Explain and illustrate the law of negligent misstatement.

The 'boom and bust' years of the 1980s were associated with the growth of the property and financial markets and this in turn led to an increase in the amount of litigation involving professionals such as surveyors and accountants.

Grade: A-C | £0.00.

The 'boom and bust' years of the 1980s were associated with the growth of the property and financial markets and this in turn led to an increase in the amount of litigation involving professionals such as surveyors and accountants. In reality we are all having to live with financial uncertainty in our global world and many of us may find ourselves seeking financial advice. At the present time for example many will be concerned about either how pension funds are performing or the financial consequences to proposed changes to pension benefits and how such changes may impact upon them. Before we see how those cases may have been responsible for the development of the law on negligent misstatement it is perhaps worth reminding ourselves about the origins of this form of liability.


Initially tort enabled successful claimants to compensation for physical loss and damage but not for economic loss. If the the principles of Donaghue v Stevenson could be applied to the facts of the case then the claim for negligent misstatement would be successful. The point being that there had been a breach of duty with resultant foreseeable damage.


The courts were less enthusiastic about allowing recovery for pure economic loss as it was considered to be more appropriate to claims for breach of contract. Originally it was necessary to be able to show that misrepresentations had been made fraudulently as opposed to negligently.


In Derry v Peek (1889), the claim was brought in the tort of deceit and involved a company prospectus issued by a tram company. The part of the prospectus in issue was the company's statement that they had permission to use steam trams, rather than horse powered ones. The reality was that this was up to the Board of Trade because at that time the right to use steam power required the Board's approval. The consent from the Board of Trade was not forthcoming and the value of the company was adversely affected and it went into liquidation. The shareholders sued, claiming that they had relied upon the contents of the prospectus. The House of Lords held that a claim in the tort of deceit was not made out as it was not shown that the statement had been made fraudulently.


Some considerable time passed, but in Candler v Crane, Christmas & Co (1951), the Court of Appeal, in a majority decision, followed the principles of Derry v Peek and refused the claim. They reasoned that any loss from a negligent misstatement was not actionable if there was no contractual or fiduciary duty between the parties.


Lord Denning was never one for shying away from an opportunity to right what he considered to be a wrong and this was no exception. He seized upon the moment to deliver a compelling dissenting speech to the effect that parties owed a duty of care to:-


'any third person to whom they themselves show the accounts, or to whom they know their employer is going to show the accounts, so as to induce them to invest money or take some action on them.'


The case of Candler v Crane, Christmas & Co (1951) had involved a tin mine in Cornwall. A director of the company that owned the mine advertised for an investor as they needed capital. They placed an advertisement in The Times newspaper. A Mr Candler replied to the effect that he was interested in investing £2,000 and asked to see the company's accounts. Crane, Christmas & Co, a firm of auditors, were instructed to produce the accounts and these were subsequently seen by Mr Candler who, relying upon them, invested £2,000 in the company. The company was, in reality, in a very bad way. As there was no contractual relationship or fiduciary relationship between the parties, the claimant could not bring an action for negligent misstatement.


Lord Denning's judgement was a dissenting judgement but his argument was a powerful one and it was not long before the courts had the opportunity to reconsider their stance on this issue in Hedley Byrne v Heller & Partners Ltd (1964). The matter came before the House of Lords.


It is this case which led to banks and other financial advisers and institutions developing policies to protect themselves from liability when asked for references concerning their customers. In Hedley Byrne v Heller & Partners Ltd (1964) the claimants, Hedley Byrne, were a firm of advertising agents. A customer placed a large order with them but Hedley Byrne wanted to check their financial standing and asked their own bank to get a report from the customer's bank who were Heller & Partners Ltd. Heller& Partners Ltd replied to the effect that the customer was 'considered good for its ordinary business engagements.' As it turned out a disclaimer was effective, so as to exclude liability, but this was not enough to deter the House from upholding the earlier dissenting judgement of Lord Denning in Candler.


The House held that a duty of care did exist on the basis that it was clear that the claimant intended to rely upon the information given. The House of Lords took the opportunity to set out criteria for allowing a claim for economic loss.


The first of these conditions was that there needed to be a special relationship between the parties, the second was that the person giving the advice must possess specialist skills and finally that there must be evidence of reliance upon the advice given. We will look at each of the criteria in turn.


'Special relationship'


The matter of what amounted to a special relationship received the attention of the courts on other occasions. Originally it was thought that it referred to a 'special relationship' in the sense that the person was expected to give advice of the sort given. In Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd (1978), a case which involved a claim that Ogden's company had been misled about the loading capacity of some barges intended to carry clay, the issue developed of whether liability arose under Hedley Bryne. The claim succeeded under the Misrepresentation Act 1967 and so it was not necessary for the Court of Appeal to rule on the issue but it became established that any business or professional relationship may well be sufficient for it to amount to a special relationship for the purposes of a claim under Hedley Byrne.



The courts have taken the view that purely social relationships are insufficient unless there is evidence to show that a considered opinion was expected. In Chaudhry v Prabhakar (1988), exceptionally, the court imposed liability in the case of a friend advising someone about the worth of a Volkswagen second hand car.


The case of Yianni v Edwin Evans & Sons (1982) changed the way Building Societies and Surveyors worked together concerning the matter of valuations and surveyors reports and, even though no contractual relationship exists, they are generally regarded to be special for the purposes of Hedley Byrne liability.


The House of Lords felt unable to provide a straight forward ruling in the case of accountants and to whom they owed a duty of care in the leading case of Caparo v Dickman (1990). The best the House could do, led by Lord Bridge, was to approve a "three-fold test", to the effect that, for one party to owe a duty of care to another, the following must be proved:


  • "reasonably foreseeable" harm must result from the defendant's conduct;

  • there must be a relationship of "proximity" between the defendant and the claimant;

  • liability will not be imposed unless it is "fair, just and reasonable" to impose liability.

The case involved the preparation of accounts by Dickman and the issue was whether the company, Caparo, was within the scope of responsibility as a shareholder at the time. Lord Bridge reasoned that the accounts had been prepared primarily to meet statutory responsibilities and therefore there was insufficient 'proximity' for the claim to succeed.

'Special skills required'

This is interpreted as meaning that a duty will only be found if the defendant has skills in the area of advice given. In Mutual Life & Citizens Assurance v Evatt (1971) it was confirmed that the person giving the advice must have the requisite skills in that area. In Evatt the claimant had been an investor with the defendant and had asked them for advice about investing in a subsidiary company. The defendant were not in the business of giving investment advice and did not claim to have any skills in this area. The advice had been gratuitous even though they had realised that the advice might be relied upon. No duty was found to exist.

'Non-expert advice'

In situations where advice is sought from non-professionals no liability will exist (Chaudhry v Prabhaker (1988)).

'Reliance to be made on the advice'

The factor laid down in Hedley Byrne, that reasonable reliance must be placed on the advice, has been confirmed by the courts - JEB Fasteners v Mark Bloom & Co Ltd (1983); Caparo v Dickman (1990).

The case of Caparo v Dickman has shown that the House of Lords, as it was then, was reluctant to accept a broad approach to liability. This may well have its' roots in policy considerations, but this narrow approach is at least in keeping with the approach taken in such cases as Anns v Merton Borough Council (1978). In addition, the main focus of the court's considerations since Caparo, have been about the nature of the relationship between accountancy professionals and those who claim to be within a special relationship and therefore owed a duty of care. The signs are that this matter will continue to exercise the minds of the senior judiciary as and when appropriate cases come before the courts.

We can see a pattern emerging whereby a step by step approach to recognising a duty of care in this area is slowly acknowledged, and we can piece together the House's preferred approach since Caparo. For example, it seems as though the judges prefer to hold on to the test of proximity rather than rely entirely upon the test of reasonable foresight. We can also see that the purpose of the report must be made known to the adviser at the time the advise is given and that it is not enough to rely upon some general authority such as the Company Acts.

Specifically, in James McNaughton Paper Group Ltd v Hicks Anderson & Co 1991, involving draft accounts which were relied upon in a takeover bid situation. The accounts were not initially meant for this purpose, and, as the purpose for which reports are prepared is a consideration, the claim that a duty of care existed was not allowed by the Court of Appeal.

The Court of Appeal went on to suggest that other considerations were also reasonable, such as:

  • the purpose of communicating the report;

  • the size of any class to which the recipient belongs;

  • whether it was reasonable to rely upon the advise;

  • the relationship or 'proximity' of the adviser to the recipient and any third parties.


In Henderson v Merrett Syndicates Ltd (1994) the law seems to have stretched slightly. The case involved Lloyd's of London insurance business and its' underwriters following substantial claims after hurricanes in America. Rather surprisingly although some of the claims were in contract, the House of Lords held that there existed a concurrent liability in tort.


There have been some notable inconsistencies which have made it more difficult for the law student (as well as practitioners ) to determine the law.


In Ross v Caunters (1980) it was held that solicitors may owe a duty of care both to their clients and to third parties who may be able to show that they suffered loss or damage. The facts of the case were that that the solicitors failed to ensure that a beneficiary did not attest the will in which they were a beneficiary, as a result, of course, the provision failed and did not take effect. The principles of Hedley Byrne were applied on the basis that the third party is someone who should have been in their mind as a person who could be affected by their acts or omissions and that harm was foreseeable. The position was reaffirmed in White v Jones (1995).


In Ministry of Housing & Local Government v Sharp (1971), Lord Denning, in his judgement, had the opportunity to reaffirm the principles of liability himself. Lord Denning said that:


'The case comes four square within the principles which are stated in Candler v Crane, Christmas & Co (1951) and which were approved by the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964).'

The case involved an employee who failed to exercise due care and skill when searching for entries in the Local Land Charges Register prior to a property transaction. Lord Denning had no doubt that the individual was liable and said so on the basis that he ought to have known that the party holding the benefit of the charge would be affected if it were not revealed. The provision of a Certificate as to the result of the search therefore amounted to a negligent misstatement.

The courts seem to have taken the approach that, in third party cases, policy considerations have come into play which suggests that to find otherwise might leave a third party without a remedy. This may be said to be reasonable on the one hand, but for purists of the law, policy considerations do not always help when trying to predict and advise as to the law (White v Jones (1995)).

Progress is one thing but certainty in the law has always had its supporters.

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