedley Byrne), Australian courts have found that a duty of care will exist in relation to a claim alleging negligent misstatement in the following types of situations (non-exhaustive) – offered by way of example:

• Professional relationships Hill v van Erp (1997) 188 CLR 159

• Where there is a practice of public authorities supplying information L Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 225

Hill v van Erp (1997) 188 CLR 159

• Facts:

  • Solicitor (Hill) allowed husband of Mrs. Erp to sign as a witness to a will in circumstances where Mrs. Erp was a beneficiary under the will. Mr. Van Erp acting as a witness meant that the will was...