Week 5-Liability for pure economic loss and nervous shock

Question 1

What was the difference between the decision of the court of appeal and the House of Lords in McLoughlin v O’Brian 1993 and what precedent did the latter court set?

Answer 1

• The court of appeal held that McLoughlin could not recover as a secondary victim of a shocking event because she was not present at the event, having only been made aware shortly after the incident. Previous case law failed to extend this to a secondary victim.
• The House of Lords disagreed and sought to extend liability for the reasonably foreseeable psychiatric injury to the mother of a family involved in a fatal car accident, where she heard or saw the immediate aftermath of said car crash (Reconciles it with the later Alcock Criteria)

Question 2

What was Lord Wilberforce’s test for secondary victim damage recovery in McLoughlin v O’Brian?

Answer 2

-Lord Wilberforce set out a test for the recovery of damages- “First, a close familial relationship must exist between claimant and victim (the Court disqualified an ordinary bystander). Second, the claimant must be in close proximity to the accident “in both time and place”; this includes witnesses of the immediate aftermath of the accident. Third, and last, the shock suffered by the claimant must “come through sight or hearing of the event, or of its immediate aftermath”

Question 3

What is the control device of shock for psychiatric damage of secondary victims?

Answer 3

1) Shock- a duty of care is only owed by the defendant to the claimant as a secondary victim where the event bringing about psychiatric is death, injury or endangerment of another, but only if the harm results from a sudden shocking event. It is possible the shock is required where the claimant fears for his or her own safety, but this is obviously not required where a claimant suffers psychiatric harm through being overworked (although this would be a primary victim case, subject to its own control devices in relation to the employer and his knowledge etc).
The purpose of the control device of shock is to exclude potential claimants who are too remote from the incident (in time and space), but it also rules out the claims where an event is not necessarily ‘shocking’ or sudden to cause foreseeable illness, even when it is witnessed first-hand.

Question 4

What are the two types of recoverable primary victim cases?

Answer 4

Physical injury accompanied by psychiatric harm- it is common that those who suffer physical injury also recover damage for psychiatric injury, as a result of their injury or physical impairment. Mental illness and psychiatric can contribute to consequential financial loss eg loss of earnings.

Physical endangerment but the only harm is done through the psychiatric route: a physical endangerment which doesn’t result in physical harm may be recoverable where it leads to illness or injury as a result of ‘shock’ eg Page v Smith

Question 5

Facts and significance of Page v Smith regarding primary victim cases?

Answer 5

Facts- the plaintiff was the victim of a moderate-impact road accident, in which he was physically endangered but suffered no immediate physical harm. Instead, the impact exacerbated his pre-existing ME condition; a condition which is difficult to define as either physical or mental by its nature in effecting both physical and psychiatric elements of a sufferer. The exacerbation had clearly been via the ‘psychiatric route’, as a result of physical endangerment, but no distinct physical injury had been suffered.

Significance- The claimant was able to recover damages for his psychiatric injury, as it was foreseeable that some personal injury would result, immaterial whether it was physical or psychiatric. The majority approach was to assess the foreseeability of personal injury (physical and or psychiatric) from the point of the view of the defendant at the time of the negligence. This foreseeability test was the normal foreseeability test applied to where there was a claim by a primary victim and focuses on what the defendant could reasonably foresee at the time. This type of foreseeability does not require that the means by which damage actually came about be foreseeable. “Only in respect of a person with a pre-existing disposition to illness could it be foreseeable that this particular impact would lead to psychiatric harm (specifically). Therefore, if the test for foreseeability applicable to secondary victims was applied in this case, the claim would fail.” This is because the test for secondary victims excludes the ‘taking victim as found’ rule, with reference to the person of ‘normal fortitude’ being applied.

Question 6

How does the test for secondary victims differ to that for primary victims regarding foreseeability?

Answer 6

“Would it be foreseeable that a person of ‘ordinary fortitude’ might suffer psychiatric injury, in the circumstances as they occurred”.

This question provides 3 departures from the normal approach to foreseeability:

1) This constitutes an exception to the egg-shell skull rule. That rule says that a defendant must generally ‘take his victim as he finds him’. Conversely, the question asked in a secondary victim case involving psychiatric damage says that it must be reasonably foreseeable that a person of normal fortitude would suffer psychiatric harm. A comparatively ‘weaker’ person who suffers because of a personal characteristic may have no remedy. Somewhat objective test, but applied to the subjective and specific facts of the incident in hind-sight.
2) Psychiatric injury must be foreseeable for secondary victims. Denning LJ reiterates this be saying ‘the test for liability for shock is foreseeability of injury by shock’
3) In secondary victim cases, foreseeability of this harm is judged with hindsight, on the basis of the events as they actually occurred; this means that the defendant must be viewed to have foreseen the injury of shock in light of the specific facts of this case, rather than the general nature of the incident eg a specific amount of force in a car collision rather than foreseeing that there would be a risk of injury (physical or mental) from a car collision. The normal approach in negligence is to judge foreseeability at the time of the negligent act or omission. “The special kind of foreseeability which is judged with hindsight, and which applies to secondary victim claims, can be referred to

Overall this makes it a stricter test than the one employed in primary victim cases, due to the variation in the application of foresight.

Question 7

How does Lord Lloyd distinguish between primary and secondary victims in Page v Smith?

Answer 7

“Lord Lloyd argues here that secondary victim cases are logically different from primary victim cases. In the case of a primary victim (of the sort represented by the plaintiff in this case), personal injury is foreseeable, and a duty of care is easily established. That being the case, the kind of ‘personal injury’ suffered is irrelevant. In a secondary victim case, there is no likelihood of physical impact involving the claimant. Thus, the only way that damage can foreseeably be done is through the psychiatric route, and foreseeability of injury by this route must be established.” (this route being psychiatric ONLY

Question 8

Facts and significance of Rothwell v Chemical 2007 with regards to the boundaries of primary victims suffering no physical damage?

Answer 8

Facts- all the claimants had incurred ‘pleural plaques’ as a result of repeated exposure to asbestos, but these did not amount to material physical injury according to the house of lords. The increased risk of anxiety commonly associated with these plaques was also not recoverable. However, one claimant, in addition to the plaques and anxiety, had also suffered anxiety neurosis concerning the prospect of future disease. This would only be actionable if a negligence-style duty of care was owed, and subsequently breached through exposal to the asbestos.

Significance- re-affirming the decision in the HOL, the AC also concluded that no duty of care was owed to the claimant by the chemical and insulating company, and they could not recover damages.

Lord Hoffmann, Rothwell
2 … ”The right to protection against psychiatric illness is limited and does not extend to an illness which would be suffered only by an unusually vulnerable person because of apprehension that he may suffer a tortious injury. The risk of disease is not actionable, and neither is a psychiatric illness caused by contemplation of that risk.” (applying the primary victim criteria due to lack of physical endangerment (due to comments made in case about damage))
-This appears to distinguish the actionability of the psychiatric harm in Page v Smith, because in this case, it was a fear of a future injury. It does however seem questionable to ignore the ‘take victim as found’ element, which is usually considered in primary victims, as it seems to be treating the claimant as a secondary victim instead.
-Lord Hoffmann, Rothwell
32. … “I do not think it would be right to depart from Page v Smith. It does not appear to have caused any practical difficulties and is not, I think, likely to do so if confined to the kind of situation which the majority in that case had in mind. That was a foreseeable event (a collision) which, viewed in prospect, was such as might cause physical injury or psychiatric injury or both. Where such an event has in fact happened and caused psychiatric injury, the House decided that it is unnecessary to ask whether it was foreseeable that what actually happened would have that consequence. Either form of injury is recoverable.
33. In the present case, the foreseeable event was that the claimant would contract an asbestos-related disease. If that event occurred, it could no doubt cause psychiatric as well as physical injury. But the event has not occurred (it has neither been caused by personal injury accompanied by psychiatric illness, nor physical endangerment resulting in psychiatric illness. The psychiatric illness has been caused by apprehension that the event may occur. The creation of such a risk is, as I have said, not in itself actionable. I think it would be an unwarranted extension of the principle in Page v Smith to apply it to psychiatric illness caused by apprehension of the possibility of an unfavourable event which had not actually happened.”

Question 9

How do stress at work cases operate, in the absence of any shocking event or physical injury/ threat of physical damage? (damage is instead done overtime via the psychiatric route?
What can be said about 1) Damage 2) Foreseeability 3) rebuttable presumptions 4) Attempts to discharge the duty by the company (including burden)

Answer 9

• 1) The damage must be more than trivial, in that it is not simply the normal stress or emotion associated with humans, but must break a threshold, as well as being attributable to stress at work.
• 2) Foreseeability includes some subjective element as to what the employer knows or ought to reasonably know with relation to any pre-existing psychiatric harm or condition to the claimant.
  3) There is a (rebuttable) presumption acceptable by an employer that an employee can withstand the normal pressures of a job unless he is aware of some particular vulnerability. It must be plain enough to the defendant that he is reasonably expected to do something to intervene.
• 4) The court must take into account any measures that the employer or company in general has taken, or any services offered by the company, to decide whether they have discharged their duty; other causative elements to the psychiatric injury mean that the employer is only liable to pay damages for a proportion of the damages
• Reasonableness assessed with reference to the cost of the burden on the company, practicability of intervening, gravity of the harm.

Question 10

What are the three imperative elements for secondary victims given in McLoughlin v O’Brian 1983 and reiterated in Alcock v CC South Yorkshire 1992?

Answer 10

1) As regards the class of persons, the possible range is between the closest of family ties—of parent and child, or husband and wife—and the ordinary bystander. Existing law recognises the claims of the first: it denies that of the second, either on the basis that such persons must be assumed to be possessed of fortitude sufficient to enable them to endure the calamities of modern life, or that defendants cannot be expected to compensate the world at large. In my opinion, these positions are justifiable, and since the present case falls within the first class, it is strictly unnecessary to say more. I think, however, that it should follow that other cases involving less close relationships must be very carefully scrutinised. I cannot say that they should never be admitted. The closer the tie (not merely in relationship, but in care) the greater the claim for consideration. The claim, in any case, has to be judged in the light of the other factors, such as proximity to the scene in time and place, and the nature of the accident.
2) As regards proximity to the accident, it is obvious that this must be close in both time and space. It is, after all, the fact and consequence of the defendant’s negligence that must be proved to have caused the “nervous shock.” Experience has shown that to insist on direct and immediate sight or hearing would be impractical and unjust and that under what may be called the “aftermath” doctrine one who, from close proximity, comes very soon upon the (p. 328) scene should not be excluded. In my opinion, the result in Benson v. Lee [1972] V.R. 879 was correct and indeed inescapable. It was based, soundly, upon “direct perception of some of the events which go to make up the accident as an entire event, and this includes … the immediate aftermath …” (p. 880.)
3) … Lastly, as regards communication, there is no case in which the law has compensated shock brought about by communication by a third party… . The shock must come through sight or hearing of the event or of its immediate aftermath. Whether some equivalent of sight or hearing, e.g. through simultaneous television, would suffice may have to be considered. Alcock denied claims for such a situation, as some claimants were those who had only witnessed or heard through the medium of tv or radio.

Question 11

Facts and outcome of Alcock v CC of South Yorkshire 1992?

Answer 11

Facts- the facts of this case arose from the Hillsborough disaster, with the claims in this case being brought by relatives of some of the supporters who were killed, injured or endangered from the negligence of the police in controlling the crowd. The claims were for psychiatric harm and nervous shock suffered to the relatives rather than the immediate victims of the disaster, and the case remains authority for the criteria for recovering damages for secondary victims (despite many contentions that it was protectionist and restrictive, in favour of the defendants).

Outcome: In the House of Lords, the defendant’s appeal was allowed. The House of Lords ruled (by a majority on each point):

1. 1. That the employer’s duty to employees did not extend to avoiding psychiatric harm where the employee would (without the contract of employment) be a secondary victim eg Police or volunteer rescuers. The ‘Alcock criteria’ applied. They were of course unable to show close ties of love and affection with the victims, and therefore failed to satisfy the criteria.
2. 2. That a rescuer who had not been exposed to the risk of physical injury was not a ‘primary victim’ and also had to satisfy the Alcock criteria, or secondary victim criteria, if they were going to be successful.

Question 12

What policy reason does Hoffmann give for not extending the Alcock criteria to bystanders or even rescuers?

Answer 12

But I think that such an extension would be unacceptable to the ordinary person because (though he might not put it this way) it would offend against his notions of distributive justice. He would think it unfair between one class of claimants and another, at best not treating like cases alike and, at worst, favouring the less deserving against the more deserving. He would think it wrong that policemen, even as part of a general class of persons who rendered assistance, should have the right to compensation for psychiatric injury out of public funds while the bereaved relatives are sent away with nothing.”
“According to Lord Hoffmann, the majority in this case merely declined to extend the boundaries of liability to rescuers who were not themselves primary victims, because they were not physically endangered. The definition of a primary victim as one who is physically endangered was said to be drawn from Page v Smith. But as Lord Goff pointed out in his dissent, and as we said clearly above, it is most unlikely that Lord Lloyd in Page v Smith was seeking to set out an exclusive test for primary victims. The majority was introducing a new control device.”

Question 13

What is the 1st exclusionary rule for pure economic loss and why is it not recoverable?
(relational economic loss)

Answer 13

Section 1/ Category A- Relational economic loss:

• The typical example is where A caused damage to Bs property, which causes C to lose money (note that C does not own the property, B does, but C loses out as a result).
• A number of reasons would cause C to lose out, including some contractual relationship between C and B.
• Policy reasons against allowing this to be recovered are sometimes considered ‘floodgate’ reasons, to prevent increasing numbers of claims for the economic losses (which could be considered missed economic opportunities instead). ‘indeterminate liability’ is also sought to be avoided, as there may be a number of different affected potential claimants who could say that their economic opportunity was missed because of the defendant.
• Many small claims may be made, whereby one defendant takes on the burden of such claims, despite not damaging property owned by any of the claimants; more equitable to deny many small remedies than allow one party to carry the burden of all claims, despite not owing a duty of care to the claimants, who lack any proprietary right to the damaged property.
• Also can be expressed as the ‘lost economic opportunity argument; an argument which recognises the highs and lows associated with operating a business (can also be private parties too)

Question 14

Facts and outcome of Spartan Steel & Alloys v Martin 1973?

Answer 14

Facts- the defendant dug up a road, severing a power supply negligently. The plaintiffs factory, a smelting factory, lost power for 14 hours, resulting in a number of damages, which were the following explained by Lord Denning:
“At the time when the power was shut off, there was an arc furnace in which metal was being melted in order to be converted into ingots. Electric power was needed throughout in order to maintain the temperature and melt the metal. When the power failed, there was a danger that the metal might solidify in the furnace and do damage to the lining of the furnace. So the plaintiffs used oxygen to melt the material and poured it from a tap out of the furnace. But this meant that the melted material was of much less value. The physical damage was assessed at £368.
In addition, if that particular melt had been properly completed, the plaintiffs would have made a profit on it of £400 (consequential economic loss)
Furthermore, during those 14 hours, when the power was cut off, the plaintiffs would have been able to put four more melts through the furnace: and, by being unable to do so, they lost a profit of £1,767.”

Significance- These economic losses, as opposed to the physical damages (£368 plus £400 consequential economic loss) were not recoverable, the court held. They were relational economic loss as they were for future anticipated losses rather than legitimate losses (the damage to the furnace plus the resultant product being of much less value as a result of the furnace being unable to operate).

Question 15

What 3 reasons did Lord Denning give in Spartan steel as to why the pure economic loss was not recoverable?

Answer 15

“1) The second consideration is the nature of the hazard, namely, the cutting of the supply of electricity. This is a hazard which we all run. It may be due to a short circuit, to a flash of lightning, to a tree falling on the wires, to an accidental cutting of the cable, or even to the negligence of someone or other. And when it does happen, it affects a multitude of persons: not as a rule by way of physical damage to them or their property, but by putting them to inconvenience, and sometimes to economic loss. The supply is usually restored in a few hours, so the economic loss is not very large. Such a hazard is regarded by most people as a thing they must put up with—without seeking compensation from anyone. Some there are who install a stand-by system. Others seek refuge by taking out an insurance policy against breakdown in the supply. But most people are content to take the risk on themselves. (other options therefore available to businesses)

2) The third consideration is this: if claims for economic loss were permitted for this particular hazard, there would be no end of claims. Some might be genuine, but many might be inflated, or even false… Rather than expose claimants to such temptation and defendants to such hard labour—on comparatively small claims—it is better to disallow economic loss altogether, at any rate when it stands alone, independent of any physical damage.
3) The fourth consideration is that, in such a hazard as this, the risk of economic loss should be suffered by the whole community who suffer the losses—usually many but comparatively small losses—rather than on the one pair of shoulders, that is, on the contractor on whom the total of them, all added together, might be very heavy… “ (this does not apply to all pure economic loss cases, as in many, the actioning party might be the only to suffer losses- quite specific to the facts of this case- in such a case, would be subject to the Caparo criteria it seems)

Question 16

Main importance of the Aliakmon (facts too)

Answer 16

Facts- Goods were damaged during shipment through the negligence of charters. The contractual negotiations dictated that the risk of damage had already passed to the plaintiffs upon shipping, but ownership did not pass until they were warehoused by the plaintiff. As a result, neither party to the contract could bring a claim, due to their strange contractual characteristics

Despite Lord Goff’s best efforts, liability could not be extended to cover the prospective owners in the absence of any contractual term purporting to extend such liability for damage when no legal ownership yet existed. The risk passed but ownership had not, and this was the result of a poor contractual relationship and negotiations.

Question 17

Facts and significance of Shell UK Ltd v Total UK 2010?

To what extent did this case extend liability

Answer 17

Facts- Fuel pipelines were damaged in an explosion, which were held on trust for shell, among others. Shell was not the legal owner of the pipes, but it was contended whether the negligent party were liable to pay for the CONSEQUENTIAL economic loss resulting from this, despite not actually owning the pipes. As they did not own the pipes, it was contended whether this was merely a case of relational economic loss, and therefore not actionable.

Significance- Court of appeal held that Shell should be able to recover, as they were the beneficial owner (so long as the actual owner joined in the proceedings). If the normal rules applied, the damage to property owned by the actual pipe owners which resulted in pure economic loss to shell would mean that shell should not be able to recover. They invested in the Pipeline- legal owner not required, but must be brought alongside the legal owner, very limited extension of the relational loss rule.
Waller LJ, Shell UK v Total UK (judgment of the Court)
“Para 143: We must confess to being somewhat influenced … by what Lord Goff of Chievely in White v Jones… called ‘the impulse to do practical justice’. It should not be legally relevant that the co-owners of the relevant pipelines, for reasons that seemed good to them, decided to vest the legal title to the pipelines in their service companies and enjoy the beneficial ownership rather than the formal legal title. Differing views about the wisdom of the exclusionary rule are widely held but however much one may think that, in general, there should be no duty to mere contracting parties who suffer economic loss as result of damage to a third party’s property, it would be a triumph of form over substance to deny a remedy to the beneficial owner of that property when the legal owner is a bare trustee for that beneficial owner.”

Question 18

Are economic losses incurred by acquiring defective products/ premises actionable? (relates to previous week)

Answer 18

-The general rule, as seen in defective products in the previous weeks, is that there is no recovery for pure economic loss deriving from defective products, where the economic loss only exists as economic loss because the cost of the defective product is not reimbursed. There is instead remedies under contract law, but certainly not under tort law- there must be damage of some sort

Question 19

Facts of Hedley Byrne v Heller & Partners 1964?

Answer 19

The appellants were advertising agents who planned to place orders for a company and who therefore asked their bankers to enquire into the financial stability of the company. Upon asking the company, the appellants were told of many favourable references, but that these had been given by the respondents ‘without responsibility’. It was upon these favourable statements that the plaintiffs placed an order but incurred economic loss as a result, because the company from which they had bought from went into liquidation. Hedley Byrne lost £17,000 and brought a claim in negligence against the company’s bankers (Heller and partners) for their statements which said that Easipower was ‘considered good for its ordinary business engagements’.

Question 20

What was the outcome of the case of Hedley Byrne?

Important quote regarding this decision as well

Answer 20

The appellants failed because whilst liability would have been accepted for the negligently prepared financial statements, the exclusionary clause in the contract was sufficient to absolve Heller and partners of liability for the negligently prepared statement.

As is often quoted, “A man cannot be said voluntarily to be undertaking a responsibility if at the very moment when he is said to be accepting it he declares that in fact he is not.”

Question 21

What was Lord Morris’s understanding for potentially imposing liability on the bank in Hedley Byrne?

Answer 21

“My Lords, I consider that it follows and that it should now be regarded as settled that if someone, possessed of a special skill undertakes quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise. The fact that the service is to be given by means of or by the instrumentality of words can make no difference. Furthermore, if in a sphere in which a person is so placed that others could reasonably rely upon his judgment or his skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his (p. 371) information or advice to be passed on to, another person who, as he knows or should know, will place reliance upon it, then a duty of care will arise.”

Proximity argument made between the provider of the statement and the receiver of the statement, where it is foreseen that the receiver will act upon the negligent statement. The defendants in this case would be liable but for their express exclusion of liability.

THIS IS CLEARLY AN APPLICATION OF THE PRINCIPLE OF PROXIMITY, AS THE LINK BETWEEN PLAINTIFF AND DEFENDANT DERIVES FROM THE NEED AND PROVISION OF THE SERVICES OF THE DEFENDANT, WITH WHICH COMES THE REQUIRED FORESEEABILITY OF RELIANCE OF SAID SERVICES.

Question 22

What was Lord Devlin’s criteria for Hedley Byrne liability extension?
How does he link it to the general negligence requirement of proximity/ justify it as an application of proximity?

Answer 22

I shall therefore content myself with the proposition that wherever there is a relationship equivalent to contract, there is a duty of care. Such a relationship may be either general or (p. 372) particular. Examples of a general relationship are those of solicitor and client and of banker and customer. For the former Nocton v. Lord Ashburton has long stood as the authority and for the latter there is the decision of Salmon J. in Woods v. Martins Bank Ltd ([1959] 1 Q.B. 55) which I respectfully approve. There may well be others yet to be established. Where there is a general relationship of this sort, it is unnecessary to do more than prove its existence and the duty follows. Where, as in the present case, what is relied on is a particular relationship created ad hoc, it will be necessary to examine the particular facts to see whether there is an express or implied undertaking of responsibility.

I regard this proposition as an application of the general conception of proximity. Cases may arise in the future in which a new and wider proposition, quite independent of any notion of contract, will be needed

Question 23

What was Lord Reid’s understanding of extending liability in Hedley Byrne (but for the contractual clause)?

Answer 23

Reid’s reasonable man and reliance argument:

Another obvious difference is that a negligently made article will only cause one accident, and so it is not very difficult to find the necessary degree of proximity or neighbourhood between the negligent manufacturer and the person injured. But words can be broadcast with or without the consent or the foresight of the speaker or writer. It would be one thing to say that the speaker owes a duty to a limited class, but it would be going very far to say that he owes a duty to every ultimate “consumer” who acts on those words to his detriment…”
… A reasonable man, knowing that he was being trusted or that his skill and judgment were being relied on, would, I think, have three courses open to him. He could keep silent or decline to give the information or advice sought: or he could give an answer with a clear qualification that he accepted no responsibility for it or that it was given without that reflection or inquiry which a careful answer would require (as in this case): or he could simply answer without any such qualification. If he chooses to adopt the last course he must, I think, be held to have accepted some responsibility for his answer being given carefully, or to have accepted a relationship with the inquirer which requires him to exercise such care as the circumstances require

Question 24

Facts of Caparo Industries v PLC Dickman 1990?

Answer 24

Caparo Industries purchased shares in Fidelity Plc in reliance of the accounts which stated that the company had made a pre-tax profit of £1.3M. In fact, Fidelity had made a loss of over £400,000. Caparo brought an action against the auditors claiming they were negligent in certifying the accounts.”

They were entitled to do their own audit but relied on another auditor who had put out information into general circulation rather than operating for a particular client/ for Caparo

Question 25

What was the decision made in Caparo?

Answer 25

The House did not rely on the ‘voluntary assumption of responsibility’ approach as they decided it was not helpful; rather, they concentrated more so on the question of proximity between the statement-offering party (defendants) and the loss suffered by the claimants.

• Held, that the claim failed, and damages were not recoverable as there was insufficient proximity between D and C. The defendants had produced only general accounts and could not (nor did they) foresee that these accounts would be relied upon by others in order to make such transactions to buy shares, notwithstanding the fact that Caparo were already shareholders in the defendant’s firm.
• The Lords reversed the decision of the Court of appeal, who had previously held that a duty of care was owed to existing shareholders (including Caparo) in respect of the accuracy of the accounts)

Question 26

How did Lord Bridge differentiate the case of Caparo from the cases of Hedley Byrne, Candler v Crane?

Answer 26

The salient feature of all these cases is that the defendant giving advice or information was fully aware of the nature of the transaction which the plaintiff had in contemplation, knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation. In these circumstances the defendant could clearly be expected, subject always to the effect of any disclaimer of responsibility, specifically to anticipate that the plaintiff would rely on the advice or information given by the defendant for the very purpose for which he did in the event rely on it. So also the plaintiff, subject again to the effect of any disclaimer, would in that situation reasonably suppose that he was entitled to rely on the advice or information communicated to him for the very purpose for which he required it. The situation is entirely different where a statement is put into more or less general circulation and may foreseeably be relied on by strangers to the maker of the statement for any one of a variety of different purposes which the maker of the statement has no specific reason to anticipate. To hold the maker of the statement to be under a duty of care in respect of the accuracy of the statement to all and sundry for any purpose for which they may choose to rely on it is not only to subject him, in the classic words of Cardozo C.J. to “liability in an indeterminate amount for an indeterminate time to an indeterminate class :

Question 27

What is the Caparo test (3 criteria) and in what situations is it thought to apply?

Answer 27

The Caparo test:, in this category of the tort of negligence, as an essential ingredient of the “proximity” between the plaintiff and the defendant, that the defendant knew that his statement would be communicated to the plaintiff, either as an individual or as a member of an identifiable class(Foresight), specifically in connection with a particular transaction or transactions of a particular kind (e.g. in a prospectus inviting investment) and that the plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter upon that transaction or upon a transaction of that kind.”(fairness)
This is a test to be applied when the relationship is not one which is akin to contract, but instead where a voluntary assumption of responsibility might have arisen due to the relationship between the parties.
-In addition, it must be ‘just and reasonable’ to lay down a duty to impose a common law duty in all circumstances.

Question 28

Facts and significance of Smith v Bush following Hedley Byrne (both economic loss cases)?

Answer 28

Facts- A surveyor, Eric Bush, was employed by a building society, Abbey National, to inspect and value 242 Silver Road, Norwich.[1] Eric Bush disclaimed responsibility to the purchaser, Mrs Smith, who was paying a fee of £36.89 to the building society to have the valuation done. The building society had a similar clause in its mortgage agreement. The property valuation said no essential repairs were needed. This was wrong. But Mrs Smith relied on this and bought the house. Bricks from the chimney collapsed through the roof, smashing through the loft. Mrs Smith argued there was a duty of care in tort to exercise care in making statements and then that the clause excluding liability for loss or damage to property was unreasonable under 2(2) and 13(1) of UCTA 1977. The value of the property at the time was around £88,000.
-Reasonableness in UCTA now changed to fairness under CRA 2015 (depends on relationship). Overlooked disclaimer of liability.

Significance- Hedley Byrne liability extended for pure economic loss suffered by the reliance on statements made by a third party acting on behalf of the insurance company which valued the house and assessed for any defects.

• It was reasonable for the house buyer to rely on the statement of the surveyor with regard to the condition of the house. Significance of decision to invest as one’s home is large; foreseeable by the surveyor that the plaintiff would reasonably rely on this information to purchase the house.
• Doesn’t extent to rented property or properties bought as investments.
• Not all home buyers can afford private surveyors, less wealthy unable to afford, they didn’t have much choice but to use surveyors supplied by bank/ building society, may be inequitable to allow the claim due to the adverse socioeconomic situation of the plaintiff who may have avoided the loss had they been able to afford a private surveyor.

Question 29

Facts and significance of Spring v Guardian assurance 1995 regarding extending Hedley Byrne liability?

Answer 29

Facts- the plaintiff was employed by a company, which acted as estate agents as well as selling insurance as an ‘appointed representative’ for GA. The plaintiff was a ‘company representative’ of GA. When the plaintiff’s company was sold to guardian, the new CEO did not get on with the plaintiff and dismissed him without reason. He sought to set up his own business and approached a company, who needed references from GA to appoint him. LAUTRO rules required its members to take “reasonable steps to satisfy itself that he is of good character and of the requisite aptitude and competence, and those steps shall … include … the taking up of references relating to character and experience.” Guardian Assurance sent unsatisfactory references for Mr Spring, not just to Scottish Amicable, but also to two other companies that were considering a similar appointment. He claimed this amounted to negligent misstatement, and that the company was liable for damages in tort. He accordingly sued for malicious falsehood, breach of contract and negligence.

Significance- the House of Lords held that Guardian owed the plaintiff a duty of care, and it further held, 3-2, that “where the relationship between the parties is that of employer and employee, the duty of care could be expressed as arising as an implied term of the contract of employment.”
-The defamation suggestion under tort was quickly shut down, and a defence of qualified privilege would protect the defendants unless any malice was made out (not really contended in the case).

Question 30

How did Lord Woolf apply the Caparo principle in Spring v Guardian?

Answer 30

• “Applying the Caparo criteria, Lord Woolf concluded that economic loss and financial instability to the plaintiff was clearly a foreseeable result of an adverse reference. Lord Woolf dealt very briefly with the ‘proximity’ criterion, saying (at 342) that ‘[t]he relationship between the plaintiff and the defendants could hardly have been closer’. This tends to prove Lord Devlin’s point when he said, in Hedley Byrne, that ‘proximity’ is not the sort of criterion that judges can sensibly be invited to apply directly. The public policy considerations that surrounded the qualified privilege defence were dealt with by Lord Woolf under the third of the Caparo criteria. He weighed up the public interest (protected by qualified privilege) in ‘full and frank’ expression in this context, with the competing public interest (as he saw it) that references should not be based upon negligent investigation. He concluded that public policy did not preclude the recognition of a duty to take care in the giving of references.

Question 31

What is the extension of Hedley Byrne liability in White v Jones 1995? How does Lord Goff explain it?

Answer 31

Hedley Byrne liability was extended to a proximate third party (beneficiaries of the contractual relationship between solicitor and testator, who suffered pure economic loss) providing the required foreseeability/ lack of remoteness looked for in negligence claims was present.

Lord Goff- “In my opinion, therefore, your Lordships’ House should in cases such as these extend to the intended beneficiary a remedy under the Hedley Byrne principle by holding that the assumption of responsibility by the solicitor towards his client should be held in law to extend to the intended beneficiary who (as the solicitor can reasonably foresee) may, as a result of the solicitor’s negligence, be deprived of his intended legacy in circumstances in which neither the testator nor his estate will have a remedy against the solicitor. Such liability will not of course arise in cases in which the defect in the will comes to light before the death of the testator, and the testator either leaves the will as it is or otherwise continues to exclude the previously intended beneficiary from the relevant benefit

Question 32

Facts and outcome of White v Jones 1995?

Answer 32

Facts- a testator executed a new will after a family quarrel, disinheriting his two daughters (the plaintiffs). After the two parties made up, he called his solicitor and asked him to reinstate his two daughters, but he died before the solicitor was able to complete this.

Significance- Lord Goff acknowledged that there was no true assumption of responsibility on the part of the defendant towards the plaintiffs but was of course assumed with respect of the solicitor and his client (the deceased) as a result of their akin to contract relationship. A remedy was nonetheless required, and instead this assumption of responsibility was construed to extend to the intended beneficiaries of the will and the acts of the deceased, who were the two daughter plaintiffs in this case. No contractual route could be used, as this was blocked by privity of contract (between solicitor and deceased). Instead, the assumption of responsibility was extended to the two daughters; this assumption would still be subject to any terms of contract between solicitor and deceased, ie any exclusion of liability, which would prevent its extension to the claimants in the same way that the deceased would also be unable to rely on breach of duty if he was still alive.
-IN this case there was no reliance upon an assumption of responsibility as the claimants were a third party whose interests were somewhat artificially protected, as well as having no direct communication with the solicitor.

Question 33

What does Lord Goff say in Henderson v Merrett regarding the concurrence of tort and contract, and how it impacts on assumption of responsibility?

Answer 33

“Mr. Kaye’s approach involves regarding the law of tort as supplementary to the law of contract, i.e. as providing for a tortious liability in cases where there is no contract. Yet the law of tort is the general law, out of which the parties can, if they wish, contract: and, as Oliver J. demonstrated, the same assumption of responsibility may, and frequently does, occur in a contractual context. Approached as a matter of principle, therefore, it is right to attribute to that assumption of responsibility, together with its concomitant reliance, a tortious liability, and then to enquire whether or not that liability is excluded by the contract because the latter is inconsistent with it (as done so in Hedley Byrne). This is the reasoning which Oliver J., as I understand it, found implicit, where not explicit, in the speeches in Hedley Byrne. With his conclusion I respectfully agree. But even if I am wrong in this, I am of the opinion that this House should now, if necessary, develop the principle of assumption of responsibility as stated in Hedley Byrne to its logical conclusion so as to make it clear that a tortious duty of care may arise not only in cases where the relevant services are rendered gratuitously, but also where they are rendered under a contract.” and this leaves it open to parties who reasonably contemplate the potential for liability for economic loss at the time that the contracts were made to contract out of such liability via reasonable exclusionary clauses (subject to UCTA/ CRA)

Question 34

Williams v Natural life health foods 1998 facts and significance regarding assumptions of responsibility?

Answer 34

Facts- The defendant, M, formed a company (the first defendant), of which he was the managing director and principal shareholder (second defendant). The plaintiffs negotiated for a franchise of the business, which turned out to be much less successful than expected, and they traded at a loss before going bankrupt. They brought a case on the basis that they had been negligently advised. Ordinarily, the director of a limited company has no personal liability in respect of the company’s debts. The plaintiffs argued that M had assumed personal responsibility to them, so that he owed a duty in tort having undertaken said personal responsibility.

Significance- In the present case there were no personal dealings between Mr Mistlin and the plaintiffs. There were no exchanges or conduct which crossed the line which could have conveyed to the plaintiffs that Mr Mistlin was willing to assume personal responsibility to the plaintiffs … I am also satisfied that there was not even evidence that the plaintiffs believed that (p. 390) Mr Mistlin was undertaking personal responsibility to them. Certainly, there was nothing in the circumstances to show that the plaintiffs could reasonably have looked to Mr Mistlin for indemnification of any loss.
If this seems a very strong test for assumption of responsibility, this can be explained by the particular need to show an assumption of personal responsibility sufficient to bypass the corporate structure within which the parties were working.
-For there to be to be an effective assumption of responsibility by a director, separate from his company, there had to be some clear direct or indirect assumption of such responsibility. The test for assumption is whether the plaintiff could reasonably rely on an assumption of personal responsibility by the individual performing services on behalf of the company.

Question 35

What is said to be the following position regarding the recoverability of pure economic loss following Barclays Bank, regarding exclusionary rules, assumptions of responsibilities (or lack thereof), and the Caparo test?

Answer 35

1) There is no general exclusionary rule applying to economic loss. Rather, there are two specific exclusionary rules, applying to categories A and B.
2) Outside the scope of the exclusionary rules, additional criteria will apply, in addition to foreseeability or ‘neighbourhood’. On the other hand, these criteria also apply to other ‘novel’ cases in negligence. There are many examples in other sections of this chapter.
3) The ‘voluntary assumption of responsibility’ is not a mere label, though there remains a strong suspicion that it is given more or less content depending on the circumstances of the case. If it is present, then it may suffice without separate consideration of policy issues.
4) Though sufficient, the assumption of responsibility is not always necessary.33 If there is no voluntary assumption of responsibility, the three-stage test may nevertheless be satisfied (Caparo test of foresight, proximity and fairness). But in such cases, policy considerations will be especially important. The (p. 397) ‘fair, just and reasonable’ criterion can be frankly and openly reassessed in terms of ‘policy’: Lord Bingham, CEC v Barclays Bank, at [4], as seems to have been done in Smith v Bush.
5) Even if a duty is owed, it is important to consider the ‘scope’ of the duty. Does the claimant’s loss fall within its scope? This question applies whether the duty is derived from Hedley Byrne, or directly from Caparo.

Question 36

Facts and significance of Robinson v PE Jones 1991 regarding the concurrence of contractual and tortious liability?

Answer 36

Facts- “In 1991, PE Jones (a builder) agreed to build, off-plan, and sell a house to Robinson (the owner). Completion and transfer took place in 1992.
In 2004, the fire alarms at the property were serviced. One fire alarm failed the inspection and was disconnected. Further investigations revealed that the flues to the fire alarms had not been constructed in accordance with building regulations in force at the time the property was built or in line with good construction practice.”

Significance- “The Court of Appeal attempted to reconcile existing case law concerning the issue of whether or not a builder, who owes his client a contractual duty, also owes a duty of care in the tort of negligence for defects in the building which give rise to purely economic loss.
It was held that although a builder can (in principle) owe concurrent duties in tort and contract, in this case, the tortious duty had been excluded by the terms of the contract.
It was also confirmed that a builder does not, by reason of their contract to construct or complete the building, assume any liability in the tort of negligence for defects in the building which give rise to purely economic loss (D and F estates) and, further, that it is possible for a builder to include in their contract a provision excluding a concurrent tortuous liability in respect of purely economic loss (which all builders would be well advised to do).”