Analysis Of Negligent Mis-statement Law: Crystal Motor Company Pty Ltd’s Liability

Auditors’Liability

After understanding the research question, it is now important to understand the relevant law that guides the scenario.

The law of negligent mis-statement is mainly an extension to the law of negligence. In Donoghue v. Stevenson [1932], Lord Atkin has lay down the basic rule of negligence under which every manufacture/defendant is liable for the losses of the consumer/plaintiff who is his neighbor. The rule that is established under the law of negligent misstatement is nothing but a variation to the law of negligence. Thus, every plaintiff while availing any benefit under the law of negligent misstatement must prove all the relevant elements that are needed to prove the law of negligence, that is, the duty of care, breach and damages. (ALEXANDER 2010)

Negligent misstatements are considered to be incurred by the defendant when he makes statements to the plaintiff who then relies upon the statements and suffers loss. The defendant is held negligent because while making the statements to the plaintiff he owns a duty of care to make sure that no loss is caused to the plaintiff because of such statements. The duty of care is imposed because the parties share a special relationship with each other.

In Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964), the duty of care in cases of providing advices is recognized and the court held that if the parties share proximate relationship wherein the defendant can believe that the plaintiff might rely on the statement then there exist duty of care and non compliance of which if results in loss to the plaintiff can make the defendant liable under Negligent misstatements. So, the prime elements to prove negligent misstatements are:

1. The duty implies that the advisor must make sure that the advice that is furnished by him does not cause harm to the relying party (plaintiff). The duty is only imposed when the parties are in: (Hocking 1999)
2. The relationship of proximity, which implies that any advise that is furnished by the advisor will affect the plaintiff and is held in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords(1997);
3. When there is presence of reasonable foresee ability. It is rightly held in Mutual Life and Citizens Assurance Co Ltd v Evatt(1968) that the duty of care can only be imposed on the advisor when he can reasonably foresee the plaintiff. If the plaintiff is not reasonable foreseeable then there is no duty to provide care.
4. It is necessary that there exist a special relationship amid the advisor and the plaintiff mainly because the advisor is at a superior position and is aware of the truth of the information that is provided by him. There exists a special relationship because the adviser is aware that the plaintiff is relying on the information that is provided by him. In the leading case of Esanda Finance Corporation Ltd v Peat Marwick Hungerfords, it was held by the court that an advisor owns a duty of care towards the third party when the auditor is aware that the advice that is provided by him to his client will be communicated to the third party and the third party would use such advice before making any contract with the client of the advisor. Thus, the advisor shares a special relationship with the third party and thus the advisor owns a duty of care against the third party.
5. It is essential that the duty of providing adequate advise to the plaintiff is not met by the advisor in order to held that the duty of care is violated by him and is held in Roads and Traffic Authority of NSW v Refrigerated Roadways Pty Limited[2009]. When the advisor fall short of the degree of care that is expected from him then there is breach;

• When the breach is incurred by the advisor then some kind of harm should be inflicted on the plaintiff and is analysed in Lindeman Ltd V Colvin [1946]. However, the loss should not be remote and reasonably anticipated by the defendant and is analysed in South Australia Asset Management Corp v York Montague Ltd, [1997].

When the plaintiff suffers loss by relying on the advice of the advisor then the advisor is negligent and is held in   Shaddock& Associates Pty Ltd V Parramatta City Council [1981].

The research methanol that is used in the current scenario is by critically evaluating both the primary and secondary sources available. Initially, the research questions are identified and it was found that the issues are relevant towards the understanding of Negligent mis-statement. To resolve the issues, its three prime ingredients, that is, duty, breach and damages. All the elements are analyzed from the point of view of an auditor who is giving advice to his client which is later used by the third party. Relevant case laws are used time and again to authenticate the rules applied.

The Research question can be resolved only after applying the relevant law to the given scenario.

The facts reveal that Dave is an accountant. He is assigned with the tasks of preparing financial statements for Excel Group Company Ltd. Dave is aware that Excel Group Company Ltd will use the statement to obtain a loan from First National Bank.

Now, Dave makes negligent omissions in the statement that result in a loss to the bank. In such situation, in order to consider whether Bank can sue Dave for negligent mis-statement, it is important that all the three elements that are needed to prove negligent mis-statement on the part of Dave must be established.

Relevant Law

It is submitted that Dave is an advisor and thus as per Hedley Byrne & Co Ltd it is the duty of Dave that the advise furnished by him should not cause any harm to the relying party.

Now, in the given situation, Dave is the financial advisor for Excel Group Company Ltd but is aware that the advice that will be furnished by him to Excel Group Company Ltd will be used by the company to seek loan from the Bank. Thus, there exists a relationship amid Dave and the Bank and as per Esanda Finance Corporation Ltd v Peat Marwick Hungerfords there exist a relationship of proximity between the two. It is the duty of Dave to make sure that no harm should be caused to bank because of his advice.

The relationship amid them is also a special relationship as Dave I at a superior position and is in knowledge of the information which can impact the decision of Bank. Bank is relying on the report of Dave prior giving any loan to Excel Group Company Ltd. thus, there a special relationship amid the two and thus Dave owns a duty of care against the Bank.

The duty also exist because Dave is aware that the Bank is relying on the advise that is furnished by him to Excel Group Company Ltd and thus Dave can reasonably foresee the presence of the Bank. Thus, as per Mutual Life and Citizens Assurance Co Ltd v Evatt (1968) there exists a duty to provide care to the bank while giving any financial advice to Excel Group Company Ltd.

Now, it is crystal clear that Dave owns a duty of care against the Bank.

The duty that exists is not met by Dave.

Now, Dave is aware that the Bank is relying on his advice. Knowing the said fact Dave made no attempt to let the Bank aware that the information might bring loss. Thus, as per Shaddock& Associates Pty Ltd V Parramatta City Council, the level of care that is expected from Dave was not resulting in breach.

This breach of duty bought loss to the bank which was reasonably anticipated by Dave. So, the loss that is caused to the Bank is because of the advice that is given by Dave. So, there is causation and no remoteness of damage. By applying San Sebastian Pty Ltd V Minister Adminstering The Enviromental Planning And Assessment Act (1986), it can be submitted that Dave can only protect his interest when he can prove that the loss that is caused to the Bank is not because of his advise but because of some other acts.

In the leading case of The Barwick Test and Mutual Life and Citizens Assurance Company Ltd v Evatt (1968), the law is settled that the duty is owned by the advisor when the advice that is frenzied is of serious nature and the advisor is aware that the plaintiff will rely on the advice furnished by him. Applying the said facts, Dave is aware that the information that is provided by him is of serious nature which is relied upon by the Bank.  Thus, there is a reasonability that Dave must have taken adequate care to make sure that no loss is caused to the Bank by relying on his advice. But, no adequate care is catered which ultimately resulted in the loss of the Bank.

Research methodology

The research question that underlines the given scenario deals with the law of agency. The law of agency is a law which creates a relationship amid three parties, that is, an agent, the principal and an outsider who is dealing with an agent considering to be authorised by the principle.

The key research question involves: Relevant Law

After understanding the research question, it is now important to understand the relevant law that guides the scenario.

The law of agency is the civil law which revolves around a simple rule that any agent who is authorized by the principal must carry out acts within such authority and any acts which are outside the said authority will not make the principal liable towards the third parties. (Turner 1999)

In the leading case of Maynegrain Pty Ltd v Compafina Bank, [1982] it was held that the acts that are underatken by the agent within his authorty will bind the principal. (Tarr 2001)

Under the law of agency, there is no one manner in which the principal can confer authority upon the agent. The various manners in which the agent possesses authority include:

1. Express authority – An authority that is possessed by the agent from the Principal either expressly or implied and is analysed in Bell v Australian Eagle Insurance Co. Ltd , (1990). Thus, an express authority is of two kinds: (Gillies 2004)
2. Actual Express authority – in the leading case of Freeman and Lockyer v Buckhurst Park Properties(Mangal) Ltd [1964] it was held that the authority possess by the agent directly by the principal is an actual express authority. The expression can be in the form of written form or by conduct or orally but there must be a direct allocation of the authority.
3. Actual implied authority – An actual implied authority is an authority that is possessed by the agent not by the principal directly by express words or actions or orally. But, the authority is possessed by the agent by implication, that is, through any documentation or any authority that can assumed by the agent while complying his actual express authority. This is the authority that is normally found to originate from the authority that is already generated to the agent and is analysed in Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd(1985).  
4. Ostensible authority – There is yet another most important authority that is normally possessed by an agent and is called ostensible authority or the apparent authority and is analysed in Panorama Developments(Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971]. The main elements to prove ostensible authority includes:
5. An over action must be carried on by the principal in front of the third party;
6. The overt act by the principal is of such a nature that makes the third party to believe that the agent have the requite authority;
7. In reality the agent does not have such authority;
8. The contractual relationship that is carried on by the third party with the agent is on the belief that the agent does posses the authority;
9. The acts of the third party must be carried out in good faith.

When all the scenarios are comply with then the authority that is possessed by the agent is called ostensible authority and any action that is undertaken by the agent within such ostensible authority is considered to be binding upon the principal and the third party has every right to sue the principal for the contract that is undertaken by the agent and is analyzed in Ogden & Co Pty Ltd v Reliance Fire Sprinkler Co Pty Ltd (1973).

The research methanol that is used in the current scenario is by critically evaluating both the primary and secondary sources available. Initially, the research questions are identified and it was found that the issue is relevant towards the understanding of law of agency and the different kinds of authority that can be possessed by an agent. To resolve the issues, all the three kinds of authorities are analyzed with prime focus on the ostensible authority of an agent. All the elements are analyzed from the point of view of the third party who intends to establish a contract with the principal which was formulated by an agent on behalf of the principal. Relevant case laws are used time and again to authenticate the rules applied.

The Research question can be resolved only after applying the relevant law to the given scenario.

The facts reveal that Crystal Motor Company Pty Ltd is a company that is dealing in the buying and selling of the used cars. Sam and John are the two partners of the company. As per the rules of the company, both, Sam and John are permitted and authorized to establish contracts on behalf of the company but only up to an amount of $ 10000. They are not permitted to take make any contractual relationship for an amount exceeding $ 10000.

Thus, as per Maynegrain Pty Ltd v Compafina Bank, both Sam and John are the agents of Crystal Motor Company Pty Ltd and are authorized by Crystal Motor Company Pty Ltd to sell and purchase the used cars on behalf of Crystal Motor Company Pty Ltd. any acts that are carried out by Sam and John within their authority will bind Crystal Motor Company Pty Ltd.

Solution to the Scenario

However, the authority that is granted to Sam and John is only to the extent of the amount of $ 10000..

As per Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964]. an express actual authority is granted by Crystal Motor Company Pty Ltd and any act that is carried out by Sam and John within such authority will bound Crystal Motor Company Pty Ltd with the third parties. The authority is directly possessed by Sam and john because the company as clearly mentioned that both Sam and John are empowered to bind the company by their contractual actions provided the limit should not exceed $ 10000.

However, Sam without seeking any authorization from John established a contract with Elite Car Sale Company Ltd for an amount of $ 15000. Thus, Sam has undertaken an act that is beyond his capacity and for the acts for which no authority is granted to him by the company or John.

Now considering that Sam has no authority to undertake contract that are beyond $10,000, thus, there cannot be any contractual relationship that exist amid Elite Car Sale Company Ltd and Crystal Motor Company Pty Ltd.

But, if Elite Car Sale Company Ltd can prove that Sam has undertaken contract with him on account of ostensible authority then there can be a binding contract amid Elite Car Sale Company Ltd and Sam and inter alia with Crystal Motor Company Pty Ltd.

Elite Car Sale Company Ltd has to prove that Crystal Motor Company Pty Ltd has overtly acted in manner which portrays that Sam has the authority to bind the company. Elite Car Sale Company Ltd is under no obligation to check the internal requirement of the company. Since both Sam and john are dealing on behalf of Crystal Motor Company Pty Ltd thus there is an overt act that is undertaken by Crystal Motor Company Pty Ltd  which portrays to every third party that both Sam and John has the authority as the same is not curtailed by Crystal Motor Company Pty Ltd  by giving any overt notice.

Since the authority of Sam and Jon was never curtailed by Crystal Motor Company Pty Ltd thus an overt act is undertaken by the comedian which can made believe Elite Car Sale Company Ltd that they have the authority to bind the company.

Now, Elite Car Sale Company Ltd acting in good faith and on the assumption that Sam has the requisite authority has established contract with him.

Thus, the contract that is made amid Elite Car Sale Company Ltd and Sam is valid and thus Sam being considered to be the agent of Crystal Motor Company Pty Ltd results in formation of contract amid the company and Elite Car Sale Company Ltd.

Thus, in such situation, when the  Elite Car Sale Company Ltd contacted Crystal Motor Company Pty Ltd to make the payment, then, it is the duty of  Crystal Motor Company Pty Ltd to make the payment of $ 15000  even though the same is outside the authorization of Sam.

Reference List

Books/Article/Journals

Hocking, B 1999, Liability for negligent words, Sydney: Federation Press 1999.

Gillies,, P (2004), Business Law. Federation Press.

Tarr, J. A 2001, Information Disclosure: Consumers, Insurers and the Insurance Contracting Process. iUniverse.

Turner C 1999, Australian Commercial Law, LBC Information Services.

Case Laws

Bell v Australian Eagle Insurance Co. Ltd , (1990);

Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985).  

Donoghue v. Stevenson [1932].

Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 (HCA);

Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964];

Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964);

Lindeman Ltd V Colvin [1946]).

Maynegrain Pty Ltd v Compafina Bank, [1982].

Mutual Life and Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 566.

Ogden & Co Pty Ltd v Reliance Fire Sprinkler Co Pty Ltd (1973).

Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971].

Roads and Traffic Authority of NSW v Refrigerated Roadways Pty Limited [2009].

Shaddock& Associates Pty Ltd V Parramatta City Council [1981] HCA 59.

San Sebastian Pty Ltd V Minister Adminstering The Enviromental Planning And Assessment Act (1986).

South Australia Asset Management Corp v York Montague Ltd, [1997] 1 A.C. 191 HL

The Barwick Test and Mutual Life and Citizens Assurance Company Ltd v Evatt (1968) 122 CLR 556

Online Material

ALEXANDER, DAVID 2010, Material Misstatement of What? A Comment on Smieliauskas et Abacus, 46(4). < https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1467-6281.2010.00327.x>.