Precursors
At the end of the nineteenth century in the United States, the ‘overwhelming weight of authority'[1254] supported the proposition that the lack of privity barred an action for negligent misstatement, whether that action was brought in negligence or misrepresentation.
Courts largely relied on the United States Supreme Court's 1879 decision in Savings Bank v Ward.[1255] A bank that lent and lost money on a real estate loan brought an action against the lawyer who negligently prepared the title report on which the bank relied. The Court cited Winterbottom v Wright[1256] for the fear of the ‘absurd consequences' of indeterminate liability that would ensue if an action by someone other than the lawyer's client was allowed.[1257] Accordingly, it held that only parties in privity could sue for negligent misstatement. Even evidence that, according to local usage, the lawyer examining the title acted for the lender as well as the buyer did not demonstrate a sufficient relationship to establish a duty in the absence of privity. Other courts subsequently used the Court's prinÂciple to bar actions by parties not in privity against design professionals,[1258] title abstracters,[1259] and certified public accountants,[1260] among others.In the early twentieth century courts moved away from the rule of WinterÂbottom v Wright, particularly in cases involving manufactured products. The most important opinion in this movement was by Judge Benjamin Cardozo of the New York Court of Appeals in MacPherson v Buick Motor Co,13 in which foreseeability replaced privity as the standard for liability. In a subsequent pair of cases, Cardozo J and his Court first raised the possibility of extending foreseeability to cases of economic harm caused by negligent misstatement and then dramatically limited that possibility.
In Glanzer v Shepard the Court imposed liability for economic harm suffered by a purchaser of beans when the bean weigher, under contract to the seller, certified an erroneous weight for the beans.[1261] [1262] Cardozo J stated: We think the law imposes a duty toward buyer as well as seller in the situation here disclosed. The plaintiffs’ use of the certificates was not an indirect or collateral conÂsequence of the action of the weighers. It was a consequence which, to the weighers’ knowledge, was the end and aim of the transaction. [The seller] ordered, but [the buyers] were to use. The defendants held themselves out to the public as skilled and careful in their calling. They knew that the beans had been sold, and that on the faith of their cerÂtificate payment would be made. They sent a copy to the plaintiffs for the very purpose of inducing action. All this they admit. In such circumstances, assumption of the task of weighing was the assumption of a duty to weigh carefully for the benefit of all whose conduct was to be governed. We do not need to state the duty in terms of contract or of privity. Growing out of a contract, it has none the less an origin not exclusively contracÂtual. Given the contract and the relation, the duty is imposed by law.[1263] The ‘end and aim’ of the transaction was to provide a service to the buyer, so the buyer had an action against the weigher either as the third party beneficiary of the weigher’s contract with the seller or under a ‘ duty... imposed by law’ for its negligence. Glanzer v Shepard was followed by Ultramares Corp v Touche,[1264] which for ensuÂing decades largely defined the law of negligent misstatement. In Ultramares an accountant had prepared and certified a balance sheet for its client, as it had done for several years, and it supplied the client with 32 copies of the certified balance sheet, knowing that the client would provide them to lenders and creditors. Cardozo J’s opinion for the Court recognised that ‘The assault upon the citadel of privity is proceeding in these days apace’[1265] in tort cases involving personal injury and in contract law through the widening of third-party beneficiary liability. But he refused to extend the foreseeability principle of MacPherson to economic harm caused by an accountant’s neglect, and he limited Glanzers ‘end and aim’ concept to cases in which there was a connection between the plaintiff and the defendant that was the equivalent of privity. The Court characterised Ultramares as a case involving a misstatement rather than a service. Accordingly, the issue (as it would be in Hedley Byrne) was what ‘liability attaches to the circulation of a thought or a release of the explosive power resident in words’.[1266] The implications of imposing liability would be catastrophic. Potentially immense and uncertain liability would extend to accountants and to other professions and businesses. In Cardozo J’s immortal aphorism: If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class.[1267] Accordingly, only when there was a contract or an equivalent relationship would an accountant be liable to a third party who relied on its negligently prepared report. III.