Business and Corporation Law - Hedley Byrne v Heller - Research Paper Example

HEDLEY BRYNE CASE ANALYSIS STUDENT NAME PROFESSOR’S NAME COURSE TITLE DATE Introduction The principle of duty of care in negligence cases was first adopted in the case of Donoghue v Stevenson1 where Lord Atkin stated that ‘a neighbour is the person who is directly affected by a person act that one has to have them in contemplation as being affected when one directs their mind to acts or omissions called to question’2. The three elements applicable in cases of negligence include; the existence of a duty of care, there was a breach of that duty and the breach resulted in damage.3 The principle of duty of care established was extended in the case of Hedley Byrne Co Ltd v Heller Partners Ltd4 or whether it is a reinterpretation of the position in Donoghue v Stevenson. This paper discuss the case of Hedley Bryne v Heller , whether the decision in the case was right, the appropriateness of use of disclaimer clauses and whether the outcome would still have been the same if it had been heard today. Facts of the Case The parties in the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd5, are Hedley Bryne who were the advertising agents, Heller & Partners were the Easipowers' clients. Heller & Partners gave a reference to Hedley Byrne regarding Easipower Ltd. In their letter of advice, Heller & Partners stated that the advice given was for private use and without any form of responsibility attaching to the bank or any of its officials. The letter by Heller & Partners did confirm that Easipower was of a sound financial position. However, this was not the case because Easipower Ltd went into liquidation and as a result Hedley Byrne & Co suffered a financial loss as a result of Easipower going into liquidation. The issue in the case was whether a Hedley Bryne & Co Ltd could recover damages or any other remedy after relying on advice given by Heller & Partner on Easipower regarding their financial standing and later went into liquidation and suffered economic loss? Decision of the Court The majority decision of the House of Lords held that the defendant was absolved from responsibility for negligent advice because there was a disclaimer in the letter. From the decision of the court, one could decipher that a plaintiff may recover for pure economic loss in circumstances where advice was offered negligently. The conditions set out in Hedley Bryne are that there has to be a special relationship between the defendant and the plaintiff. The relationship only exists where the person making the statement or giving the opinion was aware that the advice or information would be relied on by the person receiving the information for the purpose of a transaction. Therefore if the person making the representation realises that the recipient would rely on the special competence and use the information. Therefore, the person making the representation must reasonably foresee that the recipient will rely on the information and use it. According to Lord Morris where there is a duty imposed under the case that where a person has a special skill and undertakes irrespective of whether there is a contract to apply that skill in assisting another person relying on such a skill, a duty of care arises.6 Where a person is placed in a position where others may reasonably rely on their skill and judgment to make a careful inquiry and that the information or advice given to another person that the maker knows that the other person would rely on it, then a duty of care arises.7 Lord Reid set out three options that a person in the position of Heller & Partners would have done when it comes to giving professional advice. The first is to keep silent and not to give any advice or make any statement. Secondly, a reasonable man would give an answer but qualify it as being made without responsibility. Lastly, one can give an answer without any such qualification. In this case, a person advising such a party must accept a form or responsibility for the advice given or accept the relationship that exists between the person seeking advice and him and exercise the care and skill required. In respect to the decision given by Lord Reid, he posited that where there is a contract, then one can exclude liability for negligence however in Hedley Bryne the issue is whether a duty may be inferred. Lord Delvin proposed the idea of an assumption of responsibility as either an express or implied undertaking that creates a relationship equivalent to a contract where in absence of consideration there would be a contract.8 The position regarding responsibility adopted was not new but he was emphasising the decision in Nocton v Lord Ashburton9 by Lord Shaw. This means that the only instance according to Lord Delvin where duty of care is apportioned is where there is an assumption of responsibility; however there are instances where reliance and assumption of responsibility are not necessary or sufficient for the existence of a duty of care.10 According to Lord Delvin he reiterated the fact that the relationship that exists between the parties must be equivalent to that contemplated in a contract form, the consideration being absent in this circumstance. The decision of the court showed that a person can owe a general duty of care to the world not to cause economic loss in cases where the individual gives negligent advice regardless of whether the information is given in good faith; it is carelessly prepared since liability will be imposed. Disclaimer The test created in Hedley Bryne allows the innocent party to recover for negligent misstatements where: I. The innocent party relies on the defendants statements II. The reliance is reasonable and foreseeable III. There exists a relationship of proximity between the two parties A disclaimer is a clause that limits the liability of a party to a contract regarding any breach that arises out of the performance of a contract11. In the case of Hedley Byrne v Heller & Partners the court opined that a disclaimer may cause the court to disregard the duty of care because a disclaimer is an exclusion clause and therefore the usual contractual rules in regards to declaimers apply. The justices in Hedley Bryne case may have held in the favour of the plaintiff had the disclaimer of ‘without responsibility be absent’. A disclaimer is therefore an important term in any contractual context because it indicates the existence of a contractual or a tortious duty of care.12 Disclaimers or exclusion clauses has been a long standing rule that prohibits claims for pure economic loss whose legality and principle came under fire in the Australian case of Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad”13. Gibbs CJ ruled that under the exclusory rule Caltex had not suffered any damage to property and therefore was unable to recover while the AOR recovered for having repaired the pipes. The exclusion rule disadvantaged Caltex oil which had incurred a loss by finding alternative ways of transporting the oil. According to the Chief Justice a foreseeable loss is not enough to make economic loss recoverable.14 In Caltex Oil decision, the principle set thereunder are that there has to be proof of damage that constitute the basis of the claim when it comes to pure economic loss. Therefore if the loss or the damage is caused to the property of a third person, then one is not entitled to recover damages in these circumstances.15 Regardless of the existence of a disclaimer, Hedley Byrne case established a positive duty to render and provide accurate information which one would consider an important legal authority. Flowing from the decision in Hedley Bryne then one needs to consider whether: the advisor is aware that the recipient would act on the advice and which would cause damage, whether the recipient would be vulnerable to the decision16, the intention that the recipient will act on the advice and whether one can ascertain with certainty the class of recipient receiving the advice. Duty of Care in regards to Pure Economic Loss Pure economic loss is considered as part of tortious liability for the loss that does not arise from consequential upon death and injury personal in nature of where the individual claims an infringement of the victims’ property.17 In this care the duty of care that is expected in such circumstances is of persons who profess speciality in that profession, and the courts may place a higher standard of care to such persons regarded as being professions as held in Rogers v Whittacker18. Prior to the decision in Hedley Bryne Co Ltd V Heller Partners Ltd , the concept of pure economic loss was restricted to cases where there was fraudulent misrepresentation or where a duty arose from statutory breach, contract or fiduciary obligations.19 The policy informing the pure economic loss was the fear of imposing a liability in the form of an indeterminate amount for an indeterminate time to an indeterminate class of people. The statement made had to be intentionally false before the court would decide to award damages for pure economic loss.20 This means that a defendant needs to be liable for negligent advice or information that is provided to plaintiff where the plaintiff relies on the defendant’s advice and suffers economic loss. The Australian interpretation is that the duty of care regarding statements extends beyond the statements made to another for a particular person but beyond statement made to a third person for the known purpose of communication to the person who is making the statements. What if the advice is given without a plaintiff’s knowledge in mind, would the duty of care still arise? This issue was addressed in the case of Caparo Industries Plc. v Dickman21 where the plaintiff tabled a bid to take over a company and relied on the accounts rendered by the company according to statute not knowing that the accounts had been negligently prepared showing that the company was making profits instead of losses. The action for negligence and breach of duty care failed because the negligent misstatement was not prepared with the plaintiffs’ purpose in mind and hence there was no necessary degree of proximity to create a duty of care. The position of the law following the decision in Caparo v Dickman22 is that the making of a statement will give rise to a duty of care where the advice sought must emanate from a circumstance where the adviser is aware or can infer the purpose for which the advice, the adviser will act in the communication to other party, the adviser is aware that the recipient acts on the advice and the recipient acts to their detriment.23 Whether the findings of the Court in Hedley Bryne are applicable in this day and age? Different courts have interpreted the concept regarding duty of care in cases of pure economic loss differently. Prior to the decision in Hedley Bryne case , the principles could be clearly stated with certainty that; liability would arise out of a negligence causing physical harm to an individual or property, liability for causing economic loss as a result of damage or injury where there was fraud, a special relationship between the parties or where there was contract. Liability arose where there was fraudulent misrepresentation where a party relied on misrepresentation amounting to a breach of contract.24 If this were the position currently, then the only instance one would apportion liability for economic loss would be dependent on instances where there is an existence of a contractual or fiduciary relationship. In 1970 in Mutual Life & Citizens’ Assurance Co. Ltd v Evatt25 where the courts emphasised on advise that is provided by a person who possesses a special skill as a basis of apportioning liability. The law has evolved in such a way that liability for pure economic loss has been legislated and it is no longer dependent on common law principle. Moreover, the decision in Hedley Bryne broke free from the instance of having a contractual relationship in establishing duty of care but instead focused on special relationship. This would be crucial in this day and age because there are different forums in which advise is given, however a disclaimer must form part of the advice, telling the recipient not to act on the information given. In Australia, the Civil Liability Act 2002 (Cth) was legislated in order to limit the amount of damages for personal injury and death in cases of public liability and discourage over litigation.26 Section 5B (1) of the Civil Liability Act states that a person is negligent where he fails to take precautions where the risk of harm was foreseeable, the risk was significant and that he failed to take precautions the way a reasonable person would have.27 The test is determining whether a reasonable person would have done the same thing. Section 5B (2) of the Civil Liability Act gives instances where a reasonable person would have taken precautions against risk of harm that is; the probability that the harm would occur if care were not taken, the seriousness of harm the burden of taking precautions in avoiding the risk of harm and the social utility of the activity that creates the risk of harm.28 However the principle in regards to the duty of care should be limited to only persons whose profession or business is giving advice and claim to have the skill and competence and it must be extended to persons giving advice on business or a professional transaction.29 Conclusions In conclusion, the case of Hedley Byrne Co Ltd v Heller Partners Ltd sets the standards or tests that have to be met in order for a person relying on advice to recover damages for negligent advice. The duty of care evolved in the case of Hedley Byrnes case to include instances where the claim for pure economic loss arose where there was misrepresentation, and recognising that liability may arise where a duty existed for negligent advice that leads to economic loss. The Australian courts have however extended the interpretation to include reasonability in apportioning blame because the foreseeability of the loss is not enough in order to recover for pure economic loss. Statutory legislation especially the Civil Liability Act 2002 adopts the same position regarding negligence and duty of care, and in any case, the law is supreme and a judge cannot depart from what the law provides. References Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529 Caparo Industries Plc v Dickman (1990) Donoghue v Stevenson (1932) AC 562 Fridman G. H. L 1976, ‘Negligent Misrepresentation’ McGill Law Journal vol. 22, no. 1 pp. 1-39 Hedley Byrne Co Ltd v Heller Partners Ltd (1964) 38 ALJ 39 PER Lord Morris Hocking A B 1999, Liability for Negligent words, Federation Press Mutual Life & Citizens' Assurance Co. Ltd. v. Evatt (1970) 122 CLR 628 Nocton v Lord Ashburton [1914] AC 932, 971 Fridman G. H. L 1976, ‘Negligent Misrepresentation’ McGill Law Journal vol. 22, no. 1 pp. 1-39 Radan, Peter, Gooley John and Vickovich Ilija , 2009 Principles of Australian Contract Law: Cases and Materials, Lexis Nexis Rogers v Whittacker (1992) 175 CLR 479 Stevens R 2007 Torts and Rights p. 36 Read More