Introduction
Historically, the law of contract provided the primary route for a person to seek a remedy for losses caused by a professional. The doctrine of privity of contract meant that only parties to an agreement could sue upon it, creating a barrier to claims from third parties. However, the development of the tort of negligence has established that in certain circumstances, a professional can indeed be liable for losses suffered by a person with whom they have no contractual relationship. This liability typically arises in cases of negligent misstatement causing pure economic loss, and is founded upon the principle of an "assumption of responsibility" by the professional towards the third party. This essay will explain the development and application of this principle.
The Principle of Assumed Responsibility
The traditional reluctance of the courts to impose a duty of care for pure economic loss was overturned by the House of Lords in the landmark case of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. In this case, the claimants, an advertising agency, asked their bank to obtain a credit reference for a potential client from the client’s bank, Heller & Partners. Heller provided a favourable reference but included a disclaimer stating it was given "without responsibility". The claimants relied on this reference, entered into contracts, and suffered financial loss when the client went into liquidation. Although the claim ultimately failed due to the disclaimer, the House of Lords established the crucial principle that a duty of care could arise in the absence of a contract.
Lord Morris stated that a duty could exist where a person with a special skill undertakes to apply that skill for the assistance of another person who relies upon it. This creates a "special relationship" between the parties, which is the foundation of the duty. This relationship is defined by two key elements: a voluntary assumption of responsibility by the party giving the advice or information, and reasonable reliance on that advice by the party receiving it (Horsey and Rackley, 2021). The professional must know, or ought to know, that the recipient is likely to rely on their statement, and it must be reasonable in the circumstances for the recipient to do so.
The Modern Approach and its Limits
The principles established in Hedley Byrne have been refined in subsequent case law, most notably in Caparo Industries plc v Dickman [1990] 2 AC 605. In Caparo, the claimants were investors who relied on a company’s statutorily required audit, prepared by the defendant auditors, to purchase more shares and launch a successful takeover bid. When the company’s profits were found to be much lower than stated, Caparo sued the auditors for their losses. The House of Lords held that the auditors owed no duty of care to Caparo, either as potential investors or as existing shareholders wanting to purchase more shares.
The court reasoned that for a duty to arise in such cases, the defendant must have been aware of the specific transaction for which the advice was required and the identity of the person who would rely on it. The audit in Caparo was prepared for the existing body of shareholders as a class to enable them to exercise their oversight functions in a general meeting, not for individual investors to use for their private investment decisions. Lord Bridge noted that to find a duty in these circumstances would expose professionals to liability "in an indeterminate amount for an indeterminate time to an indeterminate class". This highlights the judicial concern over opening the "floodgates" to an unmanageable number of claims. Therefore, while Caparo is also known for its general three-part test for duty of care (foreseeability, proximity, and fairness), in the context of negligent misstatement, the courts often use the Hedley Byrne "assumption of responsibility" test as the primary tool for determining proximity.
Conclusion
In conclusion, a professional person can be held liable for negligence to another person with whom they have no direct contractual relationship. The law has moved beyond the constraints of privity of contract to allow for such claims in tort. However, this liability is not automatic or unlimited. The claimant must establish that a "special relationship" existed, as defined in Hedley Byrne. This requires showing that the professional voluntarily assumed responsibility for their statement, knowing that the claimant would rely on it for a specific purpose, and that the claimant's reliance was reasonable. The courts, as demonstrated in Caparo, remain cautious about extending this liability too far, carefully balancing the need to compensate for negligently inflicted loss against the public policy of protecting professionals from potentially ruinous and indeterminate liability.
References
- Caparo Industries plc v Dickman [1990] 2 AC 605.
- Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.
- Horsey, K. and Rackley, E. (2021) Tort Law. 7th edn. Oxford University Press.
