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CHAPTER 2

THE WEAPONS OF LAW

2.3.3Negligent Misrepresentation
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Negligence is Conduct which falls below the standard established by the Law for the protection of others against unreasonable Risk of harm.65


The decision of the House of Lords in Donoghue v Stevenson (1932, England) ‘treats negligence, where there is a duty to take care, as a specific tort in itself.’


In Donoghue v Stevenson Lord Atkin formulated the proposition which has come to be generally known as ‘the neighbour principle’:

'The rule that you are to love your neighbour becomes in law, you must not injure your neighbour ; and the lawyer’s question, Who is my neighbour ?, receives a restricted reply.

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 in question.66


In Loghgelly Iron and Coal Co. v M’Mullan (1934, England) Lord Wright said:

‘In strict legal analysis, negligence means more than heedless or careless conduct, whether in omission or commission: it properly connotes the complex concept of duty, breach and damage thereby suffered by the person to whom the duty is owing.’67



Therefore, where a ‘duty of care’ arises, conduct constituting negligence, whether in omission or commission, is a breach of that duty and creates a liability in damages to the person to whom the duty is owing.


The standard of Conduct required by the Common Law is that of the reasonable man.
68


The reasonable man is sometimes described as ‘the man in the street’, ‘the man on the Clapham omnibus’.68A But, when the exercise of some special skill or competence, such as that of an architect or doctor, is in question, the test of the man on the Clapham omnibus is somewhat unreal. Where, as is the case with a professional person, the exercise of some special skill or competence is intrinsic to the practice of the profession, then, it is expected of such a professional person that he should show a fair, reasonable and competent degree of skill.68B If he does not do so, he will be guilty of professional negligence.





For over thirty years now there has been a marked tendency, legislative as well as judicial, to expound the standard of care required in any particular case more in terms of Risk than in terms of reasonable foreseeability.69

A Risk is a chance of harm to others which the party whose Conduct has been called in question should have recognised.70


The Law in all cases exacts a degree of care commensurate with the Risk created.



There are two factors in determining the magnitude of a Risk — the seriousness of the injury risked, and the likelihood of the injury being in fact caused. The general principle is that before negligence can be established it must be shown not only that the event was foreseeable but also that there is a reasonable likelihood of injury.71


The reasonableness of the defendant’s conduct will also depend upon the proportion which the Risk bears to the Object to be attained. To expose others to a Risk of harm for a disproportionate Object is unreasonable, whereas an equal risk for a better cause may be lawfully run without negligence.
72





A Fiduciary Relationship


Traditionally, the general rule was that the Common Law duty to take care to avoid causing injury to others was restricted to physical injury either to person or property, and to financial losses consequent upon such injury.73



In Derry v Peek (1889, England) [see Section 2.3.2], the action of the plaintiffs had been based on fraudulent misrepresentation ['actual fraud']. It was assumed at the time, and for seventy years afterwards (until the 1964 Hedley Byrne v Heller case — related below), that the House of Lords in this case decided that no action would lie for negligent words, at least where reliance on them produced purely financial loss. It was therefore assumed that all non-fraudulent misrepresentations should be classed together as innocent misrepresentations.73A

There was, however, an important exception through Equity, in that an action would lie for negligent misrepresentation if there was a fiduciary relationship between the parties.73B

(The fiduciary is the party in whom the other party places trust / confidence.)


Note! Equity, as a branch of Law, means: the body of principles of justice constituting what is fair and right; the system of law or body of principles of justice originating in the English Court of Chancery and which supersedes the Common Law and Statute Law where there is conflict with natural justice. (Ref: Black's Law Dictionary.)

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A fiduciary relationship is also referred to as a confidential relationship.

The sole question in every case is whether the parties are so situated towards one another as to raise a presumption of confidence. If they were so situated, then, whatever be the correct definition of the relationship which in fact existed between them, or, whether such a relationship admits to any definition or classification at all, the case is within what Lord Eldon, Lord Chancellor, described in Gibson v Jeyes (1801, England) as "that great rule of the Court [of Chancery], that he, who bargains in matters of advantage with a person placing confidence in him is bound to shew that a reasonable use has been made of that confidence".73C



The basic principle on which much of the law of fiduciary duty is based is "the obligation not to profit from a position of trust, or, as it is sometimes relevant to put it, not to allow a conflict to arise between duty and interest ..."74


Note! In explaining the meaning of obligation in Law, Black’s Law Dictionary quotes from Glanville William’s edition of Salmond on Jurisprudence (10th edition 1947):

‘‘…the term obligatio (an obligation) is in law the name, not merely of the duty, but also of the correlative right. It denotes the legal relation or vinculum juris (bond of law) in its entirety, including the right of the one party, no less than the liability of the other.

Looked at from the point of view of the person entitled, an obligation is a right; looked at from the point of view of the person bound, it is a duty…..’

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Fiduciary Law may be best understood as a primary weapon of justice developed by the Court of Chancery (through Equity) to counter the 'abuse of position' by those in whom confidence is reposed.


In all cases of fiduciary misconduct, the fiduciary has a strong incentive to keep that misconduct secret. In every such case a type of deception is involved and, historically, these may all be derived from the underlying notion of 'equitable fraud' (related below) propounded by Lord Hardwicke, Lord Chancellor, in the foundation case of Chesterfield v Janssen (1851, England).74A

This underlying notion of ‘equitable fraud’ (a 'presumption of fraud') has had major significance in the development of law governing the circumstances and relationships between contracting parties. (This will become evident below and in Section 2.3.4, The Duty to Disclose and Silence as a Misrepresentation.)

 

But, in addition to its relevance to the equitable doctrines governing such relationships, the concept of ‘equitable fraud’ also impacts on yet another major doctrine of Equity.

For the concept of ‘equitable fraud’ is of paramount importance to the ‘postponement of the limitation period’ provisions within the Statute of Limitations applying in any particular jurisdiction. And it is through Equity that these respective ‘postponement provisions’ are to be interpreted. (See Section 2.9: The Time Limit for Legal Action.)

Before any further expansion on fiduciary law, a more comprehensive knowledge of the concept of ‘equitable fraud' is therefore warranted.

 

Note! Throughout this website-book, unless the term ‘equitable fraud’ is specifically used, the term fraud will always mean ‘actual fraud’, i.e. fraud  as defined in Derry v Peek. (See Section 2.3.2: Fraudulent Misrepresentation.)

 

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‘Equitable Fraud’


In Chesterfield v Janssen (1851, England), Lord Hardwicke, through the Court of Chancery, had set down ‘every species of Fraud’ (he listed four) against which Equity would grant relief.


Lord Hardwicke particularised one such species of fraud as applicable to certain circumstances and relationships, where, even though there may not be evidence of ‘an actual intention to cheat74B (see Nocton v Ashburton below), Equity would invoke a ‘presumption of fraud’:

‘a kind of fraud [is] which may be presumed from the circumstances and condition of the parties contracting. This goes farther than the rule of law, which is, that it must be proved, not presumed; but it is widely established in this Court to prevent taking surreptitious advantage of the weakness or necessity of another, which knowingly to do, is equally against conscience, as to take advantage of his ignorance.’

 


Note! While Lord Hardwicke incorporated ‘every species of fraud’ when he set down the jurisdiction of Equity on the matter of Fraud in 1851, the term ‘equitable fraud’ is most often used to distinguish Lord Hardwicke’s particular species of fraud where, from the circumstances and relationship between the parties, there is a 'presumption of fraud' (as cited above) — as distinct from where there is evidence of ‘actual fraud’.

 

Within the context of the prevailing circumstances and relationship between the contracting parties, the term ‘equitable fraud’ is therefore used to distinguish conscious (knowing or reckless) conduct by the one party, which, even though there may be no evidence of intention to deceive, nonetheless results in that party being presumed to have secretly taken advantage of the other.

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We now return to the evolution of modern Fiduciary Law.


It must now be clear that where a party in whom confidence is reposed knowingly (or recklessly) takes secret advantage of the trusting party, in the situation as described by Lord Hardwicke in Chesterfield v Janssen (above), it will often be difficult to prove (on the balance of probabilities) that this was done. It would therefore be difficult to prove that the circumstances giving rise to a 'presumption of fraud' exist.

Even though the trusting party has been wronged by the other party having secretly taken advantage of him, in the absence of evidence of knowledge (or recklessness) on his part, the party in whom trust has been reposed would still keep the benefit of his misconduct. There would therefore be no justice for the wronged party in such circumstances.

Worse still, such an application of Law would encourage and reward widespread fraud ('actual fraud'). It would make a mockery of all the relationships of confidence by which society must function, and it would run wholly contrary to the greater good.

This is the problem being addressed by Equity under Fiduciary Law.


In a relationship where one party must place trust / confidence in another, it will often not be known, or it will be unclear, whether or not the party in whom trust / confidence is being reposed (in this case — the fiduciary) has, knowingly or recklessly, done wrong. Therefore, if there has been misconduct (fraudulent, or otherwise), it is likely to remain concealed.

So, Equity, in applying the principles of Justice under Fiduciary Law, prohibits the fiduciary from even allowing the eventuality to arise where he could have an opportunity to secretly do wrong to the other party.

There must be no potential for the fiduciary to profit secretly from the transaction.


Under Fiduciary Law, when a fiduciary allows the eventuality to arise where he could be seen to have a covert opportunity to do wrong to (take advantage of) the trusting party, this becomes a misconduct of itself; and such misconduct (obviously, discounting there being evidence of 'actual fraud') is deemed to be a negligent breach of fiduciary duty.


However, it must now also be clear, from the particular circumstances giving rise to a 'presumption of fraud', as described by Lord Hardwicke in Chesterfield v Janssen (above), that for any party in whom trust / confidence is reposed (in this case — the fiduciary) the opportunity for perpetrating 'actual fraud' (be it 'common law fraud' or 'criminal fraud') against the trusting party —— is immediate.

Note! See Nocton v Ashburton below, where Viscount Haldane sets out the distinction in Law between 'actual fraud' and 'equitable fraud'.

(This issue of opportunity for perpetrating 'actual fraud' (both 'common law fraud' and 'criminal fraud') goes to the heart of what this website-book is about and will be discussed further in Section 2.3.4, The Duty to Disclose and Silence as a Misrepresentation, and in Section 2.3.6: Fraud and the Conman —— U.K. Law and Irish Law.)

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The key feature of a fiduciary or confidential relationship is therefore that one party is under a duty to act in the interests of another.74C The fiduciary, if contested, must be able to show that he has fulfilled that duty for the contract to be upheld by a court.


Fiduciary (or confidential) relationships can be divided into two categories —— those that are status based, e.g. principal and agent, solicitor and client, trustee and beneficiary, etc., —— and those where, in the absence of an inherently fiduciary status, the factual situation of the particular relationship between the parties gives rise to a fiduciary relationship.74D


The courts have always refused to confine this equitable jurisdiction to just the first category of status based relationships.75

Modern theory of Law and judicial practice, therefore, do not attempt to ascribe any specific legal meaning to the term 'fiduciary'.75A The courts are prepared to interfere in a contract wherever one party deliberately and voluntarily places himself in such a position that it becomes his duty to act fairly and to have due regard to the interest of the other party.75B


Professor Justice Finn, in his work on Fiduciary Obligations (1977), describes the work undertaken by the fiduciary (the party in whom trust is reposed) thus:

‘He [the fiduciary] is, simply, someone who undertakes to act for or on behalf of another in some particular matter. That undertaking may be of a general character. It may be specific and limited. It is immaterial that the undertaking is gratuitous. And the undertaking may be officiously assumed without request.'75C


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As will be seen in Section 2.3.4, ‘under certain circumstances a duty may arise to disclose a material fact, and its non-disclosure may have the same effect as a representation of non-existence'.76

Those in a fiduciary (or confidential) relationship with another are under a duty to make full disclosure of all material facts which might be considered likely to affect a transaction with those to whom the duty is owed.76A


Note! A knowledge of the circumstances where 'the law of non-disclosure' applies is fundamental to your comprehension of what will be exposed in this website-book. These circumstances will be explored further below, under 'A Special Relationship', and in Section 2.3.4: The Duty to Disclose and Silence as a Misrepresentation.)


There are other fiduciary duties, which are not directly concerned with the law of non-disclosure, and which follow from the overriding principle that there must not be a situation  WHERE THERE COULD BE a conflict between self-interest and duty.76B

Fiduciaries are under a duty not to take bribes, secret PROFITS or secret COMMISSIONS.

This is an absolute rule of Law.76C



In cases where there is a contention of misconduct by way of negligent misrepresentation by a fiduciary, all the party reposing trust has to establish is the existence of the fiduciary relationship. (Bear in mind that a fiduciary's not fulfilling any of the duties incumbent upon him, of itself, constitutes misconduct.)

The burden of proof rests with the fiduciary to establish that he has discharged all his fiduciary duties. If he cannot do so, he cannot hold the other party to the contract.

 




'Fiduciary Relationship' and the evolution of the broader category of 'Special Relationship'


In Nocton v Ashburton (1914, England), Viscount Haldane, Lord Chancellor, came to the conclusion that there might be cases where there were duties of particular obligation. In educing this conclusion, Viscount Haldane ensured clarity of understanding by first setting out the distinction in Law with respect to the concepts of 'actual fraud' and 'equitable fraud' (see Chesterfield v Janssen above):

'My Lords, it is known that in cases of 'actual fraud' the Courts of Chancery [Equity] and of Common Law [up until 1875 these were separate Courts] exercised a concurrent jurisdiction from the earliest times ....

But in addition to this concurrent jurisdiction, the Court of Chancery [Equity] exercised an exclusive jurisdiction in cases which, although classified in that Court as cases of fraud, yet did not necessarily import the element of dolus malus ['bad deceit', i.e. fraudulent design or intent (Ref: Black's Law Dictionary)]. The Court [of Equity] took upon itself to prevent a man from acting against the dictates of conscience as defined by the Court, and to grant injunctions in anticipation of injury, as well as relief where injury had been done. .....'77

'..... it is a mistake to suppose that an actual intention to cheat must always be proved. A man may misconceive the extent of the obligation which a Court of Equity imposes on him. His fault is that he has violated, however innocently because of his ignorance, an obligation which he must be taken by the Court to have known, and his conduct has in that sense always been called fraudulent, even in such a case as a technical fraud on a power. It was thus that the expression “constructive fraud” ['equitable fraud'] came into existence.'77A

 

Viscount Haldane then set out how such duties of particular obligation may arise:

'Such a special duty may arise from the circumstances and relations of the parties. These may give rise to an implied contract or to a fiduciary obligation in Equity. .... I do not find in Derry v Peek an authority for the suggestion that an action for damages for misrepresentation without an actual intention to deceive may not lie. What was decided there was that from the facts proved in that case no such special duty to be careful in statement could be inferred, and that mere want of care therefore gave rise to no cause of action..... I have only to add that the special relationship must, whenever it is alleged, be clearly shewn to exist.'77B


Viscount Haldane effectively treated 'a fiduciary relationship' as a particular subset of a broader category of relationship, which he described as 'a special relationship' .77C

 

Lord Shaw, in support of Viscount Haldane's conclusion, cited Sir Roundell Palmer in Peek v Gurney (1873, England), prophetically stating that Sir Roundell Palmer's argument 'may well afford guidance as to the antecedent state of the law of Equity':78

“Equity will interfere only in the following cases: first, wherever a contract is to be rescinded; secondly, where fraud, in the proper sense of the word [i.e. 'actual fraud'], is to be redressed; thirdly, where a representation has been made which binds the conscience of the party and estops (bars) and obliges him to make it good. In the last case the representation in Equity is equivalent to a contract ......"





In Woods v Martins Bank Ltd. and Another (1959, England),78A Salmon J. held that the particular factual situation was such as to give rise to a fiduciary relationship between the bank and its customer.


But in his judgement Salmon J. also intimated that, even if the relationship (in this particular instance) had not extended to full fiduciary status, he would still have held that the relationship between the bank and the plaintiff was such that the bank would be under a duty of care when giving advice.



At the beginning of May 1950, the manager of a branch of Martins Bank, in reply to a request by the plaintiff (who had no real business experience) to be his financial adviser, said that the bank would be only too pleased to take care of the plaintiff's financial affairs.

A short time later (on 9th May 1950), the plaintiff was induced to invest in shares in ‘Company A’, in consequence of advice given by the bank manager that the company, who were customers of the bank, were financially sound and that the investment was a wise one to make.

A month later again, relying on further advice from the bank manager, the plaintiff invested in more shares in 'Company A' and also made a loan available to the company.

And some twenty months after that, the plaintiff signed a guarantee of the overdraft of another company, ‘Company B', with the Martins Bank, again relying on advice from the bank manager that this company too was sound financially.


There were no grounds on which the bank manager could reasonably have advised that ‘Company A’ was in a sound or strong financial position, and still less could the investment in the shares be reasonably recommended as a wise one.

Unknown to the plaintiff, ‘Company A’ had a considerable overdraft with the bank, and the district head office of the bank had at all material times been pressing the branch manager to procure a reduction on this overdraft.

Nor were there any reasonable grounds for the bank manager giving the advice in relation to ‘Company B'.

 


Salmon J., in giving judgement, held that:

(1) The limits of a banker's business could not be laid down as a matter of law; the nature of such a business must in each case be a matter of fact, and on the facts it was within the scope of the bank's business to advise on all financial matters, and they owed a duty to the plaintiff to advise him with reasonable care and skill in the transactions referred to.

(2) From the time, on 9th May 1950, when the bank accepted the plaintiff’s instructions to invest [in consequence of advice given by the bank manager] the relationship of banker and customer existed (see Note! below) between them.

(3) Even if the plaintiff did not become a customer until later, the defendants would still have been under a duty to exercise ordinary skill and care in advising him in relation to his first investment in shares in ‘Company A’ on 9th May.

(4) The bank manager ought never to have advised the plaintiff without making a full disclosure to him of the conflicting interest between the plaintiff and the bank and the bank's other customers concerned.

(5) A fiduciary relationship existed between the plaintiff and the defendants.

 


NOTE !

 

The legal doctrine applicable in Woods v Martins Bank is often argued to have been that of 'undue influence', which, in light of the plaintiff's innocence and inexperience, is obviously a valid argument. While the judgement of Salmon J. has sometimes been criticised in that regard, there has been a marked reticence to interrogate his (Salmon J.'s) denial of fraud, even though the factual situation could be seen to support an 'absence of honest belief' on the part of the banker.

But notwithstanding any such criticisms, the fact remains that the existence of 'undue influence' does not negate a co-existence of 'fiduciary duty'. There can be clear overlaps in a particular set of circumstances between the two doctrines.

And, in the context of betterment for society in the perceived application of Law to the activities of those within the Financial Services Sector, the concentration of the judgement of Salmon J. on the circumstances that give rise to activation of a fiduciary relationship should have been seen to be of much greater relevance.

As will be seen below in the speeches from the House of Lords in Hedley Byrne v Heller & Partners, Lord Devlin respectfully approved of the decision of Salmon J. in Woods v Martins Bank.

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It is clearly to be understood from the judgement of Salmon J. (above) that it was the particular factual situation that gave rise to the existence of a fiduciary relationship.

Note particularly how Salmon J., in his judgement, draws a clear distinction between a 'customer' of the bank (i.e. an 'existing customer' of the bank) and a 'potential customer' of the bank.


In Woods v Martins Bank, the factual circumstances supported recognition that a fiduciary relationship existed or had been created / triggered on a number of fronts:

—— the relationship of confidence between banker and customer already existed when the bank manager advised the plaintiff to invest in the shares [the bank manager had already assured the plaintiff (when they first met at the beginning of May) that the bank would be only too pleased to take care of the plaintiff's financial affairs].

—— the bank manager knew that the plaintiff, who was an existing customer of the bank, was placing trust / confidence in his advice (advice from a bank manager to an existing customer regarding a choice of investment must be advice that puts the customer's interests first, and not those of the bank manger himself, or of the bank, or of any other party).

—— AND, there was a clear conflict of interest on the part of the bank (the bank's exposure to Risk was being mitigated by the transfer of some or all of that Risk to the customer / plaintiff) — and this conflict of interest was not disclosed to the plaintiff.

 

But Salmon J. also makes it clear in his judgement that, even if the plaintiff had not already been a customer prior to the time of his initial investment, even if he had been just a 'potential customer', once the bank manager chose to give advice on that investment —— he took on a duty of care in respect of the advice given.


In such circumstances, discounting the issue of 'conflict of interest', if the plaintiff had just been a 'potential customer', the duty of care would follow from the relationship created by the bank manager assuming the role of adviser. [As we have seen above, such a special relationship had already been proposed by Viscount Haldane in Nocton v Ashburton (1914). And, as we shall see below, such a special relationship would finally come to be ratified in Law by the House of Lords in Hedley Byrne & Co. Ltd. v Heller and Partners Ltd. (1964).]

 

BUT !

And be absolute clear in your understanding of this!

Irrespective of a customer's status relative to a bank / financial service provider, i.e. irrespective of whether the customer is an 'existing' or a 'potential' customer, once a bank or any other financial service provider takes it upon itself to provide advice, in a potential 'conflict of interest' situation ——  a fiduciary relationship is triggered.

 




A Special Relationship


In 1964 the House of Lords decided Hedley Byrne & Co. Ltd. v Heller and Partners Ltd.
Here the plaintiffs (Hedley Byrne) were advertising agents who relied (to their eventual detriment) on statements made by the defendants (Heller and Partners Ltd.), who were the bankers of one of the plaintiffs’ clients, about the financial situation of these clients. The defendants made the statement negligently. The plaintiffs dealt with the bank’s clients as a result of the representations and lost money. The defendants were [however] protected from liability by an effective disclaimer.

 

The House of Lords decided that what was needed to create liability was a voluntary assumption of responsibility by the defendants towards the plaintiffs which resulted in reliance by the plaintiffs on the defendants’ statements. If the reliance was reasonable, the court may decide that a special relationship exists between the parties giving rise to a ‘duty of care’.79


N.B. Note the difference between a fiduciary or confidential relationship —— and the broader category of a special relationship, as decided by the House of Lords in Hedley Byrne & Co. Ltd. v Heller and Partners Ltd. (See the passages cited from Viscount Haldane's judgement in Nocton v Ashburton, above.)






Some passages in the speeches from the House of Lords decision in Hedley Byrne are important as specifying in more detail the circumstances that give rise to the existence of a special relationship which will create a duty in law to take care in relation to the making of statements. [This statement, highlighting the importance of these speeches from the House of Lords, is taken from the judgement of Justice Keane in the Irish case of Doolan v Murray, Murray, Murray, Cheever, Aziz and Dun Laoghaire Corporation (1993), where J. Keane cites several passages from those speeches. This case is referenced further, below.]80


On the subject of special relationships —— Lord Reid said:

I can see no logical stopping place short of all those relationships where it is plain that the party seeking information or advice was trusting the other to exercise such a degree of care as the circumstances required, where it was reasonable for him to do that, and where the other gave the information or advice when he knew, or ought to have known, that the inquirer was relying on him. I say ‘ought to have known’ because in questions of negligence we now apply the objective standard of what the reasonable man would have done.81


Lord Devlin
put the matter thus:

I think, therefore, that there is ample authority to justify Your Lordships in saying now that the categories of such special relationships, which may give rise to a duty to take care in word as well as deed, are not limited to contractual relationships or to relationships of fiduciary duty, but include also relationships which in the words of Lord Shaw in Nocton v Lord Ashburton (1914, England) (see above) are ‘equivalent to contract’, that is, where there is an assumption of responsibility in circumstances in which, but for the absence of consideration (payment), there would be a contract.

Where there is an express undertaking, an express warranty as distinct from a mere representation, there can be little difficulty. The difficulty arises in discerning those cases in which the undertaking is to be implied. In this respect the absence of consideration is not irrelevant. Payment for information or advice is very good evidence that it is being relied on and that the informer and adviser knows that it is.

Where there is no consideration, it will be necessary to exercise greater care in distinguishing between social and professional relationships and between those which are of a contractual character and those which are not. It may often be material to consider whether the adviser is acting purely out of good nature or whether he is getting his reward in some indirect form.
81A

Note! Consideration, in the legal context of a contractual agreement, means: anything given or promised or forborne by one party in exchange for the promise or undertaking of another. In effect, it means any form of payment.


Lord Denning M.R., when giving judgement for the Court of Appeal in Esso Petroleum Co. Ltd. v Mardon (1976, U.K.) (see Section 2.2.1), was clear-cut on the matter of a professional person giving advice, even in the absence of consideration. Having quoted from the judgement of Viscount Haldane, L.C. in Nocton v Lord Ashburton (see above), he put the matter thus:

A professional man may give advice under a contract for reward; or [he may give advice] without a contract, in pursuance of a voluntary assumption of responsibility, gratuitously, without reward. In either case he is under one and the same duty to use reasonable care. In the one case it is by reason of a term implied by law. In the other, it is by reason of a duty imposed by law. For a breach of that duty he is liable in damages; and those damages should be, and are, the same, whether he is sued in contract or in tort.82






The then recent Hedley Byrne precedent was adopted into Irish Law by the High Court decision as stated by Davitt P. in Securities Trust Ltd. v Hugh Moore and Alexander Ltd. (1964), and was further ratified in Bank of Ireland v Smith (1966).


In Bank of Ireland v Smith, Justice Kenny, in the course of his judgement, said:

In my opinion the decision in Hedley Byrne & Co. Ltd. v Heller ...... decides that, if a person seeks information from another in circumstances in which a reasonable man would know that his judgement is being relied on, the person giving the information must use reasonable care to ensure that his answer is correct, and if he does not do so, he is liable in damages, but the relationship between the person seeking the information and the person giving it, if not fiduciary or arising out of a contract for consideration, must be, to use the words of Lord Devlin, ‘equivalent to contract’, before any liability can arise.83






While Hedley Byrne & Co. Ltd. v Heller and Partners Ltd. created precedent, it is the clear and logical application of judicial minds to precedent, as exemplified by the decision of the Court of Appeal in the case of Esso Petroleum Co. Ltd. v Mardon (1976, U.K.) (see Section 2.2.1) and subsequent analyses of same, that is most enlightening.



The decision of the Court of Appeal in Esso Petroleum Co. Ltd. v Mardon was based on the principle which had already been laid down in Hedley Byrne. This principle was summarised by Lord Denning as follows:

It seems to me that Hedley Byrne ...... properly understood, covers this particular proposition: if a man, who has or professes to have special knowledge or skill, makes a representation by virtue thereof to another — be it advice, information or opinion — with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and that the advice, information or opinion is reliable.

If he negligently gives unsound advice or misleading information or expresses an erroneous opinion, and thereby induces the other side to enter into a contract with him, he is liable in damages.84


Omrod L.J.
, after analysing the principles which he said underlay the decision in Hedley Byrne, stated:

There is no magic in the phrase ‘special relationship’; it means no more than a relationship the nature of which is such that one party, for a variety of possible reasons, would be regarded by the law as under a duty of care to the other. In this case the plaintiff (i.e. Esso Petroleum) had all the expertise, experience and authority of a large and efficient organization…….85

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In Stafford v Mahony, Smith and Palmer (1980, Ireland), Doyle J., when considering the legal situation regarding negligent misrepresentation, quoted from the judgements of both Lord Denning M.R. and Omrod L.J. in Esso Petroleum Co. Ltd. v Mardon (as written above), and further clarified the position by quoting from the speeches of both Lord Devlin and Lord Morris, in the Hedley Byrne v Heller decision, as follows:

Lord Devlin (1964, U.K.) :

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 particular. Examples of a general relationship are those of solicitor and client, and banker and customer. [For the former, Nocton v Ashburton has long stood as the authority, and for the latter, there is the decision of Salmon J. in Woods v Martins Bank, which I respectfully approve.] (See extracts from both these cases above.)

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 [Hedley Byrne v Heller], 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.86

Note!

Remember that Lord Devlin’s primary focus here is on the broad category of relationships that will give rise to a ‘special relationship duty of care’. (See the previous extract from his speech cited above.)

The two specific examples of a general relationship referred to by Lord Devlin here (Nocton v Ashburton and Woods v Martins Bank) were actually cases that entailed a breach of fiduciary duty of care, as distinct from the broader category of special relationship duty.

But again, be aware that, even where by giving advice to a 'potential customer' a special relationship may be deemed to exist between the banker and customer, it is only under particular circumstances (as where the banker is giving advice to an 'existing customer', or where the banker chooses to give advice to a 'potential customer' in a 'conflict of interest' situation) that the banker will be deemed to have activated the status of fiduciary.

Whether or not the conduct of a banker towards a customer has been such as to trigger up-classification of their relationship to a fiduciary relationship (as was the case in Woods v Martins Bank) depends on the particular factual situation!


Lord Morris
(1964, U.K.) :

I consider that it follows that it should not 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.

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 enquiry, a person takes upon himself to give information or advice to, or allow his information or advice to be passed on to, another person who, as he knows or should know, will place reliance upon it, then the duty of care will arise.87



Doyle J. then cited the clearly stated Hedley Byrne principles as had been laid down in Irish Law by Davitt P. in Securities Trust Ltd. v Hugh Moore and Alexander Ltd. (1964) and, in his own judgement, stated the position as follows:

Adopting the principles (thus) laid down by Davitt P., I have come to the conclusion that in order to establish the liability for negligent or non-fraudulent misrepresentation giving rise to an action there must first of all be a person conveying the information or the representation relied upon; secondly, that there must be a person to whom that information is intended to be conveyed or to whom it might reasonably be expected that the information would be conveyed; thirdly, that the person must act upon such information or representation to his detriment so as to show that he is entitled to damages.88

-----------------------------------------------------------


In Doolan v Murray, Murray, Murray, Cheever, Aziz and Dun Laoghaire Corporation (1993, Ireland), Keane J., when expressing his understanding of the liability that arises in Law in Ireland from a non-fraudulent misrepresentation, said:

There are (however) two broad categories of cases in which a person may be entitled to recover damages. They are:

(i)

Where a representation is made for the purpose of inducing a person to enter into a contract and it actually induces him or her to act on it by entering into the contract.

(ii)

Where the representation is made negligently by a person owing a duty of care in relation to the making of such a statement to the person to whom the representation is made.


The representation in the first category of cases has been described in some of the English authorities as a ‘collateral warranty’........

As to the second category of cases, the cause of action, if any, here derives from the legal principle enunciated by the House of Lords in Hedley Byrne and Co. Ltd. v Heller (1964, England), and adopted by the High Court in Securities Trust Ltd. v Hugh Moore and Alexander Ltd. (1964) and Bank of Ireland v Smith (1966). In the first of the Irish decisions, Davitt P. succinctly defined the context in which liability may arise as follows. ‘Circumstances may create a relationship between two parties in which, if one seeks information from the other, and is given it, that other is under a duty to take reasonable care to ensure that the information is correct.’89


Justice Keane further clarified the position by quoting from the speeches relating the House of Lords decision in Hedley Byrne (including the above passages quoted from the speeches of Lord Reid and Lord Devlin, on the subject of special relationships.) He then cited the judgement of Lord Denning M.R. in the Court of Appeal on Esso Petroleum v Mardon, where Lord Denning said :

‘If a man, who has or professes to have special knowledge or skill, makes a representation by virtue thereof to another — be it advice, information or opinion — with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and that the advice, information or opinion is reliable’ 89A


Justice Keane then, significantly, affirmed the position in Irish Law (with regard to Lord Denning’s statement above) when he said:

That statement of the law was cited, without apparent disapproval, by Doyle J. in Stafford v Mahony Smith and Palmer (1980, Ireland) (see above).89B




We may therefore adopt the following statement as a definition of Negligence appropriate to the subject matter of this website-book :

Negligence, where a fiduciary relationship or a special relationship exists, is conduct which falls below the standard established by the Law for the protection of others against unreasonable Risk of financial harm.



 

N.B. The burden of proving Negligence or Negligent Misrepresentation, under Common Law, rests with the party alleging the negligence or negligent misrepresentation.


However, as will be seen in Section 2.3.4, where a fiduciary or confidential relationship exists, the person in whom the confidence is reposed, and who thus possesses influence over the other, cannot hold that other party to the contract unless he satisfies the court that it is ADVANTAGEOUS to the other party — AND — that he has disclosed all material facts within his knowledge.90

Also, it will be seen that, where a special relationship exists, the duty of care thereby arising will be such as to obligate similar disclosure of all material facts to the relying party. And the party upon whom reliance has been placed will be burdened with showing that this obligation has been fulfilled. 

A person who has been induced to enter into a contract as a result of a negligent misrepresentation made to him by the other party to the contract is entitled to rescind the contract as in the case of fraud. He may also be entitled to recover damages in respect of any loss which may have been suffered by reason of the negligence.91

There will however be instances where, under power of Statute Law, the court may declare the contract subsisting and award damages in lieu of rescission. Also, as a non-fraudulent misrepresentation, the negligent misrepresentation may constitute statutory misrepresentation and, as such, may afford a right of action under Statute Law. (These matters will be discussed later in this Chapter, in Section 2.3.5, Section 2.8.1 and Section 2.8.3.)




65 Heuston and Buckley, Salmond and Heuston on the Law of Torts, (21st ed.), p. 225.

66 Heuston and Buckley, Salmond and Heuston on the Law of Torts, (21st ed.), p. 199.

67 Heuston and Buckley, Salmond and Heuston on the Law of Torts, (21st ed.), p. 196.

68, 68A Heuston and Buckley, Salmond and Heuston on the Law of Torts, (21st ed.), p. 222 and 223.

68B Heuston and Buckley, Salmond and Heuston on the Law of Torts, (21st ed.), p. 231 and 232.

69, 70, 71 Heuston and Buckley, Salmond and Heuston on the Law of Torts, (21st ed.), p. 225 to 227.

72 Heuston and Buckley, Salmond and Heuston on the Law of Torts, (21st ed.), p. 229.

73 Heuston and Buckley, Salmond and Heuston on the Law of Torts, (21st ed.), p. 206.

73A, 73B Furmston, Cheshire, Fifoot and Furmston's Law of Contract, (15th ed.), p. 343.

73C Turner and Sutton, Spencer Bower, The Law Relating to Actionable Non-Disclosure and Other Breaches of Duty in Relations of Confidence and Influence, 2nd edition [1990], paragraph 16.04.

74 Turner and Sutton, Spencer Bower, The Law Relating to Actionable Non-Disclosure and Other Breaches of Duty in Relations of Confidence and Influence, 2nd edition [1990], paragraph 16.14, citing Cooke J., in the decision of the New Zealand Court of Appeal in Coleman v Myers (1977).

74A Turner and Sutton, Spencer Bower, The Law Relating to Actionable Non-Disclosure and Other Breaches of Duty in Relations of Confidence and Influence, 2nd edition [1990], paragraph 16.25.

74B From record of the Judgement of the House of Lords in Nocton v Ashburton (1914), Viscount Haldane at paragraph 954. (Referenced from Wikipedia.)

74C, 74D Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29th ed.), p. 340.

75, 75B Furmston, Cheshire, Fifoot and Furmston's Law of Contract, (15th ed.), p. 380.

75A Turner and Sutton, Spencer Bower, The Law Relating to Actionable Non-Disclosure and Other Breaches of Duty in Relations of Confidence and Influence, 2nd edition [1990], paragraph 16.02.

75C Turner and Sutton, Spencer Bower, The Law Relating to Actionable Non-Disclosure and Other Breaches of Duty in Relations of Confidence and Influence, 2nd edition [1990], paragraph 16.03, referencing Finn, Fiduciary Relationships (1977), p 201.

76 Furmston, Cheshire, Fifoot and Furmston's Law of Contract, (15th ed.), p. 379, citing Ashburner, Principles of Equity (2nd ed.).

76A Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29th ed.), p. 340.

76B, 76C Turner and Sutton, Spencer Bower, The Law Relating to Actionable Non-Disclosure and Other Breaches of Duty in Relations of Confidence and Influence, 2nd edition [1990], paragraph 16.22, referencing Dr. Sealy, Cambridge Law Journal (1963), pages 128 to 132.

77, 77B, 77C Handley, Spencer Bower, Turner and Handley, Actionable Misrepresentation, 4th edition [2000], paragraph 436.

77A From record of the Judgement of the House of Lords in Nocton v Ashburton (1914), Viscount Haldane at paragraph 954. (Referenced from Wikipedia.)

78 From record of the Judgement of the House of Lords in Nocton v Ashburton (1914), Lord Shaw of Dunfermline at paragraph 971. (Referenced from Wikipedia.)

78A From the Report by G. M. Smailes Esq., Barrister-at-Law, the most comprehensive version I could find being that cached per Google (Woods v Martins Bank).

79 Wheeler and Shaw, Contract Law, (1st ed.), p. 276.

80 Clark and Clarke, Contract Cases and Materials, (4th ed.), p. 551.

81, 81A Clark and Clarke, Contract Cases and Materials, (4th ed.), p. 551 and 552.

82 Beale, Bishop and Furmston, Contract Cases and Materials, (4th ed.), p. 374.

83 Clark and Clarke, Contract Cases and Materials, (4th ed.), p. 545.

84 Clark and Clarke, Contract Cases and Materials, (4th ed.), p. 528.

85, 86, 87 Clark and Clarke, Contract Cases and Materials, (4th ed.), p. 546 and 547.

88 Clark and Clarke, Contract Cases and Materials, (4th ed.), p. 548.

89 Clark and Clarke, Contract Cases and Materials, (4th ed.), p. 550 and 551.

89A, 89B Clark and Clarke, Contract Cases and Materials, (4th ed.), p. 552.

90 Furmston, Cheshire, Fifoot and Furmston's Law of Contract, (15th ed.), p. 379 and 380.

91Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29th ed.), p. 310.

 

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