Hedley Byrne & Co Ltd v Heller and Partners (1963)

English Tort Law

Hedley Byrne & Co Ltd v Heller and Partners
‘Bankruptcy’ by Vladimir Makovsky

Duty of care under accusations of negligence, particularly within the carelessness of speech, forms the basis of a claim between a corporate entity and a merchant bank. On this occasion, the appellant advertising agency had taken steps to ascertain the financial credibility of a new client; which while careless in its execution, left them at a considerable loss when the information proved worthless.

In 1957, the appellants received instruction from a new client requiring a number of advertisements, which was later followed by a request for a structured advertising programme with estimated costs of around £100,000 p.a. Given the short-term trading history between them, the appellants asked their bank to consult their client’s bank so as to establish their financial standing. 

The reference, which was by no means official, read that their client was ‘a respectably constituted company whose trading connection is expanding speedily’ and that ‘We consider the company to be quite good for its engagements’. Upon this positive note, the appellants proceeded to organise scheduled television and newspaper slots at cost to themselves, on the strength of the bank’s statement.

Several months later, the appellants concerns for the financial integrity of their client grew to the point where a second reference was requested. This time, an oral banker’s report was provided for by the respondents, that while detailed enough to warrant a sound response, was issued under the express notice that it was given with no responsibility for the outcome of the enquiry. Within this report was knowledge that the client was a subsidiary of a parent corporation in the throes of liquidation, but the bank similarly emphasised that they had confidence in the director and his integrity as a businessman.

With written confirmation of the report sent by the bank to the appellants, the terms expressed were relied upon when in light of their client’s liquidation, the appellants suffered losses of around £17,000. It was this somewhat unsurprising event that triggered a claim for damages, based upon negligence by the respondents when offering statements that were contributory to the appellant’s extension of credit.

In the first instance, the court awarded in favour of the respondents, and when taken to the Court of Appeal, the outcome remained unchanged on grounds that such principles were unreasonably applied to the unrehearsed statements of a banker, and not an official credit report. Presented to the House of Lords, the principles of negligence peripheral to any contract, were examined for exactness, whereupon the dicta of Sir Roundell Palmer in Peek v Gurney initially proposed that:

“[I]n order that a person may avail himself of relief founded on it he must show that there was such a proximate relation between himself and the person making the representation as to bring them virtually into the position of parties contracting with each other…”

There was also mention of Candler v Crane, Christmas & Co, in which a proposed corporate takeover involved the presentation of company accounts to the prospective buyers, accounts that by all intentions had been carelessly prepared, and on which the investors had relied when purchasing the firm. While in Robinson v National Bank of Scotland Ltd, a guarantor was left facing huge debts when it was argued he had been falsely induced into signing by the lenders, prior to the borrowers lapsing into bankruptcy. In this matter, Haldane LJ commented:

“[W]hen a mere inquiry is made by one banker of another, who stands in no special relation to him, then, in the absence of special circumstances from which a contract to be careful can be inferred, I think there is no duty excepting the duty of common honesty…”

While in Shiells v Blackburne, Loughborough LJ stressed that:

“[I]f a man gratuitously undertakes to do a thing to the best of his skill, where his situation or profession is such as to imply skill, an omission of that skill is imputable to him as gross negligence.”

In Cann v Willson, the claimants sought the professional opinion of valuers when borrowing against the worth of their home; and having provided what was suggested as a moderate valuation, the claimant defaulted on the required payments, whereupon the sale of the property failed to cover the debt owed. On this occasion, the court awarded in favour of the claimant on grounds of negligence, want of skill, breach of duty and misrepresentation.

In Nocton v Lord Ashburton, Shaw LJ propagated the principle that:

“[O]nce the relations of parties have been ascertained to be those in which a duty is laid upon one person of giving information or advice to another upon which that other is entitled to rely as the basis of a transaction, responsibility for error amounting to misrepresentation in any statement made will attach to the adviser or informer, although the information and advice have been given not fraudulently but in good faith.”

This translated to a recognition by the House that while there was no question that a duty of honesty was inherent to the words of the bankers, there was no evidence to suggest fraudulent or misrepresentative intention, particularly when at the time the advice or report was issued, the respondents had expressed their abject unwillingness to be held to account for the actions of the company discussed. This left the appellants with no substance upon which to claim damages and so the appeal was uniformly dismissed, while the House held that:

“[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 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.”

Caparo Industries plc v Dickman (1989)

English Tort Law

Caparo Industries plc v Dickman
‘Daydreaming Bookkeeper’ by Norman Rockwell

When predatory investors choose to act upon the advice or information given outside the remit of those assigned to prescribe it, they do so under risk of their own suffering, and within the rules of industry and commerce. On this occasion, the cross-appellants argued that their reliance upon the annual statement provided by a company’s accountants, led to increased investment, despite the fact that the statement turned out to be inaccurate.

When the appellants, a public limited company, fell victim to poor financial trading, their stock market share values began dropping, and were in turn bought up in considerable number by the cross-appellants. While buying as outside investors, they secured an almost thirty percent share of the failing company, after which they became registered investors, and acted quickly to gain a majority controlling hold of the firm. These additional purchases were made after learning from the annual shareholder statement, that the company was due a healthy pre-tax profit. However, after the purchases had been made, it became apparent that the accounts had been poorly prepared, and showed instead a considerable loss of profit.

During the appeal, it was claimed that the accountants owed a duty of care to the now primary shareholders of the company when drafting the legally required statement, and that such care rendered them liable for the losses inherited by the investors. In this instance, a duty of care was determinable by the relationship between (or proximity to) both accountants and investors. Citing Hedley Byrne & Co Ltd v Heller and Partners, the distinction was made between expert advice (albeit subjective) from a banker, and an annual submission from a firm of accountants; and despite an implied culpability on the part of the accountants, an error was made upon which a negative investment took place.

What distinguished the two activities, was that the former was expressly undertaken to prevent loss upon lending of monies, whereas at no point did the accountants have knowledge of a planned takeover bid, despite suggestions made by the investors during the hearing. This clear divide presented the notion that duty of care is always applicable, as the two events were less similar than first appeared, however the accountants were only held liable for the losses made as shareholders, and not those of outside investors.

In conclusion, the Court held that if it were reasonable to place conscious liability upon all acts of certain parties, it would be impossible to distinguish responsibility from neglect, and in this instance there was clear frustration at an unforeseen outcome, but one must always be mindful that the very nature of financial investment is itself, riddled and prone to loss.