A Brian v Derek - Negligent Misstatement Resulting in Economic Loss - Case Study Example

LAW OF TORT - WORK THE QUESTION Alan wishes to buy a van for his own personal and domestic use. He asks his friend, Derek, who is a mechanic, to inspect a van he has seen advertised in a local newspaper and prepare a report. Derek prepares a report, which contains mistakes and gives it to Alan. Meanwhile, Alan has changed his mind and no longer wishes to buy a van. Alan passes the report to another friend, Brian, who needs a van for business purposes. Brian reads the report and, on the strength of it, buys the van. Later Brian realises that there are defects with the vehicle that are not mentioned in the report and the van is not capable of performing the demanding business function. Brian incurs additional expenses in hiring a replacement van. Brian's business operations require a constant supply of water for cooling purposes. Donald, while repairing the highway, severs the water supply pipe to Brian's business premises. The water supply is cut off and Brian's equipment overheats and is badly damaged. The production process is interrupted and all the materials in process are damaged beyond repair. In addition, because there is no water supply for 24 hours Brian loses the opportunity to carry out several more processes and loses the profits that these would have generated. Advise Brian THE ANSWER An analysis of the facts of the case presents certain ambiguous legal issues within the premise of both common law as well as the law of torts. In the first situation, the issue is whether Derek's statement to Alan about the efficacy of the van, and the consequent economic loss to Brian, imposes a liability in tort on Derek and/or Alan. In the second situation, the issue is whether Brian can claim economic damages for the losses he has suffered in terms of equipment and material damage and by way of profit loss due to operations shut down resulting from Donald's negligent action. The first situation --Brian v. Derek/Alan - relating to Brian's purchase of van prima facie pertains to area of 'pure' economic loss due to negligent misstatement, resulting in tortious liability under common law.1 The second situation --Brian v. Donald relating to severing of water supply at Brian's factory pertains to negligent act resulting in physical damage and economic loss.2 The two situations, being distinct in terms of the facts and legal principles, shall be dealt separately. A. Brian v. Derek/Alan - Negligent Misstatement Resulting in Economic Loss The common law imposes liability in tort upon persons who make misstatements to others; however, only if the misstatement is made fraudulently or negligently, when there is a duty to take care. Also, the claimant/the person to whom the misstatement has been made must have sustained a loss (which may be physical or financial or both) as a result of reliance upon the misstatement. Thus, liability in the tort of negligent misstatement is generally defined in terms of the common law premises of duty, breach and damage,3 however, a "special treatment" is usually given considering the complexity and since tortious liability in this area is a relatively recent development.4 The case in question presents considerable issues in facts and in law, an analysis of which in relation may be vital in advising Brian. The primary issues for consideration include: Whether mistakes were fraudulent or arising out of negligence Whether Derek owes a duty of care to Brian for a report he made to Alan Whether the plaintiff sustained loss, economic or physical Whether Alan has a vicarious or personal liability in relation to Derek's misstatement and/or in passing the report to Brian Any defence, legal or factual, which may be claimed by Derek/Alan against Brian As the facts of the case reveal, there is no apparent evidence of fraud -- Derek cannot be said to have any interest in Alan or Brian purchasing a van that has been advertised in the local newspaper. The mistakes in the report are mainly due to negligence; however, relying on that Brian, a third party had sustained financial loss, as he had to purchase a replacement van. It is significant to note that 'pure' economic loss, which is not the direct consequence of physical injury to the person or to the property, resulting from negligence had no common law remedy traditionally.5 Stanton observes that traditionally, as a general rule, "pure" economic loss is irrecoverable in the tort of negligence.6 Hedley Byrne v Heller (1963)7 was the first case in which House of Lords recognised such a claim with regard to negligent misstatement, though subject to certain conditions discussed below. 8 In the landmark case, though a the "Disclaimer of Responsibility" clause proved a good defence, it was held that a duty of care existed in case of negligent misstatement when the advice was given and received within a "special relationship," the person giving the advice possessed special skill in relation to the matter, and the plaintiff has acted in reliance on the advice.9 While the scope of 'special relationship' was not examined in Hedley Byrne, in cases such as Mutual Life and Citizens Assurance Co. Ltd v. Evatt (1971)10, Howard Marine and Dredging Co. Ltd v. A Ogden & Sons (Excavating) Ltd (1978)11, involving professional/ business situations; Chaudhry and Prabhakar (1988)12 involving social relationships; Yianni v. Edwin Evans & Sons (1982)13, Smith v. Eric S. Bush (1990)14 involving common relationships or two-party situations, the nature of relationship was established. The need for special skills by the person giving advice was established in Mutual Life and Citizens Assurance Co. Ltd v. Evatt (1971), Chaudhry and Prabhakar (1988) and the factor of reasonable reliance on the statement was established in cases like Smith v. Eric S. Bush (1990) and Yianni v. Edwin Evans & Sons (1982) The liability of Derek may be examined in the light of these and other cases of significance in relation to the issue. In Chaudhry v. Prabhakar, a case comparable to the case in question involving expert advice between friends with regard to purchasing a second-hand car, it was decided that though normally social relationships such as friendships do not give rise to duty of care, liability arises when a carefully considered advice was sought from a person with some expertise. The decision was later upheld in Goodwill v BPAS (1996).15 Derek, though a friend of Alan, was asked to prepare a report as he was a mechanic and possessed the required expertise. Thus, Derek owes a duty of care in preparing the report for Alan. However, the question remains as to whether his duty extends to the third party Brian, who relied on Derek's misstatement. Cases such as Ministry of Housing v. Sharp (1970), 16 Yianni v. Edwin Evans & Sons (1982), Smith v. Eric S. Bush have considered liability to third parties. The views in these cases suggests that the Hedley Byrne requirement of a 'special relationship' essentially concerns with the proximity of the parties17 to assess the degree of 'foreseeability' or likelihood of reliance by the plaintiff on the defendant resulting in loss by the former; however, there was considerable diversity of opinion.18 Lawyers like Jones have observed that the "special facts of the cases make it difficulty to derive any general principle from them."19 However, the decision in Caparo plc v Dickman, considered the current leading interpretative authority concerning the rule in Hedley Byrne for assessing liability to third party, is understood to have resolved the controversy; the case adopts an incremental approach to the establishment of duty of care to third parties.20 Accordingly, the duty of care applies if:21 The advice must be required for a purpose, The purpose must be made known, either actually or inferentially, to the advisor at the time of giving advice If the advice is to be subsequently communicated to a third party who relies on it then this fact must be known to the advisor. The advisor must be aware that the advice with be acted upon for that purpose without independent advice The defendant must have assumed responsibility to the plaintiff The plaintiff must also prove actual reliance on the statement and consequent loss suffered. Applying these criteria to the case in question, Derek's liability to Alan presents many ambiguities. It may be worthwhile to note that Derek's report to Alan primarily addressed the utility of van for personal and domestic use. At the time of preparing the statement, Derek was not informed that his report would be passed on to Brian, who would use it for a different purpose, like the more demanding business operation, and without independent advice.22 The considerations of purpose of advice and prior knowledge of advisor was considered at length in Caparo; in Lord Oliver's words, "[T]o widen that scope of the duty to include loss caused to an individual by reliance on the accounts for a purpose for which they were not supplied and were not intended would be to extend it beyond the limits"23 Though Derek's statement had mistakes, his duty of care can be assessed only with respect to the purpose made known to him; also Derek cannot be said to have assumed responsibility to Brian, being not aware of the possible transaction. Thus any claim by Brian against Derek for his negligent mistakes may not be sustainable, even if Brian succeeds in establishing reliance, as it may be not be just, fair and reasonable to hold him responsible in the light of cases such as Caparo and James McNaughton Paper Group v. Hicks Anderson (1991). 24 Now considering Alan's liability, vicarious or personal, if any, to Brian - in the context of van inspection, the relationship between Alan and Derek, may be compared to that of a principal and unpaid (non-employee) agent as decided in Chaudhry v. Prabhakar.25 However, it is understood that Tort Law is restrictive in terms of applying vicarious liability on the principal in cases of agency, particularly in case of torts of a non-employee agent, acting within authority or otherwise.26 In the present case, establishing a cause of action in negligence against Derek is by itself difficult, hence the vicarious liability on Alan may not be sustainable. Conversely, Alan who passed on the report negligently to Brian may be personally liable- the principles of 'proximity' and the 'foresight' of possible harm established by Hedley Byrne and Caparo applies to the situation. Alan apparently knew that Brian wanted a van for business purposes and he had requested Derek to prepare a report to ensure the utility of van for his personal and domestic use. In passing Derek's report to Brian, Alan has acted negligently when he owed a duty of care. It has been decided in cases such as Chaudhry v. Prabhakar that even in cases of gratuitous advice between friends (here giving Derek's written report), the duty of care may be imposed. Considering these Alan owes a duty of care to Brian, the breach of which and consequent losses may make him liable. Yet, while assessing whether it will be just, fair and reasonable - a vital test applied by Judges since Caparo27, the problem of causation proves difficult to Brian as he himself has failed to act reasonably - he himself has acted negligently contributing to the economic losses sustained by him.28 A reasonable person in the situation would have sought an independent advice, as he wanted the van for a different purpose (for business use) than for the purpose (personal and domestic use) that Alan intended to purchase the van.29 Contributory negligence under the Law Reform (Contributory Negligence) Act 1945 may be applied in defence against Brian, and would diminish the extent of damages.30 Brian v. Donald -- Negligent Act Resulting in Physical Damage and Economic Loss The second situation, as opposed to the first, involves economic loss caused by negligent acts, and as the facts of the case reveal, may be compared with the 1973 case of Spartan Steel and Alloys v. Martin & Co (Contractors) Ltd.31 In the said case, the plaintiff, a stainless steel factory sustained losses as the defendant's employees negligently cut off the cable supplying electricity to the factory while digging up the road. The plaintiffs claimed damages for physical damage to the machinery, the 'melt' in the furnace, which was destroyed, and for the loss of profit on four further melts, which they claimed they could have completed until the machinery was operational again. The Court of Appeal allowed the claim for the physical damage, both to the machinery and the melt, and also for the loss of profit on the current melt. Though the loss of profit in further melts was definitely foreseeable, the claim for the future profits was disallowed. Lord Denning explained that 'the question, at bottom was one of policy'32 and a line had to be drawn to restrict the liability. It was held that such losses were better borne by the larger community including insurers than by the defendants alone. As said, the facts of the present case bears resemblance with Spartan Steel -- issues of duty of care, breach and damages in the present situation bears direct resemblance with Spartan and since the Court of Appeal considered the case as a matter of policy, it may be prudent to apply the same policy to the situation in question. Also, it is understood that the legal policy on such cases has not changed since Spartan. Brian could have a cause of action in negligence against Donald/his employers and his claim for damages may be sustainable in respect of the economic losses resulting from the physical damage to the equipment and in-process material, which was damaged beyond repair as well as the loss of profit on the material. However, any claim for the loss of further profits from possible production during the 24 hour time when the water supply was cut off, may not be sustainable, as the Court of Appeal has restricted such liability as a matter of policy. It may be claimed from the insurers and not from Donald/ his employers. In relation to the facts of the case, it may be worthwhile to note that Donald's negligence, which constituted a tort, may impose a personal liability on Donald; however it also imposes a vicarious liability on his employers (assuming that he was employed by some company to repair the highway), as it occurred during the course of his employment. 33 Vicarious liability of employers for the negligent acts of employees, constituting tort, has been decided in cases such as Bartonshill Coal Co. v. McGuire (1853),34 Century Insurance Co. Ltd. v Northern Ireland Road Transport Board (1942)35 etc. Conclusion Thus, in conclusion, considering the facts of the case in the first situation and the current legal position of Tort Laws, Brian's claim against Derek and/or Alan, may be difficult to establish, though the chances of imposing personal liability on Alan cannot be ruled out. However, contributory negligence by Brian may limit the extent of damages recoverable. With reference to the second situation, a cause of action in negligence may be claimed against Donald (personal liability)/his employers (vicarious liability) for the loss due to physical damage to machinery and in-process material, including the profit arising from latter, however, the loss of profit on further productions may not be claimed from the defendants, but may be recoverable from insurers. Bibliography 1. Harpwood, V. 2000 Principles of Tort Law 4th Ed. Cavendish Principles of Law Series U.K.: Cavendish Publishing Limited 2. Hodgson, J. & Lewthwaite J. 2004 Tort Law Oxford: Oxford University Press 3. Heuston R F V & Buckley R A (1996) Salmond and Heuston on the Law of Torts 21st Ed. London: Sweet & Maxwell 4. Jones, M., 2002 Textbook on Torts 8th Ed, Oxford: Oxford University Press 5. Kidner, R. 2000 Casebook on Torts 6th Ed London: Blackstone Press Limited 6. Logan, J.M. 1995 Briefcase on Tort Law Cavendish Briefcase Series U.K.: Cavendish Publishing Limited 7. Lunney, M. and Oliphant, K. 2000 Tort Law: Text and Materials Oxford: Oxford University Press 8. Murphy J. 2003 Street on Torts 11th Ed. London: Butterworths 9. Stanton K.M. 1994. The Modern Law of Tort London: Sweet & Maxwell 10. Turner, C. 2000 Contract Law and Tort London: Hodder and Stoughton Read More