Professional advice and negligent misstatement

Introduction

In practice there is no difference between liability arising from negligent misstatement and liability arising from negligent acts. A party can suffer damage by reliance on incorrect advice just as he can be injured by any other negligent conduct.

With respect to a negligent misstatement however, the consequences of this could be far-reaching and affect countless people. Because of this the law had been reluctant to impose a duty of care in the making of statements.

This situation changed in 1964 when the landmark case set out below marked a new approach to the law of negligent misstatement.

Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964)

Facts: The appellants (Hedley Byrne) were advertising agents who had contracted to place advertisements for their client's (Easipower) products. As this involved giving Easipower credit they asked Easipower's bankers, the respondents, for a credit reference. Heller gave favourable references, although they stated that the information was given without responsibility on their behalf. Relying on this information, the claimants extended credit of £17,000 to Easipower, which they lost when Easipower went into liquidation. Hedley Byrne sued the bank for negligence.

Held: The respondent's disclaimer was adequate to exclude the assumption by them of the legal duty of care. However, in the absence of a disclaimer, the circumstances would have given rise to a duty of care even in spite of the absence of a contractual or fiduciary relationship. Therefore the disclaimer was the decisive factor in establishing liability. Nowadays the Unfair Contract terms Act 1977 may invalidate the disclaimer.

The effect of Hedley Byrne

The above case created a new duty situation by recognising liability for negligent misstatement causing economic loss in circumstances where a special relationship exists between the parties.

Special relationship

A special relationship exists where a professional person advises a known person who relies on the statement for a known purpose. For an action in negligent misstatement to succeed there must be a special relationship.

It is clear that liability will only arise where the defendant is in the business of giving professional advice and the statement is given in that context i.e. not on a social or informal occasion.

One important consideration is the relationship of the parties in the context of the damage suffered, for example whether the preparation of accounts is for shareholders or a potential takeover.

If advice is given or financial statements prepared for a specific purpose, then a duty of care is owed to those who are relying on them for that specific purpose.

Where there is no special relationship

As a general rule unless the defendant had prior knowledge that a certain bidder would rely on the statement made, no duty of care would exist.

The concept of special relationship has now been redefined in the following leading case:

Caparo Industries Plc v Dickman and Others (1990)

Facts: C, a shareholder in F plc, bought more shares in the company after receiving the audited accounts. He later made a takeover bid. After the takeover C sued the auditors alleging that the audited accounts had been misleading as they showed a profit when in fact there had been a loss. C said the auditors owed a duty of care to investors and potential investors as they should have been aware that a press release saying that profits would fall significantly had made F vulnerable to a takeover bid and that bidders might rely on the accounts.

Held: The court set out three criteria which had to be fulfilled in order to give rise to a duty of care:

1. The standard test of foreseeability applied
2. The concept of proximity limits the duty to circumstances where the statement would be communicated to the claimant either as an individual or a member of an identifiable group in respect of transactions of a particular kind and that the claimant would rely on the statement. It is therefore necessary to look at the purpose for which the statement is made, the statement maker’s knowledge of the person relying on the statement and the type of transaction in which it is used.
3. Whether it is just and equitable that a duty of care should be imposed so that imposing it would not be contrary to public
   policy. When the court applied these criteria to the Caparo case they found that auditors of a public company owe no duty of care to the public at large who rely on accounts when purchasing shares in a company nor was any duty owed to individual shareholders who purchase additional shares.

Where there is a special relationship

If advice is given or financial statements prepared for a specific purpose, then a duty of care is owed to those who are relying on them for that specific purpose.

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Tags:	special relationship;Caparo Industries;Hedley Byrne