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The Approach of New Zealand Courts to Negligent Misstatement: Rationalising Price Waterhouse v Kwan and R.M. Turton & Co Ltd (In Liquidation) v Kerslake and Partners.
Naomi Price
I. Introduction
Price Waterhouse v Kwan[1] and R.M. Turton & Co Ltd (In Liquidation) v Kerslake and Partners,[2] are both recent decisions of the New Zealand Court of Appeal. These two cases have similar fact patterns and were heard within a few weeks of each other. However they were approached differently and had different outcomes. This seems to undermine seriously the certainty of the law in New Zealand on negligent misstatement. Therefore, it is necessary to consider how this discrepancy has arisen. The premise of this article is that it is due to historical developments within the law of negligence, specifically that of negligent misstatement and the resulting existence of two fundamentally different lines of authority on determining liability in this class of case. To this end the emergence of the tort will be examined through the leading cases and then related to the decisions in Price Waterhouse and Turton.
II. The Emergence of a Tort of Negligent Misstatement
1. Overview
Prior to the House of Lords’ decision in Hedley Byrne & Co Ltd v Heller & Partners Ltd,[3] in general there was no liability for negligent misstatements. The most obvious exception was where the parties were in a fiduciary relationship. For a long time courts have recognised that negligent words should be treated differently to negligent acts. However, courts have also expressed concerns that holding defendants liable for negligent words would result in indeterminate liability and be unfair on defendants.
These concerns are evident in the speeches in Hedley Byrne, as Lord Reid stated: [4]
Quite careful people often express definite opinions on social or informal occasions even when they see that others are likely to be influenced by them; and they often do that without taking that care which they would take if asked for their opinion professionally, or in a business connexion... [However] it is at least unusual casually to put into circulation negligently made articles which are dangerous... Another obvious difference is that a negligently made article will only cause one accident, and so it is not very difficult to find the necessary degree of proximity or neighbourhood between the negligent manufacturer and the person injured. But words can be broadcast with or without the consent or the foresight of the speaker or writer... It would be one thing to say that the speaker owes a duty to a limited class, but it would be going very far to say that he owes a duty to every ultimate “consumer” who acts on these words to his detriment.
Lord Pearce expressed similar concerns, saying: [5]
The reason for some divergence between the law of negligence in word and that of negligence in act is clear. Negligence in word creates problems different from those of negligence in act. Words are more volatile than deeds. They travel fast and far afield. They are used without being expended and take effect in combination with innumerable facts and other words. Yet they are dangerous and can cause vast financial damage. How far they can be relied on unchecked... must in many cases be a matter of doubt and difficulty. If the mere hearing or reading of words were held to create proximity, there might be no limit to the persons to whom the speaker or writer could be liable. Damage by negligent acts to persons or property on the other hand is more visible and obvious; its limits are more easily defined and it is with this damage that the earlier cases were more concerned.
Yet it is clear that people often rely on statements, especially those made by people in a business capacity, and can, as a result, suffer loss. Where there is a contractual relationship this problem does not arise as there are remedies available. However in numerous situations where there are no direct contractual relations, information or advice is given on the understanding that it will be relied upon. It would appear to be a gap in the law if people could not recover for damage caused by this reliance; however, at the same time, it would be unreasonable and extremely harsh on defendants if they were liable to every person who relied on their statements.
2. Hedley Byrne & Co Ltd v Heller & Partners Ltd
The House of Lords in Hedley Byrne attempted to resolve this dilemma by accepting that liability could arise from a negligent statement, while attempting to limit the scope of this liability. However, discerning a single ratio from this case is no easy task. A disclaimer of responsibility led the House of Lords to reach a unanimous decision in favour of the defendant, but each of the five Law Lords approached the case in a fundamentally different way.
Lord Reid held that liability was based on “reasonable and foreseeable reliance”. He approached the case by analogy to cases of fiduciary relationships and held that for liability to exist there must be a “special relationship” between the plaintiff and the defendant. A “special relationship” exists if the following three criteria are fulfilled: [6]
[W]here 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 and advice when he knew or ought to have known that the inquirer was relying on him.
Lord Devlin approached the basis of liability completely differently. In his Lordship’s view, the tort of negligent misstatement was a by-product of the doctrine of consideration. He saw the basis of liability as being a “voluntary assumption of responsibility” by the defendant. This is clear from his words: [7]
I do not understand any of your lordships to hold that it is a responsibility imposed by law on certain types of persons or in certain sorts of situations. It is a responsibility that is voluntarily accepted or undertaken either generally where there is a general relationship, such as that of a solicitor and client or banker and customer,..., or specifically in relation to a particular transaction.... Responsibility can attach only to the single act... and only if the doing of that act implied a voluntary undertaking to assume responsibility.
It is less clear from the speeches of Lord Morris, Lord Hodson and Lord Pearce, what they considered to be the basis of liability. Lord Morris initially seemed to base his decision on a “voluntary assumption of responsibility”, saying, “it seems to me that if A assumes responsibility to B to tender him deliberate advice there could be liability if the advice is negligently given.” However, it then seems that he favours the “reasonable and foreseeable reliance” approach advocated by Lord Reid − as shown by his subsequent statement: [8]
[I]f someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies on such a skill, a duty of care will arise. The fact that the service is to be given by means of, or by the instrumentality of, words can make no difference. Furthermore if, in a sphere in which a person is so placed that others could reasonably rely on his judgment or his skill or on his ability to make careful inquiry, a person takes it on himself to give information or advice to, or allows his information or advice to be passed on to, another person who, as he knows or should know, will place reliance on it, then a duty of care will arise.
Lord Hodson also seemed to see the tort’s basis as “reasonable and foreseeable reliance”. He stated that he agreed with Lord Morris that:[9]
[I]f in a sphere where a person is so placed that others could reasonable rely on his judgment or his skill or on his ability to make careful inquiry such person takes it on himself to give information or advice to, or allows his information or advice to be passed on to, another person who, as he knows, or should know, will place reliance on it, then a duty of care will arise.
It is unclear from Lord Pearce’s decision what he considered the basis of liability to be. Like Lord Reid he reached his decision by analogy with cases of fiduciary relationships and concluded that a “special relationship” is necessary to impose liability. However he was not explicit about what it is that constitutes a “special relationship”. It is possible that this is because he considered it to be a fact specific question and one that did not need to be addressed in the present case because the disclaimer effectively denied any “special relationship”.
3. Scott Group Ltd v McFarlane
Hedley Byrne has been accepted and followed in New Zealand, yet the approach to negligent misstatement cases by the New Zealand courts has by no means been consistent. This inconsistency is clear in the decision in Scott Group Ltd v McFarlane,[10] which was heard by a three-judge bench, and each member of which approached the case differently and subsequently came to three different conclusions. Furthermore, none of the three followed Lord Reid’s Hedley Byrne criteria in their determination of the duty question.
Richmond P agreed with Lord Devlin in Hedley Byrne that the basis of liability in the tort of negligent misstatement is a “voluntary assumption of responsibility” by the defendant, stating:[11]
The question in any given case is whether the nature of the relationship is such that one party can fairly be held to have assumed a responsibility to the other as regards the reliability of the advice or information.
Richmond P held that for a “special relationship” to exist, the defendant must have known that the information or advice would be relied on by the particular person, or class of persons, at the time that the statement was made. He considered that mere foreseeability in a general sense is not enough to impose liability, as this would result in too stringent a duty on defendants. However, whether a defendant has assumed responsibility is judged objectively; that is, whether the defendant would appear to have assumed responsibility in the eyes of a reasonable person.[12] Ultimately, Richmond P held that no duty was owed to the plaintiffs in this case, as the purpose for which the report was used was not the purpose for which it had been produced. Therefore the defendant had assumed no responsibility to the plaintiff.
Woodhouse and Cooke JJ applied the two-stage Anns test to determining liability as set out by Lord Wilberforce in Anns v. Merton London Borough Council[13] and modified in South Pacific Manufacturing Ltd v New Zealand Security Consultants & Investigations Ltd.[14] However, with respect, it is questionable whether this was the correct approach, as this was not a case involving a novel situation.[15]
Woodhouse J (as he then was) approached the first step of the inquiry, the question of proximity, as being determined “simply by the reasonable contemplation of likely harm”.[16] This is a very narrow interpretation of this step of the inquiry. He held that the defendants were liable because:[17]
(1) They were professionals who had special skill;
(2) The use the which the plaintiffs put the report was in reasonable contemplation of the defendants
(3) It was impractical or impossible for the plaintiffs to acquire the information by other means; and
(4) The defendants knew that the report would be available to the public.
Furthermore his Honour held that there were no policy reasons to limit this liability under the second stage of the Anns test. In finding for the plaintiffs, he held that the defendants owed a duty of care and that this duty had been breached causing loss to the plaintiffs.[18]
Cooke J (as he then was) came to the same conclusion as Woodhouse J on the question of liability, saying:
[O]n the facts of this case as between the alleged wrongdoer and the person who has allegedly suffered damage there is a sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former, carelessness on his part may be likely to cause damage to the latter. So a prima facie duty of care arises.
Like Woodhouse J, his Honour did not think that there were any policy reasons to limit this liability. Therefore, he also held that a duty of care was owed by the defendants to the plaintiffs and that the defendants had breached this duty. However, he also found that the plaintiffs had suffered no damage – no actual loss had been sustained, instead they had simply made less of a profit than they would have had the representations in the report been accurate. As the measure of damages in tort are based on compensation for loss, the plaintiffs’ claim failed.
Therefore, both Woodhouse and Cooke JJ seemed to follow Lord Reid and base liability on “reasonable and foreseeable reliance” rather than on any form of consent. Under the Anns test, the most important investigations are those of proximity and foreseeability. However, unlike Lord Reid, Woodhouse and Cooke JJ did not inquire into the reasonableness of the reliance, but instead focused solely on whether the requirements of proximity and foreseeability were satisfied. For this reason, their judgments go well beyond that of Lord Reid in Hedley Byrne. Under Lord Reid’s criteria, the maker of a statement must know, or ought to have known, that the plaintiff would rely on that statement. Where a report was used not only for a purpose different to that for which it was produced, but also for a purpose that was not reasonably foreseeable − as was the case in Scott Group − this condition could not be satisfied. For this reason, the author respectfully disagrees with Cooke J that a company purchasing all, or the majority of shares in a company is any more closely related to the defendant auditor than an ordinary purchaser of a lesser value of shares. In either case the report was not prepared for this purpose, nor was the purpose reasonably foreseeable; therefore, the defendant need not have known of any general or specific reliance. It is also interesting to note Lord Oliver’s comment on this assertion by Cooke J in Caparo Indusries Plc v Dickman (Caparo).[19] He considered that he was unable to see why it was not foreseeable that a member of the public might rely on the report as a basis of a transaction, when it was foreseeable that the report would be relied on in a takeover bid.[20] From the decision in Scott Group, it is clear that the early approach to cases of negligent misstatement in New Zealand after Hedley Byrne was inconsistent.
*********
While the Anns test continues to be applied in New Zealand, following the decision in Governors of the Peabody Donation Fund v Sir Lindsay Parkinson & Co Ltd,[21] (Peabody), the English Courts have retreated from this test in favour of the more traditional approach. This approach focuses on individual classes of case, rather than trying to fit all classes of negligence into a single approach based on the underlying principles of negligence law. This change of approach is evident in the Lords’ speeches in Caparo, particularly that of Lord Bridge, with whom the other Lords agreed: [22]
Whilst recognising, of course, the importance of the underlying general principles common to the whole field of negligence, I think the law has now moved in the direction of attaching greater significance to the more traditional categorisation of distinct and recognisable situations as guides to the existence, the scope and the limits of the varied duties of care which the law imposes.
Indeed, Lord Oliver compares the search for a single approach with pursuing a ‘will-o-wisp’.[23] Therefore, in Caparo, the House of Lords approached the question of liability less by principle, than by a detailed analysis of similar cases. Other than the change from a general to a more specific approach to the duty question, three important points can be taken from this case.
Firstly, all the Lords make it clear that foreseeability alone is not enough to impose liability, as foreseeability without limits would impose too wide a duty. The limits that they considered necessary were considerations of “proximity” and whether imposing liability would be “just and reasonable”.[24] It is not enough simply to consider whether a duty exists, as the existence of a duty is bound up with the scope of that duty and the damage it is imposed to avoid.[25] Therefore, in order to determine the existence of a duty it is necessary to look at the purpose for which information was supplied. Given this, it is not surprising that the Lords praised the decision of Richmond P in Scott Group, while discrediting that of Woodhouse and Cooke JJ.
Secondly, Lord Bridge, Lord Roskill and Lord Oliver all questioned the use of the phrase “assumption of responsibility”. In their speeches, Lord Bridge and Lord Roskill both referred to the decision in Smith v Eric S. Bush,[26] in which Lord Griffiths stated: [27]
The phrase “assumption of responsibility” can only have any real meaning if it is understood as referring to circumstances in which the law will deem the maker of the statement to have assumed responsibility to the person who acts upon the advice.
Similarly, in both Hedley Byrne and Scott Group, it is clear that an objective standard should be used to determine whether someone has assumed responsibility. This is not surprising as an objective standard is always used in negligence cases, as well as in contract, because the tort of negligence is based on a departure from the behaviour of a reasonable person.
Thirdly, Lord Oliver set out the situations in which the Court will imply an assumption of responsibility. These are: [28]
| (1) | The purpose for which the information is used must be known or ought to have been known by the defendant; |
| (2) | The defendant must know of the plaintiff as an individual or as a member of a set class; |
| (3) | The defendant must know or ought to have known that the plaintiff would act on the information without independent inquiry; and |
| (4) | The plaintiff must have acted on the information and suffered loss as a result. |
Following Caparo the approach to negligent misstatement cases in England has been reasonably settled. However it is clear from the decisions in Price Waterhouse and Turton that this is not the case in New Zealand.
Price Waterhouse were auditors of a firm of solicitors, some of whose clients suffered loss on investments in the solicitors’ nominee company. Knowing that they were unlikely to recover these losses from the solicitors, they sued Price Waterhouse who were responsible for auditing the relevant trust accounts. The plaintiffs alleged that their losses were caused, or at least contributed to, by negligently prepared audits. Subject to the Solicitors Audit Regulations 1987, the Law Society could, following an audit, intervene in the affairs of a solicitor if the Society considered this to be warranted. The plaintiffs thus claimed that had the audits not been prepared negligently, the Law Society would have intervened and their losses would have been minimised. There were contractual relations between Price Waterhouse and the solicitors, and between the solicitors and the plaintiffs. However, there was no contractual relationship between Price Waterhouse and the plaintiffs.
In giving the judgement of the Court, Tipping J followed the Anns test to determine whether a duty was owed. After examining the legislative scheme, he concluded that one of its main purposes was to protect solicitors’ clients. Therefore, his Honour found that a sufficient relationship of proximity existed for a duty to be owed. To not impose a duty would be to undermine the protection envisaged in the legislation: [29]
Against that background, and in light of the relationships between the auditor, the solicitor, and the latter’s clients, there is in our view sufficient proximity between the auditors and the clients to justify the imposition of a duty of care in tort, subject to such policy considerations as may suggest otherwise. The regulatory regime, under which audits of solicitors’ trust accounts are conducted, confirms what is inherent anyway, that the purpose of the audit, at least in significant part, is to protect solicitors’ clients from loss as a result of improper conduct in relation to the solicitors’ trust accounts.
His Honour then considered policy reasons for and against imposing a duty, before concluding that there were no policy reasons against imposing a duty, and strong policy reasons for imposing one. Therefore, the plaintiffs were successful in their claim that a duty was owed by the defendants.
Two observations can be taken from this case. The first is the recognition by the Court that there can be concurrent liability in tort and contract. Counsel for Price Waterhouse argued that to impose a duty of care would circumvent existing contractual relations that the parties had assumed. However, the Court recognised that the plaintiffs were not limited to their contractual claim against the solicitors and that this was especially important where insolvencies were involved. As Tipping J stated in his decision: [30]
To hold that a party who enjoys sufficient proximity with A to raise a prima facie duty of care in tort should be confined to a contractual remedy against B, when the efficacy of that remedy is dubious, hardly seems a good policy reason for denying the existence of a duty of care in A.
Secondly, had this case been heard according to either Lord Reid or Lord Devlin’s approach in Hedley Byrne, the plaintiffs would not have succeeded. Neither actual reliance, nor even knowledge of the audit regime by the plaintiffs was considered necessary. While the Court held that the plaintiffs were entitled to rely in a general sense on the audit regime, it is dubious whether a person can reasonably rely on something which they have no knowledge of. It is similarly strange that a defendant can assume responsibility to a person who has no knowledge of that assumption. Shortly after the decision in Price Waterhouse, the Court of Appeal had to consider another negligent misstatement case with a similar pattern of facts. In Turton the approach to whether a duty was owed and the conclusion drawn from this were very different to that in Price Waterhouse.
Kerslake contracted with the Southland Area Health Board (the Health Board) to provide specifications for building a new hospital. The engineering specifications were provided by Kerslake’s subcontractors, and Turton successfully tendered for the contract with the Health Board to build the hospital. In constructing the hospital, Turton employed subcontractors for the mechanical services as required by their contract. However, following installation, it became evident that the specifications given by Kerslake for the heating system were inaccurate. Therefore Turton had to undertake remedial work in order to fulfill their contractual requirements. As a result Turton suffered loss and commenced proceedings against Kerslake. Kerslake were in contractual relations with the Health Board, as was Turton. However, no contractual relations existed between Turton and Kerslake. The contract between Kerslake and the Health Board set out where liability should fall, and specifically excluded liability for the accuracy of the mechanical specifications. Like in Price Waterhouse, the main argument for the defendant was that imposing a duty of care would be inconsistent with the contractual relations the parties had assumed. However, in this case, confining the plaintiff to a contractual remedy would be ineffective.
The two judges in the majority, Henry and Keith JJ, gave a joint judgment which differed greatly to that of Thomas J. in dissent. Following the English approach, they held that a general test of liability was not possible and that the case should be decided according to its specific facts, including the contractual matrix. Their Honours considered that the contractual matrix denied any duty because: [31]
| (1) | Kerslake did not have any special skill over Turton; |
| (2) | Turton did not gain the information directly from Kerslake, who undertook no “voluntary assumption of responsibility” to Turton; and |
| (3) | There was no clear indication that Turton would rely on the information, but rather that they would rely on the expertise of their subcontractors for mechanical services. |
The clearest sign that a duty would be inconsistent with the contractual matrix was that the contract between Kerslake and the Health Board, which specifically disclaimed any responsibility for the accuracy of the report. Therefore the majority came to the following conclusion:[32]
In our view the duty contended for in respect of the alleged representation that the componentry would achieve the required output would cut across and be inconsistent with the overall contractual structure which defines the relationships of the various parties to this work, and in the circumstances of this case it would not be fair, just or reasonable to impose the claimed duty of care.
The majority went on to say: [33]
There are, here, no broad policy issues to be considered. In a case such as this, therefore, we would not endorse the concept of a two-stage inquiry, which somehow first considers the general criteria (possession of skill, foreseeability, reasonable reliance) as establishing a prima facie duty of care, and then goes on to consider whether the contractual matrix negates the prima facie duty. There is no prima facie duty in that sense. The imposition of a duty will depend upon a consideration of all of the circumstances, which must include the contractual matrix.
Their honours did not deny the possibility concurrent liability in tort and contract, but said that the contractual matrix needs to be taken into account when considering the relationships of responsibility and reliance between the parties. That Kerslake denied responsibility to the Health Board for the accuracy of the report shows that they could not have assumed responsibility to Turton. Their Honours did not consider the fact that this would effectively provide no remedy as a reason to impose a duty, as the possibility of insolvency is irrelevant in deciding whether or not to impose a duty; insolvency being a known commercial risk.
In his dissent, Thomas J claimed to apply the Anns test, but actually used Lord Reid’s Hedley Byrne criteria as the sole determinate of the existence of a duty. In referring to Hedley Byrne, his Honour stated:[34]
...[I]t is generally accepted that a duty of care will arise under Hedley Byrne where the relationship between the parties manifest the following criteria:
| • | the maker of the statement possesses a special skill; |
| • | he or she voluntarily assumes responsibility for the statement and it is foreseeable that the recipient will rely on it; |
| • | it is reasonable for the recipient to rely on the statement and he or she does so; and |
| • | the recipient suffers loss as a result. |
Therefore Thomas J held that a “special relationship” existed between Kerslake and Turton because:
| (1) | The wording of the specifications for installation were mandatory; |
| (2) | Kerslake had special skill over Turton; |
| (3) | Given the little time available in the tendering process, and therefore Turton’s inability to check the specifications, it was reasonable for Turton to rely on the specifications; and |
| (4) | Turton did in fact rely on these specifications and as a result suffered loss. |
Thus, he concluded that Kerslake owed Turton a duty of care. In commenting on the approach taken by the majority, Thomas J stated that the difference was essentially one of approach, and that either approach should give the same result. However, as has been seen they did not. As His Honour put it: [35]
But the inquiry whether the consulting engineer has assumed responsibility to the contractor for a statement which the contractor then relied upon for the purposes of Hedley Byrne is effectively the question whether the parties are in sufficient proximity to each other for a duty of care to arise. As I have said... questions of proximity and foreseeability are subsumed in the questions posed by Hedley Byrne: whether a person possessed of special skills has assumed responsibility for his or her statement and is able to perceive that the recipient may reasonable rely upon it. If the answer to that question is in the affirmative, the question is then whether there is anything in the contract or contractual matrix which negates or is inconsistent with that liability. It is not good enough to say that, because of the contractual matrix, no duty of care arises but fail to recognise this conclusion with the fact that the consulting engineer has assumed responsibility to the contractor for his statement and that the contractor has relied upon it.
His Honour went on to say that the approach of the majority was fundamentally flawed because it did not take into account the implications of Donoghue v Stevenson[36] (Donoghue). In Donoghue, the contractual matrix was held to be “irrelevant or, at least, neutral.”[37] Therefore, it did not impose a bar to the plaintiff suing the manufacturer in negligence in a situation where there was a contractual matrix, but no contractual relationship between the plaintiff and the defendant. Basically, this serves as an acknowledgement that there can be concurrent liability in contract and tort.
Given this, Thomas J must have erred in saying that the majority failed to consider the decision in Donoghue. As mentioned earlier, the majority did not contend that under no duty would be owed in situations where a contractual matrix, but no contractual relationship, existed between the plaintiff and the defendant. Rather, they held that the wording of the contract in this specific case shows that there could be no liability. Given this, it seems that the differences between the decisions of the majority and that of Thomas J are deeper than a mere difference in approach to the duty question. The author contends that this difference is instead due to the course of the evolution of this branch of the law both in England and in New Zealand.
Thomas J approached the basis of liability in Turton as a question of “reasonable and foreseeable reliance” − as Lord Reid did in Hedley Byrne, and Woodhouse and Cooke JJ did in Scott Group. Therefore, without inquiring into the contractual matrix, Thomas J held that it was reasonable and foreseeable that Turton would rely on the specifications provided by Kerslake as this was the purpose for which the specifications were produced. Hence a “special relationship” existed between Kerslake and Turton, which was not negated by the contractual matrix. On this approach, it is likely that the contract would only be relevant if it specifically excluded tortuous actions − mere inconsistency with the contract would not be enough.
In contrast, Henry and Keith JJ approached the case by determining whether Kerslake had undertaken a “voluntary assumption of responsibility” to Turton. This approach was based on the approach of Lord Devlin in Hedley Byrne, and Richmond P in Scott Group − the latter cited with approval in Caparo. Their Honours examined the contractual matrix, not as an exclusive factor in determining liability, but as an indicator of the parties’ intentions as to where responsibility for loss should lie. The author agrees that, in light of the contractual matrix, it would be farfetched at least to say that Kerslake had assumed responsibility to Turton, when the former had specifically excluded liability to the Health Board. The approach of the majority, in terms of their treatment of the contractual matrix, is supported by English decisions such as British Telecommunications Plc v James Thompson & Sons (Engineers) Ltd[38] and Simaan General Contracting Co v Pilkington Glass Ltd (No2).[39]
There is a deeper difference underlying these two approaches. The “reasonable and foreseeable reliance” approach is similar to the approach taken in most tortuous actions in that it enforces a duty that is imposed by law. In contrast, the “voluntary assumption of responsibility” approach is based on consent.
At first appearance it seems unusual for the law of torts to be enforcing agreements that are generally covered by the law of contract.[40] The answer to this, as Lord Devlin acknowledged in Hedley Byrne, is that the tort of negligent misstatement can be better understood when seen as a by-product of the doctrines of consideration and privity in the law of contract. Firstly, for an agreement to be a legal contract there must be adequate and sufficient consideration. Secondly, other than in certain circumstances covered by the Contracts Privity Act 1982, only a party to a contract may sue for damages or specific performance. As many cases of negligent misstatement involve situations where no formal contract exists due to lack of consideration, or the plaintiff is not a party to the contract; a plaintiff cannot succeed through contract law. Nevertheless the advice or information may still have been given on the understanding that the plaintiff was entitled to rely on it.
Therefore the tort of negligent misstatement can be viewed primarily as having a ‘gap filling’ role between the law of tort and the law of contract, allowing the law of contract to provide discrete and clear rules, which will suffice in the majority of cases.[41] In situations where a plaintiff has valid claim to compensation for loss suffered through reliance on a defendant who has assumed responsibility to them, the tort of negligent misstatement provides recourse where the claim would otherwise fail under the law of contract.
Although there are safeguards on both approaches, the author contends that the “voluntary assumption of responsibility” approach is likely to provide a narrower scope of liability and should therefore be considered more desirable than a broad approach. Certainly it is true that a broader liability may encourage care without being too onerous on potential defendants, as regardless of whether a duty is owed, liability will only follow if there has been negligence on the part of the defendant. However, there are also strong views that this will lead to economic problems such as an increase in the cost, and decrease in the availability of indemnity insurance.[42] It would also necessarily follow that this cost would, in turn, be passed onto clients. As many situations where the tort arises involve information or advice given gratuitously, it would be undesirable to increase the cost of paid services in order to enable reliance for the recipients of this free advice or information.
Two further implications need to be considered in relation to the fact that these cases often involve advice or information given gratuitously. Firstly, as the recipient is paying no fee for it, the scope of liability should be narrow. If the recipient requires a guarantee that they can rely on the information, this can be obtained through an agreement or contract with the provider. Secondly, the imposition of a heavy burden on people who are acting gratuitously is unreasonable and would tend to discourage these types of transactions. If the “assumption of responsibility” approach is taken, it will ensure that potential defendants are able to choose who can rely on their statements.
Finally, the “voluntary assumption of responsibility” approach provides greater certainty than the “reasonable and foreseeable” approach, in an area of law that is at present characterized by an unsatisfactory level of uncertainty. Under this approach, potential defendants are better able to predict and control to whom they owe a duty of care.
Recently the New Zealand has revisited some of these issues in a judicial review of a strike out application. Carter Holt Harvey v Genesis Power[43], (CHH) was an application in the New Zealand High Court for judicial review of a striking out order. Carter Holt Harvey (CHH) had contracted with ECNZ (the predecessor of Genesis) to construct and install a cogeneration plant, while ECNZ had contracted with Rolls-Royce for the latter to design, construct and install various works in the plant. As in Price Waterhouse and Turton, there were no contractual relations between CHH and Rolls-Royce.
CHH claimed that the plant was defective. It sued ECNZ/Genesis in contract, alleging that Rolls-Royce owed CHH a duty of care in tort. In response, Rolls-Royce applied to have the case struck out, arguing that it could not possibly succeed as the contractual relations adopted by the parties clearly excluded the alleged tortuous duty. The Master declined the strike-out application and Rolls-Royce sought a review of that decision in the High Court. On review, Randerson J held that it was necessary for the court to consider not merely the contract, but also all the surrounding facts and circumstances − thus following the majority judgment in Turton:[44]
I do not read the Court of Appeal’s approach in Turton as deciding that the provisions of the contract were decisive. They were considered to be no more than a factor, albeit an important one in that case, in determining whether a duty of care existed.
Therefore, it seems that the New Zealand courts will take the following approach to negligent misstatements. The basis of liability will be determined by an investigation into whether the defendant has voluntarily assumed responsibility to the plaintiff and liability will be imposed in situations where a reasonable person would think that the defendant had assumed responsibility. In this inquiry, it is necessary to look at all the surrounding facts and circumstances in the case. Analysing any contractual matrix is an important element of this; however, a contractual matrix is not determinative of a duty or lack of a duty − it is merely a factor to consider, albeit sometimes a very important one.
Within the space of a few weeks in 2002, Price Waterhouse and Turton were decided by the New Zealand Court of Appeal. Although these cases had similar fact patterns, they were approached in different ways and subsequently the judgments differed. The undesirability of this is obvious, as people (at least theoretically) plan their actions and business practices according to the law, and this cannot be done where the law is so drastically uncertain. For this reason it is necessary to consider why these two cases have been treated so differently.
The author has premised that these differences are due to the historical development of the law relating to negligent misstatement. Although the law on this matter is now reasonably settled in England, the differences of approach that have arisen in the evolution of this branch of law have had a lasting effect on New Zealand law. This effect is evidenced by the fact that some New Zealand judges have insisted on continuing to apply the Anns test, while others apply a modified version of this test, and others still have followed England’s lead and discarded it altogether. Additionally, uncertainty remains as to whether the basis of liability in negligent misstatement cases is a “voluntary assumption of responsibility” by the defendant, or “reasonable and foreseeable reliance” by the plaintiff.
The “reasonable and foreseeable” reliance approach is typical of tort law in that it enforces an obligation imposed by law. In contrast, the “voluntary assumption of responsibility” approach is quasi-contractual − it enforces an obligation that arises out of consent and has essentially a gap-filling role. Such a role is necessary due to the doctrines of consideration and privity in the law of contract. The author considers the “assumption of responsibility” approach to be the more desirable of the two, as it has the ability to be clear and certain, thus allowing potential defendants to control the extent of the responsibility they undertake to third parties.
It seems likely from the recent decision in CHH that New Zealand Courts will favour the approach taken by the majority in Turton. This approach bases liability on a “voluntary assumption of responsibility” by the defendant, which is determined by considering all the relevant factors in the case. This includes any contractual matrix although this matrix will not be determinative.
[1] [1999] NZCA 311; [2000] 3 NZLR 39 [“Price Waterhouse”].
[2] [2000] NZCA 115; [2000] 3 NZLR 406 [Turton].
[3] [1963] UKHL 4; [1963] 2 All ER 575 [“Hedley Byrne”].
[4] Ibid 580-581.
[5] Ibid 613-614.
[6] Ibid 583.
[7] Ibid 610-611.
[8] Ibid 594.
[9] Ibid 601.
[10] [1977] NZCA 8; [1978] 1 NZLR 553 [“Scott Group”].
[11] Ibid 566.
[12] Ibid 586.
[13] [1977] UKHL 4; [1977] 2 WLR 1024.
[14] [1991] NZCA 551; [1992] 2 NZLR 282 (CA).
[15] Barker “Diving an approach to the Duty of Care: The New Zealand Court of Appeal and claims for Negligent Misstatement” [2001] OtaLawRw 4; (2001) 10 Otago L. Rev. 91.
[16] Supra note 10, 574.
[17] Ibid 575.
[18] Ibid 583.
[19] [1990] UKHL 2; [1990] 2 AC 605 (HL).
[20] Caparo Indusries Plc v Dickman, supra, per Lord Oliver, 646-647.
[21] [1984] 3 All ER 529 (HL).
[22] Caparo Industries Plc v Dickman, supra, per Lord Bridge, 618.
[23] Ibid, XXX
[24] Ibid, per Lord Oliver, 633.
[25] Ibid, per Lord Bridge, 627.
[26] [1990] UKHL 1; [1990] 1 AC 831.
[27] Smith v Eric S. Bush, supra, per Lord Griffiths, 862.
[28] Caparo Industries Plc v Dickman, supra, per Lord Oliver, 638.
[29] Price Waterhouse v Kwan, supra, per Tipping J, 43.
[30] Ibid, per Tipping J, 44.
[31] R.M. Turton & Co. Ltd. (In Liquidation) v Kerslake, supra, 413-414.
[32] Ibid, per Keith and Henry JJ, 417.
[33] Ibid, per Keith and Henry JJ, 418.
[34] Ibid, per Thomas J, 425-426.
[35] Ibid, per Thomas J, 440.
[36] [1932] AC 562 (HL)
[37] R.M. Turton v Kerslake, supra, per Thomas J, 441.
[38] [1998] UKHL 46; [1999] 2 All ER 241 (HL).
[39] [1987] 1 All ER 345 (QB).
[40] Todd, S. (2001) The Law of Torts in New Zealand (3rd ed).
[41] Rickett C, and R. Grantham, “Director’s Tortuous’ Liability: contract, tort, or Company Law” (1999) 62 MLR 133.
[42] Pacini, C, W. Hillison and D. Sinason, “Auditor Liability to Third Parties”, Managerial Accounting Journal, 2000, Bradford, U.S.A. PAGE??
[44] Ibid, p 278.
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