History, Concepts and Theory

A. History

Hedley Byrne was not the first negligence case to contemplate the award of monetary compensation for pure economic loss caused by false information outside of contract.

On this there appears to be much agreement. Less clear is the answer to the specific question whether the action in Hedley Byrne itself would have succeeded had no disclaimer of responsibility been made. Would a duty have been owed, or breached? As regards the first issue, it has commonly been assumed that a duty would indeed have arisen, but both Professor Swain (Chapter 2) and Professor Robertson and Julia Wang (in Chapter 3) hint that this may be a lie that has attained the dignity of age.^[33] Although the respective contributors read Lord Pearce slightly differently, both resolve that there was no clear majority in favour of that conclu­sion, and that both Lord Morris and Lord Hodson seemed set against it.

As regards breach, things are perhaps more intriguing still. The issue was never considered by the House of Lords, but the first instance judgment of McNair J, which we append to this work, provides some fascinating insights. Heller and Partners in fact gave two references, not one, as is sometimes assumed. On the 18th August 1958 it gave an oral reference to the plaintiff's bank (National Provin­cial Bank (‘NP’)) regarding the capacity of one of its clients (Easipower) to meet a contract worth £8-9,000.

On the 4th November Heller supplied a second, written reference to NP regard­ing Easi power's capacity to pay for a contract worth the much larger sum of £100,000. This reference is the better known. It was short, stated to be for the ‘private use’ of NP and was apparently much more guarded in its terms. Although the same phrase (‘respectably constituted, good for its ordinary business engage­ments’) was repeated, the text added ‘the figures are larger than we are accustomed to see’. That letter was relayed to the plaintiffs by NP on the 14th November.

Throughout, Heller knew that Easipower was the subsidiary of another company, Pena Industries Ltd, which was in liquidation. This fact was indeed the subject of express comment by Heller in the first reference. Heller knew that efforts were being made by Easipower’s managing director to acquire Easipower from the liquidator, but it also knew that these efforts had been unsuccessful. By the time the second, written reference was supplied, it also knew that the director had ‘wholly falsified’ his financial projections so as to give a misleading impression of Easipower’s prospects as an independent trading entity.

McNair J had no hesitation in finding that insufficient care had been taken in the giving of either the first or second reference, but Professor Buxton has recently suggested that his conclusions were wrong because the references both contained ‘coded warnings’ or ‘red flags’ regarding Easipower’s viability, which would have been readily apparent to NP.^[34] These observations are astute, but I respectfully question their conclusive force.

Part of the difficulty in resolving the issue of precisely what Heller should have said in its references stems from an uncertainty about who it thought might use them. The plaintiff’s identity was never disclosed to Heller by NP. The way in which NP itself denied responsibility when reporting the contents of the first reference might also suggest that Heller provided the required information on that occa­sion merely to facilitate a reference that NP was providing to Hedley. On the other hand, it seems unlikely that Heller really thought the information was required for NP’s own purposes, rather than those of an anonymous client. Perhaps the clinching point (and this was the one that seems to have appealed to McNair J) is that, even if Heller might reasonably have anticipated that the references would be read (or explained to a client) by a banking industry expert, Heller knew, by the 4th November, of significant additional risks: it was aware that the financial projections were false and that Easipower was fast heading for the rocks, with no sign of rescue. Even if, therefore, Heller was ‘entitled to use the private language of bankers', as Buxton says,^[35] it is unclear that it went far enough to downplay the potentially falsely favourable impression that its words might convey on the occa­sion of the second reference.

The puzzle as to whether or not the House of Lords would have allowed the claim in Hedley Byrne in the absence of a disclaimer is probably now beyond our wit to solve. This is not just a product of our not being able to re-marshal all the evidence. Historical inquiries do not deal well with hypothetical questions about human decision making as opposed to empirical matters of fact because the problems posed by such questions are not simply epistemological, but inherently indeterministic.^[36]

B. Concepts, Taxonomy and Foundational Theory

Three separate, but closely interrelated theoretical debates flowing from Hedley Byrne are canvassed in Part 2, although they are also addressed by later contribu­tions in Part 4 ‘Comparative Perspectives'. The first relates to the foundational nor­mative basis of the right foreshadowed in the case and subsequently made good in other misstatement cases involving pure economic loss. The second is a taxonomic debate about whether such cases ‘belong' to the category of tort, contract or trust (consensual relationships of dependency or inequality). The third concerns the appropriate conceptual apparatus to apply when determining duty of care ques­tions in cases of the misstatement/economic loss type. These issues have been very extensively debated in the last 50 years and it is appropriate now to try to bring matters to a head.

(i) Misstatement Liabilities as Consensual Private Ordering

Those who believe that the primary rights underpinning plaintiffs' actions in mis­statement cases are based on the defendant's own will or consent (whether sub­jectively, or objectively conceived) tend to say that they belong in contract and argue that duties of care should only arise where there is a ‘voluntary assumption of responsibility' or ‘undertaking' to the plaintiff on the defendant's part. They emphasise the closeness of the relations in cases such as Hedley Byrne to formal contracts, and the ‘near-privity' of the parties.

For such commentators, if any duty arises at all, it is not because the law (the state, acting through its courts) has chosen to grant plaintiffs any qualified primary ‘right' to the protection of their economic interests, but rather because defendants themselves have exercised their will to create or bestow such rights on plaintiffs. Similarly, when judges talk about the importance of ascertaining the ‘purpose' or ‘end aim' of the information a defendant has provided, or whether or not the defendant ‘ invited' or ‘ intended' the plaintiff to rely on it in determining duty questions in misstatement cases, this reflects the fact that the source of the plaintiff's right lies within the defendant's will. This is a classical, contractarian, formalist model of obligation, which focuses on the value of autonomous pri­vate ordering. It excludes from consideration pragmatic ‘policy concerns' about the potential effects of liability on defendants or markets, sweeping aside all talk of such matters as irrelevant to what is straightforwardly an ethical question to be decided between the parties themselves on the basis of their mutual wills as self­determining agents.

This type of vision is strongly endorsed by Professor Beever in Chapter 4 and has found favour with a number of other distinguished commentators,^[37] many (but not all) of whom have been inspired by Professor Ernest Weinrib.^[38] All of them rely extensively on the speech of Lord Devlin, whose language in Hedley Byrne is undoubtedly closest to the contractual paradigm.^[39] Beever concludes that Hedley Byrne belongs within contract, not tort, and argues that the only reason it is not so placed is because people have overly rigid and inaccurate views about the nature of contract, which is not (or should not always be) constrained by the doctrine of consideration.

Qualified support for Beever's approach is expressed by Professor Feldthusen in Chapter 11^[44] when criticising the Supreme Court of Canada's pragmatic approach to the duty question in Hercules Management v Ernst & Young.^[45] Feldthusen sees Beever's analysis as an antidote both to the idea that there are any general rights to economic welfare in tort and to the more open-textured type of policy debacle that typically attends the pragmatist approach. For these reasons, Feldthusen is also an enthusiast for the idea that duties of care should be limited in misstate­ment cases by reference to the existence of an assumption of responsibility, which he defines as an objective intention on the defendant's part to induce a plaintiff to rely on him. One serious problem with the reasoning in Hercules, he argues, is that it wrongly implies that a duty of care is justified by a plaintiff's unilateral decision to rely on information that another person has supplied.

Some aspects of Beever's analysis also appeal to Professor Campbell in Chapter 5. This is initially very surprising, since Beever's premises are formalist and Kantian, whereas Campbell is an unashamed, pragmatic liberal economist. The fact that they nonetheless evidently agree on some things serves to demonstrate the point that liberal economics and Kantian deontology both have private ordering, decen­tralised decision making and individual choice at the heart of their worlds, even if they are otherwise awkward bedfellows. Both are united in detesting regulatory judicial intervention in financial markets.

If I interpret him correctly, Campbell goes even further than Beever. Rather than simply suggesting that Hedley Byrne is justified, but better classified within contract, he says that the idea that Heller might have been under any duty of care is straightforwardly wrong. The notion that a person can have a right to the pro­tection of his economic interests without having paid for such a right is, from his point of view, ‘ economically irrational and, what is the same thing [question—is it?], morally unjust'. This is because it indemnifies him in respect of his choice to rely on something someone else has said, without him having had to pay for the indemnification. He is a freerider on another's intellectual capital.

The paradigm of payment as a source of duty and right in economic affairs that underlies Campbell's approach is reflected in the draft Third Restatement, where it is stipulated that for a duty of care to be imposed on a defendant in a misstatement case, he must be acting either in the course of business or trade, or in a transaction in which he has a ‘pecuniary interest'. ^[46] The rationale of such liabilities is said to be that they serve as a ‘ substitute for a contract between two parties who cannot conveniently write one’.^[47] Like Campbell's, this approach also appears to view the economic world as primarily a sphere of self-interested private ordering. It does not, however, tell the whole American story. United States courts have, Profes­sor Feinman points out in Chapter 10, taken a variety of different positions on misstatement duties since Glanzer, some of which are clearly more welfarist than others. In the wake of the Restatement (Second) of Torts of 1965, some of these cases came close to imposing liability according to a foreseeability standard, provided no dangers of indeterminate liability raised their ugly head. But in more recent years, Feinman signals, a significant body of courts (following the New York commercial jurisdiction) have reverted to more classical paradigms that impose near-privity-like restrictions on the sorts of relationships giving rise to duties of care. These restrictions are reflected in a focus on the need for close ‘linking’ or direct dealings between the parties, and on the defendant’s intentions, under­standings and motivations.

In Chapter 12, Professor McLauchlan also suggests an implicit preference for the conception of misstatement liability as private ordering, at least in the context of pre-contractual negotiations. This is an especially sensitive context commer­cially and one in which norms of self-protection are clearly at their strongest in the classical paradigm. In a candid reappraisal, he suggests that Hedley Byrne never intended to introduce duties of care into this context. Later decisions that did so in the 1970s were the product of confusion. The duty envisaged in Hedley Byrne itself was based on the idea of an objective (voluntary) warranty of care and it has few advantages for plaintiffs in the pre-contractual context in any event, given the other remedies likely to be available on such facts.

(ii) Misstatement Liabilities as Duties Imposed by Public Courts

At the other end of the spectrum, there are those who believe that the duty in mis­statement cases and cases of economic loss more generally has nothing to do with the parties’ wills, other than in the most rudimentary sense that is true in all tort cases, namely, that it is always a basic precursor to legal responsibility in any tort case that a defendant’s actions (note—not duties) were voluntary. On this view, negligent misstatement cases are in principle no different from any other type of negligence case. Words are simply another form of conduct that can materi­ally prejudice others’ interests (rather like the making of defective products) and duties of care arise from the basic normative premise that we ought to take reason­able care to avoid harming the interests of others who may foreseeably and directly be affected by what we do or say. For such commentators, Hedley Byrne rightly belongs in tort and it is appropriate to approach it within the same basic analyti­cal framework as any other negligence case. The ‘special relationship’ requirement is simply one instantiation of the sort of ‘proximity’ relationship that gives rise to duties of care elsewhere in the law, its added stringency reflecting the need to constrain duties based on the foreseeable effects of careless behaviour for coun­tervailing ethical or pragmatic reasons. Economic rights and duties are hence a product of a mix of basic ethical considerations relating to fault and legitimate policy concerns, not private ordering; and they are certainly not something we should have to pay for. Duties of care in respect of the economic losses of others are, on this view, simply progressive, incremental extensions of an existing, wel- farist tradition in tort law that is exhibited historically though the torts of deceit, injurious falsehood, passing off, procurement of a breach of contract, intimida­tion, conspiracy and wrongful interference with another's trade. They exhibit the incremental creation of new, qualified rights of economic protection outside of instances in which the defendant is dishonest, or happens to have some harmful purpose in mind. This gradual genesis of additional economic rights itself reflects the rising importance of pure economic interests in the modern world, and the transition of holdings of wealth from tangible to intangible forms.

To my knowledge, no one in this camp takes issue with the idea that a genuine promise to take care in the provision of advice that is reasonably and detrimentally relied on by a plaintiff ought, in principle, to give rise to liability for economic loss. They simply tend to push such cases into contract law and its equitable acolytes in estoppel. Crucially, however, they refuse to confine misstatement or economic loss duties to cases in which such promises can be inferred from a defendant's behav­iour (which is always a controversial matter), and they are sceptical of the idea that this is what is really going on in the law. They hence point to a host of tort cases in which duties have been imposed, where the inference of any promise of care on the defendant's part to the plaintiff seems not to be feasible without engaging in the type of fiction that rapidly brings the law into disrepute.

This sort of analysis is endorsed by Professor Robertson and Julia Wang (in Chapter 3), by Professor Witting (in Chapter 9)48 and by myself (in Chapter 13).^{[48] [49]} Robertson and Wang argue that there is nothing unique, nor particularly helpful, about the use of the concept of an ‘undertaking' or ‘assumption of responsibility' in negligent misstatement cases. They demonstrate how the concept has been used in a wide variety of cases beyond misstatement and economic loss, including cases involving omissions and non-delegable duties of care; and they seek to dispel the illusion that there is anything meaningfully consensual about the obligations that arise in such instances. This analysis brings them into head-on collision with Beever. They are supported by Professor Witting, who also firmly rejects the idea that negligent misstatement cases are contractual, or that ‘assumptions of respon­sibility' are anything more in most cases than conceptual devices manipulated by courts to achieve particular moral and policy outcomes. Such manipulation, he says, is clearly evident in English law in the case of Williams v Natural Life Health Foods Ltd.^[50] Witting is scathing of the view that there is no such thing in tort law as an economic right that is not created by the defendant himself and he strongly asserts the view, which he says is pretty clear from the judgments in Hedley Byrne itself, that duties in respect of words are nothing more, nor less, than examples of duties that are imposed as a result of proximate relationships.

In Chapter 13, I feed some of these ideas into an analysis of the criteria that are applied by Australian courts in what are, in many ways, the ‘crux' misstatement cases—those in which the relationship between an advisor and the person relying on his advice is ‘indirect’. These cases (along with those involving disclaimers)^[51] often strain the contractual paradigms and analogies relied on by ‘ voluntarists’ beyond tolerance, in my respectful view. Whilst acknowledging the presence in the case law of factors such as the ‘purpose’ for which information is given, or the defendant’s ‘intentions’ as to how it should be used (or who should use it), I sug­gest alternative, non-voluntaristic explanations for these concepts that root the cases firmly in tort law’s protective, welfarist tradition. Intentions and purposes go, I suggest, to the foreseeability of harm, to a defendant’s knowledge of its pros­pect and to the reasonableness or otherwise of a plaintiff’s use of the informa­tion in question. They are not to be regarded, as Professors Feldthusen and Beever conceive of them, as stand-alone requirements for the existence of misstatement duties in their own right.

Looking beyond these contributions, there is another influential view from the United States that must be mentioned—that of Professor Stephen Perry.^[52] Unlike Beever, Perry conceives of tort duties in economic loss cases as rightly belonging within that sphere and as genuinely imposed by courts, not voluntary. He nonethe­less regards ‘undertakings’ and defendant ‘intentions’ as key moral concepts that serve to generate prima facie duties of care that would not otherwise exist in such cases. An ‘undertaking’ here is not (as I have suggested Beever to understand it) an implied promise to take care, or a manifestation of consent that itself serves to create a new economic duty. It is an objectively manifested, deliberate intention to induce another person to believe he may rely upon one, bringing about a rela­tionship of dependency that interferes with that person’s freedom of choice.^[53] The interest protected by courts in cases like Hedley Byrne is hence not an economic interest that the plaintiff has at all (because such interests do not normally get protected in tort law), but the plaintiff’s economic loss serves to help quantify the consequences of the defendant's interference with his altogether distinct right to make autonomous decisions.^[54]

Some aspects of this analysis come close to McBride and Hughes' slightly later thesis in 1995, according to which the crucial driver of duty is the defend­ant's creation and abuse of a relationship of power or trust.^[55] That language is certainly reflected in the opinions of some judges, including both Lord Reid in Hedley Byrne itself and Barwick CJ in Mutual Life and Citizens’ Assurance Co Ltd v Evatt.^[56] It makes the idea of reliance (dependence) the key one, not assumption of responsibility. But Perry's is actually a much more radical idea than simply the one that fiduciary (or fiduciary-like) relationships give rise to obligations of economic protection. It envisages the creation by tort law of legal rights to personal auton­omy per se, which is a very radical, welfarist claim.^[57] On Perry's view, Hedley Byrne is hence highly significant, but for reasons very different from those we customar­ily associate with the case. It certainly is not a case about pure economic loss.

From the point of view of the commentators and judges who disavow the lan­guage of ‘assumed' duties or ‘undertakings', a key point of Perry's with which they can nonetheless all agree is this: however the individual circumstances are described that give rise to liabilities in negligence for pure economic loss, the pri­mary tort duties involved are n ot voluntarily created by defendants. Perry makes his position on this clear, by citing an important point made by Professor Raz that is all too often missed by theorists.^[58] The mere fact, he points out, that a defendant chooses to act in a particular way (undertake a particular task), even in the certain knowledge that a legal duty of care will attach to his action, does not mean that the defendant has any normative power to create the duty, or that he is therefore its creator. It is courts that have the power and courts that create the primary duties. Tort law is a welfarist, public ordering still.

(iii) PromptsforFutureThought

It is not possible to fully resolve the debate here. Professor Winfield noted in 1926 that whether or not the duties born by legal advisors and others exercising ‘common callings' are ‘imposed' or ‘assumed' was contested as long ago as the seventeenth century,^[59] when the forms of action (on this occasion, ‘assumpsit' ) served to suppress thinking about legal rights, as opposed to legal procedures. What hope is there that we shall reach unanimity now, all at once, when minds as great as those of Coke and Mansfield were unable to come to a clear view? Further­more, it seems unlikely that the ideological oppositions that are evident in current debates will be easily reconciled. It is hard to prise anyone from their world view, even if you can persuade them to organise their office more rationally. Although consensus is an end aim of mine, I am also a realist. I confine myself for present purposes to making just four points, as prompts for further thought.

First, it is clearly possible to believe that the law of tort is about primary ‘rights' without succumbing to the idea that such economic rights as it gives are necessar­ily the product of private ordering.^[60] From the Hohfeldian point of view, when­ever duties arise in cases of pure economic loss (as it is clear that they sometimes do), they are necessarily attended by correlative, qualified rights. This means that economic rights do exist in tort (because courts say that economic duties do), but it also says nothing about the origin or rationale of such rights. Rights do not come with any particular set of normative batteries supplied—they can be fuelled by a variety of different normative considerations.

Second and relatedly, it is surely possible to accept that law does and should cre­ate some qualified rights to reasonable care in respect of one's economic interests, without accepting that these rights will either be especially common (‘general' in one sense of that word), or that the only question relevant to their formulation is the free will of the respective parties. The really important question is—what fac­tors make out a ‘special' case for duty? Is what we are looking for the existence of some additional positive reason for a duty that does not normally exist, or are we looking for the absence of things that otherwise might cause problems if liability for reasonably foreseeable harm were imposed—the absence of reasons against liability, such as worries about undermining free competition, party autonomy, risk allocation, norms of self-protection, or information markets?^[61]

In practice, courts articulate a variety of factors that work together to create qualified economic rights, some of which are positive and some of which are negative. The existence of a genuine promise of care made to a plaintiff might be one of these, providing a good, positive justification for duty, and it would then simply be a question of taxonomy whether we located the case within contract or tort. It could genuinely fall within both: the promise might itself create a new duty that is authentically consensual (and therefore classically ‘contractual' save for the absence of formality), and simultaneously prove specific knowledge on the part of a defendant that his careless words may harm a particular plaintiff's interests, thereby evidencing a relationship sufficiently close, determinate and direct to jus­tify courts imposing a duty of care upon him (in tort). Nonetheless, the fact that promises could indeed positively justify economic duties of care in misstatement cases does n ot mean that tort law has no reason to act in their absence, or that when it does recognise such duties it is promises that necessarily lie at their heart. Its logic is not so limited.

Thirdly, it seems to me unlikely that any greater certainty will be introduced into this field by substituting for the existing inquiry as to whether a defendant ‘ assumed responsibility' to the plaintiff an alternative one as to whether he ‘intended' to induce the plaintiff to rely on his words. I am brought into a respectful tension with Professor Feldthusen in this respect. This is because the language of intention is at least as slippery as that of assumption. The problem is well known to criminal lawyers and philosophers of criminal responsibility,^[62] who have done much to try to bring clear definition to its use in public law, but in tort law the concept of intention is loosely defined and under-theorised.^[63] Does a defendant who knows that it is ‘ very likely' (or even an absolute certainty) that another will rely on his words ‘intend' that reliance, if he speaks? What is the relationship between ‘inten­tion' and ‘desire', ‘purpose', ‘subjective recklessness', ‘knowledge' or ‘foresight'? If a defendant's intentions are relevant in a non-promissory way, why is this? Are they relevant from the point of view of distributive justice, on the basis that those who intend potentially bad things are themselves bad, and ‘bad people pay more' ?^[64] Do defendant intentions simply help to define the nature of the task the defend­ant is performing, such that courts are then able to properly assess whether or not the task was done badly, relative to the way in which other, reasonable people would have done it? Or is the insistence on a defendant's intention simply a ‘con­trol device' limiting his exposure to indeterminate liabilities? Does the fact that a defendant has made it clear that he intends his words to be used for purpose ‘X' perhaps simply indicate that it is likely to be unforeseeable (and unreasonable) for a plaintiff rely on it for another purpose, ‘Y'?

All of these are possibilities. I express my own views at the end of this book, but am under no illusion that the answer to any of these questions is easy. Although I do not personally regard a requirement of intention (whether subjective or objective) as a just precondition to a defendant's liability for pure economic loss in cases of careless misstatement for reasons later explained, I confine myself here to observing that if the law does end up settling on it, we can expect courts to waiver considerably about its meaning. I also expect that judges will end up deliberately reading that meaning ‘up' or ‘ down' for policy reasons in precisely the same way that they have done when defining ‘assumptions.'^[65] Out of the frying pan and into the fire we go.

Finally, it is undoubtedly legitimate to question—as those favouring private ordering do—the extent to which broad questions of social ‘policy' and consid­erations about the potential empirical social effects of advisor liabilities ought to feature in judicial reasoning.^[66] Some of these questions (those concerning ‘ inde­terminate liability' especially) are highly controversial and courts often lack the empirical evidence, or the authority, to determine them. It is for this reason that we may now need to think more carefully about the relationship between common law and statutory solutions to the problems that misstatements raise. One possible vision of this relationship is that it is for courts to decide duty questions as a mat­ter of interpersonal justice, guided solely by ethics, and for government then to intervene to cut back on, or supplement, the rights so created, if it considers their social side-effects to be undesirable. The way in which legislatures have intervened to change the balance of liabilities as between advisors and co-defendants respon­sible for the same economic loss (to which I refer in Section IVB below) provides one example of this sort of approach. I suspect that Beever might approve of it. In practice, however, the division of the respective labours of justice and social policy as between legislatures and courts is always likely to be less clean cut than this. The broader point is then really that there can be no complete solution to the ques­tion about the proper metes and bounds of misstatement liabilities, or the sorts of criteria that should be allowed to influence them in negligence law without us first developing a clear and stable conception of the respective roles and capacities of courts and governments.

IV.