Smith v Bush [1989] 2 All ER 514

Facts

• Smith v Bush concerned a homebuyer (the claimant) who obtained a mortgage from a bank to purchase a property.
• The bank commissioned a valuation report from a surveyor (the defendant), for which the claimant was required to pay, creating an indirect link between the claimant and the surveyor.
• The surveyor's report, disclaiming accuracy, failed to identify significant structural issues, causing the claimant economic loss and the need for costly repairs.
• The claimant relied solely on the lender’s valuation report in the decision to purchase, not commissioning a separate survey.
• The defendant attempted to exclude liability for any errors in the valuation report via a disclaimer.
• The dispute arose as to whether the surveyor owed a duty of care to the purchaser, a third party to the contract between bank and surveyor.

Issues

1. Whether a surveyor, engaged by a lender, owes a duty of care to a purchaser who foreseeably relies on the valuation report despite not being in direct contractual relationship with the surveyor.
2. Whether reasonable reliance and foreseeability are sufficient bases for establishing such a duty of care.
3. Whether exclusion clauses contained in surveyor reports are valid or void under section 11 of the Unfair Contract Terms Act 1977.
4. Whether the context of payment, the nature of the transaction, and the characteristics of the parties affect the reasonableness of exclusion clauses.

Decision

• The House of Lords held that a duty of care could extend to a third party, such as a homebuyer, where it was foreseeable they would rely on the valuation report.
• The court found that reasonable reliance by homebuyers, especially in low-value residential transactions, made the extension of duty appropriate.
• Exclusion clauses limiting the liability of surveyors in this context were found to be void for unreasonableness under section 11 of the Unfair Contract Terms Act 1977.
• The judgment distinguished the use of exclusion clauses in consumer transactions versus commercial situations, highlighting greater protection for consumers.
• The court recognized that payment for the report by the purchaser through the bank created proximity akin to a contractual relationship.
• Both Lord Templeman and Lord Griffiths accepted liability but reasoned differently: quasi-contractual linkage versus proximity and reasonable reliance.

Legal Principles

• A duty of care for negligent misstatement may exist towards third parties where reliance is foreseeable and reasonable, even absent direct contract.
• Reasonableness of exclusion clauses is context-dependent; consumer residential transactions attract strict protection under the Unfair Contract Terms Act 1977.
• Liability for negligent misstatement can arise out of a “special relationship” based on proximity, reasonable reliance, and payment for services.
• The principle from Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 is extended to allow for duty of care to persons who indirectly pay for and reasonably rely on professional advice.
• Caparo Industries Plc v Dickman [1990] UKHL 2 affirmed that duty of care depends on foreseeability, proximity, and whether it is fair, just, and reasonable to impose such a duty.

Conclusion

Smith v Bush significantly broadened the scope of professional liability for negligent misstatements, confirming that surveyors owe a duty of care to foreseeable third-party homebuyers who rely on their reports, and that exclusion clauses may be invalidated for unreasonableness to safeguard consumer interests.