Define: Negligent Misstatement

Negligent Misstatement
Negligent Misstatement
Quick Summary of Negligent Misstatement

Negligent misstatement refers to a situation where someone provides inaccurate or misleading information to another party, which results in harm or loss to that party due to negligence or carelessness. Unlike fraudulent misrepresentation, where the false statement is made intentionally, negligent misstatement occurs when the person making the statement fails to exercise reasonable care or competence in ensuring its accuracy. Negligent misstatements can arise in various contexts, such as professional advice given by experts, financial statements provided by accountants or auditors, or representations made by sellers in commercial transactions. To establish liability for negligent misstatement, the harmed party typically needs to demonstrate that the person making the statement owed them a duty of care, breached that duty by providing inaccurate information, and caused them to suffer damages as a result. Negligent misstatement claims are common in civil litigation, particularly in cases involving professional malpractice or negligence.

Full Definition Of Negligent Misstatement

It has long been recognised that liability in tort might arise from negligent actions, but liability for negligent misstatements and negligent advice has been less well accepted by the courts. A negligent misstatement might be defined as a representation of fact, carelessly made, that is relied on by the claimant to his disadvantage. Where the misstatement or advice is fraudulent, this is a different matter; such misstatements may amount to a tort of deceit. In Derry v. Peek (1888), the House of Lords held that dishonesty was an essential element of deceit and that mere carelessness would never suffice. This judgement was taken, perhaps wrongly, to indicate that there could be no liability in tort for negligent statements, but since this judgement predated the seminal Donoghue v. Stevenson (1932), there was no well-developed law of negligence at the time. Consequently, it is not entirely surprising that this conclusion was reached.

Tracing

Tracing the development of liability for negligent misstatement is complicated by the fact that the reported cases are tangled up with that other legal bete noire: liability for pure economic loss. This is hardly surprising, because in most cases, it is, in fact, only economic loss that the claimant suffers. Where there is actual physical damage, it seems to be taken for granted that liability for negligent advice is not excluded. In Clayton v. Woodman (1962), for example, architects were held liable for misdirecting a bricklayer, with the effect that a wall collapsed and injured the claimant. It was argued on behalf of the defendant that, following Derry, there was simply no liability for negligent misstatement. The Court of Appeal preferred the view that Derry and other authorities applied only to economic, not physical, loss. So the story of negligent misstatement is intimately bound up with the story of pure economic loss.

The first major shift in the law relating to negligent misstatement came with the House of Lords decision in Hedley Byrne v. Heller (1963). In this case, the claimant advertising agency sought to recover its economic losses from the defendant bank on the grounds that the bank had negligently overstated the financial resources of one of the agency’s clients. It was generally accepted by the House that, in principle, a person who gives inaccurate information, where it is reasonably foreseeable that it will be acted on, could be liable for losses suffered as a result of that reliance. This decision is little more than a broad interpretation of Donoghue; the ‘neighbour principle’ applies where there is a ‘special relationship’ between the claimant and the defendant. The claimants in Hedley Byrne failed, not because their losses were unrecoverable in law but because they had not shown that their reliance on the defendant’s ‘without prejudice’ statement was reasonable.

Hedley Byrne was not really concerned with pure economic loss but with liability for statements. However, by recognising that there are some circumstances in which pure economic loss is recoverable, Hedley Byrne did pave the way for a rapid expansion in litigation for economic loss. As a result, when looking at the cases that followed Hedley Byrne and which did not impose liability, it is not always easy to determine whether the court’s decision was influenced more by a desire to limit liability for economic loss than for reasons related to negligent misstatement.

Special Relationship

A lot of cases subsequent to Hedley Byrne have focused on determining what a ‘special relationship’ is. It is clear that a key factor is whether the defendant has ‘assumed responsibility’ for the effect of his statements on the defendant. It has also become important to determine whether it is reasonable for the claimant to rely on the defendant’s statements. The courts have varied considerably in their interpretation of reasonable reliance. In the admittedly striking case of Chaudhry v. Prabhakar (1989), a man was held liable for giving incompetent advice on buying a secondhand car to a friend. However, two 1990 House of Lords cases appeared to place limits on the extent to which it could be considered reasonable for a claimant to rely on statements that were not made for his benefit. In Smith v. Bush (1990), it was suggested that it was reasonable for the purchaser of a modest house to rely on the valuation carried out by the mortgagee’s surveyor, while it might not necessarily be reasonable for the purchaser of an expensive property to do so. In Caparo v. Dickman (1990), it was held not to be reasonable for investors to rely on the findings of a company auditor when the auditor’s report was not prepared for their benefit. The decision in Caparo emphasised whether it was ‘fair, just, and reasonable’ to impose liability—a formulation that has become important in other areas of negligence as well.

In Henderson v. Merrett (1995), the House of Lords was called upon to determine whether insurance underwriting agents had a duty of care to prevent pure economic loss to members of underwriting syndicates, irrespective of their contractual relationship. The members, ‘names’ at Lloyds, had suffered catastrophic losses, which they claimed to be due to the negligent advice of the agents. The agents variously claimed that they had no liability because they had no contractual relationship with the claimants or because their liability was defined by the contract and excluded a parallel liability in tort. With no contractual relationship or one that precluded a claim for the losses suffered by the claimants, the defendants argued that pure economic loss was unrecoverable.

Lord Goff suggested that the test of whether it was ‘fair, just, and reasonable’ to impose liability for negligent advice was not a separate test from whether the defendant had assumed responsibility for the claimant. If there was an assumption of responsibility and it was reasonably foreseeable that the claimant would rely on the defendant’s advice, it was automatically fair, just, and reasonable to assume a duty of care.

Henderson suggests that there might be a liability for pure economic loss that flows not only from negligent misstatement but from negligent advice in general. From there, it is only a small step towards imposing liability for negligent performance of services.

Shortly after Henderson, the use of the ‘extended’ Hedley Byrne principle was considered again by the House in White v. Jones (1995). In that case, a solicitor had been asked by his client to modify the client’s will. The solicitor failed to organise this in a timely manner, and the client died before he could attest to the new will. The beneficiaries under the will sued the solicitor for negligence in an attempt to recover the money they would have obtained had the will been properly attested. By a bare majority, the House held that beneficiaries could recover. This decision was based in part on the finding that the earlier, first-instance decision of Ross Ventures (1979) had stood for 15 years without doing any serious damage. The facts in Ross were very similar: a negligent solicitor had not properly handled his client’s will. However, the problem with Ross was that its reasoning relied extensively on the arguments in Anns v. Merton (1977), a case that really has not stood the test of time (Murphy v. Brentwood DC (1990)). Nevertheless, the inability of the beneficiaries to recover would, according to Lord Goff, represent an injustice; the party who suffered loss would have no claim, and the party that had a potential claim—the testator’s estate—would have no loss. This would indeed be a sorry state of affairs. In White v. Jones, the principles of Hedley Byrne and Henderson were not directly applicable, according to Lord Goff. Although the solicitor had ‘assumed responsibility’ to his client, he could not be said to have assumed responsibility for the claimants, who were uninvolved in the transaction. However, a remedy could be made available by reasoning that the solicitor’s assumption of responsibility to his client could be ‘transferred’ to the beneficiaries under the principle annunciated by the House in Linden Gardens v. Lenesta Sludge Disposal (1993). In that case, the lessee of a building contracted with the defendants to remove asbestos, then assigned his lease to the claimant. Although the claimant had no contractual relationship with the defendant, the defendant was held to have assumed responsibility for the claimant on the basis that the original lessee’s assignment of the lease was foreseeable.

Lord Browne-Wilkinson, on the other hand, found that the claimants in White v. Jones should succeed on the basis of the principle in Hedley Byrne itself—an assumption of responsibility and concomitant reliance. The fact that the assumption of responsibility was for persons who had no direct involvement with the solicitor’s professional duties at the time they were exercised was held to be only an incremental extension of the Hedley-Byrne principle. Lord Browne-Wilkinson argued that the important factor in Hedley Byrne was that a special relationship existed between the claimant and the defendant, and that relationship was founded on the assumption of responsibility to the claimant on the part of the defendant. However, the category of ‘special relationships’ was not closed, and, in White v. Jones, it could be extended to encompass situations in which a professional person should foresee that inadequate performance of his duties will cause economic loss to someone who later had good reason to rely on his actions. Consequently, White v. Jones espouses two slightly different meanings of ‘assumption of responsibility’. In Lord Goff’s view, the defendant had assumed a responsibility to his client, the benefit of which could be transferred to the claimant. The assumption of responsibility was, in a sense, an ordinary contractual one. By accepting instructions from his client, the solicitor agreed to exercise adequate professional diligence. However, Lord Browne-Wilkinson’s interpretation was that the solicitor had assumed a responsibility to the beneficiaries of the will on the grounds that there was a ‘special relationship’ between them. That special relationship was based on the foreseeability that the beneficiaries’ future well-being would depend on the proper exercise of their duties.

Responding to the argument that the extension of liability he proposed would lead to the deluge of pure economic loss cases so feared by the courts and a return to the Anns approach, Lord Browne-Wilkinson suggested that, for an action such as White v. Jones to succeed, it must not only be reasonably foreseeable that the defendant’s services would be relied on but also foreseeable that loss would be suffered if they were performed inadequately. In other words, not all cases where reliance was reasonably foreseeable would lead to liability being established.

Summary

It seems well established that pure economic loss might be recoverable where the defendant has assumed responsibility for the claimant, either directly or, as in White v. Jones, indirectly. The liability may arise from negligent statements (Hedley Byrne) or the provision of services (Henderson, White, v. Jones). In addition, once responsibility is assumed, White v. Jones shows that there can be liability for omission as well as action.

Problems

Some problems remain.

  1. First, it can be argued that White v. Jones is quite a radical extension of Henderson, which is a somewhat radical extension of Hedley Byrne. In fact, Lord Keith, in a rather terse dissenting speech in White v. Jones, stated bluntly that there was no conceivable decided case that was capable of being extended incrementally to cover the facts of the present case. That being so, one has to wonder whether there are sufficient limits on the ‘assumption of responsibility’ to predict how it will be used by the courts.
  2. Second, there are grounds for believing that the whole notion of ‘assumption of responsibility’ is a policy device to allow what the courts feel to be meritorious claims. Ultimately, it is difficult to find a logical and just approach to the apportionment of losses in these cases, and this is at the root of the problems they cause. When one person acts in a blameworthy manner and causes loss to another, there often arises a desire to see the victim compensated at the expense of the wrongdoer. Clearly, there was a sense in which the solicitor was ‘at fault’ in White v. Jones. But as Lord Mustill, dissenting, pointed out, ‘fault’ is not free-standing. Not every case of fault will lead to liability; there must be a fault between the claimant and the defendant.
    1. As an example, he described a scenario in which the testator in White v. Jones had been run down and killed by a careless driver on the way to sign the will. Naturally, the driver was ‘at fault’ with respect to his victim, but it would be stretching the law to hold him at fault with respect to the beneficiaries under the victim’s will. In fact, the beneficiary’s losses stemmed from a defect in the law of wills; the strict requirements for attestation do sometimes lead to the testator’s wishes not being given effect. However, it was setting a dangerous precedent to allow a novel and radical development of the law of negligence to compensate for a defect in statute. I submit that Lord Browne-Wilkinson’s notion of ‘assumption of responsibility’ is sufficiently broad that it could be made to encompass other cases where liability has, as a matter of law, been denied.
    2. Consider Murphy v. Brentwood (dc1990), for example. In this case, a local authority was held not to be liable to the owner of a dwelling, which had to be sold at a loss because it had become too dangerous to live in. The local authority had approved the inadequate design of the building or, at least, accepted the advice of its contractors to do so. It could be argued that the authority had assumed responsibility for ensuring that the proposed building would be habitable. It had exercised a professional function and ought to have foreseen that its exercise would be relied on by future occupiers and that inadequate exercise would cause those occupiers economic loss. This seems very close to the criteria described by Lord Browne-Wilkinson in White. However, Murphy is generally regarded as representing the limits to the liability for pure economic loss, and it has to be wondered how it fits with Henderson and White v Jones.
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This glossary post was last updated: 9th June 2024.

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