Thursday, 2 May 2024

B114
Module 6: Fiduciary obligations, agency,
negligent misstatement and property

Part C
Negligence and negligent misstatement
Module 6: LEARNING OUTCOMES
By the end of Module 6 students will be able to:

LO 1: Identify fiduciary obligations, understand their purpose and how they interact with
accounting and business in general
LO 2: Explain and apply the laws of agency

LO 3: Explain and apply the laws of negligence and negligent misstatement

LO 4: Classify property as real or personal and explain the characteristics of each

LO 5: Understand estates and interests in land, and the registration system

LO 6: Appreciate how security interests in property can be used

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Negligence and negligent misstatement

In the law of torts, the law recognises certain obligations not to cause wrong to legal strangers.

Liability in the tort of negligence and negligent misstatement.

• The tort of negligence concerns liability for carelessness

• The tort of negligent misstatement concerns liability for careless words (focus)

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Duty of care

In the tort of negligence, the law essentially finds that there exists an obligation of care (a duty
of care) despite the fact that there are no contractual or equitable obligations between the
parties.

Carelessness exposes a person to legal liability.

But not all carelessness leads to liability.

NB : In NZ we have ACC (accident compensation regime)

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Specific elements required to prove negligence
In order to succeed in an action for negligence, the plaintiff must prove:

1. That the defendant owed the plaintiff a duty of care

2. That the defendant breached that duty by failing to exercise the degree of care which the
courts have deemed appropriate in the circumstances
( = breach of duty)
3. That it was the defendant’s breach which caused the harm to the plaintiff
( = the causation element)
4. That the harm to the plaintiff was not so remote from the defendant’s breach as to
make it undesirable to compensate the plaintiff for reasons of social policy or economic
efficiency ( = the remoteness element).

If the plaintiff is not able to prove all these requisite elements, the action will be unsuccessful
and the defendant will thus avoid liability.
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Relationship (degree of proximity)
between the parties

“The rule that you are to love your neighbour becomes in law, you must
not injure your neighbour; and the lawyer's question. Who is my
neighbour? Receives a restricted reply. You must take reasonable care to
avoid acts or omissions which you can reasonably foresee would be
likely to injure your neighbour. Who, then, in law is my neighbour?
The answer seems to be - persons who are so closely and directly
affected by my act that I ought reasonably to have them in
contemplation as being so affected when I am directing my mind to the
acts or omissions which are called in question.”
Donoghue v Stevenson

Plaintiff
Donoghue Ginger beer Defendant
Contract
purchased by friend Stevenson
from cafe proprietor

Consumed ginger beer

containing decomposed
snail
Manufactured the
ginger beer
•Nausea
•Shock
•Severe gastro-enteritis
Consequence of D v S

According to Donoghue v Stevenson a person owes a duty of care to those people:

1. Who are are close enough to be affected by their actions (proximity)

2. Who the person should reasonably foresee as people who might be affected by their actions
(foreseeability)

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Negligent misstatement
• Negligent (mis)statement is a (relatively) recent variation of the tort of negligence.

• It is about saying (or not saying) something negligently.

• NOT doing (or not doing) something. ie. words not physical acts

• Historically, statements could only be sued on if:

• the statement was fraudulent (deceit);or

• if there was a contract involved.

The negligent misstatement tort grew out of judgment of the House of Lords in Hedley
Byrne v Heller

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Hedley Byrne v Heller & Partners
[1964] AC 465 House of Lords
• Hedley Byrne were proposing to give credit facilities to Easipower, and normal practice in
these circumstances is to take up references first.
• The references were misleading and Hedley Byrne suffered a loss of £17,000.
• Heller & Partners were the bankers and the reference they gave included a disclaimer – i.e.
they were saying that if they were wrong then that is tough luck.

Also there was no contract between the parties, so the action was based on negligence rather
than contract.

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Hedley Byrne v Heller & Partners

no contract

H & Partners:
Bankers
HB: Advertising
Agents Disclaimer: “good for ...
ordinary business
engagements: “For your
private use and without
responsibility”

11 Easipower Ltd
Hedley Byrne v Heller & Partners - outcome
Held: Because of the disclaimer the Heller was held not liable

Ratio: Use of effective disclaimer means that a person cannot be liable in negligent
misstatement

Obiter: a person (X) with special skills who undertakes to apply that skill for the assistance of
another person and provides information or advice and other person reasonably relies upon
such skill, X will owe a duty of care to all those people that X can foresee as relying on
that information/advice

The obiter adopted LJ Denning’s dissenting opinion in Candler v Crane

Consequence: the obiter of the case effectively established liability for negligent misstatement
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Policy reasons for reluctance to impose
liability in this tort

• Is it unfair to compensate plaintiff when plaintiff hasn’t paid for advice – should be a
contract.

• Did the plaintiff cause own loss through lack of care?

• Valuation of loss difficulties, e.g there are a number of factors that are capable of affecting
share price

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Elements of negligence
and negligent Physical Acts (Negligence) Statements (Negligent
Misstatement)

misstatement
Duty of Care =
Proximity
Duty of Care =
&
Assumed responsibility
Comparison between Foreseeability &
Proximity ("Special relationship")
negligence (physical acts) and Reasonable Reliance
negligent misstatement
(statements)
Breach of standard of Breach of standard of
care care

Factual causation
Factual causation =
Actual reliance

Remoteness of harm
Remoteness of harm
(economic loss only)
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 Proximity and assumed responsibility
Proximity focuses on interdependent concepts of assumption of responsibility and
reasonable reliance

All this is just another way of saying “is it fair, just and reasonable to hold that a duty of
care is owed by the defendant to plaintiff?”

To establish a duty of care proximity required between defendant and plaintiff

1. Has there been an assumption of responsibility by the defendant for what he/she says?
This is usually a deemed assumption of responsibility.
2. Reliance by plaintiff on statement (has to be reasonable)

If statement made for a particular purpose, it will usually not be reasonable to rely on it for
another purpose.

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Types of Relationship
4 types of relationship (always fact dependent)

A special relationship
Judges use ‘special relationship’ to achieve same effect as (deemed) assumption of
responsibility

Type 1 relationship:
Plaintiff is in a contract with defendant
Liability in contract and negligent misstatement.
Examples: Doctor/patient; lawyer/client

Type 2 relationship:
Plaintiff and defendant have communicated directly or indirectly. Liability likely
Hedley Byrne v Heller fits into this type of relationship
• No liability because of disclaimer.
• But P and D communicated directly.
• There would have been liability of it had not been for the disclaimer
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Types of Relationship cont…
Type 3 relationship:
Defendant knows plaintiff will rely and act on his/her advice for an immediate purpose.
Liability likely

Smith v Eric S Bush [1990} UKHL 1

Purchasers of property v Valuers/Surveyors

Report prepared at the request of the
purchaser’s bank as part of obtaining
Finance for purchase of house.

Not unreasonable for the purchaser of a

modest house to rely on the Surveyor’s
report.
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Types of Relationship cont…(2)
Type 4 relationship:
Defendant has special knowledge may reasonably infer plaintiff will use.
Liability possible.

Type 5 relationship:
Defendant knows statements likely to be relied on but knows nothing about
plaintiff.
Liability unlikely

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Negligent misstatement summary
To establish a special relationship (assumption of responsibility) ask:

1. What did the Defendant prepare the statement for? (Purpose)

2. Who did the Defendant prepare the statement for?
3. What did the Plaintiff use the statement for?
4. Was it reasonable to rely on the statement? (Reasonable reliance)

Disclaimers can be effective. Need to be:

• Clear and unambiguous
• Defendant gives reasonable notice of disclaimer

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