Contract Ws 2

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Crystal Palace FC (2000) Ltd v Dowie

Queen's Bench Division

14 June 2007

Subject: Contracts

Keywords: Fraudulent misrepresentation; Deceit; Contracts of employment; Rescission

Summary: A football club had entered into a compromise agreement with its former manager on

the basis of fraudulent misrepresentations by him but in the circumstances the agreement shouldnot be rescinded.

Abstract: On a trial of preliminary issues it fell to be determined whether the claimant footballclub (P) had entered into a compromise agreement with its former manager (D) on the basis of

alleged fraudulent misrepresentations by D and, if so, whether the agreement should berescinded.

D had been employed as the manager of P. His employment contract contained a provision that

required the payment of compensation of £1 million if D left P prematurely and gainedemployment with a Premiership club. At the relevant time P were playing in the Football League

Championship, the second tier of the English professional game. At the end of the season P

failed to achieve promotion to the Premiership. D discussed the situation with P's chairman andmajority shareholder (J). After those discussions J and D signed the compromise agreement

releasing D from the employment agreement and D's early departure from P was announced.

Eight days later D was appointed manager of a Premiership club (C). P issued proceedings

alleging that D had deceived J into releasing him from the employment agreement by falselyrepresenting that he wanted to leave P to move to the North of England for family reasons and

had had no contact with C. Preliminary issues were ordered to be tried as to whether P entered

the compromise agreement on the basis of fraudulent misrepresentations by D and, if so, whetherthe agreement should be rescinded.

D submitted that the remedy of rescission was not available to P because it was impossible toreturn the parties to the position that they had been in before the compromise agreement was

signed.

Preliminary issues determined. (1) On the evidence P had proved that before the compromise

agreement was signed D had represented that he had had no contact from C, whereas he had hadcontact from C, and, by implication, that he had no present intention to join C, whereas he hadsuch an intention, if offered the job on the right terms. Those representations were therefore false

to the knowledge of D. In context the purpose and effect of the misrepresentations were to

induce J to sign the compromise agreement, and P had been induced by them to enter into that

agreement in the form in which the parties signed it. (2) The effect of rescinding the compromiseagreement would be retrospectively to revive D's employment contract with P. However D was

employed as manager at another football club and P had a new manager. The rights of D's new

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club were a significant matter of a kind not normally considered under the heading of counter

restitution. It would not be just to that club to make an order the effect of which was to place Dunder an employee's obligations to P. A manager could not perform two employment contracts at

the same time, and if P envisaged that it would not call on D to perform any obligations except

under the compensation clause, then that would not amount to rescission in any practical sense. It

would not be just to revive the compensation clause on its own. Practical justice in the instantcase meant the making of appropriate orders for damages or other financial relief. The

compromise agreement should not be rescinded.

Judge: Tugendhat, J.

Kleinwort Benson Ltd v Malaysia Mining Corp Bhd

COURT OF APPEAL, CIVIL DIVISION

FOX, RALPH GIBSON AND NICHOLLS LJJ

13, 14 DECEMBER 1988, 2 FEBRUARY 1989.

The plaintiff bank agreed with the defendants to make a loan facility of up to £10m available tothe defendants' wholly-owned subsidiary, M, which traded in tin on the London Metal Exchange.

As part of the facility arrangement the defendants furnished to the plaintiffs two 'letters of

comfort', each of which stated in para 3 that 'It is our policy to ensure that the business of [M] isat all times in a position to meet its liabilities to you under the [loan facility] arrangements'. In

1985 the tin market collapsed at a time when M owed the plaintiffs the whole amount of the

facility. M went into liquidation and the plaintiffs sought payment of the amount owing from thedefendants. When the defendants refused to pay the plaintiffs brought an action against them to

recover the amount owing. The judge held that the plaintiffs were entitled to recover. Thedefendants appealed to the Court of Appeal.

Held – A letter of comfort from a parent company to a lender stating that it was the policy of the

parent company to ensure that its subsidiary was 'at all times in a position to meet its liabilities'in respect of a loan made by the lender to the subsidiary did not have contractual effect if it was

merely a statement of present fact regarding the parent company's intentions and was not a

contractual promise as to the parent company's future conduct. On the facts, para 3 of the letters

of comfort was in terms a statement of present fact and not a promise as to future conduct and inthe context in which the letters were written was not intended to be anything other than a

representation of fact giving rise to no more than a moral responsibility on the part of the

defendants to meet M's debt. The appeal would therefore be allowed (see p 792 d e, p 795 a to f,p 796 g to j and p 797 d j to p 798 b, post).

Edwards v Skyways Ltd [1964] 1 All ER 494 and Esso Petroleum Co Ltd v Mardon [1976] 2 AllER 5 considered.

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Kleinwort Benson Ltd v Lincoln City Council

29 October 1998

Subject: Equity

Keywords: Local authorities; Mistake; Restitution; Swap agreements

Summary: restitution; recovery of money paid under mistake of law; abolition of general ruleprecluding recovery in favour of general right to recovery

Abstract: KB instituted proceedings claiming restitution of sums paid to four local authoritiesunder interest rate swap agreements held to be ultra vires and therefore void ab initio by the

House of Lords in Hazell v Hammersmith and Fulham LBC [1992] 2 A.C. 1 . KB recovered

sums paid less than six years prior to issue of the writs, but trial of a preliminary issue was

ordered in respect of payments made outside that period to determine whether KB's claim that

the payments were made under the mistaken belief that they were lawfully due under a bindingcontract disclosed a cause of action in mistake and, if so, whether the mistake fell within the

Limitation Act 1980 s.32(1)(c) so that the limitation period did not begin to run until KB becameaware of the mistake. The judge held that he was bound by the rule that money paid under a

mistake of law was not recoverable in restitution. KB appealed, contending that the mistake of

law rule should be abrogated.

Held, allowing the appeals (Lord Browne-Wilkinson and Lord Lloyd dissenting), that the rule

could not be maintained and should be replaced with a general right to recovery of money paidunder mistake of fact or law, subject to the defences available in restitution. The argument for the

introduction of a defence of payments made under a settled understanding of the law,

subsequently changed by judicial decision, on the basis that a payment so made was not amistake, could not be accepted, and a defence of honest receipt would be too broad in scope.

Further, the fact that all transactions had been performed could not be permitted to preclude the

right to recovery. As the pre-existing equitable rule applied to all mistakes, it had to be

concluded that s.32(1)(c) applied to mistakes of law. However, since that meant that the cause of action in a case such as the present might be extended indefinitely, legislative reform might be

required to address that issue. Per Lord Browne-Wilkinson, it could not be accepted that, when

the law was changed, payments made under the previous law became payments made under amistake of law. A change in the rule was desirable, but should have been left to the Law

Commission and Parliament, so that a new cause of action could be introduced at the same time

as reform of the limitation period.

Judge: Lord Browne-Wilkinson; Lord Goff of Chieveley; Lord Lloyd of Berwick; Lord

Hoffmann; Lord Hope of Craighead

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Bufe v Turner and Others

(1815) 6 Taunton 338

128 E.R. 1065

1815

Nov. 9, 1815.

[S. C. 1 Marsh. 46.]

The Plaintiff having one of several warehouses, next but one to a boat-builder's shop which took

fire, on the same evening, after that fire was apparently extinguished, gave instructions, by anextraordinary conveyance, for insuring that warehouse, then having others uninsured, but without

apprizing the insurers of the neighbouring fire. Though the terms of insurance did not expressly

require the communication, held that the concealment of this fact avoided the policy.

This was an action of covenant brought against the directors of the Phœnix Fire Insurance Officeupon a policy of insurance, dated the 25th July 1814, effected by the Plaintiff on a certain

warehouse in Heligoland. The policy referred to a letter of the Plaintiff's of 11th July 1814,

containing the instructions for the insurance and certain conditions to the policy annexed,

amongst which was, that if any person should insure his buildings or goods, and should cause thesame to be described in the policy otherwise than as they really were, so as the same were

charged at a lower premium than was therein proposed, such insurance should be of no force,

and that persons insured should give in a particular of their losses, signed, and verified uponoath: and if there appeared any fraud, or false swearing, the claimant should forfeit his claim to

restitution or payment. The Defendants, among several pleas, pleaded, 2dly, that immediatelybefore and at the time of the writing the Plaintiff's letter referred to in the declaration, to wit, on

11th July, the warehouse in the declaration mentioned, and the merchandizes contained therein,being the premises intended to be insured by the policy, were in imminent peril of being

consumed by fire, which the Plaintiff at the time of writing the letter very well knew; that the

policy was effected upon the representation contained in the letter, but that the [339] Plaintiff fraudulently and deceitfully, and with intent to induce the Defendants to effect the policy, before

and at the time of effecting the same, concealed from the Defendants the fact that the premises

were in such peril; by reason of which concealment the Defendants averred that the policy was

void. The Plaintiff replied, that at the time of writing his letter, he did not know that the premiseswere in imminent danger of being consumed by fire, and did not fraudulently and deceitfully,

and with intent to induce the Defendants to effect the policy, conceal from the Defendants thefact that the premises were in such peril. The Defendants joined issue on this replication. Thecause was tried at Guildhall, at the sittings after Trinity term 1815, before Gibbs C. J. It appeared

that the Plaintiff was possessed of two warehouses at Heligoland, one of which was separated by

only one other building from the workshop of Jasper a boat-builder, wherein a fire broke out

about seven o'clock in the evening of the 11th of July. That fire, however, was apparentlyextinguished in half an hour, and four persons were employed by the Plaintiff, who was a

magistrate there, to watch during the night lest the fire should again break out. The Plaintiff on



the same evening wrote the letter referred to in the declaration to his agent in London, requesting

him to effect the insurance against fire for three months, of 400l., upon the Plaintiff's warehouse,No. 1, situate on the South quarter of the lower town, between the warehouse of Mr. John Leader

to the South, and that of Mr. Nicolaus Peter Krohn to the North, as also upon the coffee in casks

and bags then stored in the same warehouse, value 3500l. The mail for England was to sail that

day, and was then closed; but the Plaintiff procured the master of the packet-boat to take theletter with him, and put it into the post-office at Cuxhaven, so that the letter left Heligoland at a

late hour on the same [340] night, and it *1066 reached England by the same packet on the 24th,

and the Plaintiff's agent, on the following day, effected the policy in question. Early on themorning of the 13th a fire again broke out in the workshop of Jasper the boat-builder, and

consumed the premises insured. The jury acquitted the Plaintiff of any fraud or dishonest design,

the fire being apparently extinguished when he ordered the insurance, but thought that thecircumstance of the fire on the 11th ought to have been communicated to the Defendants, who

without this information did not engage on fair grounds with the Plaintiff, and for whom, under

these circumstances, they gave their verdict.

Lens Serjt. now moved to set aside the verdict and have a new trial, but the Court

Refused the Rule.

JEB Fasteners Ltd v Marks Bloom & Co

Court of Appeal (Civil Division)

22 July 1982

Subject: Negligence

Keywords: Duty of care; Advisers; Third parties

Summary: Duty of care; information and advice; reliance by third parties

Abstract: Only where information provided by auditors has played a real and substantial(although not necessarily decisive) part in a decision to acquire a company, will they be liable if

it subsequently turns out that the audit was conducted negligently. Per curiam: "reliance" or

"relied upon" were terms capable of bearing either a broad meaning, that is supporting thedecision, or a narrow meaning, namely inducing the decision, in which case the decision would

not have been made but for the "reliance" on the information. JEB took over a company of which

MBC were the auditors. The primary motive for the take-over was that JEB should therebyacquire the services of the two directors of the company. At the time of the take-over JEBappreciated that the audited accounts contained some inaccuracies, but did not realise just how

inaccurate they were. At all times the auditors, MBC, were fully aware that JEB were taking into

account the figures that they had produced of the company's position.

Held, that the judge had been entitled to dismiss JEB's claim for damages. There was ample

evidence to justify his finding of fact that JEB had formed its own judgment of the worth of the



company. The judge had been incorrect in separating out the issues of whether JEB relied upon

the accounts and whether they suffered loss by so doing, because both were really differentaspects of the question of causation. On the facts the appeal would be dismissed (Hedley Byrne

& Co Ltd v Heller & Partners Ltd [1964] A.C. 465 considered).

EARL OF SELBORNE L.C., LORD BLACKBURN, LORD WATSON and

LORD BRAMWELL.

Action of Deceit - Fraudulent Misrepresentation ambiguous in Meaning - Burden of Proof on

Plaintiff.

The prospectus of a company which was being formed to take over ironworks, contained a

statement that "the present value of the turnover or output of the entire works is over £1,000,000sterling per annum."

If that statement meant that the works had actually in one year turned out produce worth at

present prices more than a million, or at that rate per year, it was untrue. If it meant only that theworks were capable of turning out that amount of produce it was true.

In an action of deceit for fraudulent misrepresentation whereby the plaintiff was induced to take

shares he swore in answer to interrogatories that he "understood the meaning" of the statement

"to be that which the words obviously conveyed," and at the trial was not asked either inexamination or cross-examination what interpretation he had put upon the words:-

Held, by the EARL OF SELBORNE L.C. and LORDS BLACKBURN and WATSON, affirmingthe decision of the Court of Appeal, that the statement taken in connection with the context was

ambiguous and capable of the two meanings; that it lay on the plaintiff to prove that he had

interpreted the words in the sense in which they were false and had in fact been deceived bythem into taking the shares, and that as he had as a matter of fact failed to prove this the actioncould not be maintained.

Held, by LORD BRAMWELL, that the statement was capable only of the meaning in which it

was untrue, and that the plaintiff had proved that he had understood it in that sense; but that there

was not sufficient evidence that the statement was fraudulent on the part of the defendants, andthat the decision of the Court of Appeal should be affirmed on that ground.

APPEAL by the plaintiff from two orders of the Court of Appeal (Jessel M.R. Cotton and

Lindley L.JJ.) reversing an order of Fry J. in favour of the plaintiff. All the facts are set out at

length in the report of the decisions below (1). The facts

(1) 20 Ch. D. 27.

(1884) 9 App.Cas. 187 Page 188

material to this report are stated in the judgment of Lord Blackburn in this House. All the

questions argued below were mentioned by the appellant's counsel on the present appeal, but the

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only one seriously insisted on was that arising upon the representation as to the turnover or

output, and the arguments on the other points are therefore omitted.

Attwood v Small and others

[1835-42] All ER Rep 258

HOUSE OF LORDSLord Gottenham LC, The Earl of Devon, Lord Lyndhurst, Lord Brougham and Lord Wynford

JUNE, JULY 1835, MAY, JUNE, JULY, AUGUST 1836, 22 MARCH 1838

26 March 1838

If two parties enter into a contract and one of them, to induce the other to contract with him,states, with regard to some material matter, that which is not true, which he knew at the time he

stated it not to be true, and which the other party had no means of knowing, and if upon that

statement of what is not true and what is known by the party making it to be false the contract is

entered into by the other party, then generally speaking there will be at law an action open to theparty entering into the contract, an action for damages founded on the deceit, and there will be

relief in equity to the same party to escape from the contract which he has been inveigled intomaking by the false representation of the other contracting party. General fraudulent conduct,general dishonesty of purpose, attempts to overreach, an intention and design to deceive, will go

for nothing unless the fraud, dishonesty, or intention or design can be, not only connected with

the particular transaction, but also shown to be the very ground on which the transaction took place and to have given rise to the contract. The fraudulent representation must have had the

effect of deceiving the purchaser, and the purchaser must have trusted to that representation and

not to his own acumen, not to his own perspicacity, not to inquiries of his own.

Per the EARL OF DEVON: In an action for the rescission of a contract on the ground of fraudnothing but the most clear and decisive proof of fraudulent representations, made under such

circumstances as show that the contract was based upon them, will justify the interference of acourt of equity.

Per LORD WYNFORD: I do not quite agree that in order to set the contract aside the parties

must appear to have been induced entirely to enter into it by false representations. I say, if the

parties are induced fraudulently in any way, although they may have other reasons for entering

into the contract, if the strong grounds which prevailed on them to enter into the contract werefraudulent representations, that will give an action in a court of law for deceit, and, I should

hope, would be considered as a sufficient ground in a court of equity to set aside the contract.

See post pp 260, 266, 267, 269.

Per LORD LYNDHURST: If a case of fraud is established, for the defendant to get rid of thatcase by showing adoption or waiver on the part of the plaintiff the adoption or waiver must be

with an entire or full knowledge of all the facts.



Per the EARL OF DEVON: If a party engaged in negotiating for a purchase of property, having

employed competent agents to inspect that property, either does not call for or obtain any reportfrom those agents, or, having got such a report, does not act on it, he cannot afterwards turn

round and say that he has been deceived by placing reliance on the statements of the vendor

instead of availing himself of the means of information which were open to him. Cases are of

daily occurrence in which the doctrine of caveat emptor applies, and parties are left to take theconsequences of their want of caution or prudence. A court of equity will only interfere with this

doctrine

[1835-42] All ER Rep 258 at 259

of the common law in those cases in which it is proved that one party has made a representationof a material circumstance which he knows to be false and the falsehood is one of which the

other party has no means of knowing, and in which it can be further shown that the contract

which it is sought to set aside was founded on this misrepresentation so made and in reliance onthe facts so misrepresented. The question is whether the purchasers have used the ordinary

degree of vigilance and circumspection in order to protect themselves which the law has a rightto expect from those who apply for its aid.

See post pp 261, 265.

Per LORD LYNDHURSTT: Where representations are made with respect to the nature andcharacter of property which is to become the subject of purchase; affecting the value of that

property, and those representations afterwards turn out to be incorrect and false to the knowledgeof the party making them, a foundation is laid for maintaining an action in a court of common

law to recover damages for the deceit so practised, and in a court of equity a foundation is laid

for setting aside the contract which was founded on a fraudulent basis .... This principle was

acted on even after the conveyance was executed in Edwards v McLeay (1) (1815) Coop 308.


An agent cannot commit his principal to any criminal purpose of which the principal is ignorant,having given him no authority to do the criminal act, and not waived or adopted the agent's act

when he did know of it. But if an agent, without his principal's knowledge, makes a wilfully false

representation to another person who acts on the representation and consequently enters into a

contract, equity mill grant relief to the person deceived just as much as if there proved scienteron the part of the principal.

See post p 268.

No weight is to be given to parol testimony which is contrary to the obvious construction of

written documents, confirmed by the acts of the parties and their acquiescence, although hardlyany length of time would bar them from redress against fraud, if proved.




Smith v Eric S Bush (A Firm)

House of Lords

20 April 1989

Subject: Negligence

Keywords: Exclusion clauses; Mortgages; Professional negligence; Surveyors; Valuation

Summary: Mortgages; valuation

Abstract: Valuers of houses for mortgage purposes had duties of care to the purchasers, and

their disclaimers of liability for negligence were subject to, and did not in fact satisfy, the

requirement of reasonableness imposed by the Unfair Contract Terms Act 1977. In two separateactions ([1988] Q.B. 743 and [1988] Q.B. 835) questions arose as to whether valuers instructed

by mortgagees to value a house, knowing that the valuation would probably be relied upon bythe prospective purchaser and mortgagor, had owed him a duty to exercise reasonable skill andcare unless liability was disclaimed; if so, whether any such disclaimer was a notice purporting

to exclude liability for negligence within the Unfair Contract Terms Act 1977, and accordingly

ineffective unless satisfying the requirement of reasonableness; and, if so, whether in the absenceof special circumstances it was fair and reasonable for the valuer to rely on the notice excluding

liability.

Held, dismissing the valuer's appeal in the first case, and allowing the purchaser's appeal in the

second, (1) that the valuers had owed duties of care; (2) that the disclaimers had been subject to

the requirement of reasonableness imposed by the 1977 Act; and (3) that, having regard in

particular to the parties' bargaining power, to whether it was practicable to obtain the advice froman alternative source, to the difficulty of the task being undertaken and to the practical

consequences of the decision on the question of reasonableness, the disclaimers had not satisfied

the requirement of reasonableness, and had accordingly been ineffective Yianni v. Evans(Edwin) & Sons [1981] C.L.Y. 1837 approved; Cann v Willson (1888) L.R. 39 Ch. D. 39,

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] A.C. 465, Candler v Crane Christmas &

Co [1951] 2 K.B. 164, Ministry of Housing and Local Government v Sharp [1970] 2 Q.B. 223, Curran v Northern Ireland Coownership Housing Association Ltd [1987] A.C. 718, Anns v

Merton LBC [1978] A.C. 728, Roberts v J Hampson & Co Ltd [1990] 1 W.L.R. 94 and Phillips

Products v Hyland [1987] 1 W.L.R. 659 considered. Per curiam: Different considerations may

well apply in relation to valuations of other types of property, such as industrial property, large

blocks of flats or very expensive houses.

Judge: Lord Keith of Kinkel; Lord Brandon of Oakbrook; Lord Templeman; Lord Griffiths;Lord Jauncey of Tullichettle

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NOCTON APPELLANT; AND LORD ASHBURTON RESPONDENT. ET E

CONTRA.

1914 June 19.

VISCOUNT HALDANE L.C., LORD DUNEDIN, LORD ATKINSON, LORD SHAW OFDUNFERMLINE, and LORD PARMOOR.Solicitor and Client - Claim for Indemnity - Misrepresentation - Improper Advice - Fraud -

Negligence - Breach of Fiduciary Obligation - Pleading - Cause of Action.

Per Viscount Haldane L.C.: Derry v. Peek (1889) 14 App. Cas. 337, which establishes that proof

of a fraudulent intention is necessary to sustain an action of deceit, whether the claim is dealt

with by a Court of Law or by a Court of Equity in the exercise of its concurrent jurisdiction, does

not narrow the scope of the remedy in actions within the exclusive jurisdiction of a Court of Equity, which, though classed under the head of fraud, do not necessarily involve the existence

of a fraudulent intention, as, for example, an action for indemnity for loss arising from a

misrepresentation made in breach of a special duty imposed by the Court by reason of therelationship of the parties.

A mortgagee brought an action against his solicitor, claiming to be indemnified against the losswhich he had sustained by having been improperly advised and induced by the defendant, acting

as his confidential solicitor, to release a part of a mortgage security, whereby the security had

become insufficient. The statement of claim alleged that the defendant, when he gave the advice,well knew that the security would be thereby rendered insufficient and that the advice was not

given in good faith, but in the defendant's own interest.

Neville J. found that the charge of fraud was not proved arid dismissed the action. The Court of

Appeal reversed this finding and granted relief on the footing of fraud:-

Held, (1.) that in the circumstances the Court of Appeal was not justified in reversing the finding

of fact of the judge of first instance; but (2.) that the plaintiff was not precluded by the form of

his pleadings from claiming relief on the footing of breach of duty arising from fiduciaryrelationship and that he was entitled to relief on that footing.

Decision of the Court of Appeal affirmed on different grounds.

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Candler v Crane Christmas & Co

Court of Appeal

15 December 1950

Subject: Negligence

Keywords: Companies; Accounts; Negligence; Shareholders; Causes of action

Summary: Accountants; defective accounts of company; duty to investor

Abstract: There is no decided case in which (apart from fraud, contract and fiduciary

relationship) A has ever been held liable to B in damages for a careless misrepresentation. On the

contrary, in Le Lievre v Gould [1893] 1 Q.B. 491 , Lord Esher, M.R., in considering the questionof liability for a negligent misrepresentation observed: "All that he" (the defendant) "had done

was to give untrue certificates negligently. Such negligence, in the absence of contract with theplaintiffs, can give no right of action at law or in equity". The principle in Le Lievre v Gould wasqualified by Nocton v Lord Ashburton [1914] A.C. 932 where it was observed "that in the

passage from Lord Esher's judgment, after the words 'in the absence of contract with the

plaintiff', the further words 'or in some circumstances where a fiduciary relationship existsbetween the defendant and the plaintiff'" ought to be written in. The principle stated by Lord

Atkin in Donoghue v Stevenson [1932] A.C. 562 : "You must take reasonable care to avoid acts

or omissions which you can reasonably foresee would be likely to injure your neighbour", has

never been applied where the damage complained of was not physical, and must be confined inits application to physical injury to life, limb or property. The plaintiff invested money in a

company which failed. He did so on the faith of accounts, found to be defective and deficient,

prepared negligently by the defendants as accountants to the company. The defendants, whenpreparing the accounts, knew that the plaintiff's investments in the company would depend upon

his being satisfied with the balance sheet of the company. Held, the defendants owed no duty of

care to the plaintiff and his action, consequently, failed. Le Lievre v Gould , Nocton v Ashburton ,

and Derry v Peek (1889) L.R. 14 App. Cas. 337 applied; and Heskell v Continental Express Ltd[1950] 1 All E.R. 1033 applied; Donoghue v Stevenson distinguished.

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Hedley Byrne & Co Ltd v Heller & Partners Ltd

28 May 1963

Case Analysis

Case Digest

Subject: Negligence

Keywords: Negligent misstatement; Duty of care; Advice; Banks; Economic loss; Professional

negligence; Reliance

Summary: In making a statement at the request of another, a duty of care would be owed by therepresentor to the inquirer if it was plain that in seeking information or advice from the

representor the inquirer was reasonably trusting him to exercise such a degree of care as the

circumstances required and the representor knew or ought to have known that the inquirer wasdoing so. If in those circumstances the representor gave information or advice which was

negligent he would be liable for any pecuniary or personal damage caused to the inquirer, but

where the representor had expressly excluded responsibility for reliance on his statement noliability arose.

Abstract: The appellant company (H) appealed against the Court of Appeal's decision that itcould not recover damages arising from moneys lost in reliance on the credit reference given by

the respondent bank (X) in respect of one of X's customers (E).

H was an advertising agent who had placed substantial orders for advertising space for E, for

which H was personally liable. H had then enquired of X as to the creditworthiness of E, and in

reliance on the representations H refrained from cancelling the orders to relieve its personal

liability. H became doubtful about the financial position of E, and it sought a further reference"without responsibility" from X. X's response to H, stated to be "for your private use and without

responsibility on the part of the bank", was that E was considered good for its ordinary business

engagements. After that communication, H lost money when E went into liquidation. H sought torecover the money lost by a claim in negligence against X. By authority binding upon them, both

the judge at first instance and the Court of Appeal considered themselves driven to the

conclusion that no such action could lie in the absence of a contract or fiduciary relationship, and

that no special relationship involving a duty of care could be inferred.

Appeal dismissed. (1) (Per Lord Reid) The principle in Donoghue v Stevenson [1932] A.C. 562 had no direct bearing on the instant case. Donoghue set out to reflect the standards of the

reasonable man but reasonable people often stated opinions without taking care, so the law had

to treat words and acts differently . It was clear that liability for negligent misstatement could not

be founded on the Donoghue principle alone; something more was required, namely that therepresentor had expressly or impliedly undertaken responsibility for their statement, Donoghue

considered. The decision in Derry v Peek (1889) L.R. 14 App. Cas. 337 had not established any

universal rule that, in the absence of any contract, an innocent (not fraudulent) but negligent

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misrepresentation could not give rise to an action, Nocton v Lord Ashburton [1914] A.C. 932

applied, Derry considered. In the light of the decision in Robinson v National Bank of ScotlandLtd 1916 S.C. (H.L.) 154, concerning a duty of care arising from other "special

relationships",there was no logical stopping place short of all those relationships where the party

seeking the advice was reasonably trusting the other to exercise such a degree of care as the

circumstances required, and where the representor knew or should reasonably have known thatthe inquirer would rely on him, Robinson applied, Candler v Crane Christmas & Co [1951] 2

K.B. 164 overruled, Le Lievre v Gould [1893] 1 Q.B. 491 not followed and Cann v Willson

(1888) L.R. 39 Ch. D. 39 approved. The relevant question in the instant case was whether anundertaking to assume a duty to take care could be inferred. Since H's inquiry had been requested

"without responsibility" from X, it was clear that no such duty could be inferred. (2) (Per Lord

Morris) It should be regarded as settled that if someone possessed of a special skill undertook,irrespective of contract, to apply that skill for the assistance of another person who relied upon

such skill, a duty of care should arise. That the service was given by words made no difference.

Where a person was so placed that others could reasonably rely on his skill, and that person

allowed his advice to be passed on to another whom he knew or should have known would rely

on it, a duty of care also arose. (3) (Per Lord Hodson) A banker giving references as to credit-worthiness was not under a legal obligation to do more than to give honest answers to the best of

his actual knowledge. However, in accordance with Lord Morris, where a person gave advice inthe knowledge that it would reasonably be relied upon, a duty of care arose. (4) (Per Lord

Devlin) The problem in issue was a by-product of the doctrine of consideration in English law.

The special relationship required to establish a duty of care arose in relationships "equivalent to

contract" where there was an assumption of responsibility which, but for the absence of consideration, would constitute a contract. The responsibility was not one implied by law, but

one which was voluntarily accepted either generally where a general relationship was created or

specifically in relation to a particular transaction. Where there was a general relationship (such asthat of solicitor/client, banker/customer, although there were others yet to be established) it was

unnecessary to prove any more than its existence, and the duty followed. Where a particular

relationship was created ad hoc (as in the instant case) the facts had to be examined to see if

there was an express or implied undertaking of responsibility. (5) (Per Lord Pearce) To import aduty of care, the relationship between the parties had normally to concern a business or

professional transaction whose nature made clear the gravity of the inquiry.

Judge: Lord Reid; Lord Morris; Lord Hodson; Lord Devlin; Lord Pearce





























Caparo Industries Plc v Dickman


29 July 1988

Subject: Negligence

Keywords: Auditors; Duty of care; Professional negligence; Shareholders

Summary: Professional negligence; auditors; duty of care to potential investors

Abstract: An auditor of a public limited company owed a duty of care to shareholders who

bought additional shares as an investment, but no duty of care to potential investors. The

plaintiffs, a public limited company, took over F Plc, and brought an action against its directorsalleging fraud and against its auditors, claiming that they were negligent in carrying out the audit

and in making their report which they were required to do under the Companies Act 1985 s.236and s.237 . They claimed that as existing shareholders, they made further purchases of shares inreliance on the certified accounts, and that the auditors owed them a duty as potential investors to

make accurate audits. On a trial of a preliminary issue, the judge held that the auditors did not

owe the plaintiffs a duty of care at common law either as a shareholder of F Plc. or as an investorholding no shares. The plaintiffs' appeal was allowed, by a majority, and leave to appeal to the

House of Lords was granted.

Held, allowing the appeal, that the auditor owed each individual shareholder of a public limited

company a duty of care, since the identity of each shareholder was ascertainable. Where an

auditor was negligent in reporting on the company, and reliance had been placed on that report, it

was just and reasonable that a shareholder could claim for negligence. The duty of care appliedto a shareholder buying additional shares as an investment. Since it was clearly foreseeable that

reliance on such a report would cause a shareholder economic loss in the purchase of further

shares, they could sue, on the basis of the assumed facts Ministry of Housing and LocalGovernment v Sharp [1970] 2 Q.B. 223 , Simaan General Contracting Co v Pilkington Glass Ltd

[1988] Q.B. 758 considered. Although an auditor's report was available for public inspection,

there was no close and proximate relationship between an auditor and a potential investor whoheld no shares in a company, and it was not just and reasonable that such a duty of care should

be placed on the auditor JEB Fasteners Ltd v Marks Bloom & Co [1983] 1 All E.R. 583 ;

Twomax Ltd v Dickinson, McFarlane & Robinson 1982 S.C. 113 and Scott Group v MacFarlane

[1978] 1 N.Z.L.R. 553 considered.

Judge: O'Connor, L.J.; Bingham, L.J.; Taylor, L.J.

Appellate History

Reversed in part by

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Affirmed by:House of Lords

James McNaughton Paper Group Ltd v Hicks Anderson & Co


31 July 1990

Subject: Negligence

Keywords: Accountants; Duty of care; Professional negligence; Take overs

Summary: Duty of care; preparation of company's accounts; accountants' duty to takeoverbidder; whether duty owed

Abstract: HA, accountants to the MK Paper Group (MK), appealed against the finding that they

owed a duty of care, when preparing accounts, to JMPG, a firm considering taking over MK.

JMPG suggested that the valuation of MK's shares for the purpose of the take over should be

made on values certified by MK's accountants and examined by JMPG's auditors. The chairmanof MK asked HA to prepare the annual accounts as quickly as possible. Draft accounts were

provided to MK's chairman who then passed on the information to JMPG. The take over went

ahead. When JMPG's accountants subsequently discovered errors in the accounts, an action innegligence was brought for loss and damage suffered in the take over.

Held: Appeal allowed. JMPG should not have relied on the draft accounts without having them

examined by their own accountants. The circumstances in which the necessary relationshipbetween the maker of a statement and the recipient might be held to exist as defined in Caparo

Industries Plc v Dickman [1990] 2 A.C. 605, were considered and applied. HA could not have

foreseen that JMPG would treat the accounts as final without further examination and in thecircumstances JMPG had been unable to prove that a duty of care was owed to it by HA.

Judge: Neill, L.J.; Nourse, L.J.; Balcombe, L.J.

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Spring v Guardian Assurance Plc

House of Lords

07 July 1994

Subject: Employment

Keywords: Employment; Duty of care; Employers' liability; References

Summary: Contract of employment; employer preparing unfavourable reference on former

employee; reference given to prospective employer; whether duty of care owed; whethernegligent misstatement; whether breach of implied term of contract of employment

Abstract: An ex-employer who provides a reference to his former employee is under a duty of care in respect of the preparation of the reference. S was employed in a senior position by C,

agents for the sale of life assurance policies. C was taken over by G, who soon dismissed S. Heattempted to set himself up in a similar business in the locality, but the company whose policieshe was intending to sell obtained a reference, as they were legally obliged to do, from his

previous employers. This reference was so unfavourable that all S's attempts to get work were

doomed. He brought an action alleging (a) breach of implied term of contract and (b) negligence.The judge held that there was no breach of contract but a duty of care was owed by G in respect

of the preparation of the reference. The Court of Appeal allowed the employer's appeal. S

appealed to the House of Lords

Held, allowing S's appeal, that an employer who provided a reference in respect of an employee

to a prospective future employer owed a duty of care to the employee in respect of the

preparation of the reference and was liable in damages for economic loss suffered as a result of the negligent preparation of the reference ( Hedley Byrne & Co Ltd v Heller & Partners Ltd

[1964] A.C. 465 explained and applied).

Judge: Lord Keith of Kinkel; Lord Goff of Chieveley; Lord Lowry; Lord Slynn of Hadley; Lord

Woolf

Counsel: For S: Bernard Livesey Q.C. and Witold Pawlak. For GA: David Eady Q.C. and

Gerard Clarke

Solicitor: For S: Elliott & Co for Bevans (Bristol). For GA: Clifford Chance

Appellate History

Reversed by


Spring v Guardian Assurance Plc

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Reversed by

House of Lords

Spring v Guardian As

MUTUAL LIFE AND CITIZENS' ASSURANCE CO LTD AND ANOTHERAPPELLANTS AND CLIVE RALEIGH EVATT RESPONDENT [ON APPEAL

FROM THE HIGH COURT OF AUSTRALIA]

1970 July 1, 2, 6, 20, 21, 22; Nov. 16

Lord Reid, Lord Morris of Borth-y-Gest, Lord Hodson, Lord Guest and Lord Diplock Negligence - Duty of care to whom? - Careless misrepresentation - Gratuitous information and

advice - Insurance company giving inquirer information and advice as to financial affairs of

associated company - Inquirer investing money - Loss of investments - Whether duty of care

owed to inquirer Whether inquirer having cause of action.

The plaintiff, who was a policy holder in the defendant insurance company, brought an actionagainst that company claiming damages for the negligence of the company in giving gratuitousinformation and advice on the financial stability of an associated company with the knowledge

that the plaintiff would act on that advice and invest in the associated company; and claiming

that he had invested therein and that he had incurred a financial loss. He also claimed that thecompany was in a better position than himself for obtaining full information concerning the

associated company's financial affairs and that the company's officers were capable of forming a

reliable judgment upon that information. The defendant company entered a demurrer that the

facts alleged did not disclose a cause of action. The demurrer was dismissed by the SupremeCourt of

[1971] A.C. 793 Page 794

New South Wales and the decision was upheld by a majority of the High Court of Australia.

On appeal to the Judicial Committee:-

Held, allowing the appeal (Lord Reid and Lord Morris of Borth-y-Gest dissenting), that, since

the company's business did not include giving advice on investments and it did not claim to have

the necessary skill and competence to give such advice and to exercise the necessary diligence togive reliable advice, its duty towards the plaintiff was merely the duty to give him an honest

answer to his inquiry and, accordingly, the facts alleged did not disclose a cause of action (post,p. 809C, D).



Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co (The Wagon

Mound)

Privy Council (Australia)

18 January 1961

Case Analysis

Subject: Damages

Keywords: Remoteness; Negligence

Summary: Remoteness; escape of oil thought not to be dangerous

Abstract: A plaintiff can recover as damages for the negligence of the defendant compensation

for resulting damage only if that damage could have been foreseen by a reasonable man. It is not

enough that the damage was a direct consequence of the negligent act. By the negligence of thedefendant's servants large quantities of oil escaped into a harbour. The oil spread to a wharf

owned by the plaintiff where, some floating cotton waste acting as a wick, it was ignited by hot

metal falling from oxy-acetylene welding there carried on. The fire spread to the wharf and theequipment on it. The trial judge found that the plaintiff did not know, and could not reasonably

be expected to have known, that the floating oil could be set alight, but that the damage to the

wharf and equipment was a direct result of the escape of the oil.

Held, the defendant was not liable to compensate the plaintiff for the damage to the wharf and

equipment Bourhill v Young [1943] A.C. 92 applied and King v Phillips [1953] 1 Q.B. 429

applied; Greenland v Chaplin 155 E.R. 104 considered; Rigby v Hewitt 155 E.R. 103 considered;Hadley v Baxendale 156 E.R. 145 considered; Smith v London & South Western Railway Co

(1870-71) L.R. 6 C.P. 14 considered; Sharp v Powell (1871-72) L.R. 7 C.P. 253 considered;

Cory & Son Ltd v France Fenwick & Co Ltd [1911] 1 K.B. 114 considered; London, The [1914]P. 72 considered; Glasgow Corp v Muir [1943] A.C. 448 considered; and Woods v Duncan

[1946] A.C. 401 considered; disapproving dictum of Lord Sumner in Weld-Blundell v Stephens

[1920] A.C. 956 considered; Polemis and Furness Withy & Co Ltd, Re [1921] 3 K.B. 560 notfollowed.

Judge: Viscount Simonds; Lord Reid; Lord Radcliffe; Lord Tucker; Lord Morris of Borth-y-Gest

Appellate History

Supreme Court (New South Wales)

Affirmed by

Court of Appeal (New South Wales)

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Reversed by: Privy Council (Australia)

Thomas Witter Ltd v TBP Industries Ltd

Chancery Division

15 July 1994

[1996] 2 All E.R. 573; Independent, August 8, 1994

Case Digest

Subject: Contracts

Keywords: Misrepresentation; Sale of business; Rescission

Summary: Misrepresentation; company sale; extent of false representation based on accountchanges; effectiveness of contractual limitation clauses under Misrepresentation Act 1967;

statutory interpretation

Abstract: In December 1989, D, a conglomerate negotiated the sale of a carpet company to P. In

the course of so doing D negligently misrepresented that there was a special one off expense of

GBP 120,000 in accounts produced, and that those accounts spread the bi-annual expense of

producing pattern books over two years instead of immediately writing it off. The sale contractincluded a provision stating that P acknowledged it had not been induced to enter into the

agreement by any representation or warranty, and a contractual limitation clause that D was not

liable for a breach of the agreement unless written notice was given by January 1, 1992. When Psued for negligent misrepresentation, D sought to rely on those two contractual provisions.

Held, giving judgment for P, that (1) the representation and warranty clause did not have the

purported effect of excluding liability or remedies for misrepresentation as the Misrepresentation

Act 1967 s.1 rendered ineffective a clause intended to exclude liability for a misrepresentation

which had become a warranty of the agreement, and even if that was not so, the clause wouldhave been ineffective under s.3 of the 1967 Act as attempting to exclude all forms of

misrepresentation including fraudulent misrepresentation and (2) the limitation clause only

applied to breaches of the agreement or claims on warranties in the contract, not

misrepresentations inducing P to enter into the contract. Rescission was not available, as, on the

facts, the parties could not be restored to their pre-contract positions. Significant changes hadbeen made to the business following the sale and third party interests would be affected.

Judge: Jacob, J.

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