Identifying the Hedley Byrne Action
We must first resist the temptation to think that our subject matter concerns any case in which a court has cited Hedley Byrne or utilised the phrase ‘assumption of responsibility’.
Because of the confusion surrounding this area of the law, such citations and references abound, but many of the cases that contain them fall outÂside the scope of this investigation.[473] It will be more utile to return to Hedley Byrne itself in order to identify its most salient features. Because its facts are easier to deal with, it will help also if we consider another leading case: Caparo Industries v Dickman.[474]In Hedley Byrne, the plaintiffs requested from the defendant a report on the financial soundness of the company Easipower Ltd. The defendant replied:
CONFIDENTIAL
For your private use and without responsibility on the part of this bank or its officials.
Dear Sir, In reply to your inquiring letter of 7th instant we beg to advise:
ReE... Ltd.
Respectably constituted company, considered good for its ordinary business engageÂments. Your figures are larger than we are accustomed to see.
Yours faithfully,
Per pro. Heller & Partners Ltd.[475]
In reliance on this report, the plaintiffs placed forward advertising orders for Easipower with other third parties, for which the plaintiffs were personally liable. Easipower later went into liquidation and the plaintiffs suffered loss as a result of being unable to recover the costs of the orders from Easipower.
In Caparo. the defendant auditors prepared a report on a company to be used at a meeting of that company’s shareholders. In reliance on information contained in the report, the plaintiffs invested in the company. In fact, the company was in significantly worse financial shape than the report indicated and the plaintiffs suffered loss as a result.
It is first important to pay attention to the injuries said to have been suffered by the plaintiffs in these cases. The decisive point is easiest to see with respect to Caparo. The plaintiffs purchased shares that were not worth what they believed the shares to be worth. Certainly, that is in some sense a loss, but what is crucial here is that this loss was no violation of the rights of the plaintiffs.11 It is important to be clear about the nature of this claim. It is not that the plaintiffs had no right to recover for the loss that they suffered (though that is often true).12 The point is that—as all contract lawyers know—purchasing something that is less valuable than one believes is not, without more, a violation of one's rights.
This must be compared with the situation in Donoghue v Stevenson. In that case, the allegations were that the defendant placed on the market a drink that contained a substance that gave the plaintiff gastroenteritis. This allegation itself maintains that the defendant violated the plaintiff's rights—the right here being the so-called right to bodily integrity. In Caparo, on the other hand, there is no corresponding right.
The simplest way to reveal this is to imagine that the plaintiffs purchased the shares with banknotes. This assumption is adopted for demonstrative purposes only, as of course the plaintiffs did not do this. But this analysis reveals the legal structure of the transactions in question. Having done that, it is simple to apply the analysis to more realistic scenarios.
11 Note that this is not because I have a theory of rights according to which no such right exists. It is because, in the light of the argument that follows, it is an observable fact that the law recognises no such right. Also significant is that no reference to theories, such as corrective justice accounts of the law, is necessary to make this point (though a focus on corrective justice certainly helps to reveal it).
A note on corrective justice and rights is pertinent at this point. In his contribution to this volume, Christian Witting maintains: ‘Much like a birthday sparkler, it would seem that the rights fad will eventually exhaust itself' (Chapter 9, text following n 12). One might imagine a now unremembered and unlamented classical philosopher, frustrated at the influence of Aristotle's Nicomachean Ethics, scratching down something similar two-and-a-half thousand years ago. But were this ancient to be provided with a glimpse into the future, enabling him to observe that corrective justice theory was to enjoy the adherence of thousands of scholars, including many of the West's more important thinkers, and to survive for millennia, we might imagine that he would wish to withdraw his statement with some embarrassment. (For the history of corrective justice theory, see I Englard, Corrective Justice and Distributive Justice: From Aristotle to Modern Times (Oxford, Oxford University Press, 2009)). In that light, it is interesting to note that Witting's claim is advanced in the context of defending an underÂstanding of tort law that shows no danger of rising to the level of a fad. The genuinely curious notion here is the peculiarly modern one that a law of civil wrongs can properly be analysed without reference to the plaintiff's rights or the need to correct violations of them.12 I n this area and elsewhere, much confusion is occasioned by failing properly to distinguish primary from secondary rights. Even where the plaintiff cannot recover, the claim is of course not that this is because he has no right to recover. That would be to say that the plaintiff has no secondary right because he has no secondary right and this is clearly circular. The claim is that the plaintiff canÂnot recover (ie has no secondary right to recover) because he has no right to the thing that he is said to have lost (ie had no primary right to the subject matter of the alleged loss). Though this notion is controversial, I submit that it is a perfectly ordinary idea.
If our two-year-old smashes our eight-year- old's toy, we might require her to make it up to him in some way, but not require her to do anything for our five-year-old despite the fact that he too regrets the loss of the toy. Why? Because it was our eightÂyear-old's, not our five-year-old's, toy. If our five-year-old asks why our two-year-old is saying sorry to our eight-year-old and not to him, we might say ‘Because she broke his toy, not your toy'. It is quite remarkable that legal scholars find these notions so difficult to understand—though that is in line with a general failure in this regard. See A Beever, Forgotten Justice: A History of Political and Legal Theory (Oxford, Oxford University Press, 2013). Let the children grow up and change the toy for a cable or a pipeline and you have Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] QB 27 (CA) and Caltex Oil Pty Ltd v The Dredge ‘ Willemstad, (1976) 136 CLR 529 (HCA).If we assume that the shares were bought with banknotes, then the plaintiffs naturally began with rights to those notes. They then chose to exchange the bankÂnotes for shares. The key point here—a point that reveals a crucial difference from negligence cases—is that this exchange was consensual and thus entirely legal; ie there was here no violation of the plaintiffs' rights to the banknotes. This is clear from the situation. The party from which the plaintiffs purchased the shares in no way violated the plaintiffs' rights to the banknotes. That party received the notes in exchange for shares. It was an entirely legitimate transfer. But nor did the defendant violate the plaintiffs' rights to the banknotes. The defendant did nothing to them at all. And in any case, in a situation of this kind, the plaintiffs' complaint is that she suffered a certain quantum of financial loss,[476] it is not that she was wrongly deprived of particular banknotes. Eventually the legitimately purchased shares lost value.
Again, however, that is no violation of the plaintiffs' rights in the banknotes. At this point, no such rights remain. Nor is it a violation of the plaintiffs' rights in the shares. The rights to the shares entail no right to any particular value, or every fall in the share market would be a violation of every shareholder's rights. The rights that the plaintiffs have to the shares are entirely unaffected by fluctuations in their value. On these assumptions, then, the loss that the plaintiffs are claiming is a loss over which the plaintiffs have no apparent right. This is not to deny that they lost something, the point is that they lost something that was not theirs. Nor is the point that the plaintiffs cannot recover. The point now is only that it is opaque how the defendant is said to have violated the plainÂtiffs' rights. There has been no violation of the plaintiffs' rights to the banknotes or the shares, so what wrong has the defendant done the plaintiff?[477]Naturally, the assumption made in the previous paragraph fails to reflect commercial reality. But nothing significant changes when we take that into account. The analysis is unaffected if, say, the plaintiffs transferred a chose in action in return for the shares. Any violation of the plaintiff's rights remains opaque. It is for this reason that Hedley Byrne is usually characterised as a case involving pure economic loss. The concept of pure economic loss is the modern law's defective proxy for identifying cases in which the notion that the defendant violated the plaintiff's rights is problematic, as the plaintiff appears to have no legal entitleÂment to the subject matter of the loss.[478]
It is important to see that the argument is not that the plaintiff cannot recover in these cases (because, say, the defendant did not violate her rights). On the contrary, on occasion the plaintiff can recover. The point is that, in order for liabilÂity to exist, it is not enough to establish what needs to be established for liability in the law of negligence.
In Donoghue v Stevenson, it was enough to show that the defendant created a reasonably foreseeable risk of the plaintiff's injury, as that injury connected with the plaintiff's right to her body. In Caparo, on the other hand, demonstrating that the plaintiffs' injuries were reasonably foreseeable was not sufficient, because those injuries involved the loss of something to which the plaintiffs had no apparent legal entitlement. Because of this, it was necessary that the plaintiffs demonstrate that the representation made by the defendant created a right in the plaintiffs upon which the plaintiffs could rely in bringing their action. That is entirely unlike D onoghue v Stevenson and the question we must ask ourÂselves is: How can the defendant's representation create this right? We return to this matter below.Hedley Byrne is more difficult, but the situation is essentially the same as in Caparo. The plaintiffs placed forward advertising orders, committing themÂselves, and were unable to recover the costs of these orders from Easipower. As the placing of the orders was consensual, no legal wrong was committed at this point. The problem was that the plaintiffs believed that they would be able to recover these costs from Easipower, but the plaintiffs never had any right as against the defendant to do so.[479] Again, we are left with the question: Where is the defendant's violation of the plaintiffs' rights?
Again, the claim is not that the plaintiffs in these cases must not recover. It is that, in order to recover, the plaintiffs must demonstrate that the representation made by the defendant created a right in them upon which they can rely in bringÂing their action. And again it is important to stress the divergence between this and cases such as Donoghue v Stevenson. Take the following three examples.
The first is Palsgraf v Long Island Railroad Co.[480] The plaintiff suffered personal injury when the defendant's employees dislodged a package carried by a third party that contained fireworks, triggering an explosion that caused scales to fall onto her. The second case is Donoghue v Stevenson. The third is Hedley Byrne. The first two cases are usually grouped together. We might call them ordinary negliÂgence cases. The third is thought to belong to a different category, what is generÂally called negligent misrepresentation or misstatement cases. But it is possible to group them differently. In the first case, the plaintiff was simply standing, waiting for a train, when injury was inflicted on her. In both of the last two cases, on the other hand, the plaintiffs were injured as a result of their decisions to rely on explicit or implicit representations made by the defendant. In Donoghue v Stevenson, the defendant was (potentially) liable because he manufactured and released onto the market a product intended to be consumed and the plaintiff relied on the (partly implicit) representation that it was potable. She could not have succeeded had the item been marketed as rat poison, for instance.[481] So why, then, do we not group Donoghue v Stevenson and Hedley Byrne together? Why do we not think that Donoghue v Stevenson is a Hedley Byrne type, a detrimental reliance, a negligent misrepresentation case?[482]
We are right to group Palsgraf and Donoghue v Stevenson together and to distinÂguish Hedley Byrne. This is because, though detrimental reliance was essential in Donoghue v Stevenson, though the defendant's representation that the ginger beer was potable was essential to liability, that representation did not create the right in the plaintiff upon which she needed to rely. In both Palsgraf and Donoghue v Stevenson, the right was the right to bodily integrity, a right that existed indepenÂdently of any representation made by the defendant, in fact independently of the defendant's actions. The plaintiffs possessed this right from birth. But in Hedley Byrne and like cases, the plaintiff can recover only if she can show that the defendÂant's representation created a right in her that grounds her entitlement to the thing that she is said to have lost. This makes these cases totally different from Palsgraf and Donoghue v Stevenson.
Again, this is dimly reflected in the law's general understanding, which holds that Palsgraf and Donoghue v Stevenson are personal injury cases whereas Hedley Byrne involves pure economic loss. These are the law's defective proxies for idenÂtifying cases in which the plaintiff's primary right is not in question and cases in which the right is opaque.
These, then, are the Hedley Byrne cases. They are cases in which the plaintiff's claim against the defendant is problematic because the loss for which the plaintiff is attempting to recover is a loss of something to which the plaintiff has no right independently of the defendant's representation. Because of this, the plaintiff must claim that the representation generated a right in her, a right that was then violated.
In neither Hedley Byrne nor Caparo could the plaintiffs do this. In Hedley Byrne, this was chiefly because of the defendant's insistence that its report was provided ‘without responsibility’.[483] In Caparo, it was because the plaintiffs relied on the defendant's report for a purpose other than that for which the defendant prepared it. This is to say that the right in question was not given by the defendants to the plaintiffs, and for that reason the plaintiffs failed. This is totally unlike Donoghue v Stevenson.
In the following, then, we are interested only in these cases: cases in which the right upon which the plaintiff must rely could only be a creation of the defendant’s representations or actions. Other cases involving representations, or where judges have mentioned Hedley Byrne or notions such as assumptions of responsibility are not relevant.
III.