The Advantages of a Tort Claim

Despite its dubious provenance, it is undeniable that the availability of a tort action in respect of pre-contract negligent misrepresentation may have some remedial advantages from the plaintiff's point of view.

However, such advantages can be exaggerated. Much will depend on one's understanding of what the law of contract prescribes. Indeed, it is often the case that, when a rule of the law of contract appears to dictate an answer that unjustly deprives a party of relief, there is an exception to, or some other way of circum­venting, that rule.^[1500] Be that as it may, the reality is that in the great majority of cases plaintiffs will be better placed if they are able to establish that the representa­tion was a contractually binding warranty due to the availability of loss of bargain damages enabling them to recover the amount of damages that will put them in the position, so far as money can do so, that they would have been in if the rep­resentation had been true, as opposed to tort damages for the consequences of their being wrongfully induced to enter into the contract in question.

A. The Contract and Tort Requirements for Liability

The well-established test for determining whether a pre-contract statement is contractually binding is, of course, ‘the intention of the parties’. The question the court must ask itself is: did the parties intend the statement to be a term of their contract? Here, as elsewhere in the law of contract, the courts adopt an objective approach. ‘If an intelligent bystander would reasonably infer that a warranty was intended, that will suffice’.^[1501] Under the guise of this test of intention the real ques­tion that the courts ask themselves is: is it reasonable to regard the representor as having accepted contractual responsibility for the accuracy of his statement? There are several well-known factors that the courts take into account in reach­ing their decisions and, of these, one of the most important is the respective skill and knowledge of the parties.^[1502] If the representor has a special skill or has greater knowledge or means of knowledge with respect to the subject matter of the state­ment than the representee, this will strongly support a conclusion that it is reason­able to regard him as accepting contractual responsibility for the accuracy of his statement. Conversely, the fact that the representor was not in a better position will be adverse to such a conclusion, although not conclusive.

Nowadays, where it is found that the representor ought to be regarded as hav­ing accepted responsibility for his statement, there are few obstacles in the way of the court concluding that the statement was contractually binding and then proceeding to award damages.^[1503] If a statutory writing requirement applies it can be easily overcome by the court classifying the statement, not simply as a term of the contract, but as a separate collateral contract. Furthermore, the parol evidence rule, which prohibits the addition of oral terms to written contracts, is no longer the force it used to be. The courts either disregard it altogether, as in Mardon, or find that it does not apply either because the statement is a term of a partly written and partly oral contract or a collateral contract.^[1504]

It should now be apparent that the test for contractual liability in respect of misstatements inducing the contract is similar to the basic test for liability under the Hedley Byrne principle. As we have seen, there will be a ‘special relation­ship' under Hedley Byrne giving rise to a duty of care where the speaker can in all the circumstances reasonably be regarded as assuming responsibility for the statement.^[1505] Of course, the tests do not correspond exactly, but they are surely close enough to at least require some explanation for a finding that a statement (a) was not contractually binding but (b) was made in circumstances satisfying the tort requirements for liability. No such explanation appeared, for example, in the judgment of Lawson J in Mardon where his Lordship held, in effect, that Esso had assumed responsibility in tort but not in contract.

The overlap is readily apparent from Lord Denning's description of Hedley Byrne liability in relation to pre-contract misstatements quoted earlier^[1506] and the following well-known description of the usual characteristics of a special relationship by Barwick CJ in Mutual Life & Citizens’ Assurance Co Ltd v Evatt:^[1507]

It seems to me that it is this element of trust which the one has of the other which is at the heart of the relevant relationship.

Indeed, arguably there is only one important difference between the contract and tort requirements. In a negligent misstatement action, the plaintiff must prove that the defendant assumed responsibility for the statement not ‘ in the sense that he warrants its accuracy' but ‘ in the sense that he must use due care in making it'. ^[1508] Accordingly, the tort ‘ assumption of responsibility' is for something less than the usual contract assumption of responsibility, which is for the accuracy of the state­ment. In an action for breach of contract, once the statement is found to be a term, the defendant is liable even if reasonable care was exercised.^[1509] The plaintiff in a Hedley Byrne claim must prove not only that the statement was false but also a failure to exercise reasonable care.

In view of this difference, it might be argued that there could be cases where a representor can reasonably be regarded as undertaking a duty to take care but not as guaranteeing the truth of his statement. Is this a situation where Hedley Byrne provides a cause of action that otherwise would not exist? Interestingly, Honore, in his early commentary on Hedley Byrne, gave the following example of a situa­tion where, there being no contractual liability for the misstatement, Hedley Byrne comes to the representee’s rescue and affords a remedy in damages:^[1510]

Finding an electrical fault I send for the electrician. After examining my house from top to bottom he says ‘Your whole house needs rewiring and I can do it for £100’. I agree. In fact, the old wiring was perfectly sound.

The example is not a particularly well-chosen one. It is questionable whether it is unreasonable to regard the electrician as guaranteeing the correctness of his statement. Furthermore, it would seem that there was an existing contractual rela­tionship between the parties at the time of the inspection and the making of the statement that would have obliged the electrician, by way of a term implied by law, to exercise reasonable care. However, ignoring these points and regarding the situation as one where there was a careless pre-contract statement which was not warranted accurate, this is still not a situation where Hedley Byrne gives a cause of action that otherwise would be unavailable.

A decision that the electrician was not binding himself to the accuracy of his statement would appear to be sustainable only on the basis that he was merely expressing his opinion on the matter. It is well established, however, that where a statement of opinion is made by a person who is in a better position to know the facts, that statement of opinion will be taken to carry with it an actionable rep­resentation of fact that there are reasonable grounds for the opinion. Thus, state­ments that a house is ‘let to a most desirable tenant’,^[1511] that an annuitant ‘is believed to have no aggregable estate', ^[1512] and that a ship is ‘ expected ready to load' ^[1513] have each been held to constitute a representation that there were reasonable grounds for holding the opinion.

Of course, support for the above analysis is to be found in the Mardon case where the Court of Appeal held on the facts that there was co-extensive liability in contract and tort. Although in some respects the discussion of the contract issue was unsatisfactory,^[1514] the decision did highlight the flexibility of the modern law of contract with regard to the finding of warranties. As noted earlier, it was held that the petrol throughput estimate carried with it the representation of fact that it was based on reasonable grounds and, furthermore, that representation, in the circumstances, constituted a contractually binding warranty. In other words, the lack of reasonable grounds for the estimate amounted to a breach of contract.

In summary, it is suggested that ordinarily there will be no need to invoke Hed­ley Byrne in order for the aggrieved party to be able to recover damages in respect of a pre-contract misrepresentation. Where the tort test of liability is satisfied and the representor has assumed a responsibility to exercise reasonable care, the same circumstances should normally also lead to a finding of a warranty, if not that the statement itself is accurate, then at least that it is based on reasonable grounds. In the majority of such cases, however, the representee will be able to establish that the representor assumed responsibility for the accuracy of the statement, thus making the action in contract more advantageous to the representee in that the representor is strictly liable. Interestingly, although in Mardon Ormrod LJ could ‘see no reason why an action in negligence should not be available in a proper case', he did immediately point out that

[m]uch will depend upon how the law on warranties is applied. If a restrictive view is taken, there will be room for this cause of action; but, if not, most, if not all, misstate­ments which fall within the Hedley Byrne principle are likely to be regarded as warranties.

V.