Business Law - Bumble & Co - Essay Example

BUSINESS LAW By Due This essay discusses the law of negligence by applyingit to three remotely connected cases asked by the instructor. It discusses the facts of the cases and explains what statutes and past cases are applicable and why. It also explains the alternative solutions in the case of vague facts with possible presumptions. Keywords: Negligence, tort, duty of care, causation, foreseeable damage, proximity. i. Peter is suing Bumble & Co for the losses that he sustained due to their misrepresentation in the financial statements of Horizontal plc. He, already being a shareholder in the company, purchased 10,000 more shares believing the financial statement provided by Bumble & Co to be correct that Horizontal plc was making a profit of £10 million when they were making a loss in reality. He claims that the duty of care exists on the part of Bumble & Co who, being the preparers of the financial statements, were liable to prepare them in a manner which is understandable by the end users and give a true and fair view of the business entity i.e. Horizon plc. Peter, acting on the belief that the information is true, made some investments that made him suffer huge losses. Peters claim against Bumble & Co can be based on the tort of negligence. “The tort of negligence has three ingredients and to succeed in an action the claimant must show: (a) the existence of a duty to take care which was owed to him by the defendant; (b) breach of such duty by the defendant; and (c) resulting damage to the claimant.” (Wild & Weinstein 2010)1 The duty of care is a matter of law and is adjudged on the basis of facts of a particular case. The scope of tort of negligence was very much widened in 1932 (Donoghue v Stevenson) 2 but as Lord MacMillan said,”…the categories of negligence are never closed.” the courts have since endeavored to adapt to newly emerging circumstances and possibilities. In Caparo Industries v Dickman & others (1990)3, Caparo, being already a shareholder, believed the accounts of Fidelity plc, prepared by Touche Ross & Co, to be true and acquired holding interest in the company later on the basis of same knowledge. It was held that the auditors did owe a duty of care to Caparo because he made the bid while relying on the information provided by them. Also, in a few similar cases, the auditors were held liable when their misrepresentation caused losses to shareholders. Lord Bridge explained that in all those cases, the auditors were liable because their information caused harm to those who were known by the auditors to be depending on their opinion and it was foreseeable that they would suffer a loss in case of a misrepresentation. The scope of negligence encompasses a colossal number of general public who could make investment decisions by relying on their opinion. There are veritable users of financial statements. Lord Bridge concluded that auditors of a public company’s accounts owed no duty of care to the members of public at large who relied on the accounts in deciding to buy shares in the company. Furthermore, the shareholders stand in no different to the members of investing public to whom auditors owed no duty of care. In Peter’s case, Bumble & Co owe duty of care to him in respect of the shares that he already owned prior to the promulgation of financial statements. Caparo Industries v Dickman & others (1990) applies here. Bumble & Co should be held liable to compensate Peter for the loss of those shares. On the other hand, Bumble & Co owes no duty of care to the new investing public and as Peter purchased 10,000 new shares on the belief on latest financial statements to be true, he stands in no different position than them. Therefore, in respect of 10,000 shares, Bumble & Co owes no duty of care to Peter and cannot be held liable. ii. Alison is suing Bumble & Co on the same grounds as Peter. Alison, previously not a shareholder, purchased 200 shares of Horizontal plc believing the same financial statement to be true when it was shown to her by Peter. It has been discussed above that the auditors owe no duty of care to the investing public because it cannot be foreseen that they would be injured in a consequence of a misrepresentation. Their motives are only concerned with speculation and auditors cannot be held responsible for a loss incurred as a result of a bad speculation. There is a lack of proximity between the two parties. The loss suffered by Alison was not foreseeable by the auditors. “…on occasion the courts have found it necessary to limit the scope of negligence liability by reference to the other non-tortuous principles in order to maintain the coherence of the law.”(Halsburys Laws of England) 4 “The purpose for which the auditors certificate was made and published was that of providing those entitled to receive the report with information to enable them to exercise the powers which their respective propriety rights in the company conferred on them and not for the purposes of individual speculation with a view to profit.”(Wild & Weinstein 2010)5 Donoghue v Stevenson (1932) is also not applicable because when Peter showed the financial statements to Alison, they both decided to purchase new shares. There proximity to auditors in the nature of this transaction is the same. The neighbor test fails here. Therefore, by the application of Lord Bridge’s explanation of Caparo Industries v Dickman & others (1990) and Hedley Byrne & Co Ltd v Heller & Partners Ltd (1963)6, Bumble & Co owes no duty of care to Alison as she was not a shareholder of Horizon plc prior to the authorization for issue of the financial statements. Alison’s claim would not be awarded. iii. Peter was in a road accident when a large pothole, which had opened in the road along which he was driving, caused his car to crash. The pothole was due to negligence of the local council which had made financial cutbacks and failed to maintain the road for a long time. Peter had to spend some time in a hospital and he lost earnings as a result of being off from work. Peter is suing the local council for the car accident he suffered and for the lost earnings for the time that he was off from work. The question, again, is whether the Local Council owes duty of care to Peter. The first thing that needs to be tested is the level of proximity between the two parties. From the given facts, there is proximity between the two as Peter is using a commodity, the road, which needs to be maintained by the Local Council. It can be assumed that since a failure in maintaining the road has dire consequences, for an authority like Local Council, if it was a temporary financial cutback, they must have put sufficient indications and signs that the road is not in a perfect condition so the drivers should be careful. Also, Peter’s car crashed while coming back from Alison’s house. There is a huge probability that he would have taken the same road when he got to her house and must have sufficient knowledge about the condition of the road. Therefore, it could be very hard for Peter to show that the accident was caused solely due to the negligence of the Local Authority. Causation is determined by a test called but-for test whereby: “But-for causation is established on the balance of probabilities: if it is more likely than not that an event was the cause, it is treated as if it were the cause.” (Lunney & Oliphant) 7 In that case Peter’s claim would not be awarded. On the other hand, assuming that the Local Council did not gave any indications at all and Peter is able to prove the causation, they could be held liable for a breach of a statutory duty to maintain the road. “It (negligence) may consist in omitting to do something which ought to be done or in doing something which ought to be done either in a different manner or not at all” (Halsburys Laws of England) 8. But, by the application of Cattle v Stockton Waterworks Co (1875)9, they would be liable only to the extent of damages that Peter suffered directly due to the car accident. The economic losses that are suffered as an indirect result of a breach of duty cannot be recovered. Therefore, Peter cannot recover the lost earnings. References 1. Charles Wild & Stuart Weinstein, 2010, ‘Tort of Negligence’, Smith and Keenan’s English Law – Text and Cases, 16th Ed, pp. 458. 2. Donoghue (or McAlister) v Stevenson, [1932] All ER Rep 1; [1932] AC 562; House of Lords. 3. Caparo Industries plc v Dickman [1990] 2 AC 605. 4. N.A, 2010, ‘Negligence’, Halsburys Laws of England VOLUME 78, 5th Ed. N.P. 5. Charles Wild & Stuart Weinstein, 2010, ‘Part 8- Cases and Materials: Tort of Negligence’, Smith and Keenan’s English Law – Text and Cases, 16th Ed, pp. 861. 6. Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. 7. Mark Lunney & Ken Oliphant, 2008, ‘Causation and Remoteness’, Tort Law: Text and Materials, 3rd Ed, pp. 211. 8. N.A, 2010, ‘Negligence’, Halsburys Laws of England VOLUME 78, 5th Ed. N.P. 9. Cattle v Stockton Waterworks Co, [1875] LR 10 QB 453. Read More