Introduction
In the commercial world, statements and advice are frequently provided by corporate entities during pre-contractual negotiations. When these statements are inaccurate and made without due care, they can cause significant financial loss to the party that relies on them. This raises the question of how corporate entities, which are legal fictions that act through human agents, can be held responsible. This essay will explain the legal principles governing the liability of corporate entities for negligent misrepresentation in England and Wales. It will outline the two primary legal avenues for a claimant: the common law action for negligent misstatement established in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 and the statutory action under section 2(1) of the Misrepresentation Act 1967.
Common Law Negligent Misstatement
The House of Lords' decision in Hedley Byrne created the modern tort of negligent misstatement. Prior to this, recovery for pure economic loss caused by a negligent statement was generally not permitted. The case established that a duty of care could arise where a 'special relationship' exists between the person making the statement and the person to whom it is made. For a corporate entity to be liable under this principle, several criteria must be satisfied.
Firstly, there must be an assumption of responsibility by the company, through its employee or agent, for the advice or information given (Hedley Byrne, p. 529). This is often inferred where a business with special skill provides information to a party who it knows will rely upon it. Secondly, the claimant must have reasonably relied on that information and, thirdly, suffered a loss as a result. A corporate entity becomes liable when an employee, acting in the course of their employment, makes a negligent statement to a third party. The law attributes the employee’s actions to the company under the principle of vicarious liability, meaning the company itself is held responsible for the tort committed by its employee (McKendrick, 2022). Therefore, if a company's sales director provides incorrect financial projections to a potential business partner, and the director failed to take reasonable care in preparing them, both the director and the company could be found liable for the resulting losses.
Statutory Misrepresentation under the Misrepresentation Act 1967
A more commonly used route for claimants is the Misrepresentation Act 1967, specifically section 2(1). This provision creates a statutory right to damages for a misrepresentation that induces a party to enter into a contract, unless the representor can prove they had reasonable grounds to believe, and did believe up to the time the contract was made, that the facts represented were true.
The key advantage of section 2(1) for a claimant is the reversal of the burden of proof. Unlike in a common law claim, the claimant does not have to prove that the company was negligent. Instead, the company has the difficult task of proving that it was not negligent. The case of Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574 demonstrates how high this hurdle can be for a corporate defendant. In that case, an employee of the defendant company incorrectly stated the carrying capacity of two barges. The employee had based this information on his memory of a document which was itself incorrect, rather than checking the ships' official registration documents which were held at the company's head office. The Court of Appeal held that the company had not established reasonable grounds for the belief, as a reasonable manager would have checked the official documents. This illustrates that a company cannot escape liability simply because its employee genuinely believed the statement; the grounds for that belief must be objectively reasonable.
Conclusion
In summary, a corporate entity can be held liable for negligent misrepresentation through two distinct legal pathways. At common law, under the principles of Hedley Byrne, liability is established by proving a special relationship, an assumption of responsibility by the company’s employee, and reasonable reliance by the claimant. The company is held liable through the doctrine of vicarious liability. Alternatively, and more frequently in a contractual context, a claim can be brought under section 2(1) of the Misrepresentation Act 1967. This route is often more favourable to claimants, as it places the burden on the corporate entity to demonstrate it had reasonable grounds for believing its statement was true, a standard which, as seen in cases like Howard Marine, can be difficult for a company to meet.
References
- Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.
- Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574.
- McKendrick, E. (2022) Contract Law. 15th edn. Palgrave Macmillan.
- Misrepresentation Act 1967.
