Development of the Law
A. TheEarlyCases
During the period 1963-70, the question of the application of Hedley Byrne to pre-contract representations received little attention from the courts. On the two occasions that it did arise for consideration it was simply asserted that the traÂditional contract rules had survived Hedley Byrne unqualified.
Thus, in Oleificio Zucchi SPA v Northern Sales Ltd[1460] McNair J said that ‘the submission advanced by the buyers, that the ruling in [Hedley Byrne] applies as between contracting parÂties, is without foundation'. A similar view was expressed by the New South Wales Court of Appeal in Rural Bank of New South Wales v King.[1461]Any further development of the law might have been curtailed as a result of the restrictive approach to Hedley Byrne liability in the controversial 1970 deciÂsion of the Privy Council in Mutual Life & Citizens' Assurance Co Ltd v Evatt[1462] but, for the most part,[1463] this did not happen.[1464] Instead, during the period 1971-76, the volume of authorities increased and the attitude of the courts graduÂally changed. In the first case, the question was left open.[1465] This was followed by two cases in which, although the tort action failed on the facts, it was cautiously suggested that the Hedley Byrne principle could in some circumstances impose a duty of care in respect of pre-contract statements. [1466] Then, in a series of Canadian,[1467] New Zealand,[1468] and English[1469] [1470] decisions, plaintiffs finally succeeded in establishing liability for negligent misrepresentation inducing contracts. B. The Measure of Damages An interesting feature of those early cases is that they illustrate the different measÂures of damages applicable to a tort claim for negligent misrepresentation and a contract claim for breach of warranty. vehicle dealer was held liable for its salesman's careless misrepresentation that a car had not had more than two previous owners, which was hardly a matter requiring the exercise of any special skill or competence. Instead, the courts were prepared, broadly in line with the approach of Barwick CJ in the High Court of Australia in Evatt (1968) 122 CLR 556, 571, to impose liability where the circumstances were such that the representor knew or ought to have known that he was being trusted to give the information or advice, the subject matter of the information or advice was of ‘a serious or business nature', the representor knew or ought to have known that that the representor intended to act upon the information or advice ‘in connexion with some matter of business or serious consequence', and it was reasonable for the representee to accept and rely on what was said. Another case illustrating that the plaintiff will usually need to establish a breach of warranty in order to achieve the desired level of recovery is Sealand of the Pacific v Ocean Cement Ltd.[1471] The essential facts, for present purposes, were as follows. The plaintiff company wished to raise the level of its sea life display vessel. The defendant's sales representative advised that the company had a lightweight conÂcrete with a dry density of 30 lbs per cubic foot that would do the job. The plaintiff ordered the concrete and the work was carried out but the concrete turned out to be much heavier than represented with the result that the vessel settled even deeper into the water. The plaintiff claimed damages for negligent misrepresentaÂtion and breach of warranty. McKay J, in the British Columbia Supreme Court, found for the plaintiff under both heads. The defendant was liable in tort because it owed and was in breach of a duty of care in giving the advice. It was liable in conÂtract because the representative's statement amounted to a warranty. McKay J also found that it was an implied condition of the contract under the Sale of Goods Act that the product was reasonably fit for its purpose. As a result, the plaintiff was awarded damages covering, inter alia, the cost of replacing the concrete with a substance that would raise the level of the vessel and the loss of profits for the period the vessel would be out of commission while the new work was carried out. The decision was affirmed by the British Columbia Court of Appeal,[1472] although it was found unnecessary, in view of the warranty finding, to deal with the negliÂgence issue. An interesting aspect of the decision is the Court's observation that the plaintiff could not have recovered the cost of replacing the concrete with a substance which would raise the level of the vessel if there had been no breach of contract and the plaintiff's claim was solely in negligence. As noted earlier, the object of tort damages is to restore the plaintiff to the position it would have been in if the misrepresentation had not been made. By contrast, the decision in the New Zealand Supreme Court case of Capital Motors Ltd v Beecham[1473] illustrates a situation where, in theory, the availability of an action for negligent misrepresentation enables an award of damages greater than the amount recoverable in an action for breach of warranty. Indeed, for damÂages to be recoverable at all, the plaintiff must sue in tort. The plaintiff (Beecham) had purchased a used car from the defendant motor vehicle dealer in reliance on the salesman's careless misrepresentation that the car had not had more than two previous owners. He claimed damages in tort for negligent misrepresentation and in the Magistrate's Court was awarded $100, being the difference between the price paid for the car and its market value at the time of the purchase. The decision was upheld by Cooke J (as he then was). His Honour held that the essential ingredients for the application of the Hedley Byrne principle were present and that liability was not ruled out by the fact that the statement was made in the course of pre-contract negotiations. On the surface, this case seems like a straightforward example of a situation where application of the tort and contract measures will lead to the same result. The plaintiff had paid $1,400 for a car which had a market value of $1,300 as a result of its having had more than two owners. The question then arises whether the damages of $100 were recoverable in tort. In other words, was the plaintiff entitled to recoup the loss resulting from his bad bargain by proceeding in tort? It could be argued that damages were not recoverable because there was no causal connection between the misrepresentation and the loss. If the representation had been true the plaintiff would still have suffered the loss. Although a plaintiff can sometimes recoup the consequences of his bad bargain by suing in tort, it must still be shown that the misrepresentation caused some of the loss. In Beecham, Cooke J said that ‘it was reasonably foreseeable... that if it had been known that there were more owners [than two] the market value of the car might well have been diminished'.[1475] That was certainly so, but on the facts as stated the greater number of owners did not account for the decrease in value. C. The Quality of Reasoning Another feature of the early cases is the unconvincing reasoning employed to justify the extension of Hedley Byrne liability to pre-contract representations. This is best illustrated by an analysis of Esso Petroleum Co Ltd v Mardon,33 not only because it became the leading case but also because the judgments of the English High Court and Court of Appeal were the first to contain anything like a full discussion of the issue. It will be recalled that Mr Mardon entered into a tenancy of one of Esso Petroleum's new petrol stations in reliance on the statement by the company's representative: ‘ we estimate that the throughput of the station in its third year of operation will amount to 200,000 gallons'. This forecast was given carelessly and only about half of the throughput estimated was ever achieved. When Esso sued to recover moneys due under the tenancy agreement Mardon counterclaimed for damages for breach of warranty and negligent misrepresentation. In the Queen's Bench Division, Lawson J rejected the claim for breach of warÂranty. Esso's statement was held to be a mere estimate, not a promise or assurance that the throughput would be achieved. However, his Lordship did find for Mardon on the alternative claim for negligent misrepresentation, holding, inter alia, that a duty of care was not ruled out by the fact that the statement was made in the course of pre-contract negotiations. In the Court of Appeal, Lawson J's deciÂsion on the contract issue was reversed on the ground that, while it was true that Esso had not promised that the throughput would be achieved, their statement did in the circumstances amount to an assurance that the forecast was sound and reliable in the sense that it had been made with reasonable skill and care. However, the judge's decision on the tort issue was affirmed, in particular, his conclusion that there was no ground for excluding Hedley Byrne liability in relation to preÂcontract misstatements. In the words of Lord Denning MR, the latter case covers this particular proposition: if a man, who has or professes to have special knowlÂedge or skill, makes a representation by virtue thereof to another—be it advice, informaÂtion or opinion—with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and that the advice, information or opinion is reliable.[1479] Lawson J gave two main reasons for his decision on this aspect of the case. First, the speeches in Hedley Byrne did not exclude the duty of care in relation to preÂcontract misstatements.[1480] Secondly, ‘as a matter of principle' there was nothing wrong in imposing such a duty.[1481] Neither of these reasons is satisfactory. With regard to the former, the judge said:[1482] It is also possible to contend that the observations of the House of Lords in Hedley Byrne... assumed that statements made in pre-contractual negotiations between parties who ultimately came to contract were excluded from the duty of care principle: see, for example, what Lord Reid said, at p 483: ‘Where there is a contract there is no difficulty as regards the contracting parties: the question is whether there is a warranty.’ There are, however, other relevant passages in Hedley Byrne, and, taking the speeches as a whole, in my judgment it is not right to regard Hedley Byrne as containing anything which excludes the duty of care relationship in a pre-contractual negotiation situation. It seems to me that Lord Devlin’s observations, at pp 516-517 and 526-527, are a clear indication to the contrary, because he was dealing in those passages with the situation in which one has running alongside a contractual relationship a relationship which gives rise to a duty of care. The suggestion that none of their Lordships in Hedley Byrne excluded the duty of care from the pre-contract situation bypassed the central issue. That issue was whether the speeches in Hedley Byrne supported an important qualification of the settled rule that in order to recover damages for non-fraudulent pre-contract misÂrepresentation, it must be established that the representation was contractually binding. The answer to that question, as suggested earlier, was that the House of Lords were not only not asked to and did not sanction an undermining of the contract rule, but also they could not do so in view of the binding decision in Heilbut, Symons & Co v Buckleton. By posing the question as being whether the speeches in Hedley Byrne excluded the duty of care from pre-contract negotiaÂtions Lawson J subtly shifted the onus onto the representor to establish that Hedley Byrne had not changed the pre-existing law with regard to the warranty requireÂment. Furthermore, while it may be true that most of their Lordships in HedÂley Byrne did not exclude the duty of care from the pre-contract situation, it is not easy to place Lord Reid into this category. His Lordship's statement, quoted above by Lawson J, was not merely indicative of an assumption on his part that pre-contract statements were excluded from the new principle. It was an express acknowledgement that the warranty requirement remained unaffected. In addition, it is difficult to accept Lawson J's reliance on Lord Devlin's speech as positively supporting his conclusion. As stated earlier, Lord Devlin at no stage addressed himself to the pre-contract issue. Lawson J referred to pp 516-17 and 526-27, which he said dealt ‘with the situation in which one has running alongÂside a contractual relationship a relationship which gives rise to a duty of care', but a reading of those pages reveals nothing pertinent to the present issue. The judge may have had in mind a later passage[1483] that arguably indicates that Lord Devlin did envisage certain contractual relationships, such as solicitor and client and banker and customer, giving rise to concurrent duties in contract and tort. However, even so, it is difficult to see how it follows that, because there can be concurrent liability in tort and contract in such cases, there should be liability in tort for pre-contract misrepresentation. The latter is an entirely different situation. There is no contract in existence when the duty of care is said to arise. Further differences will be noted shortly when the Court of Appeal's decision in Mardon is considered. Lawson J also said:[1484] As a matter of principle, I cannot think there is anything wrong in holding that the duty of care in relation to the making of statements may arise in a pre-contractual situation. For example, it is well established that a seller of goods which are dangerous, and which are dangerous to the knowledge of the seller, can be liable to the buyer in damages for negligence as well as in damages for breach of the contractual term in relation to the merchantability or fitness of the goods It is difficult to see how the example provided support for the judge's ‘matter of principle' argument. It dealt with a situation where there are complementary and consistent actions in contract and tort. The situation in Mardon, at least as Lawson J viewed it, was the opposite. His Lordship was seeking to impose liability in tort to pay damages in respect of a statement that the law of contract declared did not give a right of action in damages. He was seeking to override the contract rule by imposing tort liability. A more appropriate example in the context of his judgment would have been one that led him to the opposite conclusion: the sale contract that unequivocally excludes liability for negligence. It is well established that in such a situation the exemption clause cannot be overcome simply by suing in tort. The example given by the judge involves a situation where an action may be brought in contract and tort to enforce dissimilar duties, albeit arising from the same facts. How did it support extending the Hedley Byrne principle to pre-contract repreÂsentations? It begged the very question in issue as to whether there was a tort of negligent pre-contract misrepresentation. It is easy to accept that the same set of facts may sometimes give rise to dual liability in contract and tort, but this did not justify permitting a representee to sue in tort for damages in respect of a misrepresentation that the law of contract declared did not give a right to damages. Turning now to the decision of the Court of Appeal upholding Mardon's claims in both contract and tort, the main submission by counsel for Esso against the application of Hedley Byrne was that ‘when the negotiations between two parties resulted in a contract between them, their rights and duties were governed by the law of contract and not by the law of tort'. [1485] They relied particularly on the deciÂsion in Clark v Kirby-Smith,[1486] which held that a negligent solicitor may be liable to his client in contract but not in tort. They might also, as Lord Denning pointed out, have relied on Bagot v Stevens Scanlon & Co Ltd,[1487] which applied the same principle to architects. The reasoning behind these decisions was that, since the allegations against the defendants were of failures to do the very things they had contracted to do, the only duties allegedly broken were contractual and the plainÂtiffs' actions therefore sounded in contract alone. Earlier cases in which it was held that a similar duty of care was owed both under contract and independently of contract were explained as ‘ cases where the law in the old days recognised either something in the nature of a status like a public calling (such as common carrier, common innkeeper, or a bailor and bailee) or the status of a master and servant'.[1488] In such cases, ‘there existed from the mere status a relationship which gave rise to a duty of care not dependent upon the existence of a contract between the parties'.[1489] That principle did not apply to professional relationships such as that between architect and client and solicitor and client ‘where someone undertakes to exercise by contract his professional skill in relation to the matter'.[1490] Lord Denning, with whose judgment on this point the other members of the Court implicitly agreed,[1491] rejected counsel's argument and held that Clark and Bagot were[1492] in conflict with other decisions of high authority which were not cited in them. These decisions show that, in the case of a professional man, the duty to use reasonable care arises not only in contract, but is also imposed by the law apart from contract, and is therefore actionable in tort. The true position was as stated by Lord Campbell in Boorman v Brown:[1493] [W]herever there is a contract, and something to be done in the course of the employÂment which is the subject of that contract, if there is a breach of a duty in the course of that employment, the plaintiff may either recover in tort or in contract. In Lord Denning's view, it followed that, since Clark and Bagot were wrong, counÂsel's argument that Hedley Byrne did not apply to pre-contract representations must be rejected. His Lordship's views on concurrent liability were, of course, vindicated by later cases, most notably by the House of Lords in Henderson v Merrett Syndicates Ltd[1494] (despite Lord Goff's remark that the judgments in Mardon ‘reveal no analysis in depth of the basis upon which concurrent liability rests').[1495] Nevertheless, the question can still be asked: if the law is that a professional who fails in his duty to exercise reasonable care can be sued in contract or tort, did this justify extending the Hedley Byrne prinÂciple to pre-contract representations? In other words, did it necessarily follow that, because there can be concurrent liability in contract and tort in cases of professional negligence, there should be liability in tort for pre-contract representations? To my mind, the answer to this question is no. The decision in Mardon undoubtÂedly settled the common law position but the reasoning does not survive close scrutiny. The cases that uphold the professional's concurrent liability in contract and tort cannot logically be appealed to as supporting the availability of an action in tort in respect of careless pre-contract misrepresentations. Basically, such reaÂsoning begs the essential question whether there is such a tort. Furthermore, the two situations are entirely different. Under the professional negligence cases, where a breach of contract occurs that also happens to satisfy the ingredients of the tort of negligence, the plaintiff may proceed alternatively in contract and tort. The action in tort is founded on the defendant's failure to do the very thing he contracted to do. It follows that the plaintiff cannot succeed in tort if the alleged breach of duty did not constitute a breach of contract. The extent of the tort duty will depend upon an analysis of the terms of the contract. There is no doubt that if, for example, the terms of the contract clearly limit the obligations and responsibilities undertaken, those terms cannot be circumvented by bringing an action in tort.[1496] Contrast the situation where an action is brought for negligent misrepresentaÂtion inducing a contract. The alleged duty of care must arise independently of the obligations undertaken pursuant to the contract. There is simply no contract in existence when the alleged duty of care arises and is breached. In other words, the negligence, when it occurs, does not constitute a breach of contract. Furthermore, even if one were to disregard this technicality, the action in tort is still not based on the defendant's breach of contract. Indeed, in the usual case, the alleged tort and contract duties are dissimilar. The contractual obligation is that the repreÂsentation is true. Once it is proved that the representation was a warranty and that it was false, the representor is strictly liable. In tort, however, the duty is difÂferent. The plaintiff must establish, in addition to acceptance of responsibility, reliance and falsity of the statement, that the defendant failed to take reasonable care. The Mardon situation was one of the few exceptions. There the alleged tort and contract duties did coincide. The actionable representation/warranty was not that the petrol throughput would be achieved but that the estimate was based on reasonable grounds. Finally, if the professional negligence cases are the basis for imposing liability in tort in respect of negligent pre-contract misrepresentations, strictly it would follow that plaintiffs would first have to establish that the representation was contractuÂally binding, ie, a warranty or a collateral contract. Of course, in most cases that would defeat the very purpose of their proceeding in tort, which is to avoid having to establish that the representation was contractually binding. It is interesting that in Mardon all of the judges decided the question of tort liability on the assumption that no warranty had been given.[1497] This suggests that the two alternative causes of action were mutually exclusive. If the professional negligence cases were the explanation for tort liability in respect of careless pre-contract misrepresentation then, on the judges' assumption of no contractual liability, it was logically impossible to find for Mr Mardon. IV.