Tort of Negligent Misstatement

A tort can be defined as a wrongful act or omission which gives rise to a civil action in a court of law against the party that committed the wrongful act.

The tort of negligent misstatement is defined as an “inaccurate statement made honestly but carelessly usually in the form of advice given by a party with special skill/knowledge to a party that doesn’t possess this skill or knowledge” (Willesee Bill, Law management 252, Curtin Handbook 2010).

In today’s society we can observe that there are various forms of tort, some of which have roots back in medieval times and have been recognised by courts since. In order to prove that negligent misstatement occurred, we have to prove that the elements of negligence were breached as most torts have common elements which include:

ELEMENT OF FAULT - There has to be proof presented showing that one party committed the tortuous act either intentionally or negligently

ELEMENT OF ACTUAL DAMAGE - the plaintiff would have the onus to prove that they suffered actual damage/injury/loss as a result of the tortuous act by the tortfeasor.

ELEMENT OF OBTAINING REMEDY - as the law of Torts is concerned with compensating the victim rather than punishing the wrongdoer, the rule applied by the Courts is to put the plaintiff/victim into a position they enjoyed before the wrongful act took place.

For example, if a person was wrongfully imprisoned, the courts would seek to put the victim back into the position they previously enjoyed before the imprisonment took place possibly through monetary compensation.

For the Court to decide whether a tortuous act took place, it would have to take into account additional factors that make the wrongdoer responsible for the outcome of the tortuous act. Such factors include:

DUTY OF CARE

A person/party must initially owe a legal duty of care to the other person/party in order to be held liable for negligence.

“Duty of care can be defined as a duty to take reasonable care/skill that a normal reasonable person would” (Latimer Paul; Australian Law Handbook (2009) Chapter 4; Torts)

The onus is therefore on the plaintiff to show that a duty of care was owed to him/her by the defendant. The plaintiff will have to consider the three state test of proving that the duty of care did exist between the plaintiff and defendant which considers:

FORESEEABILITY - was it reasonably foreseeable to the alleged wrongdoer that his/her conduct/omission would be likely to cause harm?

PROXIMITY TEST - was there a physical? Factual or circumstantial link between the parties involved?

VULNERABILITY - is it possible that the plaintiff was vulnerable to harm as a result of the defendant’s conduct/course of action?

These pre-requisites need to be addressed in order to prove that the element of duty of care was present when pursuing a case in negligence or negligent misstatement.

(Willesee Bill, Law management 252 Curtin Handbook (2010), Chapter three)

With reference to duty of care, we may observe in:

COLE V SOUTH TWEED RUGBY LEAGUE FOOTBALL CLUB LTD [2004] HCA 29

FACTS: Mrs Cole left the club on foot at 5.30pm with a blood alcohol limit of 0.238 and was hit by a car

RULING: the court held that the club management had fulfilled its duty of care and could not have legally prevented her from leaving.

HACKSHAW V SHAW [1984] HCA 84

FACTS: A farmer shot at a car of a trespasser stealing petrol from the farm following a series of robberies at his farm. The shooting occurred in darkness when the thief was standing beside his car and his girlfriend was crouched in the front seat of the car and was eventually wounded…

RULING: The Court held that the use of firearms was excessive force and the risk of killing/serious injury was out of proportion to the wrongful acts of the plaintiff.

The second Factor to be considered by the court would be:

STANDARD OF CARE

Once we have ascertained that a duty of care was present between the parties, we need to address if the standard care was breached by the wrongdoer by observing his/her conduct towards the plaintiff.

“An appropriate standard of care can be defined as the standard of care that an ordinary, reasonable and prudent person would follow” (Willesee Bill, Law management 252 Curtin Handbook 2010)

As there are various cases with varying degrees of the amount of care needed to be present, basic principals are considered such as:

• the risks inherent in the conduct
• the severity of the likely outcome should any of the risks materialise
• if the defendant’s conduct can be gauged with existing standards
• and whether the defendant has kept up with changes in professional standards.

The third element to consider is:

DAMAGES CAUSED

As the area of Torts is concerned with compensating the victim, it is paramount that the Court ascertains that the defendant’s actions led to the plaintiff suffering loss/injury.

Once we have ascertained that there was a duty of care present between the parties and that duty was breached, the Court will look at the resulting loss/injury and its connection to the standard of care breached by the defendant. This is also referred to as “the remoteness test”.

With reference to the Remoteness Test, we may observe in:

LINDEMAN LTD V COLVIN [1946] HCA 35

FACTS: A Person was hospitalised following a work-related injury to his head. Due to a pre-existing condition “brittle bones”, he fractured his leg while in hospital adding to his stay in hospital and medical expenses.

RULING: The Court held that the employer was not liable for the injuries received in hospital as the broken leg was a separate injury with separate cause independent from the initial injury to the head.

When we try and tackle the concept of negligent misstatement, we can conclude that this area of tort has morphed into a branch of its own though the basic fundamentals of negligence have to be present first such as establishing the presence of a duty of care, standard of care provided and possible breach and damages caused.

Negligent misstatement also takes into account another aspect; the existence of special relationship that exists between the parties involved.

This special relationship has been found to be present when one of the parties has special skills/knowledge of a particular field and the second party (plaintiff/receiver of information) has sought the services of the defendant in order to make a sound decision. If the provider of such information put across information that later proves to be detrimental to the plaintiff, the plaintiff can seek action in a Court of Law for compensation/damages.

The Courts have formulated a four point test which seeks to prove whether there was a special relationship between the parties and include:

• The defendant realises that the plaintiff has sought the services of the defendant as he/she possess special knowledge/skill in a chosen profession and that the plaintiff trusts the advice/information given by the defendant.
• The information exchanged by the parties involves a serious/business matter
• The defendant realise that the plaintiff intends to act on the information/advice given
• It would be reasonable in the circumstances for the plaintiff to seek out and rely on the information given. (Willesee Bill, Law management 252, Curtin Handbook 2010, Chapter four; Torts)

When examining the special relationship concept, we may observe in:

SHADDOCK& ASSOCIATES PTY LTD V PARRAMATTA CITY COUNCIL [1981] HCA 59; 150 CLR 225

FACTS: A solicitor acting on behalf of Shaddock contacted the Parramatta city council to enquire if a property would be affected by road widening proposals. The council employees issued a form and made other statements, none of which indicated if the property was under threat.

Consequently shaddock purchased the property and the road widening proposals were effected and Shaddock suffered losses which he sued for under negligent misstatement.

RULING: The Court held that the council was at fault for not providing the correct information to a person who relies on that information.

Also it is possible for this special relationship to be non-existent by referring to:

SAN SEBASTIAN PTY LTD V MINISTER ADMINSTERING THE ENVIROMENTAL PLANNING AND ASSESSMENT ACT (1986) HCA 68

FACTS: The New south Wales’s state planning authority and the Sydney city council were held not liable to a property developer for their publicly displayed study documents on the proposed development of Woolloomooloo in inner Sydney. The developer purchased properties in reliance on the documents but sold them at a loss when the proposals were drooped due to being unviable.

As the proposal offered no assurance about the ultimate level of development, there was no specific representation by the planning authorities necessary to establish of a duty of care. Such proposals were subject to frequent alteration, variation or revocation.

APPLICATION OF LAW

When examining Ivan’s claim to negligent misstatement, we have to firstly consider the presence of the elements that exist in an ordinary claim for negligence and lastly the presence of a special relationship.

DUTY OF CARE

A person/party must owe a legal duty of care to the other person/party in order to claim for negligence. As the onus of proving that a duty of care exists between the parties is on the plaintiff, he/she needs to tackle the three state tests.

Firstly, was it reasonably foreseeable that the actions of the defendant (Catherine) would cause harm/loss/injury? As Catherine is a financial adviser by profession, it is reasonably foreseeable that her conduct/omission is likely to impact on Ivan in a positive and negative manner

Secondly, is there a physical, factual or circumstantial link between Ivan and Catherine? We can deduce that their relationship was factual as Ivan has contracted Catherine to be his financial adviser.

Thirdly, how vulnerable was the plaintiff (Ivan)? We can also deduce that the risk exposure/vulnerability to Ivan was very high as he was relying on her advice in order to make a sound financial decision.

Another facet to consider is:

STANDARD OF CARE

This standard of care is what we consider would be what an ordinarily prudent person would observe. How would we gauge such a standard? We need to consider what a normal prudent financial adviser would do under the circumstances, which may be a thorough investigation of the proposed scheme after obtaining clear intentions from the client. In this case, Ivan had asked for an investigation into the accounts of Midget Widget as he sought to invest some of his funds in the company. This intention would have been relayed to Catherine during the course of their dealings.

A prudent financial adviser would have made thorough enquiries before making any recommendations. A breach of the standard of care provided can be observed as Catherine misread the accounts of the proposed investment.

The third facet to consider is:

ACTUAL DAMAGES CAUSED

What is the likely outcome if Ivan invested his life savings into the company only for it to become insolvent? There would be disastrous consequences for Ivan if he was relying on the investment to fund his lifestyle/retirement.

While we know the company became insolvent soon after investing and Ivan’s funds were lost, this loss can be taken by the Courts as sign of actual loss suffered by the plaintiff and form grounds for a claim in negligent misstatement if the duty of care can be shown to have existed and the standard of care was breached.

The fourth element to prove would be:

EXISTENCE OF SPECIAL RELATIONSHIP

In order to make a claim for negligent misstatement, we have to prove that the basic elements of negligence existed at the time of the tortuous act in addition to the link of special relationship.

A person/party would have to seek out the one on one service of a financial adviser or accountant in order to enjoy exclusive information/knowledge that normally would not be present to the general public. This special relationship only existed between Ivan (Client) and Catherine (financial adviser) and did not extend to the general public.

When we also consider the four point test, it is also possible to conclude that a special relationship did exist between Ivan and Catherine as:

• The defendant realises/should realise that the plaintiff believes the defendant possess special skill/knowledge/information as a financial adviser and that the plaintiff trusts the judgement of the defendant.
• The advice sought relates to an investment/business matter
• The defendant realises/should realise that the client intends to act on the information acquired in this case Ivan intends to invest in the company if it is viable.
• It is highly reasonable in the circumstances for the plaintiff to seek and rely on the advice/information given by the defendant.

CONCLUSION

In conclusion, it is highly likely that Ivan has suitable grounds to make a claim under the Tort of negligent misstatement as the criteria for making such a claim currently exist such as the existence of duty of care, breach of standard of care, actual loss was incurred and the existence of a special relationship.