Pure economic loss caused by Negligent Misstatement

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1 Pure economic loss caused by Negligent Misstatement Development of negligent misstatement as a cause of action A negligent misstatement is information or advice which is honestly provided but is inaccurate or misleading. The action for negligent misstatement is a comparatively recent common law development. In Derry v Peak (1889) 12 App Cas 337 the English Court of Appeal decided that a negligent misstatement was insufficient to support an action in deceit because a non-fraudulent misrepresentation in the absence of a contract or a fiduciary obligation was not enough to establish a duty of care. However, the decision in Derry v Peak was reviewed by the House of Lords in the landmark decision in Hedley Byrne & Co v Heller & Partners [1964] AC 465. The House of Lords considered that Derry v Peak did not decide anything regarding causes of action for negligent misstatement and limited the decision to actions in deceit. 1 In England Hedley Byrne & Co v Heller & Partners established that there might be liability in tort for negligent misstatement in circumstances in which information or advice is sought from a person possessing some special skill or judgement where that person knows or ought to know that reliance is being placed upon information or advice by the person seeking it. 2 Hedley Byrne & Co v Heller & Partners was considered and accepted by the Australian High Court in Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556 Per Barwick CJ: The duty will arise whenever a person gives information or advice to another, whether that information is actively sought or merely accepted by that other upon a serious matter and the relationship arising out of the circumstances is such that on the one hand the speaker realizes or ought to realize that he is being trusted to give the best of his information or advice as a basis for action on the part of the other party and it is reasonable in the circumstances for the other party to seek or accept and in either case to act upon that information or advice. However, Barwick CJ deviated from the English conception of the principle by determining the special relationship between the parties did not require the speaker to have actual possession of skill or judgement or to profess to have any such skill or judgement on the matter. 3 This decision was rejected by the Privy Council on appeal and the decision was reversed. However, in subsequent cases the views of Barwick CJ in Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556 have gained support. 4 Any uncertainty regarding this issue was subsequently resolved in the High Court s decision in San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (NSW) (1988) 162 CLR 340 where it was decided that the speaker need not possesses or claim to possess any special skill or experience. 1 [1964] AC Ibid. 3 Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556 at L Shaddock v Parramatta City Council (No 1) (1981) 150 CLR 225.

2 Elements of the Cause of Action There are three elements to a cause of action founded in negligence: A legal duty must be recognized in the circumstances requiring a certain standard of conduct to protect against foreseeable risk. There must be a breach of that duty by failing to meet the requisite standard of care owed. And, finally, the plaintiff must have suffered a material injury as a result of the breach. DUTY OF CARE 1. Characterize the Harm Pure economic loss Negligence does not entail liability unless the defendant owed the plaintiff a duty of care. It is necessary to firstly characterize the harm caused to the plaintiff in order to apply the correct test to establishing that the defendant did indeed owe the plaintiff a duty to take reasonable care. With the expansion of the duty of care since the 1960 s it is now possible to claim compensation for pure economic loss resulting from the defendant s negligence. Pure economic loss is when the plaintiff suffers a financial loss in the absence of any physical or property damage due to the negligence of the defendant. In Sutherland Shire Council v Heyman the High Court determined the plaintiff suffered pure economic loss as a result of the financial losses suffered when it was discovered the building work on their house was defective. 5 Additionally, in Perre v Apand Pty Ltd the plaintiff suffered pure economic loss based on the lost opportunity to sell potatoes in a particularly profitable market Reasonable Foreseeability For a duty of care to be established the risk posed to the plaintiff or a class of people to which the plaintiff belongs must have been reasonably foreseeable. The original concept of foreseeability was articulated by Lord Atkin in Donoghue v Stevenson when he introduced the neighbor principle : You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law is my neighbour? The answer seems to be persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question. 7 The role of foreseeability has developed since its conception by Lord Atkin; however it remains a central element in the test for establishing a common law duty of care. Modern cases focus on the concept of reasonableness. The inquiry involves considering what a reasonable person in the position of the defendant would have foreseen as potential risks associated with his or her 5 (1985) 157 CLR (1999) 198 CLR Donoghue v Stevenson [1931] UKHL 3.

3 behaviour. It is not necessary for the plaintiff to show the precise manner in which the harm was occasioned was foreseeable, merely that they fall into a class of persons that could have been harmed as a foreseen consequence of the defendant s actions or omissions. 8 Consideration must be taken regarding the expense, difficulty and inconvenience of taking alleviating action and other conflicting responsibilities which the defendant may have had Proximity/Special relationship Salient feature While reasonably foreseeability of harm is required, it has long been recognised by the authorities that mere foreseeability of purely economic loss is not sufficient in itself to give rise to a duty to take care. 10 To apply a duty of care for mere foreseeability that a person might suffer a financial loss would extend liability in negligence beyond acceptable bounds and could stifle commercial activity. Proximity Thus, in the early authorities a duty of care to avoid causing another pure economic loss required a relationship of proximity between the parties in addition to the foreseeability of harm. 11 The doctrine of proximity involves the notion of nearness or closeness, and had the effect of limiting what was reasonable foreseeable. 12 Bryan v Maloney was a case decided according to the doctrine of proximity. 13 That case considered, under the law of negligence, whether a builder who constructs a house for the then owner owes a prima facie duty to a to a subsequent owner of the house to exercise reasonable care to avoid foreseeable damage such as the decrease in value of the property based on unknown latent defects. 14 Bryan v Maloney held the builder did owe a duty to subsequent purchasers and reaffirmed that a sufficiently proximate relationship between a plaintiff and a defendant would be indicated by factors such as the plaintiff s reliance, the defendant s assumption of responsibility; or the presence of a contractual relationship between the defendant and a third party and whether it was reasonable in all the circumstances for the plaintiff to rely on the knowledge of the defendant. 15 However, the doctrine of proximity was decisively rejected in this country by the High Court decision in Sullivan v Moody. 16 Accordingly Bryan v Maloney remains good law in the sense that it has not been overruled by the Court. 17 However it is of no authority in relation to modern cases because it was decided according to the doctrine of proximity which is no longer followed Chapman v Hearse (1961) 106 CLR Vairy v Wyong Shire Council, above, at 127, applying Wyong Shire Council v Shirt (1980) 146 CLR 40 at Esanda Finance v Peat Marwick Hungerfords (1997) 188 CLR 241 DAWSON J. 11 Hedley Byrne & Co v Heller & Partners [1964] AC 465; Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR Cook v Cook (1986) 162 CLR 376; Hawkins v Clayton (1988) 164 CLR 539; Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR (1995) 182 CLR Ibid. 15 Ibid. 16 (2001) 207 CLR 562 at Woolcock Street Investments Pty Ltd v CDG Pty Ltd & Anor [2004] HCA Ibid.

4 Salient features The courts have rejected the notion of proximity and have instead proceeded on incremental basis according to established case law and precedent. 19 In Caltex Oil, Stephen J identified a number of salient features that combined to establish a sufficiently close relationship to give rise to a duty of care. 20 Chiefly among these was the defendant s knowledge that to damage the pipeline was inherently likely to cause pure economic loss to parties relying directly on its use and their knowledge and means of knowledge of where the pipeline was, their use and who used them. 21 Many cases have developed the list of salient factors. However, the multifactorial approach should not be treated as a list of factors, all of which must have application in a particular case. Rather, it provides a list of factors that should be considered, as potentially relevant, depending on the kind of case before the court. 22 Vulnerability In recent times there has been a development of the need for vulnerability in order to establish a duty of care was owed. Indeed vulnerability seems to have replaced proximity as the touchstone. Vulnerability is characterised as the plaintiff s inability to protect itself from the consequences of a defendant s want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant. 23 The NSW Court of Appeal has just handed down a decision on pure economic loss in The Owners -Strata Plan No v Brookfield Australia Investments Ltd [2013] NSWCA 317, which appears to suggest that at least in the view of that Court, vulnerability is a requirement for the existence of a duty of care to prevent pure economic loss. In Perre v Apand the plaintiff could do nothing to protect themselves from the economic consequences to them of the defendant s negligence in sowing a crop which cause the quarantining of the plaintiff s land. 24 However, in Essanda Finance Corporation Ltd v Peat Marwick Hungerfords financer could itself have made more inquiries about the financial position of the company to which it was to lend money, rather than depend on the auditor s certification of the accounts of the company. 25 Indeterminate liability Indeterminacy of liability is a factor that will ordinarily defeat a claim that the defendant owed a duty of care to persons such as the plaintiff. 26 Indeterminacy arises when the defendant would not be able to determine how many claims might be brought against him or her or what their general nature might be. 27 However, it was considered in Woolcock that indeterminacy would not be a significant issue in cases of economic loss suffered by the subsequent purchaser of a commercial 19 Perre v Apand (1999) 198 CLR 180 at Caltex Oil v The Dredge Willemstadt (1976) 136 CLR Ibid. 22 Caltex Refineries (Qld) Pty Limited v Stavar [2009] NSWCA Ibid. 24 (1999) 198 CLR (1997) 188 CLR Perre v Apand (1999) 198 CLR 180 at Ibid.

5 building that becomes defective by negligent construction. 28 Liability is restricted to the builder and the claimants would be limited to either the first purchaser of subsequent purchasers. Autonomy of the individual The common law regards individuals as autonomous, able to make their own choices and be held responsible for those choices. 29 As long a person is legitimately protecting or perusing his or her social or business interests, the common law will not require that person to be concerned with the effect his or her conduct on the economic interests of other persons. 30 And this is so regardless if that person knows his or her actions will cause loss to another person. 31 What is considered the legitimate pursuit of ones interest? Competitive acts are not prohibited as long as they fall within the ambit of one of the economic torts. However, Just because is competitive behaviour will not be acceptable if it amounts to deceit or duress. 32 Defendant s knowledge of the risk and its magnitude For imposing a duty it is always strengthened if the defendant actually knew of the risk and its magnitude. 33 Whether the defendant was aware of risks and their magnitude depends on the facts of the case. 34 In Woolcock McHugh stated: It would be a rare case where those involved in the construction of the commercial premises would not be aware of the risks arising from particular defects and their potential magnitude. 35 The inference was irresistible that, as consulting engineers asked to inspect the building, that they would fully understand the magnitude of the damage that the owner of the building would suffer if the risk would eventuate. 36 Other relevant policy considerations cited in Woolcock Investments include responsibility to control third parties, outflanking the law of contract, flood gates arguments, lack of measureable standard of care and circumventing the policy of limitation legislation. In Perre v Apand the question of insurance was a relevant salient factor. 4. Exclusion clauses However, the speaker may provide information with a clear qualification that he will accept no responsibility for it or state that it was given without the reflection and enquiry a careful answer would require. In such circumstances a duty of care might not be established if the defendant has excluded liability for any inaccuracy in the information or advice provided. 37 Whether an exclusion clause applies is a matter of construction and the contractual rules of incorporation must be considered. In Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd no duty of care arose because the 28 Woolcock Street Investments Pty Ltd v CDG Pty Ltd & Anor [2004] HCA 16 at Perre v Apand (1999) 198 CLR 180 at Ibid. 31 Ibid. 32 Ibid. 33 Woolcock Street Investments Pty Ltd v CDG Pty Ltd & Anor [2004] HCA 16 at Ibid. 35 Ibid. 36 Ibid. 37 Hedley Byrne & Co v Heller & Partners [1964] AC 465; Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556.

6 information or advice was given "confidentially" and "without responsibility". The House of Lords were unanimous that this disclaimer prevented any duty of care from arising. 38 This decision is important because it indicates there can be no duty of care imposed upon a person who, in voluntarily advising, effectively disclaims responsibility [1964] AC 465 at Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556.

7 Exclusion clauses Parties often insert exclusion clauses into contract because they are not willing to accept full responsibility for contractual breaches or and negligence on their part. There are three main types of exclusion clauses: those which limit liability altogether, those which limit a party s liability to a specific sum of money; and those which make liability limited to certain circumstances. These clauses are legitimate given the principle of freedom of contract. However, there are two important principles which must be met. The clause must be properly incorporated into the contract and must sufficiently cover the liability in question. Incorporation Unless the exclusion or limitation clause is incorporated into the relevant contract, it will be unenforceable. There are five main methods of incorporation: Signature Reasonable notice Course of dealing The acceptance of an offer made in a ticket Reference Signature The simplest way of incorporating an exclusion clause is to have the other party sign that contract containing the clause. A person who signs a contract containing an exclusion clause will be bound by it as an express term of the contract, even if they have not read it. 40 When a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not. 41 L Estrange v Graucob Ltd has been approved in Australia in Wilton v Farnworth 42 and considered by the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd. 43 Rights and liabilities regarding contracts are to be determined objectively rather than by the parties subjective intentions. 44 The test is what a reasonable person would understand the terms to mean given the surrounding circumstances. A reasonable person signing a contract recognises it is a legal document and by signing agrees to be bound by those terms. The principle applies if a person signs a contract that incorporates standard form general conditions. 45 However, the principle is subject to any vitiating factors such as whether there is equitable or statutory relief available, whether the clauses have been misrepresented to the party or in circumstances of non est factum. 40 L Estrange v F Graucob Ltd [1934] 2 KB [1934] 2 KB 394 at (1948) 165 CLR 197 at (2004) 79 ALJR (2004) 79 ALJR 129 at Ange v First East Auction Holdings Pty Ltd [2011] VSCA 335.

8 Reasonable Notice Issues arise regarding incorporation generally arise where there is no memorandum signed by the parties. In such circumstances the terms can be incorporated by way of reasonable notice. In such circumstances if the party did all that was reasonable in the circumstances to bring the clause to the attention of the other party, then that party will be bound by such a clause even if he or she did not read the term. 46 That person must additionally prove, given the circumstances, that the document containing the clause was not merely delivered to the recipient as merely a voucher or receipt. In Causer v Browne 47 a dry cleaning docket contained printed words on the front claiming no responsibility would be accepted for any loss or damage to garments however caused. However, the dry cleaners could not rely on this clause because in the circumstances the docket might reasonably be understood to be a voucher for the customer to pick up goods rather than form part of the contract. Unless a course of dealing can be established between the parties then notice must be given prior or contemporaneously with entry into the contract. 48 In Olley v Malborough Court Ltd [1949] 1 KB 532 the defendant could not rely on a sign in the hotel room excluding liability for negligence. The contract was entered into in the lobby when the client booked and paid for the hotel room and notice given after the contract has been made is ineffectual. 49 Course of Dealing Contracts are often entered into over the phone and dockets or sold notice containing terms are often provided when goods delivered or services are provided. If the person relying on the exclusion clause can prove that the dealings between the parties have been consistent and sufficiently long they can claim that knowledge of the exclusion clause can be interred and the customer will be considered to have received reasonable notice at some stage in those dealings even though has not trouble to read the clause. This was the case in Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association. 50 The plaintiff provided ground nuts to SAPPA in accordance with oral contracts. They provided deliveries three or four times per month. When the stock was delivered they handed over a sold note which said that conditions of sale where on the back of the notice. Such clauses were taken to form part of the contract. The dealings were sufficiently long and it was inferred that by the defendant s actions, accepting the goods and never objecting to the terms, he accepted to goods under the terms set out on the notice even though he had never actually bothered to read the terms. Ticket Cases Where a party makes an offer on a document, usually a ticket of some description, the other party s decision to keep the ticket indicates he has accepted the terms and entered the agreement. 51 The party relying on the ticket must give reasonable notice that the ticket is a contractual document Balmain New Ferry Co Ltd v Robertson (1906) 4 CLR379 at [1952] ALR Olley v Marlborough Court Ltd [1949] 1 KB 1 All ER 127; Oceanic Sun Line Shipping Co Inc v Fay (1988) 165 CLR Olley v Malborough Court Ltd [1949] 1 KB [1969] 2 AC McCutchen v David MacBraye Ltd [1964] 1 All ER Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163

9 However, the principle will not apply if there is no ability to reject the ticket and negotiate the terms. 53 Three questions are to be applied in ticket cases. Did the person receiving the ticket know there was writing on it? Did that person know that writing represented contractual terms? And finally, did the person relying on the terms adequately provide notice of the terms so as to bring it to the other party s attention? Provided the party provided reasonable notice it will not matter that the other party has not in fact read the terms on the ticket. Reference Parties may record the bare essentials terms of the contract in a document and the document may refer to and incorporate a set of terms such as standard terms of one of the parties. 54 The incorporated terms must be consistent with the other terms of the contract into which they are alleged to be incorporated. The written terms of the contract will prevail over any inconsistency in the incorporated provisions. 55 Does it clause cover the liability in question? Additionally the clause must cover the liability in question. Primary Rule In Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 the High Court observed that it had in the past authoritatively stated the approach to be adopted in Australia to the construction of exclusion clauses. Its view was that the decisions in Sydney City Council v West (see [123,020]); Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353: Clearly established that the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appeared including the nature and object of the contract, and, where appropriate, construing contra proferentemin case of ambiguity. However, in cases involving negligence it has been repeatedly said that the exempting clause must be construed strictly and that clear words are necessary to exclude liability. 56 To exclude liability for negligence it will be necessary to specifically use the word negligence. The law in Darlington Futures Ltd v Delco Australia Pty Ltd and Davis v Pearce Parking Station Pty Ltd have been referred to as the authorities dealing with the proper construction of exemption clauses in many subsequent cases. 57 ANGAS SECURITIES LTD (ACN ) and others v VALCORP 53 Ibid at Apioil Ltd v Kuwait Petroleum Italia SpA [1995] 1 Lloyd s Rep Sabah Flour and Feedmills SDN BHD v Comfez Ltd [1988] 1 Lloyd s Rep Davis v Pearce Parking Station Pty Ltd (1954) 91 CLR 642 at

10 AUSTRALIA PTY LTD (ACN ) [2011] FCA 190. and BestCare Foods Ltd & Anor v Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) & Anor [2011] NSWSC 908. Secondary rules designed to assist in the application of the primary rule The contra proferentem rule Where there is some ambiguity the clause and the clause cannot be interpreted according to its natural and ordinary meaning, the clause will be interpreted against the party who is relying on the clause. The words must clearly specify the type of liability which is excluded or else it will be read down by the courts. 58 The Four Corners Rule The four corners rule is stated in Gibaud v Great Eastern Railway Co [1921] 2 KB 426 at 435:... a condition absolving a party from liability, in particular exonerating a bailee from liability for the loss of the goods in his care, is construed as referring only to a loss which occurs when the party is dealing with the goods in a way that can be regarded as an intended performance of his contractual obligations. He is not relieved of liability if, having obtained possession of the goods; he deals with them in a way that is quite alien to his contract. This rule was accepted by the Australian High Court in Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 at 377. The rule applies when there is a grave breach of the contract. An exclusion clause will not cover an act that is neither authorised nor permitted as the main object of the contract. In The Council of the City of Sydney v West (1965) 114 CLR 481 the Council could not rely on the exclusion clause when the plaintiffs car was stolen from the Domain car park. Read strictly the exclusion clause did not cover the Council conduct and they were held liable. however, recourse to this principle of construction may be defeated where the language of an exclusion clause is sufficiently explicit to establish, on the literal reading, that the clause was intended to excuse conduct that lay outside the four corners of the contract. 58 White v John Warrick & Co Ltd [1953] a All ER 1021