Assignment I

Economic Loss Due to Negligent Misstatement

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Economic Loss Lecture
Economic Loss Due to Negligent Misstatement
Finally, there exists a category of cases involving economic loss due to negligent misstatement. The Case focus here is on Hedley Byrne & Co Ltd v Heller and Partners Ltd [1964] AC 265. The facts were that the claimant was a marketing company that was approached by a third party with an offer of work. The claimant then went to the third-party’s bank for a reference to ensure that it would be able to pay them for the work. The reference was prepared without examining the company’s current financial status. Relying on the reference, the claimants contracted with the company. In actual fact, the company’s financial status was poor, and it went into liquidation before it paid the marketing agency - causing a purely economic loss. The claimant then sued the defendant (the bank). The courts ruled that the loss was recoverable. It should be noted, however, that the bank had attached a disclaimer to its advice, and so the courts rejected the claim, (although the case still stands as precedent).
Four conditions must be met before it is possible to recover economic losses due to negligent misstatement.
1. A special relationship must exist between the parties. This will usually involve one party acting as an expert advisor. Thus, in Cornish v Midland Bank plc [1985] 3 All ER a mortgage advisor failed to explain to a client that she would be responsible for all of her husband’s debt. As a result, she lost a lot of money when the house was sold following their divorce. This relationship needn’t be particularly professional. In Chaudry v Prabhakar [1989] 1 WLR 29, the defendant was advised by a friend (who had a self-proclaimed knowledge of cars) that a car she was looking to buy had not been in any accidents. The opposite was true, and the car was not road-worthy. Thus, the relationship of trust does not need to be professional-to-client, it simply needs to be expert-to-non-expert.
2. The advising party (or expert) needs to have voluntarily assumed the risk of misadvising. In the Cornish Bank case, for example, the defendant might have chosen to not sell the mortgage to the claimant. As seen in Hedley Byrne, it is also possible to use a disclaimer to avoid liability. In other words, someone who says ‘here is my advice but you should not rely on it effectively’ or ‘I do not assume the risk of misadvising’.
3. There must be reliance on the advice of the defendant. So, in the Hedley Byrne scenario, if it could be shown that the claimant would have contracted with the third party regardless of the bank’s advice, it would have no claim - there was no reliance on the advice given.

Notably, just because both parties are ‘experts’ does not mean that reliance does not exist. Whilst it used to be the case that those negotiating a contract could not be held to be in reliance on one another concerning expert advice, this has since been overturned. Thus, in Esso Petroleum v Mardon[1976] QB 801, the defendant (Esso) was liable for negligently overstating the business prospects of one of its petrol stations. The claimant purchased the petrol station and then made large losses, and subsequently sued for negligent misstatement, successfully.

4. The reliance on the advice must be reasonable and foreseeable. This can be thought of as a control measure, letting the courts separate worthy and unworthy cases. This is illustrated in Law Society v KPMG Peat Marwick [2000] 4 All ER 540 - the defendant negligently prepared a report on the financial status of a solicitors’ firm for the claimant (the Law Society). The firm subsequently went bankrupt, meaning the Law Society had to pay out nearly £9 million in compensation to the firm’s clients. Since the entire purpose of the report was to alert the law society to any firms which might be in financial distress, it was held reasonable for the Law Society to rely on the report, and the claim was upheld.

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