Negligent Mistatement
Overview
If the only loss incurred as a consequence of a negligent act (as opposed to a negligent statement) is economic, then, unless there is a contract, there is usually no right of compensation. This is the principle that there is generally no right of recovery for so-called pure economic loss. An example of so-called “pure” (or, more accurately, purely) economic loss is when a negligent act cuts an electric cable causing financial loss or damage to local factories.
The law of negligence extends to liability for financial loss caused by negligent statements and advice (as opposed to negligent acts). Negligent misstatement often arises in the context of negligent professional advice or work. Outside of negligent statements and advice, negligence law does not generally allow recovery of loss which is economic only.
If the economic loss follows from physical injury or damage to property, then follow on economic loss is usually recoverable. For example, when a person is injured in an accident caused by another’s negligence, he will be entitled to recover his past and future lost earnings.
Negligent Misstatement and Advice
Liability for negligent misstatement and advice has general application beyond advice-based professional services. The most famous case which established the principle of liability arose in relation to a careless credit reference by a bank.
The same principles that apply to negligence generally apply to negligent misstatement. There must be a duty of care, and breach of that duty with foreseeable, actual economic loss and damage caused by that breach.
There must generally be an assumption of responsibility before there is a liability for a careless statement. This will not usually be an issue in the case is a professional relationship for payment. The principle would, for example, rule out liability for statements made in casual conversation in a social context.
The person giving the advice or information must assume responsibility for its accuracy. It must be reasonable for the third party to rely on the information. The person giving the information must be aware that the third party was likely to rely on the statement or advice.
Closeness / Proximity
There must generally be a close link or so-called proximity between the parties. The claimant must be someone who is immediately foreseeable as likely to suffer a loss in consequence of the defendant’s negligent statement. The
y must generally be a relatively small group to whom the duty of care may potentially be deemed to be owed. They must be sufficiently close to create a relationship such that it is reasonable and foreseeable that the latter will rely on the former’s advice.
An auditor may, for example, be liable for negligence where shareholders rely on his opinion or certificate. The shareholder may be sufficiently proximate.
However, the auditor is unlikely, for example, to have a duty to third parties generally who might use the information as a basis for decision making. The latter relationship is less likely to be sufficiently proximate. The position will depend on the particular circumstances. An auditor may owe a duty to prospective investors in circumstances where they constitute a narrow foreseeable class in a particular context.
In addition to a relationship of proximity, it must be foreseeable that the claimant will rely on the statement. He must actually rely on the statement. The reliance itself must be reasonable.
Negligence and Breach of Contract
It is in that context of professional services there is likely to be a contract that deals with the quality and delivery of the service. The client will be a party to the contract. However, the service may be wholly or partly for the benefit of a third party. An example would be where a will is made with a client for the benefit of a third party.
The negligent service or advice may simultaneously constitute a breach of contract and negligent misstatement. The persons to whom the service provider may be liable are persons who should be in the immediate contemplation of the service provider as prospectively suffering loss. In contrast, contract law only gives rights to parties to the contract.
Claims for negligent advice are often based both on breach of contract and negligence. The contract may limit or exclude the duty of the service provider. These clauses will generally be upheld in relation to both breaches of contract and negligence, provided that they apply to the circumstances.
The clause will usually only bind the parties to the contract. A wider category may be bound in respect of limitation of a negligence claim. See our chapter on third parties and contracts.
A claim for negligence will often be more advantageous than a breach of contract claim. This is because the time limits run from the date of loss rather than the date of the original service. In addition, the rules on the extent of the loss for which compensation will be allowed are more generous under negligence and civil wrongs generally.
Relationship of Proximity Required
There must be sufficient proximity to establish liability for negligent misstatement. Important factors include foreseeability, assumption of responsibility to take care and reliance by the claimant.
Even if an economic loss is foreseeable, damages are recoverable where there is sufficiently close proximity between the parties and the defendants have the knowledge or at least a means of knowing that a particular person and not just a member of a class will rely on them and be likely to suffer consequences. It must also be fair, just and reasonable that the duty is imposed.
In the case of Hedley Byrne v Heller & Partners, a telephone inquiry was made to a bank regarding a customer’s financial position. Replies were given with a disclaimer to the effect that the customer was respectable and good for normal engagements. The information was passed by the inquiring bank to a claimant advertising agent, which suffered a significant loss as consequence.
The House of Lords held that if, in the ordinary course of business, a person gives advice or information to another without a contractual relationship, in circumstances where a reasonable man would know that he was being trusted or that his skill or judgment was being relied on, he accepts a legal duty to take care in the circumstances.
The courts are more likely to hold the defendant liable where he has made a statement with a view to inducing or persuading another to enter into a transaction with him. The duty of care is based on an express or implied assumption of responsibility to take reasonable care when giving advice or passing information.
It is usually essential to show the defendant knew of the statement communicated by the claimant, either as an individual or a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind. The defendant must know the claimant will be very likely to rely on the statement.
Professional Negligence
The duty of care generally arises in relation to the provision of professional services. However, it is not necessarily so limited. It applies to any person who professes a special knowledge or skill.
The Supreme Court has held that the solicitor for a seller owes a duty of care to the buyer in answering enquiries when acting in the sale of the property. He assumes responsibility to the buyer, whom he knows the third party must rely on his answers. This was justified under the general principles of liability.
This does not necessarily mean that the seller’s solicitor is unconditionally responsible for every reply. In some cases, he will be giving his opinion or replying based on instructions received.
Public Authorities
Public authorities are liable for negligent misstatement in much the same way as individuals. Where they undertake a duty of care by issuing information which they know persons will reasonably rely on, they may be liable in negligence.
In some contexts, statements by public authorities may create legitimate expectations that the public authorities may be obliged to fulfil. If the State or public body creates an expectation, it may be liable to the third parties if this expectation is not fulfilled.
The principle is analogous to that of equitable estoppel. The breach of legitimate expectation may give rise to an equity as the case demands. However, the courts have been reluctant to expound too wide a principle of legitimate expectations.
Insurance Contracts
In Brennan v Flannery [2013] IEHC 145 the National House Building Guarantee Co Ltd was held not to be liable beyond the terms of its guarantee for defects in a house whose builder was a member of the scheme.
Dunne J.
“I can see nothing in the Homebond literature, the Homebond rules, the guarantee or the final notice HB11 that precludes Homebond from registering a property which is either being built or has been built.
Homebond has expressly excluded liability in clause 4(b) of the agreement where it was provided:
‘That the company, its servants or agents shall have no liability arising to the purchaser in respect of any claim for damages relating to any act or omission in or about any proceedings relating to the dwelling and shall have no liability in respect of any negligence or default in inspecting or failing to inspect the dwelling …’
There is simply no relationship of any kind between the plaintiff and Homebond prior to the signing of the Homebond guarantee and there is simply no evidence at all to the effect that any representation was made by Homebond to the plaintiff over and above the express terms of the Homebond Guarantee …
I accept the submissions of counsel on behalf of Homebond as to the applicable law herein. In all the circumstances of this case, I cannot come to the conclusion that the plaintiff has established that Homebond owed a duty of care to the plaintiff giving rise to liability for all the defects in the dwelling house as contended for by the plaintiff.”
Hu v Duleek Formwork Ltd [2013] IEHC 50, Peart J. rejected the claim that an insurance company owed a duty to a claimant against the insured party. The claimant was employed by the insured which was a company in liquidation. He was awarded damages against the company but could not recover it as the company was obliged to pay the excess as a precondition in making a claim
“Sympathy is an insufficient basis for determining whether or not negligence would provide a reasonable cause of action against Aviva. In order to plead negligence there would have in the first instance to be a duty of care owed to the plaintiff of the kind argued for, and then a breach of that duty of care causing loss and damage to the plaintiff. I cannot see that Aviva are under a duty of care to this plaintiff to ensure that he is provided with information as to whether or not the insured has complied with the conditions of his insurance policy with Aviva. The contract is with the insured person, and rights exist in both directions arising from that contract. But I fail to see any basis for any third party duty of care as asserted by [counsel for the plaintiff]. If such a duty of care was owed to this plaintiff, the question arises as to whether the same duty is owed to other potential claimants under the policy of whose existence Aviva may not even be aware if proceedings have not been issued. How would such a duty of care be fulfilled? But I do not believe that Aviva is in a position of proximity with potential claimants as to be liable for a duty of care to them. The class of persons to whom such proximity would exist is too vague and uncertain.
There have been classes of relationship where a duty of care has been found to be owed on the basis of sufficient proximity. For example, where a solicitor is instructed by a client to prepare a will, he can be liable to a person who, but for the solicitor’s negligence, would have been a beneficiary under the will upon the death of the testator, even though that beneficiary is not the solicitor’s client and is not in any contractual relationship with that solicitor. But I know of no case where the Courts have found a duty of care to exist between an insurance company and a potential claimant against the insured party, and have been referred to none. It would not be right in the present case in such circumstances to extend the law that far, so as to find that the plaintiff might reasonably argue his claim against Aviva under the law of negligence.”
Financial Advice
In Haughey v J & E Davy t/a Davy [2014] IEHC 206 the claimant had invested in contracts for differences with the stockbroker defendant of which he was a client. He was 20 years of age and had inherited a substantial estate
“Davy owed a duty of care towards James Haughey. This does not require any deep legal analysis. James Haughey was paying Davy to exercise that care. The duty of care owed arose from the contract but was independently manifested in tort. Davy owed to James Haughey the duty of care that is appropriate to an experienced stockbroker towards the particular client when, pursuant that duty of care, the stockbroker has taken appropriate steps to get to know the client and as to what his or her aims are, what his or her means of knowledge are, what his or her financial circumstances are, what the attitude of the client is to risk and, importantly, judged objectively, whether that level of risk is appropriate to that client. If it is not the client should be advised against and in some circumstances more than that.”
“The comparison is appropriate since it is part of the job of the lawyer to ask reasonable questions with a view to ascertaining the true position of the client for the purpose of tailoring the advice accordingly. Here, Davy have continually made the hollow argument that merely taking a pen picture was enough to get to know a client. The implication of the lack of intervention by senior management in authorising James Haughey to trade in CFDs and the failure of the document section to put a stop on the account is that a practice of a sufficient kind was being followed. That is not a discharge of the relevant duty.”
“ common law is not antipathetic to concurrent liability and … there is no sound basis for a rule which automatically restricts the claimant to either a tortious or a contractual remedy. The result may be untidy; but given that the tortious duty is imposed by the general law, and the contractual duty is attributable to the will of the parties, I do not find it objectionable that the claimant may be entitled to take advantage of the remedy which is most advantageous to him, subject only to ascertaining whether the tortious duty is so inconsistent with the applicable contract that, in accordance with ordinary principle, the parties may be taken to have agreed that the tortious remedy is to be limited or excluded.”
“The Court is bound as a matter of law to accept, and further accepts as a matter of expert opinion, that the correct way to have dealt with James Haughey would have been for Davy, firstly, to get to know him properly. In that context, secondly, if there was a manifest desire coupled with appropriate knowledge to engage in some form of trading in contracts for difference, someone with his background and vulnerability in terms of not having a job and only having inherited wealth should strongly have been advised in writing against any trading in contracts for differences. The correct approach, thirdly, for any investment for this particular client with his particular needs and his special disabilities would be to structure a share portfolio that was spread over time and over investments that would minimise risk; thus providing a reasonable prospect of a steady but conservative return. Had Joe Motley been receiving fees from this client that is indeed what would have happened. It did not happen. That failure represents negligence and manifest breach of contract through deliberate neglect over the relevant period of the relationship.”