Scope of Liability for Negligent Misstatement by Professionals - Essay Example

Scope of Liability for Negligent Mis ment by Professionals Inserts Inserts Grade Inserts of Submission Outline 1.0 Introduction 2.0 Scope of Liability for Negligent Misstatement 2.1 Test of Negligence 2.2 Proximate Relationship 2.3 Exclusion and Limitation of Liability 2.4 Statutory Regulation on Exclusion Clauses 3.0 Conclusion 5.0 References Introduction Unlike in the past where liability in tort arose mainly from negligent actions, courts have over time determined that liability will also arise from negligent misstatements or from advice that was given negligently. A statement is referred to as a negligent misstatement if it is a representation of fact, recklessly made and on which the claimant relied on to his detriment. In the past cases for negligent misstatement were wound up with cases for pure economic loss. But even where there is physical loss, it seems liability for negligent advice is not excluded as was the decision in Clayton V Woodman, (1962). Scope of Liability for Negligent Misstatement Test of Negligence Generally, for a claim of negligence to stand, one has to prove three elements. These elements are: That there was a duty of care owed to the claimant by the defendant, That the duty of care owed was breached, That the breach caused reasonably foreseeable damage borne by the claimant These grounds have been applied for cases involving personal injury. But when it comes to negligent misstatement by professionals, this control test may not be appropriate, more so when it comes to the element of reasonable foreseeability. In Caparo Industries Plc V Dickman, Lord Oliver foresaw a situation whereby a professional would be open to a limitless scope of liability, if the test of reasonable foreseeability alone was applied, (Katter 2003, P. 1). This has led the courts to device additional mechanisms to be applied in determining duty of care when it is a claim of negligent advice or information. These additional mechanisms are that there has to exist a special or proximate relationship as between the claimant and the defendant in regard to the information or advice given. Proximate Relationship Courts have in their decisions tried to determine what a proximate relationship is. A duty of care will only arise where the advice giver, expressly or impliedly, guaranteed the information user that he will exercise due care when making the required statement. The person giving advice must be in possession of special skills and judgement on which the claimant relied on. This will not suffice if according to the circumstances, it was unreasonable for the claimant to rely on such a statement. The information giver, at the time of giving the statement, must have known or reasonably expected to know, that the claimant was going to rely on the statement given. In the case of Hedley Byrne & Co. Ltd V Heller & Partners Ltd, the plaintiffs who were an advertising agency had suffered economic losses due to the negligent statement of the defendant bank about the financial standing of one of its clients. It was held that where there exists a special relationship and an individual gives inaccurate statements where it was reasonably foreseeable that that information was to be acted on, liability could arise for losses sustained from that reliance. When it comes to the requirement of special relationship, liability restricted only to reasonable circumstances. This prevents a situation whereby multiple claims could be made against the same defendant who has made a negligent statement that turns out to affect many people. In order to restrict such multiple claims arising from the same misstatement, the court laid out the essential of special relationship in the case of Caparo Industries V Dickman (1990). These essential are: That the maker of the statement knew that it would be communicated to plaintiff, whether named or unnamed. That the advice given was in relation to a particular transaction or one that is ascertainable. That the maker of the statement anticipated or should have reasonably anticipated that the claimant would rely on the statement made for purposes of the transaction in question without seeking further advise from an independent party, (O’Riordan 2007, P. 1) . In the above mentioned case of Caparo (1990), the claimant, a shareholder of the defendant, relied on the financial statements prepared by the company to buy more shares for a takeover bid. The statements reflected the company as having made profits when in reality it had made losses. On an action for negligent misstatement, it was held that there was no duty of care owed to the claimant since there lacked a sufficient degree of proximity as between the company and the claimant. The accounts were not prepared with the claimant in mind to be relied by him in making his decision to purchase more stocks. No liability will arise where the defendant did not know that the claimant would rely on the statements made and where, according to the circumstances, it would be reasonable to assume that the claimant would seek advice from an independent party. In the case of James McNaughton V Hicks (1991), the defendants, the accountants to the company subject of a planned takeover bid, at the request of the company, had prepared some draft financial statements to be used for the negotiations. The statements were later discovered to have been inaccurate and had caused the claimants to suffer economic loss. It was held that there was no duty of care owed by the defendant to the claimants because they did not know that the claimants would rely on those accounts for the takeover bid. They were entitled to assume that the plaintiffs would seek alternative advice from a third party before pursuing on with the takeover. There will be a duty of care owed where the defendants knew who the claimants were and they knew or should have reasonably known that the claimants would rely on the statements given, (O’Riordan 2007, P. 2). In the case of Morgan Crusible V Hill Samuel Bank (1991), a company’s financial advisers gave some inaccurate information on the financial soundness of the company as a result of which the claimants suffered loss by increasing their takeover bid. The defendants were found to be liable because they knew who the claimants were and they reasonably knew that the claimants would rely on the statements. Further, the information could only be available to defendants and was out of reach of an independent advisor. Also, in Yorkshire Enterprise Ltd V Robson Rhodes (1998), the plaintiffs, who were investors in a company, instituted proceedings against the accountants of the company for misstatements included in the letters inviting them for a subscription, which they relied on to invest in the company. The company went into liquidation immediately after. The accountants were found to be liable as they knew the claimants would be potential investors. Also, the circumstances were such that the claimants could be reasonably allowed to rely on the information given without enquiring further. No liability arises where the statement was given in a purely social setting even if the giver is an expert, or where it was merely a quick response given to a question. Even then, liability will arise where the circumstances show that a clear and well thought out advice was being sought from a friend. This was shown by the decision in Chaudhry V Prabhaker (1994), where a friend sought the advice of a friend who was an expert in cars in finding a second hand car. She had expressly stated that she did not wish to have a vehicle which had previously been involved in any accident. Out of the advice of the friend, she bought a car which was later discovered to have been involved in a car accident and which had rendered it unroadworthy. The court held that there was a duty of care owed by the defendant arising from his special knowledge of cars. Exclusion and Limitation of Liability A person may be able to exclude liability for loss caused by a misstatement by including an exclusion clause in the terms of agreement. An exclusion clause seeks to protect the maker of a statement from liability arising out of any misstatements made. Exclusion clause will not be effective where the statement was made fraudulently, (Goldstone 2009, Para. 5), with the intention of inducing the claimant to act to the benefit of the maker. An exclusion clause must form part of the contract; otherwise it will not be effective. In the case of Chapleton V Barry UDC (1940), the defendant sought to rely on an exclusion clause written at the back of the receipt that was handed to the claimant. It was held that the clause was ineffective as it did not form part of the larger contract. Whether an exclusion clause forms part of the contract is a matter of construction by the court. Effectiveness of an exclusion clause will also be determined by whether the contract is signed or unsigned, (Gillhams 2008, Para 3). For signed contracts, unless it can be shown that there was a misrepresentation by the claimant who relied on it, an exclusion clause will be effective. This was the decision in L’Estrange V Graucob (1934), where a claimant purchased an automatic machine and signed a sales agreement containing the terms of sale without reading it. The defendant successfully relied on an exclusion clause contained in the signed document when the plaintiff laid a claim against him for defects discovered in the machine. If the contract is unsigned, the party relying on the exclusion clause must show that reasonable notice was given to the other party on the existence of the exclusion clause. Failure to give reasonable notice will render the exclusion clause ineffective. In Olley V Marlborough Court Ltd (1949), a hotel had an exclusion clause excluding liability for any theft occurring in their premises. The plaintiff’s fur court was stolen and she laid a claim against the hotel. The exclusion clause was held to be ineffective as the plaintiff was not aware of the exclusion clause and only received notice of its existence after entering into the contract. If an exclusion clause was included in previous course of dealings as between the same parties, the parties will be deemed to know of its existence and the requirement of reasonable notice will not be necessary. But proof of consistent course of dealing is required from the party who is relying on such an exclusion clause to be adequately inferred in future dealings. In Spurling (J) Ltd V Bradshaw (1956), an exclusion clause was held to be effective even though there was no notice given because the claimant ought to have known of its existence from previous dealings that had taken place with the defendant. It is also possible to infer an exclusion clause into a contract even where reasonable notice was not issued and there is no evidence of previous course of dealings with the defendant. This normally occurs where both parties are reasonably expected to have a common knowledge of the existence of the exclusion clause. This is common where the parties belong to the same trade and are expected to be well familiar with terms of dealings within that trade. This was the decision in British Hire Corp. V Ipswich Plant Hire Ltd (1974). In this case, the parties belonged to the same line of business which having a common exclusion clause. The defendant’s claim that he was not aware of the exclusion clause before the work began did not render the clause ineffective. Statutory Regulation for Exclusion Clause Exclusion clauses are mainly regulated by the Unfair Contract Terms Act of 1977 (UCTA). An exclusion clause may be rendered either effective or ineffective by the statute but the clause must be subjected to the test of reasonableness. This is mainly applies in business as between businesses themselves or between businesses and consumers. Thus if the contract is between private individuals, it is outside the scope of UCTA. Even then, the statute is only applicable in three situations: in negligence, in standard terms contract and for consumer protection, (Gillhams 2008, Para. 7). It determines whether an exclusion clause is effective or ineffective unless a test of reasonableness has been satisfied. Test of Reasonableness has been determined by the Act as asking oneself “is it a fair and reasonable [exclusion clause] to be included, having regard to the circumstances which were, or ought reasonably to have been, known to or in contemplation of the parties when the contract was made,” [UCTA 1977, Sec 11(1)]. Courts have considered various factors in determining the reasonability of an exclusion clause such as the bargaining power of both parties, circumstances surrounding the particular transaction, how much the parties knew of the clause and its scope and extent e.t.c. The burden to prove the existence of the exclusion clause lies on the party who wishes to rely on it. If the test of reasonableness is proved, the exclusion clause becomes effective. Conclusion This paper has discussed the extent to which a professional may be liable for negligent misstatement causing loss to the claimant by relying on it. For negligent misstatement by professionals, it is not only a requirement to prove the existence of duty of care which was breached resulting to loss but it is also a requirement that there should exist a proximate or special relationship between the parties for a duty of care to arise. This proximate relationship arises from the special skills possessed by the defendant and on which the claimant reasonably relies on. Such a defendant can limit his scope of liability by including an exclusion clause in the terms of agreement. Such a clause will be effective if it has been properly incorporated and satisfies the test of reasonableness. References Gillhams (2008). Exclusion Clauses and Limitations of Liability in Business Contracts. Gillhams Lawyers, 47 Fleet Street, London EC4Y 1BJ, UK. Goldstone A. (2009). United Kingdom: Effective Exclusion Clauses: Ensuring They Work - Excluding And Limiting Liability. Lawrence Graham LLP: Commerce & Technology. UK UCTA (1977). Unfair Contract Terms Act. The National Archives. Retrieved on 31st October 2011 from http://www.legislation.gov.uk/ukpga/1977/50 Katter A. (2003). The Ambit of Liability of Professionals For Negligent Advice or Information: The Law in Great Britain and Australia. School of Accountancy. Queensland University of Technology, UK. O’Riordan J. (2007). Negligent Misstatement. Dillon Eustace. Englinton Street, Cork, Ireland. Read More