Pure economic loss caused by Negligent Misstatement

Development of negligent misstatement as a cause of action

A negligent misstatement is information or advice which is honestly provided but is inaccurate or

misleading. The action for negligent misstatement is a comparatively recent common law
development. In Derry v Peak (1889) 12 App Cas 337 the English Court of Appeal decided that a
negligent misstatement was insufficient to support an action in deceit because a non-fraudulent
misrepresentation in the absence of a contract or a fiduciary obligation was not enough to establish
a duty of care.

However, the decision in Derry v Peak was reviewed by the House of Lords in the landmark decision
in Hedley Byrne & Co v Heller & Partners [1964] AC 465. The House of Lords considered that Derry v
Peak did not decide anything regarding causes of action for negligent misstatement and limited the
decision to actions in deceit.1 In England Hedley Byrne & Co v Heller & Partners established that
there might be liability in tort for negligent misstatement in circumstances in which information or
advice is sought from a person possessing some special skill or judgement where that person knows
or ought to know that reliance is being placed upon information or advice by the person seeking it.2

Hedley Byrne & Co v Heller & Partners was considered and accepted by the Australian High Court in
Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556 Per Barwick CJ:

“The duty will arise whenever a person gives information or advice to another,
whether that information is actively sought or merely accepted by that other upon a
serious matter… and the relationship… arising out of the circumstances is such that
on the one hand the speaker realizes or ought to realize that he is being trusted… to
give the best of his information or advice as a basis for action on the part of the other
party and it is reasonable in the circumstances for the other party to seek or accept
and in either case to act upon that information or advice.”

However, Barwick CJ deviated from the English conception of the principle by determining the
‘special relationship’ between the parties did not require the speaker to have actual possession of
skill or judgement or to profess to have any such skill or judgement on the matter.3 This decision was
rejected by the Privy Council on appeal and the decision was reversed.

However, in subsequent cases the views of Barwick CJ in Mutual Life & Citizens’ Assurance Co Ltd v
Evatt (1968) 122 CLR 556 have gained support.4 Any uncertainty regarding this issue was
subsequently resolved in the High Court’s decision in San Sebastian Pty Ltd v Minister Administering
the Environmental Planning and Assessment Act 1979 (NSW) (1988) 162 CLR 340 where it was
decided that the speaker need not possesses or claim to possess any special skill or experience.

1
[1964] AC 465.
2
Ibid.
3
Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556 at 572-3.
4
L Shaddock v Parramatta City Council (No 1) (1981) 150 CLR 225.
 Elements of the Cause of Action

There are three elements to a cause of action founded in negligence:

 A legal duty must be recognized in the circumstances requiring a certain standard of conduct
to protect against foreseeable risk.
 There must be a breach of that duty by failing to meet the requisite standard of care owed.
 And, finally, the plaintiff must have suffered a material injury as a result of the breach.

DUTY OF CARE

1. Characterize the Harm – Pure economic loss

Negligence does not entail liability unless the defendant owed the plaintiff a duty of care. It is
necessary to firstly characterize the harm caused to the plaintiff in order to apply the correct test to
establishing that the defendant did indeed owe the plaintiff a duty to take reasonable care. With the
expansion of the duty of care since the 1960’s it is now possible to claim compensation for pure
economic loss resulting from the defendant’s negligence.

Pure economic loss is when the plaintiff suffers a financial loss in the absence of any physical or
property damage due to the negligence of the defendant. In Sutherland Shire Council v Heyman the
High Court determined the plaintiff suffered pure economic loss as a result of the financial losses
suffered when it was discovered the building work on their house was defective.5 Additionally, in
Perre v Apand Pty Ltd the plaintiff suffered pure economic loss based on the lost opportunity to sell
potatoes in a particularly profitable market.6

2. Reasonable Foreseeability

For a duty of care to be established the risk posed to the plaintiff or a class of people to which the
plaintiff belongs must have been reasonably foreseeable. The original concept of foreseeability was
articulated by Lord Atkin in Donoghue v Stevenson when he introduced the ‘neighbor principle’:

You must take reasonable care to avoid acts or omissions which you can reasonably
foresee would be likely to injure your neighbour. Who, then, in law is my
neighbour? The answer seems to be—persons who are so closely and directly
affected by my act that I ought reasonably to have them in contemplation as being
so affected when I am directing my mind to the acts or omissions which are called
in question.”7

The role of foreseeability has developed since its conception by Lord Atkin; however it remains a
central element in the test for establishing a common law duty of care. Modern cases focus on the
concept of reasonableness. The inquiry involves considering what a reasonable person in the
position of the defendant would have foreseen as potential risks associated with his or her

5
(1985) 157 CLR 424.
6
(1999) 198 CLR 180.
7
Donoghue v Stevenson [1931] UKHL 3.
behaviour. It is not necessary for the plaintiff to show the precise manner in which the harm was
occasioned was foreseeable, merely that they fall into a class of persons that could have been
harmed as a foreseen consequence of the defendant’s actions or omissions.8 Consideration must be
taken regarding the ‘expense, difficulty and inconvenience of taking alleviating action and other
conflicting responsibilities which the defendant may have had.’9

3. Proximity/Special relationship – ‘Salient feature’

While reasonably foreseeability of harm is required, it has long been recognised by the authorities
that mere foreseeability of purely economic loss is not sufficient in itself to give rise to a duty to take
care.10 To apply a duty of care for mere foreseeability that a person might suffer a financial loss
would extend liability in negligence beyond acceptable bounds and could stifle commercial activity.

Proximity

Thus, in the early authorities a duty of care to avoid causing another pure economic loss required a
‘relationship of proximity’ between the parties in addition to the foreseeability of harm.11 The
doctrine of proximity ‘involves the notion of nearness or closeness’, and had the effect of limiting
what was reasonable foreseeable.12

Bryan v Maloney was a case decided according to the doctrine of proximity.13 That case considered,
under the law of negligence, whether a builder who constructs a house for the then owner owes a
prima facie duty to a to a subsequent owner of the house to exercise reasonable care to avoid
foreseeable damage such as the decrease in value of the property based on unknown latent
defects.14 Bryan v Maloney held the builder did owe a duty to subsequent purchasers and reaffirmed
that a sufficiently proximate relationship between a plaintiff and a defendant would be indicated by
factors such as the plaintiff’s reliance, the defendant’s assumption of responsibility; or the presence
of a contractual relationship between the defendant and a third party and whether it was
reasonable in all the circumstances for the plaintiff to rely on the knowledge of the defendant.15

However, the doctrine of proximity was decisively rejected in this country by the High Court decision
in Sullivan v Moody.16 Accordingly Bryan v Maloney remains good law in the sense that it has not
been overruled by the Court.17 However it is of no authority in relation to modern cases because it
was decided according to the doctrine of proximity which is no longer followed.18

8
Chapman v Hearse (1961) 106 CLR 112.
9
Vairy v Wyong Shire Council, above, at 127, applying Wyong Shire Council v Shirt (1980) 146 CLR 40 at 47.
10
Esanda Finance v Peat Marwick Hungerfords (1997) 188 CLR 241 DAWSON J.
11
Hedley Byrne & Co v Heller & Partners [1964] AC 465; Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968)
122 CLR 556.
12
Cook v Cook (1986) 162 CLR 376; Hawkins v Clayton (1988) 164 CLR 539; Burnie Port Authority v General
Jones Pty Ltd (1994) 179 CLR 520.
13
(1995) 182 CLR 609.
14
Ibid.
15
Ibid.
16
(2001) 207 CLR 562 at 48.
17
Woolcock Street Investments Pty Ltd v CDG Pty Ltd & Anor [2004] HCA 16 72-73.
18
Ibid.
Salient features

The courts have rejected the notion of proximity and have instead proceeded on incremental basis
according to established case law and precedent.19 In Caltex Oil, Stephen J identified a number of
‘salient features’ that combined to establish a sufficiently close relationship to give rise to a duty of
care.20 Chiefly among these was the defendant’s knowledge that to damage the pipeline was
inherently likely to cause pure economic loss to parties relying directly on its use and their
knowledge and means of knowledge of where the pipeline was, their use and who used them.21

Many cases have developed the list of salient factors. However, the multifactorial approach should not
be treated as a list of factors, all of which must have application in a particular case. Rather, it provides a list of
22
factors that should be considered, as potentially relevant, depending on the kind of case before the court.

Vulnerability

In recent times there has been a development of the need for vulnerability in order to establish a
duty of care was owed. Indeed vulnerability seems to have replaced proximity as the touchstone.
Vulnerability is characterised as the plaintiff’s inability to protect itself from the consequences of a
defendant’s want of reasonable care, either entirely or at least in a way which would cast the
consequences of loss on the defendant.23 The NSW Court of Appeal has just handed down a decision
on pure economic loss in The Owners -Strata Plan No 61288 v Brookfield Australia Investments Ltd
[2013] NSWCA 317, which appears to suggest that at least in the view of that Court, vulnerability is a
requirement for the existence of a duty of care to prevent pure economic loss.

In Perre v Apand the plaintiff could do nothing to protect themselves from the economic
consequences to them of the defendant’s negligence in sowing a crop which cause the quarantining
of the plaintiff’s land.24 However, in Essanda Finance Corporation Ltd v Peat Marwick Hungerfords
financer could itself have made more inquiries about the financial position of the company to which
it was to lend money, rather than depend on the auditor’s certification of the accounts of the
company.25

Indeterminate liability

Indeterminacy of liability is a factor that will ordinarily defeat a claim that the defendant owed a
duty of care to persons such as the plaintiff.26 Indeterminacy arises when the defendant would not
be able to determine how many claims might be brought against him or her or what their general
nature might be.27 However, it was considered in Woolcock that indeterminacy would not be a
significant issue in cases of economic loss suffered by the subsequent purchaser of a commercial

19
Perre v Apand (1999) 198 CLR 180 at 215.
20
Caltex Oil v The Dredge ‘Willemstadt’ (1976) 136 CLR 529.
21
Ibid.
22
Caltex Refineries (Qld) Pty Limited v Stavar [2009] NSWCA 25.
23
Ibid.
24
(1999) 198 CLR 180.
25
(1997) 188 CLR 241.
26
Perre v Apand (1999) 198 CLR 180 at 220.
27
Ibid.
building that becomes defective by negligent construction.28 Liability is restricted to the builder and
the claimants would be limited to either the first purchaser of subsequent purchasers.

Autonomy of the individual

The common law regards individuals as autonomous, able to make their own choices and be held
responsible for those choices.29 As long a person is legitimately protecting or perusing his or her
social or business interests, the common law will not require that person to be concerned with the
effect his or her conduct on the economic interests of other persons.30 And this is so regardless if
that person knows his or her actions will cause loss to another person.31

What is considered the legitimate pursuit of ones interest? Competitive acts are not prohibited as
long as they fall within the ambit of one of the economic torts. However, Just because is competitive
behaviour will not be acceptable if it amounts to deceit or duress.32

Defendant’s knowledge of the risk and its magnitude

For imposing a duty it is always strengthened if the defendant actually knew of the risk and its
magnitude.33 Whether the defendant was aware of risks and their magnitude depends on the facts
of the case.34

In Woolcock McHugh stated: ‘It would be a rare case where those involved in the construction of the
commercial premises would not be aware of the risks arising from particular defects and their
potential magnitude.’35 The inference was irresistible that, as consulting engineers asked to inspect
the building, that they would fully understand the magnitude of the damage that the owner of the
building would suffer if the risk would eventuate.36

Other relevant policy considerations cited in Woolcock Investments include– responsibility to control
third parties, outflanking the law of contract, flood gates arguments, lack of measureable standard
of care and circumventing the policy of limitation legislation. In Perre v Apand the question of
insurance was a relevant salient factor.

4. Exclusion clauses

However, the speaker may provide information with a clear qualification that he will accept no
responsibility for it or state that it was given without the reflection and enquiry a careful answer
would require. In such circumstances a duty of care might not be established if the defendant has
excluded liability for any inaccuracy in the information or advice provided.37 Whether an exclusion
clause applies is a matter of construction and the contractual rules of incorporation must be
considered. In Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd no duty of care arose because the

28
Woolcock Street Investments Pty Ltd v CDG Pty Ltd & Anor [2004] HCA 16 at 77.
29
Perre v Apand (1999) 198 CLR 180 at 223.
30
Ibid.
31
Ibid.
32
Ibid.
33
Woolcock Street Investments Pty Ltd v CDG Pty Ltd & Anor [2004] HCA 16 at 87.
34
Ibid.
35
Ibid.
36
Ibid.
37
Hedley Byrne & Co v Heller & Partners [1964] AC 465; Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968)
122 CLR 556.
information or advice was given "confidentially" and "without responsibility". The House of Lords
were unanimous that this disclaimer prevented any duty of care from arising.38 This decision is
important because it indicates there can be no duty of care imposed upon a person who, in
voluntarily advising, effectively disclaims responsibility.39

38
[1964] AC 465 at 615.
39
Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556.
 Exclusion clauses

Parties often insert exclusion clauses into contract because they are not willing to accept full
responsibility for contractual breaches or and negligence on their part.

There are three main types of exclusion clauses: those which limit liability altogether, those which
limit a party’s liability to a specific sum of money; and those which make liability limited to certain
circumstances. These clauses are legitimate given the principle of freedom of contract. However,
there are two important principles which must be met. The clause must be properly incorporated
into the contract and must sufficiently cover the liability in question.

Incorporation

Unless the exclusion or limitation clause is incorporated into the relevant contract, it will be
unenforceable. There are five main methods of incorporation:

 Signature
 Reasonable notice
 Course of dealing
 The acceptance of an offer made in a ticket
 Reference

Signature

The simplest way of incorporating an exclusion clause is to have the other party sign that contract
containing the clause. A person who signs a contract containing an exclusion clause will be bound by
it as an express term of the contract, even if they have not read it.40

When a document containing contractual terms is signed, then, in the absence of

fraud, or, I will add, misrepresentation, the party signing it is bound, and it is
wholly immaterial whether he has read the document or not.41

L’Estrange v Graucob Ltd has been approved in Australia in Wilton v Farnworth42 and considered by
the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd.43 Rights and liabilities regarding contracts
are to be determined objectively rather than by the parties’ subjective intentions.44 The test is what
a reasonable person would understand the terms to mean given the surrounding circumstances. A
reasonable person signing a contract recognises it is a legal document and by signing agrees to be
bound by those terms. The principle applies if a person signs a contract that incorporates standard
form general conditions.45

However, the principle is subject to any vitiating factors such as whether there is equitable or
statutory relief available, whether the clauses have been misrepresented to the party or in
circumstances of non est factum.

40
L’Estrange v F Graucob Ltd [1934] 2 KB 394.
41
[1934] 2 KB 394 at 403.
42
(1948) 165 CLR 197 at 228.
43
(2004) 79 ALJR 129.
44
(2004) 79 ALJR 129 at 136.
45
Ange v First East Auction Holdings Pty Ltd [2011] VSCA 335.
Reasonable Notice

Issues arise regarding incorporation generally arise where there is no memorandum signed by the
parties. In such circumstances the terms can be incorporated by way of reasonable notice. In such
circumstances if the party did all that was reasonable in the circumstances to bring the clause to the
attention of the other party, then that party will be bound by such a clause even if he or she did not
read the term.46

That person must additionally prove, given the circumstances, that the document containing the
clause was not merely delivered to the recipient as merely a voucher or receipt. In Causer v
Browne47 a dry cleaning docket contained printed words on the front claiming no responsibility
would be accepted for any loss or damage to garments however caused. However, the dry cleaners
could not rely on this clause because in the circumstances the docket might reasonably be
understood to be a voucher for the customer to pick up goods rather than form part of the contract.

Unless a course of dealing can be established between the parties then notice must be given prior or
contemporaneously with entry into the contract.48 In Olley v Malborough Court Ltd [1949] 1 KB 532
the defendant could not rely on a sign in the hotel room excluding liability for negligence. The
contract was entered into in the lobby when the client booked and paid for the hotel room and
notice given after the contract has been made is ineffectual.49

Course of Dealing

Contracts are often entered into over the phone and dockets or ‘sold notice’ containing terms are
often provided when goods delivered or services are provided. If the person relying on the exclusion
clause can prove that the dealings between the parties have been consistent and sufficiently long
they can claim that knowledge of the exclusion clause can be interred and the customer will be
considered to have received reasonable notice at some stage in those dealings even though has not
trouble to read the clause.

This was the case in Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association.50 The
plaintiff provided ground nuts to SAPPA in accordance with oral contracts. They provided deliveries
three or four times per month. When the stock was delivered they handed over a ‘sold note’ which
said that conditions of sale where on the back of the notice. Such clauses were taken to form part of
the contract. The dealings were sufficiently long and it was inferred that by the defendant’s actions,
accepting the goods and never objecting to the terms, he accepted to goods under the terms set out
on the notice even though he had never actually bothered to read the terms.

Ticket Cases

Where a party makes an offer on a document, usually a ticket of some description, the other party’s
decision to keep the ticket indicates he has accepted the terms and entered the agreement.51 The
party relying on the ticket must give reasonable notice that the ticket is a contractual document.52

46
Balmain New Ferry Co Ltd v Robertson (1906) 4 CLR379 at 386.
47
[1952] ALR 12.
48
Olley v Marlborough Court Ltd [1949] 1 KB 1 All ER 127; Oceanic Sun Line Shipping Co Inc v Fay (1988) 165
CLR 197.
49
Olley v Malborough Court Ltd [1949] 1 KB 532
50
[1969] 2 AC 31.
51
McCutchen v David MacBraye Ltd [1964] 1 All ER 430.
52
Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163
However, the principle will not apply if there is no ability to reject the ticket and negotiate the
terms.53

Three questions are to be applied in ticket cases. Did the person receiving the ticket know there was
writing on it? Did that person know that writing represented contractual terms? And finally, did the
person relying on the terms adequately provide notice of the terms so as to bring it to the other
party’s attention? Provided the party provided reasonable notice it will not matter that the other
party has not in fact read the terms on the ticket.

Reference

Parties may record the bare essentials terms of the contract in a document and the document may
refer to and incorporate a set of terms such as standard terms of one of the parties.54 The
incorporated terms must be consistent with the other terms of the contract into which they are
alleged to be incorporated. The written terms of the contract will prevail over any inconsistency in
the incorporated provisions.55

Does it clause cover the liability in question?

Additionally the clause must cover the liability in question.

Primary Rule

In Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 the High Court observed that
it had in the past authoritatively stated the approach to be adopted in Australia to the construction
of exclusion clauses. Its view was that the decisions in Sydney City Council v West (see [123,020]);
Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR
353:

‘Clearly established that the interpretation of an exclusion clause is to be

determined by construing the clause according to its natural and ordinary meaning,
read in the light of the contract as a whole, thereby giving due weight to the
context in which the clause appeared including the nature and object of the
contract, and, where appropriate, construing contra proferentemin case of
ambiguity.’

However, in cases involving negligence it has been repeatedly said that the exempting clause must
be construed strictly and that clear words are necessary to exclude liability.56 To exclude liability for
negligence it will be necessary to specifically use the word ‘negligence’. The law in Darlington
Futures Ltd v Delco Australia Pty Ltd and Davis v Pearce Parking Station Pty Ltd have been referred to
as the authorities dealing with the proper construction of exemption clauses in many subsequent
cases.57

ANGAS SECURITIES LTD (ACN 091 942 728) and others v VALCORP

53
Ibid at 169-70.
54
Apioil Ltd v Kuwait Petroleum Italia SpA [1995] 1 Lloyd’s Rep 124.
55
Sabah Flour and Feedmills SDN BHD v Comfez Ltd [1988] 1 Lloyd’s Rep 18.
56
Davis v Pearce Parking Station Pty Ltd (1954) 91 CLR 642 at 649.
57
AUSTRALIA PTY LTD (ACN 008 147 671) [2011] FCA 190. and BestCare Foods Ltd & Anor v Origin
Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) & Anor [2011] NSWSC 908.

Secondary rules designed to assist in the application of the primary rule

The contra proferentem rule

Where there is some ambiguity the clause and the clause cannot be interpreted according to its
natural and ordinary meaning, the clause will be interpreted against the party who is relying on the
clause. The words must clearly specify the type of liability which is excluded or else it will be read
down by the courts.58

The Four Corners Rule

The four corners rule is stated in Gibaud v Great Eastern Railway Co [1921] 2 KB 426 at 435:

. . . a condition absolving a party from liability, in particular exonerating a bailee

from liability for the loss of the goods in his care, is construed as referring only to
a loss which occurs when the party is dealing with the goods in a way that can be
regarded as an intended performance of his contractual obligations. He is not
relieved of liability if, having obtained possession of the goods; he deals with them
in a way that is quite alien to his contract’.

This rule was accepted by the Australian High Court in Thomas National Transport
(Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 at 377. The rule
applies when there is a grave breach of the contract. An exclusion clause will not cover an
act that is neither authorised nor permitted as the main object of the contract. In The
Council of the City of Sydney v West (1965) 114 CLR 481 the Council could not rely on the
exclusion clause when the plaintiffs car was stolen from the Domain car park. Read strictly
the exclusion clause did not cover the Council conduct and they were held liable. however,
recourse to this principle of construction may be defeated where the language of an
exclusion clause is sufficiently explicit to establish, on the literal reading, that the clause
was intended to excuse conduct that lay outside the four corners of the contract.

58
White v John Warrick & Co Ltd [1953] a All ER 1021