Topic 5 Negligent Misstatements and Advisory Services

TOPIC 5: DUTY OF CARE PROBLEMS: ECONOMIC LOSS 3- MISSTATEMENTS AND ADVICE Topic 5 Overview 1. Introduction 2. Typical Scenarios 3. Policy Concerns 4. The Modern Law 4.1 Two Party Cases –Direct Dealings (i). Origins of Liability in England- Hedley Byrne (ii). Australia- ‘The Barwick Test’ – MLA v Evatt and Tepko (iii) Unrequested Statements to the ‘World at Large’ – San Sebastian 4.2 Three Party Cases – Indirect Relationships (i) Example 1- Negligent Audit Reports (ii) Example 2- Negligent Solicitors and Disappointed Beneficiaries 5. Alternative Statutory Remedies- The Australian Consumer Law (1) Introduction Last week we examined cases of ‘relational’ economic loss. This week, we turn to cases in which pure economic loss results from negligent misstatements, or advisory services. Not many cases have recently been litigated to High Court level in this category, which has left the relevant duty of care principles in some state of uncertainty and disarray. One important reason for this is that it is now often easier for plaintiffs to rely upon a statutory cause of action for misleading or deceptive conduct under the Australian Consumer Law (ACL) than to sue for negligence (see Section 5 below). Liability under the statute has the advantage of being strict. However, there are still instances in which plaintiffs may need to rely on the law of negligence– for example, where they suffer loss as a result of relying on statements that have not been made in the course of a defendant’s trade or commerce, as, for example, where a person relies on a statement made by a public authority. We do not consider the statutory cause of action in any detail on this course. You will study it elsewhere. You should nonetheless be aware of its existence by way of background context. As in previous weeks, try this week to identify the criteria that courts apply in determining the duty question and the reasons why courts are restrictive in their approach. Where uncertainties persist, try to reach a view as to how best they might be resolved. (2) Typical Scenarios Typical examples of negligent misstatements and advisory services include: negligent information or advice given by solicitors to their clients; careless credit-references supplied by banks to commercial parties in respect of the creditworthiness of a customer with whom the commercial parry is dealing; negligent reports by company auditors on the state of company finances, which are relied upon by shareholders, creditors or investors; careless reports or certifications made by environmental consultants regarding the state of land that a person is considering purchasing; and negligent advice or certifications offered by governmental regulatory or planning authorities, the inaccuracy of which results in disastrous investment decisions by property purchasers. A particular high-profile example in recent years of negligent misstatement is that of those credit-rating agencies who carelessly accorded AAA credit ratings to what turned out to be very high-risk and in practice worthless commercial products that had been purchased as investments by Municipal Councils (see the Amro case in section 4.2(i) below. You will come across a variety of examples drawn from these different categories in these materials. (3) Policy Concerns Of the various policy concerns we examined in Topic 3, the ones most commonly expressed in the cases are those regarding indeterminate or disproportionate liability. Since information is readily transmissible by one party to another and can ‘ripple outwards’, the giving of a single piece of careless information or advice has the potential to cause economic losses indirectly to potentially very large and uncertain classes of plaintiff that may foreseeably rely upon it. The possible economic effects of imposing very high liabilities on advisors in such cases (higher prices for professional advice, or the withdrawal of advisory services about some matters from the market altogether) are sometimes regarded as explaining the need to keep liability within containable and predictable boundaries (see the article by Bishop, listed above under recommended further 1 Reading BCLT pp 485-501 or B&D (5th edn) 431-443 *Tepko Pty Ltd v Water Board (2001) 206 CLR 1 (HCA) know the facts and read esp pp 16-17, 22-27 and 44-55. Recommended Further Reading: *K Barker, “Negligent Misstatement in Australia— Resolving the Uncertain Legacy of Esanda’ Ch 13 in Barker, Grantham and Swain (eds), The Law of Misstatements (Hart Publishing, 2015) Bishop, ‘Negligent Representation through Economists’ Eyes’ (1980) LQR 360 reading). Note, however, that indeterminate and disproportionate liability are not the only concerns that judges refer to in this context. They are also wary of imposing duties of care where this might unduly impinge upon a person’s liberty to speak (especially on social occasions) and they are wary of imposing a tortious duty of care upon an advisor where this might potentially conflict either with the duties he or she owes a client (see eg the Badenach case, below), or with the way in which a statutory regime regulates his or her duties and responsibilities (Caparo Industries v Dickman). Courts have also recently expressed the concern that plaintiffs should take reasonable steps to protect their own economic interests (vulnerability), although, as usual, they are not very helpful in explaining why this should be the case. Notes and Questions: To what extent are courts in the following cases in the materials concerned about: 1. Indeterminate (uncertain) liability? 2. Disproportionate (excessive) liability? 3. Defendant autonomy (freedom to speak) 4. Conflicts between an advisor’s duties to plaintiffs (on the one hand) and their clients (on the other)? 5. Plaintiff vulnerability (reasonable obligations of self-protection)? (4) The Modern Law – When is a Duty Owed? For the purposes of exposition, these materials divide the cases into two-’ and ‘three-party’ cases. This division is one of convenience (the cases do not make the same distinction explicitly) but the approach to duty is both more straightforward and more certain in two-party cases on the current law than it is in the (more difficult and apparently more uncertain) ‘threeparty’ type of case. Consider why this might be the case. For a full and detailed consideration of the state of the modern Australian law, which argues that the same, basic approach ought to be taken in both two and three party cases, see K Barker, “Negligent Misstatement in Australia— Resolving the Uncertain Legacy of Esanda’ (available on blackboard). (1) Two-Party Cases: Direct Dealings In the two-party case, D provides information or advice directly to P, who relies upon it to his or her financial detriment. In most cases, the information or advice has been requested by D, but not always. Sometimes, it may have been volunteered. It is in this context that the possibility of liability for pure economic loss caused by negligent misstatement was first recognised in the UK in the seminal case of Hedley Byrne v Heller [1964] AC 46 (below). Prior to this point in time, liability for economic loss caused by inaccurate statements had been recognised in only 3 situations: (i) Where D’s statement was fraudulent - Derry v Peek (1889) 14 App Cas 337; (for a modern eg, see Tresize v NAB (2005) 220 ALR 706. According to Derry v Peek, actions for fraud (the tort of deceit) require proof that D knew either the statement to be false, did not believe it to be true, or appreciated that there was a risk of it being false, but reckless proceeded regardless). Fraud is hard to prove because it involves a degree of subjective dishonesty. (ii) Where D and P were in a contract: Le Lievre v Gould [1893] 1 QB 491. This covered most situations in which P paid D to provide the statement or advice, doing so under an agreement. It did not, however, cover cases in which the advice was gratuitously provided. (iii) Where D and P were in a Fiduciary relationship (Nocton v Lord Ashburton) [1914] AC 932. A fiduciary relationship is a special relationship of trust and confidence, giving rise to obligations of protection on the part of the fiduciary toward a vulnerable party. Typical examples of fiduciary relationship are those between a bank and its customer, or between a solicitor and his or her client. Such relationships are usually also contractual as well, but they do not need to be. For example, a trustee owes fiduciary obligations to the beneficiaries of a trust, but there is no contract between them. The result was that there was no apparently no liability (outside the United States at least) for honest but merely careless misstatements outside of recognised contractual or fiduciary relationships. This position changed first in England and then in Australia. 2 D P (i) Origins of Liability in England - Hedley Byrne Hedley Byrne v Heller [1964] AC 465 (HL) The plaintiff, a firm of advertising agents, sought a credit-reference from the defendant bank in respect of one of the bank’s customers, a firm called Easipower. The plaintiff wished to know whether or not Easipower was likely to be able to pay the value of the advertising services that the plaintiff was providing to it. The defendant, after some hesitation, provided a guarded reference to the plaintiff via the plaintiff’s own bank, indicating that Easipower was ‘respectably constituted’ and ‘good for normal business engagements.’ In fact, Easipower was, to the defendant’s knowledge, the subsidiary of a company that was at the time in liquidation. The reference was accompanied by a disclaimer of responsibility for the statement’s accuracy. Easipower was ultimately unable to pay the plaintiff, who suffered pure economic loss as a result. The plaintiff sued the defendant bank on the basis that it had relied on the reference and the latter had been made negligently. The House of Lords (Lords Reid, Morris, Hodson, Devlin and Pearce) dismissed the claim on the basis that the defendant’s disclaimer of responsibility was sufficient to negate any liability, but it nonetheless went on to consider whether (and when) in principle a duty of care could arise. The Court suggest that such a duty might arise outside of contract or existing categories of fiduciary relationship where there was a ‘special relationship’ between the parties. Lord Reid: Apart altogether from authority, I would think that the law must treat negligent words differently from negligent acts. … The most obvious difference between negligent words and negligent acts is this. Quite careful people often express definite opinions on social or informal occasions even when they see that others are likely to be influenced by them; and they often do that without taking that H. L. (E.) care which they would take if asked for their opinion professionally or in a business connection…. Another obvious difference is that a negligently made article will only cause one accident, and so it is not very difficult to find the necessary degree of proximity or neighbourhood between the negligent manufacturer and the person injured. But words can be broadcast with or without the consent or the foresight of the speaker or writer. It would be one thing to say that the speaker owes a duty to a limited class, but it would be going very far to say that he owes a duty to every ultimate " consumer " who acts on those words to his detriment… So it seems to me that there is good sense behind our present law that in general an innocent [non-fraudulent] but negligent misrepresentation gives no cause of action. There must be something more than the mere misstatement. I therefore turn to the authorities to see what more is required. The most natural requirement would be that expressly or by implication from the circumstances the speaker or writer has undertaken some responsibility, and that appears to me not to conflict with any authority which is binding on this House…. Lord Haldane did not think that a duty to take care must be limited to cases of fiduciary relationship in the narrow sense…. He speaks of other special relationships, and I can see no logical stopping place short of all those relationships where it is plain that the party seeking information or advice was trusting the other to exercise such a degree of care as the circumstances required, where it was reasonable for him to do that, and where the other gave the information or advice when he knew or ought to have known that the inquirer was relying on him. I say " ought to have known'' because in questions of negligence we now apply the objective standard of what the reasonable man would have done. … A reasonable man, knowing that he was being trusted or that his skill and judgment were being relied on, would, I think, have three courses open to him. He could keep silent or decline to give the information or advice sought: or he could give an answer with a clear qualification that he accepted no responsibility for it or that it was given without that reflection or inquiry which a careful answer would require: or he could simply answer without any such qualification. If he chooses to adopt the last course he must, I think, be held to have accepted some responsibility for his answer being given carefully, or to have accepted a relationship with the inquirer which requires him to exercise such care as the circumstances require. Notes and Questions: 1. Was either of the potential objections to imposing liability for negligent misstatement mentioned by Lord Reid a concern on the facts? 2. Technically, everything the House of Lords said about the possibility of a duty of care in this case was obiter, since the claim failed anyway on account of the disclaimer. This has not prevented the case being taken to be a foundational case, second in significance only to Donoghue v Stevenson. It was clearly influential in the subsequent development of the Australian law. 3. Lord Morris (with whom Lord Hodson agreed at 514) described the required special relationship in terms similar to Lord Reid, saying (at 497, 503) 3 ‘..other special relationships….where it is plain that the party seeking information or advice was trusting the other to exercise such a degree of care as the circumstances required, where it was reasonable for him to do that, and where the other gave the information or advice when he knew or ought to have known that the inquirer was relying on him “Leaving aside cases where there is some contractual or fiduciary relationship, there may be man