1.

Introduction to Tort Law

Tort liability can be imposed in many instances that include negligent behaviour
towards a person or land, negatively affecting a person’s reputation or limiting
freedom of movement. This module will aim to explain and take you through how
and why liability can be imposed on a defendant, giving you an in-depth
understanding of the nature of tortious liability.

There are many torts that will be discussed in this module. They include, for example,
libel, slander, nuisance, negligence, trespass, assault and battery. Thus, it is not
possible to provide one definition that encompasses all torts, considering how each
tort has its own specific characteristics. It is, therefore, best to think of the law of tort
as the law of behaviour that is legally ‘wrong’ or ’tortious’, giving rise to an
entitlement to a remedy for the claimant.

Whilst it may not be possible to precisely define what tort is, various principles can
be identified that help establish when a tortious liability arises. It has to be noted,
however, that there is no predominance of any one principle. The principles that can
be turned to are:

 Compensation
 Fault
 Retributive justice (punishment)
 Deterrence
 Economic efficiency
 Loss distribution

Tort law also aims to protect individual interests from a harm that is actual or
threatened. However, not all interests are protected and some benefit from better
protection than others. This is as a result of the importance of an interest reflected by
society through the years. The interests protected include:

 Personal harm
 Harm to property
 Harm to reputation
 Harm to financial interests
 Harm to the due process of law
2.1.1 Duty of Care - Introduction
Welcome to the first lesson of the second topic in this module guide – Negligence!
Duty of care constitutes the first of the three primary elements of tort (duty of care,
breach and causation). Although the term ‘duty of care’ can seem a little alien at first,
it can roughly be thought of a responsibility of an individual to not harm others
through carelessness. To establish a duty of care the  Caparo three-stage test must
be applied.

At the completion of this section, you should be comfortable understanding how to

apply the  Caparo three-stage test to establish whether a duty of care is owed. You
will understand the development of the duty of care and the exceptions to owing a
duty of care. This will enable you to deal with different factual scenarios effectively.

This section begins by discussing what a duty of care is and how the law in this area
developed, leading to the current law and the  Caparo three-stage test and how this
test is applied. It then goes on to discuss specific exceptions, and surrounding factors
influencing the outcome of different factual circumstances in finding duty of care.

Goals for this section

● To understand how to establish whether a duty of care is owed using

the  Caparo three-stage test.

● To understand how to deal with the exceptions to duty of care.

Objectives for this section

 To be able to define duty of care.

 To understand the development of duty of care.
 To be able to outline the  Caparo three-stage test.
 To know the exceptions and special situations.
 To understand how to deal with duty of care and third party actors.
 To understand how duty of care operates in the Public Service and how
immunity applies.
 To be able to understand how and why duty of care applies with Special
Claimants.

2.1.2 Duty of Care Lecture

Duty of Care

What is a ‘Duty of Care’?

Although the term ‘duty of care’ can seem a little alien at first, it can roughly be
thought of as the responsibility of an individual to not harm others through
carelessness.

The Development of the Duty of Care

The legal basis for finding a duty of care has its roots in Donoghue v Stevenson [1932]
AC 562. Although, as will be noted below, there exists a more modern test to
establish a duty of care, Donoghue v Stevenson  provides the theoretical basis for the
duty of care, and thus modern negligence, and so it is necessary to be familiar with
the case.

Key to the decision  in Donoghuev Stevenson is the reasoning of Lord Atkin (who led
the majority of the court). Atkin held that a general duty of care could be said to exist
between two parties under the ‘neighbour principle’, described in this key quote:

“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 into question.”

 Lord Atkin, Donoghue v Stevenson, at 44.

However, Lord Atkin’s description of the neighbour principle is relatively broad in

scope, and is thus inclusive of a wide range of situations. As a result of this, a number
of cases subsequently sought to limit the application of the neighbour principle, such
as limiting it to cases involving physical harm or damage to property (Old Gate
Estates Ltd v Toplis & Harding & Russell[1939] 3 All ER 209).

Following these restrictions, the law once again returned towards the application of a
universal principle, with Anns v Merton London Borough[1978] AC 728 establishing a
two-part test similar to the one employed in Donoghue.

The Current Law: The Caparo Test

The Caparo test is made up of three stages: foreseeability, proximity and fairness.

This first stage revolves around whether it is foreseeable that the defendant’s
carelessness could cause damage to the claimant. A prime example of foreseeability
can be seen in the US-based case of Palsgraf v Long Island Railroad Co [1928] 248
N.Y. 339. In the case, although it was possible to trace the claimant’s injuries to the
defendant’s negligence, in applying a test of foreseeability, the courts found that it
was not foreseeable that the claimant would be injured.
The second stage is based on whether there is a relationship of proximity between
the defendant and the claimant. This does not dictate that there must be physical
proximity, rather that there must be a connection between the two. An example of
proximity (or, rather, a lack of proximity) can be seen in Alcock v Chief Constable of
South Yorkshire Police[1991] UKHL 5 – members of the general public coming across
the aftermath of the Hillsborough disaster and suffering nervous shock as a result
were held to not be owed a duty of care, because the link between the defendants
and claimants was held to be too distant.

The third and final stage of Caparo involves establishing whether it would be fair,
just and reasonable for the courts to find that the defendant owed a duty of care to
the claimant. Owing to the vague nature of this criteria, this stage can be thought of
as somewhat of a ‘safety valve’, allowing judicial discretion in cases where public
policy might dictate that it would be unreasonable for a duty of care to be held to
exist- Marc Rich & Co v Bishop Rock Marine Co Ltd[1995] UKHL.

So, if all three of these stages are passed, the case can be said to have satisfied
the Caparo test, and thus a duty of care can be said to exist.

Exceptions and Special Situations

Liability for Omissions

Whilst a driver has a duty to not cause an accident through carelessness, they do not
have a duty to help those involved in an accident they happen to come across. The
principle of non-liability for omissions can be seen at work in Stovin v Wise[1996]
UKHL 15. Non-liability also extends to warning – there is no general duty to warn
someone of a harm.

There are some exceptions to the rule. The law provides three general groups of
scenarios where an individual has a duty to act – where the defendant has control of
a situation, where the defendant has assumed responsibility, and where the
defendant has created or adopted a risk.

Control situations arise where a defendant has a high degree of control over an

individual (and thus is held as owing a duty to exercise that control responsibly. For
example, in Reeves v Commisioner of Police for the Metropolis[2000] 1 AC 360 the
police were held responsible after an inmate on suicide-watch was able to kill
himself.

Assumption of Responsibilitysituations involve, as might be expected, scenarios

where one individual implicitly takes on a duty of care by merit of a contract or
employment. For example, in Costello v Chief Constable of Northumbria Police[1998]
EWCA Civ 1898 it was held that by merit of their joint employment, one had a duty of
care to the other to act to prevent foreseeable harm from occurring.

Creation or Adoption of a Risk situations arise where a defendant creates a

dangerous situation (including accidentally.)- Capital & Counties plc v Hampshire
County Council[1997] 3 WLR 331.

Duty of Care and Third-Party Actors

For the vast majority of cases, the actions of third parties will not impart liability on
claimants, and will usually be held as a novus actus interveniens,  as per Home Office v
Dorset Yacht Co Ltd[1970]. Thus, the general rule is that there is no duty of care to
prevent a third party’s actions. However, there are exceptions to this rule, laid down
in Smith v Littlewoods[1987] UKHL 18. These exceptions include where there is
a special relationshipbetween claimant and defendant, where there is a special
relationship between defendant and third party, where the defendant creates
a source of danger and where the defendant fails to take steps to deal with a
known danger created by a third party.

Duty of Care and Public Service Immunity

Overall, the stance of the courts is that public services do not have a duty of care
towards individuals. This can be thought of in terms of the ‘fair, just and reasonable’
part of Caparo – essentially the courts are remiss to find that public services (e.g.
police) have a duty to do a particular thing because this would have a negative effect
on those services overall. Furthermore, allowing public services to be sued would
cause significant resources to be put into defending the case, reducing the ability of
that service to serve the general public. Compensation would be paid out of public
service coffers, essentially allowing individual claimants to acquire tax payers’ money.

Special Claimants

Finally, there are certain set situations in which a duty of care will be imposed, even if
it would traditionally be legally unfeasible- Pre-natal Injuries:Burton v Islington Health
Authority[1993] QB 204, and Rescuers: Ogwo v Taylor [1988] AC 431 .

2.1.3 Duty of Care Lecture - Hands on

Example
Scenario

Jack is the owner and sole employee of a small private nursery called Little Wonders.
Following an economic downturn, Jack decides that the best way to promote his
business would be through establishing a stellar safety record. Although Jack had a
mandatory state safety inspection last year, Jack decides to have a private safety
audit carried out, in order to emphasise just how safe his nursery is. He decides to
employ Marla, who has set up her own nursery safety regulatory body – Sure Safe.
Marla, inspects the nursery, and gives it the highest safety rating possible. During the
inspection, she checks a child-proof gate used to prevent children from leaving the
building and wandering out into the streets. She declares it to be safe.

The next day, Jack is temporarily distracted by an urgent phone call, and Tyler (a 3-
year-old boy) decides to mount an escape attempt. It emerges that the catch holding
the child-proof gate closed has become worn out through lack of maintenance, and
with the lightest of pulls, the gate opens. Tyler leaves the nursery and walks around
the corner. He finds a lighter which has fallen out of someone’s pocket, and in
playing with it, accidentally starts a fire which spreads to a nearby warehouse.

A passer-by, Robert, notices the fire and calls the emergency services. The dispatcher
tells the passer-by that a fire engine is on its way. Unfortunately, the dispatcher fails
to send the call through to the local fire service, and the fire engine is not dispatched
until 30 minutes later, when the dispatcher notices the mistake. It is a particularly
quiet day, and so all fire engines in the area are ready to go, and waiting at the local
station.

Shortly after making the call, Robert notices that on the outside of the building there
is a large red button, marked ‘Oil Fire Sprinkler Activation’. He thinks this would help,
and the button is far away from the fire, but he refuses to press it – he decides the
warehouse is ugly, and so thinks that it would be nice if it was no longer there.

In the meantime, the warehouse suffers significant fire damage. When the fire
brigade does arrive, they fail to notice the bright warning stickers on the warehouse’s
exterior warning that it is used to house cooking oil. They spray the warehouse with
water, which reacts violently with the burning cooking oil, causing the warehouse to
burn to the ground within a matter of minutes.

You are interning at a solicitors and your supervisor brings the above set of facts to
you. They want you to discuss the duties of care which might arise between those
parties. You are told to not discuss matters of causation, breach or remoteness – your
supervisor will address these herself, but does not have time to examine the arising
duties. She tells you that there are five relationships she wants you to deal with.

1.Does a duty of care exist between Jack and the Warehouse Owner?

2.Does a duty of care exist between the Fire Service Dispatcher and the Warehouse
Owner?
3.Does a duty of care exist between the Fire Service and the Warehouse Owner?

4.Does a duty of care exist between Marla and the Warehouse Owner?

5.Does a duty of care exist between Robert and the Warehouse Owner?

1)Jack does not cause the fire himself, instead it is a third party (Tyler) who causes
the fire. This is, therefore, a matter of third-party action. Jack clearly has control over
the third party – Tyler – and it is his job to ensure that Tyler is both safe and acting
safely. This brings it under Home Office v Dorset Yacht Club, meaning that a duty of
care exists between Jack and those harmed by Tyler’s actions should Jack fail to
supervise him properly. It can be argued that under the Caparo test, it is not
foreseeable that Tyler might start a fire. This can, therefore, be argued either way
(although a child starting a fire by accident, when unsupervised, is not a great
stretch.)

2)The emergency services line is a public service, and thus a number of specific rules
apply. It should be noted that a general immunity applies, and so the presumption is
that no duty applies. However, this presumption is rebuttable, and the fire
dispatcher’s actions mirror those Kent v Griffiths. They promise the response of the
fire services, but then fail to follow through with that promise. There is no question of
the outcome of the failure to dispatch – all of the fire engines are available, so the
only thing stopping them from attending is the mistake of the dispatcher. Because
this is an overwhelming failure of the dispatcher, a duty of care can be said to exist.

3)The fire service itself can also avail itself of public service immunity – it has no
general duty to

those it serves. However, the fact that it attends and makes matters worse though
obvious incompetence will serve to rebut this presumption as per Capital & Counties
plc v Hampshire County Council.

4)Marla is acting as regulatory body. However, there is no indication that she is

acting as a public regulatory body, and indeed, it is indicated in the question that she
is acting in a purely private capacity – there is already a safety inspectorate in
operation, and she is merely supplementing it. This means that Marla will be unlikely
to avail herself of public service immunity, distinguishing her situation from Marc
Rich & Co AG v Bishop’s Rock Marine Co Ltd, The Nicholas H. Caparo  can be argued
either way – that it is foreseeable that mischief might occur should Marla negligently
evaluated the safety gate, or otherwise that it is not

5)Although it is easy and safe for Robert to act, he refuses to. This makes the duty a
matter of omission. Under Stovin v Wiseno duty will arise from an omission, and so
Robert is not required to act to avoid liability.
2.2.1 Economic Loss Lecture - Introduction
Welcome to the second lesson of the second topic in this module guide – Economic
Loss! Economic loss that is not linked to physical damage will generally not be
recoverable under negligence. Such loss is of importance to many commercial and
professional sectors, and the ability to distinguish between pure in-actionable
economic loss, and actionable consequential economic loss, will be invaluable to
answering problem questions in this area.

At the end of this section, you should be comfortable understanding that which
counts as pure economic loss, and as such is generally not recoverable under tort.
You will understand the three exceptions to this general rule, and be able to apply
such exceptions to various scenarios that may arise. You should also have a good
understanding of why the law operates to either include or exclude liability for
various types of economic loss.

This section begins by defining pure economic loss, and the reasons why the law
restricts the recovery of such loss. It then goes on to discuss the first of the
exceptions to this general exclusion; economic loss due to physical damage. After
discussing the operation of this exception, the next category is discussed; economic
loss due to negligence causing a claimant to acquire defective goods or property.
Finally, the third exception, economic loss due to negligent misstatement, is
discussed with reference to the conditions required for a successful claim in this area.

Goals for this section:

 To be able to define pure economic loss, and justifications for the restriction of its
liability under negligence.
 To understand which types of economic loss will be recoverable, as exceptions to the
general rule, and why this is so.

Objectives for this section:

 To understand why tort restricts economic claims under negligence.

 To know the exceptions to the general exclusion of liability for pure economic loss.
 To be able to establish when economic loss is directly linked to physical damage.
 To understand when or why liability for economic loss resulting from defective goods or
property may arise.
 To understand the development of the law with regard to the recoverability of economic
loss due to negligent misstatement.
2.2.2 Economic Loss Lecture
What is a ‘Pure’ Economic Loss?

Not all foreseeable losses stemming from negligence are recoverable. Economic
losses are treated in a significantly different manner than damages for injury or
property damage. This is largely because of the self-limiting manner of injury and
property damage. For example, a negligent driver who creates an accident will only
cause so much physical harm – eventually the cars involved will come to a stop, no
further harm will stem from the driver’s negligence.

Economic damage however, is far less easy to quantify, can grow out of proportion
very quickly. Consider a situation in which a driver takes out an electricity pylon
supplying a small village. If economic harm was recoverable, then the driver could be
liable for the loss of business of every shop and business run from that village.
Perhaps one of those businesses failed to make a sale, which in turn would have
given it the ability to invest in a stock which consequently took off, meaning that
even a relatively small economic loss could be linked to a huge loss in potential
profits. In combination with various economic phenomena like compound interest,
our negligent driver has the potential for almost infinite liability. Whilst this might
satisfy a desire for absolute justice (indeed, those business owners affected by the
power outage are not at fault), this is clearly an untenable situation. No insurer would
be able to cover such a loss, and it would consequently become impossible to
purchase effective insurance to cover this liability. As such the law places significant
limits on the recovery of pure economic losses.

The presiding rule is therefore that pure economic loss is not recoverable – that is,
economic losses which cannot be directly traced back to harm to a person or
property. However, there exists three primary exceptions to this rule: where the loss
is based on physical damage to the claimant’s property, where the negligence
act causes a claimant to acquire defective goods or property, or when economic
loss stems from negligent misstatement. It should be noted that the ‘usual’ rules of
negligence still apply here, so there must still be a duty of care in line with Caparo, a
breach of duty, and that breach must have caused the loss.

Economic Loss Due to Physical Damage

Where an economic loss stems from physical damage to a product or equipment,

then it is recoverable. This principle is best understood by looking at the leading
precedent of Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd  [1973] 1 QB
27.
Case in Focus: Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd[1973] 1 QB
27.

The claimant ran a smelting business from its factory, taking scrap metal, and melting
it down in order to purify it. It should be noted that this process took some time, and
that if interrupted half-way through, the metal would re-solidify, leaving a sub-par
product as well as damaging the involved furnaces. The defendants were digging
with an excavator nearby when they damaged a cable supplying electricity to the
claimant’s factory. This cable was not owned by the claimants. The claimant’s factory
consequently had to shut down for 15 hours. As a result, Spartan suffered three
harms (and attempted to claim for all three.)

1) During the power outage, the factory’s furnaces shutdown mid-melt, causing half-
processed steel to solidify. This meant that the furnaces were damaged and the steel
was unusable. The first harm was therefore the harm caused to the furnace and the
damage to the steel.

2) Spartan intended to sell the steel which was damaged by the power outage at a
profit. The second harm was therefore the loss of profit because Spartan could not
sell it at full price.

3) Spartan claimed that it was unable to process steel during the power outage. Had
the power supply been uninterrupted, it would have started another steel melt, which
would have brought the factory more profit. The third harm was therefore the loss of
profit due to the factory’s non-operation.

The first harm was unproblematic – the contractors were held to have a duty of care
to the factory owners which was breached. This resulted in physical harm to the
furnaces and the steel, and was thus recoverable. This should not be surprising – if a
driver negligently drives through a shop window, then they will be held liable for the
cost of replacing the shop window and any stock they damaged, and the same
principle applies here.

The second harm was also held to be recoverable – although lost profits are an
economic harm, it was held that the lost profits were a direct result of damaging the
steel. Thus in our above example, the driver would not only be liable for the cost of
replacing the damage stock, but also for the loss of profits on that stock. So, if the
stock cost £500 to buy, but would have been sold for £1000, then the driver would
be liable for the full amount - £500 costs plus £500 profit.

The third harm was not held to be recoverable. It was purely economic in nature –

nothing had directly affected the steel which would be melted in the future, and so
this was an attempt to claim a purely economic loss. This would be the equivalent of
the shopkeeper claiming for the profits which were lost during time spent repairing
the shop and is not recoverable.

Exam Consideration: The distinction made between the different harms

in Spartan  is important – the rule is that economic loss stemming directly from
physical harm is recoverable. You should ask what has been damaged in a given
situation, and limit recoverable economic harm to the cost of replacement (or repair)
plus lost profits, but only from the damaged property. It should also be noted as a
general exception that where a case involves physical harm to a claimant, then lost
earnings are recoverable; but this should be considered to be a symptom of tort
law’s habit of proactively compensating claimants for personal physical harm, rather
than as a part of the law regarding pure economic loss.

Economic Loss Due to Negligence Causing a Claimant to Acquire Defective

Goods or Property

As a general rule, tort will not compensate for the economic loss of receiving a
defective product. There have been some cases which appear to ignore this rule,
however. These should be treated cautiously as an eccentricity, rather than as
evidence of any ongoing rule or legal principle, particularly since they have since
been overturned. Nonetheless, they represent an important, if temporary, exception
to the rule on pure economic loss.

Before describing the law in this area, it is worth noting the position of tort law on
defective products. As a rule, it is not possible to recover damages in tort for a
defective product. So, if someone sells you a new car which you expect to have a fuel
consumption of 40 miles per gallon, but due to a fault it only gets 20 miles per
gallon, that is not recoverable in tort. A helpful distinction between property damage
and property defect can be that damage involves hurting the quality of a product,
whereas defect involves a product being created in a damaged form. For example, if
someone damages your new car in an accident, the quality can be described as
going from 10/10 to 8/10. However, if someone sells you a new car and it is
defective, you receive an 8/10 car in the first place. There’s no direct damage by the
seller, the car doesn’t ‘lose’ anything: it has just always been of a sub-par quality. Its
resale value will be harmed however, meaning you lose money down the line – an
economic loss. Tort is prepared to deal with damage and harm, but leaves it to
contract law to deal with defective products. However, contract law will often fail to
cover all eventualities. In particular, it is not always the parties to a contract who will
be harmed by a breach, and so the rule of privity of contract will prevent the injured
party from bringing a claim in contract law. This somewhat explains law’s position on
defective property – the desire to fill in a gap left by contract law.

The primary case in this area is Anns v Merton London Borough Council[1978] AC 728.
Case in Focus: Anns v Merton London Borough Council  [1978] AC 728. The defendant
(a local council) negligently approved plans for a block of flats which contained
foundations which were too shallow (furthermore, the defendant failed to inspect the
foundations during construction.) As a result several defects emerged in the
properties built on the foundations, such as cracks in the walls and the sloping of
floors. This meant that the claimants had to spend money correcting the fault. No
physical harm to person or property was caused by the negligence, meaning that the
damage was purely economic. Nonetheless, the courts ruled that negligence had
occurred, causing the claimants to acquire faulty property – the economic loss here
can be thought of as the difference in value between a flat in a safe condition, and
one which has poorly designed foundations and is therefore unsafe.The courts ruled
that a duty of care existed between the defendants and the claimants to exercise
appropriate skill when inspecting the plans. The loss was held to be recoverable as a
result:

“what is recoverable is the amount of expenditure necessary to restore the dwelling

to a condition in which it is no longer a danger to the health or safety of persons
occupying and possibly (depending on the circumstances) expense arising from the
necessary displacement”

 Lord Wilberforce, at 759.

This principle was applied similarly in  Junior Books Ltd v Veitchi Co Ltd[1983] 1 AC
520. The defendants negligently laid the flooring of a newly constructed factory. This
meant that the floor had to be replaced before it could be used. The claimants
therefore sued for the cost of replacing the floor, and the profits lost whilst the floor
was re-laid. The claimants were successful, and recovered for lost profits.

The basis for these exceptions can be thought of as a type of ‘preventative

compensation’ – rather than waiting for someone to be injured by a faulty building
and then suing, the courts appear to have decided to make the cost of repair
recoverable, before injury or damage has occurred.

However, Anns  was overruled in Murphy v Brentwood District Council[1991] 1 AC 398

– making Murphy  the leading case. Again, a council approved faulty plans for some
buildings. The resulting properties developed cracks, causing a loss of value in the
buildings. The courts ruled that this was not recoverable – it was purely an economic
loss, nothing was damaged and nobody was hurt, and so the only harm was
receiving a building with a lesser value.

Usefully, in  Murphy, Lord Bridge points out the reasoning behind ‘preventative
compensation’ of the type seen in Anns  and Junior:
“If a building stands so close to the boundary of the building owner’s land that after
discovery of the dangerous defect it remains a potential source of injury to persons
or property on neighbouring land or on the highway, the building owner ought, in
principle, to be entitled to recover in tort from the negligent building the cost of
obviating the danger, whether by repair or demolition, so far as that cost is
necessarily incurred in order to protect himself from potential liability to third parties.

 Lord Bridge, at 926

In essence, Lord Bridge is pointing out the odd nature of having a legal principle
which dictates that someone must be injured by a negligently constructed building
before the builder might be sued in tort, rather than one which states that tort
should act proactively to prevent the damage from occurring in the first place.

Exam Consideration: Although overruled or otherwise ignored by the English law

currently, Anns and Junior represent a distinct departure from the status quo. It is
important to be aware of it when discussing the theory of economic loss.
Furthermore, the position in Anns remains influential in number of commonwealth
jurisdictions where it has not been overturned.

In practical situations (i.e. problem questions) it will largely be sufficient to note that
whilst the Anns  and Junior exception exists, Murphy  takes precedence, and so it is
unlikely that recovery for the acquisition of a defective product will be possible. This
should not be regarded as a complete oversight – never forget that contract law
exists to deal with products and transactions! At the same time, privity of contract
prevents a certain proportion of claimants with no legal recourse, demonstrating the
reasoning behind the law’s deviation in this area.

Economic Loss Due to Negligent Misstatement

Finally, there exist a category of cases involving economic loss due to negligent
misstatement.

Case in Focus: The leading case here is Hedley Byrne & Co Ltd v Heller and Partners
Ltd[1964] AC 265. The claimant was a marketing company which 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 of a recoverable nature. 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 in fact not road-worthy. Thus, 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 Cornish Bank 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’ is effectively saying ‘I do
not assume the risk of misadvising’.
3. There must be reliance on the advice by 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 with regards to 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.
There are a number of other specific situations which can arise with regard to
negligent misstatement. Firstly, the claimant does not have to be the individual who
has commissioned the advice in the first place – although the claimant must still be
in the mind of the defendant. Thus, in Smith v Eric S Bush[1990] 1 AC 831 the
claimant sought a mortgage on a house, and the mortgage company employed a
surveyor to check for structural defects. The surveyor acted negligently, and failed to
notice such defects. The claim was upheld. Although the claimant was not the
primary recipient of the report (the mortgage company was), she was held to still
have a viable claim – it would take no great stretch of the imagination for a surveyor
to realise that mortgage companies do not survey houses for fun, but rather in order
to work out the viability of a house as security on a mortgage. In turn, this means,
logically, that a potential buyer exists who will foreseeably rely on the structural
report.

Secondly, it is rare that a widely disseminated statement will meet the threshold for
negligent misstatement, especially where the claimant is using the misstatement for
a purpose other than that which it is designed for. This can be seen
in Caparo (discussed in detail in the Duty of Care chapter) – the defendant’s
evaluation of the company was for the purposes of informing current shareholders of
the company’s status, rather than enabling third-parties to work out the viability of a
takeover. Thus, because the claimant used the report in a non-ordinary manner, the
claim failed. The same principle can be seen at work in Mariola Marine Corporation v
Lloyd’s Register of Shipping[1990] 1 Lloyd’s Rep 547 – the claimant relied on a report
from the defendant stating that a yacht was in a good state or repair, buying it. In
actual fact, the yacht had severe corrosion, devaluing it. Because the original report
was only intended to denote seaworthiness, rather than economic value, the claim
failed.

It should be noted that this point is not entirely intuitive – third parties often use
audits of the nature used in Caparo  to work out whether a company is a viable
purchase, and it is arguably foreseeable that a third party will use a yacht safety
report in order to work out whether a yacht is a good purchase or not. Thus, this rule
should be regarded as somewhat of a legal fiction. Notably, this principle will not
stand, however, should the defendant know of the claimant’s intentions. Thus,
in Morgan Crucible Co v Hill Samuel & Co[1991] Ch 295 the defendant widely
disseminated a negative report on its own financial state as a means of dissuading a
takeover bid from the claimant. The report was later found to be inaccurate. The
claimants sued and won – although the report was disseminated widely, the
defendants knew that the claimants would use it to determine the viability of its bid.
So, specific knowledge of a claimant’s intentions will defeat the rule against imposing
liability for widely disseminated misstatements.

Thirdly, there exists a legal oddity in the form of cases regarding ‘negligent silence’.
Such situations are not beyond imagination – if you always received advice from
someone before you made a bad decision, it would not be unreasonable for you to
assume that silence from that person would imply that the decision you are making
is good. However, the law has stopped short of imposing a duty to avoid silence in
such situations. See  Banque Keyser Ullman (UK) Insurance Co v Skandia  [1991] 2 AC
249, in which (obiter) it was stated that there was nothing, in principle, preventing
silence from giving rise to negligent misstatement liability. However, it is important
to note that ultimately, liability was not imposed in the case, primarily because such
an approach would run contrary to the contract law on silence in negotiations.

Fourthly, negligent misstatement can occur where the defendant is a public

authority. However, as noted in the chapter on duty of care, it should be assumed as
a starting point that liability will not be conferred. An example of where it will be
however is seen in Welton v North Cornwall District Council [1997] 1 WLR 570. A food
health inspector inspected the claimant’s guest house, and noted a number of
changes that the guest house must make to avoid being shut down. After making
these changes (at significant expense), the claimant discovered that many of them
were not actually required. The claimant sued for negligent misstatement and won.

This can be contrasted with Harris v Evans [1998] 3 All ER 522, in which a safety

inspector declared that a crane used for bungee jumping had to be officially certified
for that purpose. The claimant objected, and was issued a prohibition notice,
preventing the claimant from operating. It emerged that the inspector was wrong,
and so the prohibition notice was wrongly issued. The courts held that Parliament
could not have ever intended for safety inspectors to be liable for mistakenly over-
applying legislation, and so the claim failed. Notably, however, the courts held that
liability might arise should an inspector give bad advice which resulted in a new
danger being created. Thus, a distinction can be seen between a scenario in which a
local authority acts to make a situation too safe, and one in which it acts to make a
situation less safe.

Therefore, liability for misstatement can be seen to apply where public bodies are
involved but they act in a way which is not consummate the purposes of their
empowering legislation. Consider the difference between the two cases – in the
former, the claimant unnecessarily spent money because the defendant advised that
it was compulsory to do so. The purpose of the statute giving the food inspector
power was to ensure a basic standard of food safety was met, but the misstatement
caused the claimant to go far beyond that standard. It is unlikely that parliament
intended for

In contrast, the statute giving the safety inspector power was misapplied, but it
would not be sensible to have safety inspectors worry about making things too safe
– this would run contrary to the statute. It should also be noted that the relevant
statute included its own appeals process for prohibition noticed – this meant that
there was already a remedy in place for the claimant, both lessening the need for a
remedy in tort to apply, and implying that Parliament knew of the risk of overeager
enforcement, and so created a process to deal with it.

Exam Consideration: Negligent misstatement is a favourite area for problem

questions because it tests both your general knowledge of negligence, as well as
niche knowledge of the Hedley Byrne criteria, and the further sub-rules regarding
third-parties etc. Its importance should therefore not be underestimated. 

It also indicates the importance of having commercial knowledge within the law –
without a basic commercial grounding, you will not be well placed to identify
whether a given action in a problem question is reasonable or not.

2.2.3 Economic Loss Lecture - Hands on

Examples
Question:

Footly Chill is the owner of a large food production factory, specialising in baked
goods. They operate out of a large factory, which runs 24/7, producing cakes for
supermarkets across the country. They rent their factory from RightGo Facilities, who
are in charge of maintaining the Footly Chill Co’s factory, and supplying it with
electricity and water.

One day, due to a failure to maintain the power supply running to Footly Chill’s
factory, the entire building is left without power for three hours whilst the supply is
repaired. This causes the factory’s ovens to shutdown, ruining all of the cakes
currently being baked (which are left as half-solidified batter, and are thus inedible.)
The factory is also unable to proceed with baking its next two batches of cakes.

The following week, in acknowledgement of the costs associated with the shutdown,
Footly Chill’s board of directors decide to diversify their business interests, seeking to
acquire two new companies. They identify two different food production businesses
they wish to buy – Tea Corp and Coffee Co.

The board of directors decide to check the stock prices for Tea Corp, and see in the
Financial Times that Tea Corp has been selling at a good price, indicating that it is a
healthy business. At the bottom of the stock prices, there is a printing disclaimer –
“Warning: these figures are subject to correction, and should not be used for
business acquisition purposes.”

Ignoring this disclaimer, Footly Chill make a successful takeover bid based on this
information. It later emerges that the price listed for Tea Corp is in fact a misprint,
and that the organisation has been losing value for months. As a result, Footly Chill
have to sell Tea Corp at a significant loss.

The board decide to employ a private auditor to check out Coffee Co – the auditor
reports to them that Coffee Co would be a good investment. Unfortunately the
auditor has failed to notice that Coffee Co has a large number of unpaid invoices
outstanding, and is therefore in significant debt. This is only discovered by Footly
Chill after it has acquired the organisation. Again, it has to sell the organisation
shortly after acquisition, at a significant loss.

You are asked to provide advice on the following possible claims:

1) Footly Chill’s claim against RightGo Facilities for negligently failing to maintain the
power line.

They note that a large batch of cakes was ruined during the time the factory was
without power, and that the power outage stopped them from baking two more
large batches of cakes in the meantime, throwing their production schedule off.

2) Footly Chill wishes to sue the Financial Times for negligent misstatement.

3) Footly Chill wishes to sue the auditor it has employed, again, for negligent
misstatement.

Answer:

1. Footly Chill’s first claim is a matter of economic loss due to physical damage –
negligence has caused damage to occur to Footly Chill’s property, causing an
economic loss.

As per Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd[1973] 1 QB 27 it is

necessary to split the harms suffered into those directly related to physical damage,
and those which are not. RightGo Facilities had a duty to maintain the power line,
breached this duty, and this caused the power loss to Footly Chill’s factory. Much like
the half-melted steel in Spartan, Footly Chill will likely have a claim for the costs
involved in producing the cakes which were rendered inedible – raw ingredients,
staffing costs etc.

Footly Chill will also have a claim for the loss of profit on the half-baked cakes –
although this is an economic loss (nothing physical is damage, only the ability to sell
the cakes), this harm is itself caused by physical damage to the claimant’s property,
and so is covered under Spartan.
However, Footly Chill will not have a claim for the profit lost on the cakes which were
unable to be baked whilst the power was out – this is a purely economic harm, as no
damage has occurred to either these cakes or their ingredients.

2. Footly Chill has not suffered any direct harm, and so the loss is only economic in
nature. It can be argued to be caused by the misprint in the Financial Times, and so is
a matter of negligent misstatement.

Footly Chill is not likely to have a claim against the Financial Times. Whilst Hedley
Byrne & Co Ltd v Heller and Partners Ltd[1964] AC 265 lays out the situations in which
negligent misstatement is actionable, the facts of this case distinguish it.

There is hardly proximity between Footly Chill and the Financial Times, meaning that
a special relationship between the parties can be said to have arisen – the
information is simply too widely disseminated. It is also neither foreseeable nor
reasonable for a large organisation to rely solely on stock listings of the Financial
Times as an indicator of an organisation’s health. Furthermore, much like Hedley
Byrne, the Financial Times’ disclaimer means that it cannot be said to have voluntarily
assumed the position of an advisor. This means that this claim is likely to fail.

There also exists a policy argument here – significant chaos would ensue if a simple
numerical misprint in a newspaper could give rise to a claim for negligent
misstatement.

3. Footly Chill’s claim against the auditor is likely to succeed. Under Hedley Byrne, the
auditor has taken up an advisory position, creating a special relationship between
himself and Footly Chill. He voluntarily assumes this role. It is clear that Footly Chill
rely on his (mis)advice, since the entire purpose of taking on the auditor was to
advise them on the viability of Coffee Co as a takeover prospect. Although Footly
Chill might be expected to have the expertise to judge fellow food production
organisations, this does not necessarily indicate a lack of reliance. Indeed, a
claimant’s own expertise does not always mean it is not relying on another’s
expertise, as in Esso Petroleum v Mardon[1976] QB 801.

It is also arguably reasonable and foreseeable that Footly Chill would rely on the
auditor’s advice – after all, this is why it has employed him.