Mind Your Words
31 December 2015
Natalie Ooi re-visits the landmark case of Hedley Byrne & Co Ltd v Heller & Partners Ltd.
In 1932, the House of Lords had in Donoghue v Stevenson  AC 562 established the law of negligence as a distinct tort by holding a person liable for acts or omissions which could reasonably be foreseen to cause harm or loss to another person.
The years that followed witnessed many developments and refinements in the law of negligence but conventional thought was that liability under this new branch of law did not extend to statements made negligently or to cases where the aggrieved party suffered only economic or financial loss.
Almost two decades later, the Court of Appeal, by a 2:1 decision in Candler v Crane, Christmas & Co  2 KB 164, declined to extend the principles laid down in Donoghue v Stevenson by confining the imposition of liability for economic loss to cases where a contractual or fiduciary relationship exists between the parties.
Some 13 years later, the House of Lords was presented with the opportunity to reconsider the decision in Candler v Crane, Christmas & Co in Hedley Byrne & Co Ltd v Heller & Partners Ltd  AC 465 (“Hedley Byrne”).
The appellants, Hedley Byrne & Co Ltd, were an advertising agency. As the appellants had concerns on the financial position of their customer, Easipower Ltd (“Easipower”), the appellants requested their bankers to obtain a banker’s report on Easipower on two occasions. The appellants’ bankers communicated with the respondents, Heller and Partners, a firm of merchant bankers with whom Easipower maintained a bank account.
On 18 August 1958, in response to an enquiry by the appellants’ bankers as to whether Easipower would be good for an advertising contract worth £8,000 to £9,000, the respondents opined orally that they believed Easipower to be “respectably constituted” and “considered good for its normal business engagements”. The contents of the oral reference were relayed by the appellants’ bankers to the appellants in a letter. It was common ground that the respondents had given the oral reference gratuitously and without responsibility on their part.
On the second occasion, the respondents were requested by the appellants’ bankers to confirm Easipower’s creditworthiness for an advertising contract worth £100,000. The respondents advised in writing on 11 November 1958 that Easipower was a “respectably constituted company, considered good for its ordinary business engagements”. The respondents qualified its advice as “confidential” and “for your private use and without responsibility on the part of the bank or its officials”. The respondents’ response was sent to the appellants by its bankers.
Relying on the statements made by the respondents, the appellants extended credit to Easipower and suffered financial losses of about £17,000 when Easipower went into liquidation. The appellants commenced legal proceedings against the respondents to recover the losses on grounds that their advice was given fradulently or negligently and in breach of the respondents' duty to exercise due care in giving the advice. The allegation of fraud was subsequently abandoned and the trial proceeded on the basis of negligent misstatement.
THE HIGH COURT AND THE COURT OF APPEAL
The trial judge, McNair J, found that the respondents were negligent. However, based on authorities binding upon him, the learned Judge absolved the respondents from liability due to the absence of a contractual or fiduciary relationship between the parties.
The Court of Appeal upheld McNair J’s decision on the same ground and added that apart from authorities binding on the court, it would not be reasonable to impose on a banker answering such queries a duty to do more than act honestly.
THE DECISION OF THE HOUSE OF LORDS
Lord Reid stated in his judgment that in general, an innocent but negligent misrepresentation does not give rise to a cause of action. There must be something more than a mere misstatement. According to Lord Reid a “special relationship” must exist between the parties so as to give rise to a duty of care on the part of the party who is giving the information or advice.
This “special relationship” can arise when it is established that a party was relying on the other party to exercise reasonable care in giving the information or advice and the other party knew, or ought to have known, that the first-mentioned party was relying on his information or advice.
Lord Reid said that three options are available to a reasonable man who knows that his skill and judgement were being relied upon:
(1) He could keep silent or decline to give any information or advice;
(2) He could give an answer with a clear qualification that it is being made without responsibility; or
(3) He could answer without any such qualification.
In the first two scenarios, the person would not be liable for any loss suffered by the other person. However, if a person took the third course of action, he must, according to Lord Reid, “be held to have accepted some responsibility for his answer being given carefully, or to have accepted a relationship with the enquirer which requires him to exercise such care as the circumstances require”.
In the opinion of Lord Pearce, the question as to whether a “special relationship” arises depends on the circumstances of the transaction. His Lordship added that, “if, for instance, they disclosed a casual social approach to the inquiry, no such special relationship or duty of care would be assumed. To import such a duty the representation must normally, I think, concern a business or professional transaction whose nature makes clear the gravity of the inquiry and the importance and influence attached to the answer.”
Lord Morris expounded that “it should now be regarded as settled that if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise. 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 upon his judgment or his skill or upon his ability to make careful enquiry a person takes it upon 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 upon it, then a duty of care will arise.”
According to Lord Devlin, “… the categories of special relationships, which may give rise to a duty to take care in word as well as deed, are not limited to contractual relationships or to relationships of fiduciary duty, but include also relationships which … are equivalent to contract that is, where there is an assumption of responsibility in circumstances in which, but for the absence of consideration, there would be a contract …”
The learned Judge continued:
“Payment for information or advice is very good evidence that it is being relied on and that the informer or adviser knows that it is. Where there is no consideration, it will be necessary to exercise greater care in distinguishing between social and professional relationships and between those which are of a contractual character and those which are not. It may often be material to consider whether the adviser is acting purely out of good nature or whether he is getting his reward in some indirect form. The service that a bank performs in giving a reference is not done simply out of a desire to assist commerce. It would discourage the customers of the bank if their deals fell through because the bank had refused to testify to their credit when it was good.”
Notwithstanding that all five Law Lords were of the view that a person could be liable for a negligent misstatement if a special relationship exists between the parties, their Lordships unanimously agreed to dismiss the appellants’ claim on the ground that the respondents had clearly stated that they assumed no responsibility for their statements and thus did not assume any duty of care to the appellants.
THE LEGAL POSITION IN MALAYSIA
The principle laid down in Hedley Byrne has been applied in Malaysia (e.g. Malaysian International Merchant Bankers Berhad v Lembaga Bersekutu Pemegang Amanah Pengajian Tinggi Islam Malaysia  1 MLJ 375 (CA)).
Over the years, the Malaysian Courts have recognised that a special relationship exists in certain circumstances which gives rise to a duty of care. Amongst these are the relationship between a merchant bank and its client (Malaysian International Merchant Bankers Berhad v Lembaga Bersekutu Pemegang Amanah Pengajian Tinggi Islam Malaysia); a stockbroker and its client (Ho Kam Seong v Arab Malaysian Securities Sdn Bhd  4 AMR 3947); a solicitor and his client (Dato’ Seri Au Ba Chi v Malaysian United Finance Bhd & Anor  3 MLJ 434); and a financial adviser/consultant and its client (Bank Utama Bhd v Insan Budi Sdn Bhd  1 MLJ 148 and Dato’ Zamzuri bin Ghaffar v BIMB Trust Ltd & Ors  8 MLJ 185).
The pronouncements by the House of Lords in Hedley Byrne dispelled the three-decade old notion that the principles laid down in Donoghue v Stevenson do not apply to negligent misstatements (except where a contractual or fiduciary duty exists) or to financial or economic losses.
Arising from Hedley Byrne, it is clear that a party may succeed in a claim against another party for negligent misstatements if the claimant is able to establish that:
(1) A “special relationship” exists between the parties so as to give rise to a duty of care on the part of the other party to exercise reasonable care in giving the information or advice;
(2) The other party must have acted negligently in giving the information or advice; and
(3) The claimant has suffered loss or damage, which could be financial or economic in nature, in reliance on the information or advice given by the other party.
In his dissenting judgment in Candler v Crane, Christmas & Co (@ p. 178), Denning LJ observed that in each of the great cases of Ashby v White 92 ER 126, Pasley v Freeman 100 ER 450 and Donoghue v Stevenson, the judges were divided in opinion – on the one side were “the timorous souls who were fearful of allowing a new cause of action” and on the other were “the bold spirits who were ready to allow it if justice so required.” It may be apt to say that the five Law Lords in Hedley Byrne were indeed “the bold spirits” who did not hesitate to extend the boundaries of the law of negligence.