Limiting Factors in the Law of Negligent Misstatement

A. Reasonable Foreseeability is Necessary but Not Sufficient

Under the common law, one way of limiting defendant liability is to restrict the circumstances in which a duty of care will arise.

There are two main policy factors identified in the case law that are said to support this conclusion. The first arises from the inherent tendency of statements to be circulated well beyond their original and intended audience, to be put to use in ways outside their original purpose and to produce purely economic losses.^[828] These factors raise ‘ the law's concern to avoid the imposition of liability “in an indeterminate amount for an indeterminate time to an indeterminate class”'. ^[829] A second policy concern is that a blanket duty to take reasonable care to avoid causing foreseeable economic loss would run counter to important norms of commercial responsibility^[830] and impose a correspondingly heavy burden on party autonomy.^[831] Here it should be recognised that there are competing considera­tions. Misinformation can distort the market and lead to an inefficient allocation of resources. Thus, it is legitimate to encourage parties to verify the accuracy of their statements and to qualify matters of uncertainty.^[832] Parties in the market have the freedom to pursue their own commercial interests but not always to the extent that their own failure to take care misleads those with whom they are dealing.

What mechanisms, then, does the law of negligent misstatement employ to limit defendant liability in the face of these policy concerns? Accepting that the cases do not all speak with one voice, it is nonetheless possible to discern a number of overlapping standards deployed by courts to assess the relationship between the parties and their relative responsibility for harm suffered. These standards, and the factors used by courts to give content to them, provide flexible and context­specific tools for delineating the scope of defendant liability, both at the initial stage of establishing a duty of care and then in assessing the appropriate remedy for negligent misstatement.

B. The Reasonable Defendant

We have seen that it has been consistently accepted in Australia and England that the requirement of reasonable foreseeability is not sufficient to meet the law's concerns of undue and excessive liability in cases of misstatement.

As to this last indicator, the role of intention in cases of negligent misstate­ment has not been entirely clear.

C. The Reasonable Plaintiff

As we have seen, courts have consistently incorporated objective fault-based enquiries in determining whether a defendant held a duty of care to the plaintiff. The defendant is judged against a standard of reasonable knowledge and behaviour of someone in her position. Courts have also consistently recognised that the plaintiff's reliance or dependence on the statement must be reasonable.^[847] This requirement contains two discrete elements.

The authorities reveal that courts will look very closely at a number of factors relevant to the reasonableness of the plaintiff's reliance: whether the defendant held or purported to hold particular skill or expertise in the area the subject of the misstatement;^[850] what the plaintiff knew or ought to have known about the defendant's likely ability to make a careful and correct statement;^[851] whether the statement was made in a social setting or whether it was in response to a serious or formal request for information or advice;^[852] whether the plaintiff was in a position to check the veracity of the statement;^[853] whether the plaintiff was in the position to take other steps (such as entering into a contract) to protect himself from the risk of error in the statement;^[854] the comparative commercial experience of the parties^[855] and so on. All of these factors are very familiar from the law of estoppel, where courts are also used to determining whether a plaintiff's decision to act in reliance on a defendant's representation was reasonable.^[856] The High Court of Australia has recently emphasised that an informing consideration is the plaintiff's ‘vulnerability'—whether he was unable reasonably to protect himself because of ‘ignorance or social, political or economic constraints'.^[857] McHugh J has suggested that vulnerability subsumes the requirement of reasonable reliance.^[858] However, in most cases the concept appears to be another way of articulating the factors that inform reasonable reliance by the plaintiff.^[859] What is clear is that, however characterised, an objective fault-based standard of conduct informs this aspect of the enquiry.

In summary, the previous sections have considered how the combination of overlapping standards of reasonable foreseeability, actual or assumed knowledge, and reasonable reliance operate to limit the scope of defendants' liability by restricting the circumstances in which they become subject to an actionable duty of care. Where these conditions are not met, liability will be precluded in toto.^[860]9 The defendant will owe no actionable duty so is liable for no loss. Where, on the other hand, a duty is both found and breached, the defendant is potentially liable for all the loss caused by her breach. Defendant liability is commonly further restricted at the remedial stage, through concepts also infused with standards of reasonable conduct, such as ‘remoteness', ‘contributory negligence' and ‘mitiga­tion', requirements to which we now turn.

D. Remoteness and Reasonable Foreseeability of the Harm

In the context of the law of negligence (including negligent misstatement),^[861] the general test of remoteness is ‘reasonable foreseeability'. This requirement plays an important, but not conclusive, role in negligent misstatement both in ascertaining the existence of a duty of care and in delimiting the defendant's scope of liability.^[862] It is useful to contrast this remoteness rule with those applied for intentional torts such as deceit. In the latter cases, the test of reasonable foreseeability is inapt: there is no reason to allow a fraudulent defendant to escape liability on the basis that a reasonable person would not have foreseen the loss. The fraudster is ‘ manifestly not a reasonable person’.^[863] Rather, the defendant will be liable for all damage consequent on and arising directly from the fraudulent misrepresentation. Thus, where the transaction in question involves purchase of an asset, the measure of liability will be the difference between the price paid and the ‘real’ or ‘true’ value of the asset (rather than its market value at the date of acquisition), taking into account all losses in value that are inherent to the asset up until the date of trial.^[864]

The comparison demonstrates that remoteness rules in private law are closely tied to the nature of the claim. The remoteness rule must reflect and support the reason for the law’s intervention in the particular category of case.^[865] The comparison also shows that the private law does not favour unrestricted liability, even in cases of flagrant wrongdoing such as deceit. Thus, while the approach to loss in the case of acquisition of an asset seems to expand the defendant’s scope of liability considerably, taking into account intrinsic losses valued up until the date of trial, it also operates to exclude losses relating to the asset that are attribut­able to ‘extraneous factors in the later history of the asset’.^[866] These extrinsic losses include losses caused by the gross negligence of the plaintiff in managing the asset.^[867] Objective carelessness on the part of the plaintiff also informs the final two restrictions on defendant liability, to which we now turn.

E. Contributory Negligence

Contributory negligence originally operated as a very severe, bright line limitation on defendant liability: if the plaintiff was herself negligent contemporaneously or in association with the defendant’s breach of a duty of care her claim failed in toto, however slight her comparative fault might have been. The harshness of this rule was mitigated by legislative reforms that allowed courts to apportion liability by reference to the respective fault of the parties.^[868]

Contributory negligence operates as an important restriction on defendant scope of liability for negligent behaviour causing physical damage or harm. Its proper role in cases of negligent misstatement is somewhat less obvious. We have seen that plaintiffs in cases of contributory negligence must have demonstrated that their reliance was reasonable. It would seem that this leaves little room for the operation of contributory negligence as a limiting factor. ^[869] Indeed, the operation of reasonable reliance as a factor that precludes defendant liability entirely is notably severe compared to the proportional operation of contributory negligence, which does not deny but reduces defendant liability. The judicial choice of a reasonable reliance requirement over the more generalised operation of contributory neg­ligence is accordingly significant and must reflect the perceived strength of the policy concerns, discussed earlier, favouring restrictions on defendant liability.^[870]

Contributory negligence is expressed and sometimes analysed in terms sugges­tive of factual causation: the plaintiff's award is reduced to the extent that she has contributed to her own loss.^[871] However, the purpose of the legislation is appor­tionment and courts have emphasised that the task is a comparison of relative culpability.^[872] Courts compare the degree to which each party has departed from the standard of the reasonable person.^[873] For this reason, it is clear that (as for the primary claim) normative and policy considerations play a strong role in contributory negligence. It is also for this reason that contributory negligence will usually play no role in the intentional torts. However, even in torts such as deceit, the plaintiff's failure to act reasonably may have a further role to play in limiting defendant liability. This is done through the closely related requirement of mitiga­tion, to which we now turn.

F. Mitigation: Taking Reasonable Steps to Minimise Loss

The requirement that a plaintiff take reasonable steps following breach to miti­gate her loss is common to all torts, including negligent misstatement and deceit. Although it is commonly called a ‘ duty to mitigate', a failure to mitigate does not give rise to an obligation to compensate the defendant but rather results in a dimi­nution of the plaintiff's damages to the amount that would have been awarded had the plaintiff acted prudently.^[874] It is closely associated with the date of assess­ment for loss (discussed previously in the context of deceit): losses that fall after the plaintiff should have taken steps to lessen or avoid her loss may be reduced or excluded.^[875]

At base, the mitigation bar reflects the policy view that it is desirable for plaintiff losses to be stemmed as soon as reasonably possible and, conversely, that it is undesirable for a plaintiff to continue to amass losses in circumstances where she has the ability to minimise or avoid further damage.^[876] These policy considera­tions apply as much in cases of deceit as for negligent misstatement, although in the case of fraud the court will be relatively generous in determining what steps in mitigation a duped plaintiff can reasonably be expected to undertake.^[877]

In summary, this brief review highlights the repeated use by courts of core con­ceptual criteria in the law of negligent misstatement. Courts draw on a number of standards of objective fault and related principles to analyse the relationship between the parties and their respective responsibility for the wrong alleged and any harm suffered as a result. These standards are also relevant in assessing defendant liability in cases of deceit, albeit to a lesser extent. This is important in the context of the statutory prohibition on misleading or deceptive conduct because, as we will see below, it is frequently alleged that liability for misleading or deceptive conduct is unaffected by objective standards of fault on the part of the defendant,^[878] such as intention or foresight on the part of the defendant and, other than under limited statutory provisions, the plaintiff's failure to take rea­sonable care of her own interests. If true, it suggests that the statutory prohibition constitutes a true and radical break from the common law doctrines applicable to misleading statements. However, as will become apparent, these protestations not only overstate the case, they also tend to conceal the important role that common law concepts currently do and may yet play in limiting defendant liability under the statute.

The analysis is also valuable in highlighting that the common law approaches to duty of care in negligent misstatement and deceit developed against a background of broader rules of contributory negligence, remoteness and mitigation. All components work together to articulate and delimit defendants' scope of liability, informed by the underlying policy reasons for the law's prohibition. This strongly suggests that it is neither possible nor desirable to draw on isolated components of these common law doctrines for the purposes of interpreting the statutory provi­sions by analogy without considering their role and fit in that broader context. Likewise, it is necessary to consider closely the role and fit of any common law analogy in the light of the words and purpose of the statute. It is to this nuanced process of enquiry that we now turn.

III.