Commercial Transaction For Negligent Misstatement

Issues

Discuss about the Commercial Transaction for Negligent Misstatement.

There are three issues that arose in the given case study. The same are:

1. Whether any negligent misstatement has been made? If yes, then by whom?
2. Whether any liability can be imposed upon John/Abacus and Associates for the loss caused to Fed, Southpac Bank and to the parents of Fred for a negligent misstatement?

• Whether the liability so raised under negligent misstatement has been excluded? 

A negligent misstatement is a kind of advice or information which is provided honestly but is misleading or false. Earlier in Derry v Peak (1889) 12 App Cas 337, the court held that no action for deceit can be established which is based on negligent misstatement because a misrepresentation which is non-fraudulent cannot establish duty of care in absence of fiduciary relationship or contract. But, in Hedley Byrne & Co v Heller & Partners [1964] AC 465, the decision of Derry case was reviewed and it was held that negligent misstatements may result in incurring of liability when an unskilled person sought information/advice from a skilled person and that skilled person is aware that his advice/information will be relied upon by the unskilled person. The decision is later applied in Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556. (Negligent Misstatement, 2014)

However, in L Shaddock v Parramatta City Council (No 1) (1981) 150 CLR 225 & San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (NSW) (1988) 162 CLR 340, it was held that it is not always necessary to establish that the speaker must possess any special skill/knowledge in order to hold him liable for negligent misstatement. The basic requirements for negligent misstatement are: (Christensen et.al, 2008)

1. Mere negligent misstatement does not make a speaker liable, it is necessary that such a speaker owns a duty of care. The duty of care is imposed when the risk which may be caused is reasonably foreseeable. Further, the speaker and the plaintiff must be neighbors of each other, that is, there is a direct impact on the speaker’s advice or information upon the plaintiff and thus there is a duty upon the speaker to provide information in such a manner so that no harm is caused to the plaintiff (Donoghue v Stevenson [1931] UKHL 3.
2. It is not necessary that the relationship must be contractual in nature. The speaker is obligated to take adequate care while furnishing information or advice even when there is fiduciary relationship amid the parties Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520.

• It is important to establish that the plaintiff has relied on the advice of speaker in order to impose upon him the legal duty of care. The speaker must be aware that the plaintiff is relying upon him and in such situation he must be very careful while furnishing any information to him (Shaddock& Associates Pty Ltd V Parramatta City Council [1981] HCA 59; (The Law Teacher, 2016)

1. The duty of care which is imposed upon the speaker must be breached by him. The duty is breached when the speaker is not able to get the required level of degree of care that is necessary in the given situation. The degree of care increases when the speaker is aware that the plaintiff is relying on his information/advice and thus the speaker must be extra cautious while furnishing any information/advice.
2. It is necessary that the plaintiff have suffered damage by relying on the information/advice of the speaker and thus there must be presence of causation. Also, the damage must not be remote and must be reasonably foreseeable by the parties.

Now, the plaintiff can also recover pure economic losses which incur because of the negligent misstatements of the speaker (Sutherland Shire Council v Heyman (1985) 157 CLR 424 & Perre v Apand Pty Ltd (1999) 198 CLR 180. 

Further, many times when the speaker is providing any advice or information then he specifically submits that he does not accept any kind of responsibility of the losses that might be incurred by the plaintiff by relying on the advice or information so furnished by the speaker to the plaintiff. In such situation, the speaker has excluded his duty of care that is imposed upon him in law and is held in Hedley Byrne & Co v Heller & Partners [1964] AC 465. It is thus important that whether there is application of exclusion clause or not in a particular situation is a matter of construction and the rules of incorporation. Once a disclaimer is provided then it results in the ceasing the legal duty of care upon the speaker.  (Negligent Misstatement, 2014)

Relevant Law

Vicarious liability is a kind of tort law wherein an employer is held liable for the actions of his employee. In order to hold an employee liable under vicarious liability it is necessary to establish few relevant points. That is: (Unistudyguide, 2016)

1. The relationship amid the parties is that of an employer –employee (Hollis v Vabu (2001);
2. That the employee is carrying out the actions within the course of employment (Limpus v London General Omnibus Co(1962);

• That the employer is controlling the actions of the employee;

1. That the employee is acting as per the direction of the employer;
2. That the actions of the employee are not personal in nature, that is, revenge or anger.

If such conditions are satisfied then any damage which is caused to a third party because of the acts of an employee will make an employer liable for the same.

Fred intends to expand his business but does not have any knowledge of accounts and how the business should be developed. So he took the help of his old friend john who is working in Abacus and Associates (where he is acting as a client manager for advice). A pre condition was imposed upon John by Abacus that any advice furnished by him must be approved by any partner of the firm.

John provided an advice to Fred wherein he suggests that Fred must expand his business and must take loan from a bank. But, the advice so furnished is a negligent misstatement. The basic reasons to consider the advice as negligent misstatement are:

1. John and Fred are in a special kind of relationship where John is has requisite skill and knowledge to provide a sound advice whereas Fred has no knowledge in the said field and thus is relying on the advice of John.
2. Since John is aware that Fred is relying on his advice, thus, he is imposed with a duty of acre to provide sound advice. The duty exists because the parties are in proximate relationship and John can reasonably foresee the harm that might be incurred by Freed if any wrong advice is furnished by him.

• However , the level of care is not cater by John by providing advice as his advice is based on internet research and the accounts provided by Fred but he failed to take into account the set up costs, liabilities and the presence of a national competitor. Thus, the duty was breached by John

1. Because of breach, Fred has suffered losses.

Thus, there is a clear negligent misrepresentation which is made by John.

Further, the acts of John will make Abacus liable under the law of vicarious liability. This is because, John was employed by Abacus and the negligent actions which are undertaken by John was within the course of employment. Though the action is not authorized by Abacus (as no permission is taken by the partner of the firm) however still he has a letter which depicts the same and thus, Abacus must be vicariously liable for the acts of John. Hence,  both John and Abacus are liable for causing loss to Fred.

However, the liability is not excluded in any manner whatsoever. This is because, the business plan which is so developed by John and Abacus does not contain any disclaimer to support the same.

Also, John and Abacus are also answerable to the loss that is suffered by Bank. In the law of negligent misstatement there is must be presence of special relationship regardless whether the same is contractual or not. When the business plan was made by John, he also issue a letter in the name of bank along with the plan which is signed by one of the partner. Thus, John has violated his duty of care which he must cater against the bank as he knows that the bank will rely on the plan prepared by him, however, he still does not acted with his duties causing loss to the bank. Thus, Bank can sue john and Abacus.

But, John and Abacus can exclude their liabilities against the bank because they have mentioned a disclaimer regarding the same in the letter and thus have thus shed away their responsibility of duty of care.

However, John and Abacus are not liable to the loss caused to the parent because there is no proximate relationship amid John/Abacus and neither the parents nor the harm was reasonably foreseeable.

Conclusion

Thus, John and Fred are only liable to the Fred for his loss. Whereas, they are answerer to bank as the liability is excluded and they are not liable to patents as there is no duty of care which is imposed

Reference List

Books/Journals/Articles.

Christensen et.al. 2008. Shifting paradigms of government liability for inaccurate information. < https://elaw.murdoch.edu.au/archives/issues/2008/2/elaw_15_2_Stickley.pdf>. [viewed on 22^nd September 2016].

Case Laws

Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520.

Derry v Peak (1889) 12 App Cas 337.

Donoghue v Stevenson [1931] UKHL 3 Hedley Byrne & Co v Heller & Partners [1964] AC 465.

Hedley Byrne & Co v Heller & Partners [1964] AC 465.

Hollis v Vabu (2001).

L Shaddock v Parramatta City Council (No 1) (1981) 150 CLR 225.

Limpus v London General Omnibus Co(1962) .

Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556 at 572-3.

Perre v Apand Pty Ltd (1999) 198 CLR 180.

San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (NSW) (1988) 162 CLR 340.

Sutherland Shire Council v Heyman (1985) 157 CLR 424

Online Material

Negligent Misstatement. 2014. Pure economic loss caused by Negligent Misstatement. < https://www.yellowpages.com.au/content/if/extract/contentstore/2014/10/10/14/40/1080864102/1/pureeconomiclosscausedbynegligentmisstatement.pdf>. [viewed on 22^nd September 2016].

The Law Teacher. 2016. Tort of Negligent Misstatement. < https://www.lawteacher.net/free-law-essays/contract-law/tort-of-negligent-misstatement-contract-law-essay.php>. [viewed on 22^nd September 2016].

Unistudyguide. 2016. Vicarious liability. < https://www.unistudyguides.com/wiki/Vicarious_liability#cite_note-3>. [viewed on 22^nd September 2016].