Pure Economic Loss, Hedley Byrne and the Rise of Proximity

The fact that the statement in Shaddock & Associates Pty Ltd v The Council of the City of Parramatta (No 1)^ri5 involved the provision of information rather than advice was insufficient to distinguish the facts from Hedley Byrne.

Outside of negligent misstatements, Hedley Byrne largely disappeared in England in the decade post Anns v London Merton London Borough.^[182] In Anns, Hedley Byrne was, contrary to what was said there, treated as a direct descendant of Donoghue v Stevenson.

When Brennan J criticised the ‘extended’ use of proximity^[191] he was refer­ring to the way that proximity was treated as ‘a unifying theme’ which explains the imposition of a duty of care.^[192] It is difficult to argue that proximity was used in this sense by Lord Devlin. At best, the term was probably intended to do no more than indicate that reasonable foreseeability was not enough.^[193] In England, Hedley Byrne has been variously explained by the House of Lords on the basis of reliance,^[194] proximity^[195] the assumption of responsibility^[196] and a relationship ‘akin to contract’.^[197] That these may be no more than ‘convenient labels'^[198] perhaps matters less if the law of negligence is to truly develop incrementally from exist­ing categories. Incrementalism of this kind, which restricts developments in novel cases to cautious development from an existing authority, has found some support in Australia.^[199] It has also been criticised.^[200] Yet the importance of earlier decisions in novel cases continues to be recognised in the new multifactoral approach to the duty of care.^[201] Incrementalism does not necessarily promote certainty.

The late 1980s was a period of retrenchment of pure economic loss in England. By the mid-1990s more exceptions to the no-liability rule for pure economic loss were been created concerning the provision of services.^[204] Hedley Byrne, through the medium of ‘assumption of responsibility’, played a crucial part in the reasoning of Lord Goff in particular.^[205] The scope of liability for pure economic loss in England was extended, but left the English courts struggling to reconcile the new wider Hedley Byrne approach^[206] with Caparo.^[207] The Australian courts avoided these difficulties because, after Caltex, there was no exclusionary rule. As a result, Hedley Byrne became an important authority beyond the confines of negligent misstatements at a much earlier point in time.^[208] As in England, because pure eco­nomic loss remains ‘special',^[209] Hedley Byrne is still at the heart of things. Even in the ‘core' case of misstatements the decision has proved useful to those advancing a variety of different and even contradictory propositions.

In Esanda Finance Corporation Ltd v Peat Marwick Hungerfords,^[210] the High Court rejected a claim in negligence by a finance company which had relied on an auditor's report. The result was consistent with Caparo. Once again, Hedley Byrne was evident in the High Court's reasoning. Having referred to Lord Morris in Hedley Byrne,^[211] Brennan CJ stressed the absence of reasonable reliance.^[212] Dawson J emphasised the absence of proximity^[213] but appeared to consider some of the same factors.^[214] Toohey and Gaudron JJ discussed both reliance and the assumption of responsibility but concluded that ‘they do not, of themselves, reveal the precise nature of the situations or categories of situation which involve a spe­cial relationship of proximity'.^[215] McHugh J delivered the most sophisticated judg­ment.

In the end, the most powerful point for holding that auditors owe a duty of care in cases like the present is that investors and creditors suffer their losses because they have relied, as the auditor knew or ought reasonably to have known they would, on his or her report, and the auditor has made that report carelessly. As against that, however, is the fact that the auditor did not invite or intend them to rely on it and they have paid nothing to the auditor for the preparation of the work. They require the auditor to compensate them for the loss that arose from their self-induced reliance, but they were not prepared to pay for the auditor's work.^[218]

McHugh J added that the demands of corrective justice did not require the impo­sition of a duty.^[219] Gummow J disposed of the appeal on the more limited grounds that the pleadings were deficient^[220] and suggested that terms such as ‘assumption of responsibility' ‘reliance' and ‘intention to induce activity', while imprecise, ‘in a real sense reflect... the quest for an alternative to consideration'.^[221] This seems to hint that liability in a case like Hedley Byrne is based on some notion of consent^[222] as captured by the phrase ‘akin to contract'. ^[223] This analysis has not been much discussed in Australia, but when a contract between a mortgage lender and valuer provided that the valuation ‘may' be relied on by a mortgage insurer, then it was held that the valuer owed the insurer a duty of care when the property was over­valued. The relationship between the valuer and the insurer was said to be ‘akin to contract'.^[224] In Hedley Byrne it was consideration that was missing. The plaintiffs here ran into the problem of privity.^[225]

Although it was sometimes criticised, proximity^[226] remained, for a while, a popular way of determining the existence of a duty of care in novel situations.^[227] Typically as in Esanda, ‘assumption of responsibility' was a factor along with others such as reliance in establishing proximity and not as in England a free­standing ground for determining the existence of a duty of care.^[228] Proximity still has supporters.^[229] Over time judges began to downplay what the concept could achieve^[230] and it has now been supplanted.^[231]

V.