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Negligent Misstatement

Negligent misstatement can be said to occur when one party misleads another – for example, if an inaccurate employment reference costs a former employee a job somewhere else.

It has always been the case that where someone’s actions have been negligent and have caused loss then it is possible to claim compensation. Traditionally it was necessary for the claimant to show that there was some pre-existing contractual relationship between him and the defendant.

This changed in 1932 when the House of Lords ruled in the case of Donaghue v. Stevenson that in appropriate circumstances a person has a duty to take care that their actions do not cause harm where it is reasonably foreseeable that harm might result. A common example is that a person will generally owe a duty not to negligently cause injury to another person.

However, the courts have been less willing to accept that where someone gives negligent advice or negligently states incorrect facts that there should be any liability for damage caused as a result. Partly this position is based on the recognition that most people are very careless with their words and often open their mouths without thinking, and that to allow people to sue every time someone starts talking about a topic on which they actually know very little would create chaos.

In addition, the law already provides two causes of action which can be used to obtain compensation from someone who has caused damage by making false statements:

  • The tort of defamation covers situations where the defendant deliberately & maliciously or recklessly makes statements about someone else which he knows or suspects not to be true and where as a result the claimant’s reputation or good standing is damaged;
  • The tort of deceit covers situations in which the defendant makes a statement of fact dishonestly when he knows or reasonably suspects that this is not true and causes damage as a result. This might apply, for example, where the seller of goods makes false claims about their condition in order to close a deal.

However, neither of these torts applies to situations where the defendant has merely been negligent or careless but where there is no malice or belief that the statements are untrue.

Development of the Law

The first case in which a senior court was prepared to consider that it might be possibl e for someone to be liable for damage caused by negligent misstatements was Hedley Byrne v. Heller in 1963.

This case concerned an advertising agency which had been asked to extend a line of credit to one of its clients. The agency asked the client’s bank for a reference and the bank negligently produced an incorrect reference which made it appear that the client’s finances were in much better shape than they really were.

As a result, the agency extended credit to a client which couldn’t pay and suffered losses. The House of Lords considered the position on negligent misstatements and stated that where a person gives inaccurate information and it is reasonably foreseeable that the recipient will act on this information, that person may be liable for any losses which result.

However, the House of Lords decided that this would not apply in most cases, and that there would need to be a “special relationship” between the parties.

Further cases have discussed the concept of the “special relationship” and judges in subsequent cases have tended to take the view that two of the most important things to consider when determining whether a special relationship exists are:

  1. Has the person making the statement “voluntarily assumed responsibility” for the recipient acting on this statement? For example, where an advisor knows that a person will receive and read advice given, the advisor may assume responsibility towards the recipient of this advice, and if his advice is negligent the recipient may well have a claim against him for any loss which results.
  2. Is it fair, just and reasonable for the person to whom a statement has been made to rely on that statement? For example, in the 1990 case of Smith v. Eric Bush it was suggested that it might be reasonable for someone who is buying a small property to rely on the valuation carried out for the mortgage company, whereas the purchaser of an expensive property could not reasonably rely on this and should commission a full structural survey of his own. In the same year the court in Caparo v. Dickman decided that it was not reasonable for investors to rely on a an internal company audit report as this report was not prepared for their benefit or as the basis for any investment and was merely prepared to discharge a statutory duty. In the 1995 case of Henderson v. Merret Lord Goff suggested that the “fair just and reasonable” test wasn’t really an independent requirement and was really just a way of helping to determine whether there had been a voluntary assumption of responsibility.

Employment References

In the past, employees have brought claims against former employers who negligently or maliciously stated untrue or inaccurate facts in employment references, causing the employee to lose out on future job opportunities.

Duty of care to employees

In 1987 the High Court decided in the case of Lawton v. BOC Transhield that in circumstances such as this the employee was owed a duty of care by the employer under the general law of negligence and would have a valid claim. However, many other judges tended to disapprove of this ruling and the precedent was often not followed. It was not until 1995 that a binding precedent was set when the issue was considered in the case of Spring v. Guardian Assurance PLC. In this case the claimant had been employed by an insurance firm and when it was discovered that he was planning to leave and join a rival firm he was dismissed. When the rival firm asked for a reference, the former employer stated that the employee had deliberately mis-sold insurance policies to clients, had acted dishonestly and had creamed off the most profitable business for himself, and had been dismissed as a result. Due to this unfavourable and inaccurate reference the employee was not only unable to get a job for several years but was also struck off the insurance industry register. Initially the Court of Appeal overruled the precedent set in Lawton, but the case was then appealed again to the House of Lords which took a very different view.

Voluntary assumption of responsibility and reasonable reliance

The House of Lords considered the development in the law of negligent misstatement which had occurred in the late 1980s and early 1990s and it applied the tests of “voluntary assumption of responsibility” and “reasonable reliance” which had been established in cases such as Caparo v. Dickman and Henderson v. Merret. The view of the House of Lords was that the former employer had assumed responsibility towards the employee and that it was reasonable for the employee to place reliance on an accurate reference being given – the court also thought that it was entirely foreseeable to the former employer that a bad reference would damage the employees prospects of employment and that due care should be taken. It was the judgment of the court that employers must act with reasonable skill and care to ensure that any facts on which a prospective employer might form a negative opinion are accurate and that any negative opinion which he himself expresses must be based on accurate and objective facts.

Duty of care of former employers

The House of Lords also considered the question of whether the former employer owed a duty of care to prospective employers. If so, this would allow prospective employers to sue a former employer where they lost out on a potentially valuable member of staff whom they couldn’t appoint because of a negative, but inaccurate employment reference. The court considered that theoretically it would be possible to demonstrate that the former employer had voluntarily assumed responsibility to the prospective employer. However, the court decided that this was a matter which would need to be decided in each individual case and would depend on the exact circumstances.