Negligent Misstatement: Key Requirements, Cases and Practica...

Introduction

Negligent misstatement covers situations where one person supplies inaccurate information or advice, another person reasonably relies on it, and financial loss follows. It is a tort claim designed to deal with pure economic loss caused by careless words, usually where there is no contract between the parties.

The modern rule comes from Hedley Byrne v Heller [1964] AC 465. A duty of care may arise where the maker of the statement has (or claims to have) special skill, knows the claimant is likely to rely on what is said for a particular purpose, and has assumed responsibility for the accuracy of the information. Disclaimers can limit or defeat liability if they clearly state that responsibility is not accepted and, where applicable, pass the statutory test of reasonableness.

Negligent misstatement is different from fraudulent misrepresentation (which requires dishonesty) and from claims under the Misrepresentation Act 1967 (a contractual route). It sits alongside general negligence principles, refined by cases such as Caparo v Dickman [1990] 2 AC 605 on foreseeability, proximity, and whether it is fair, just and reasonable to impose a duty in the circumstances.

What You'll Learn

• When a duty of care arises for statements causing pure economic loss
• The Hedley Byrne assumption of responsibility test and its limits
• How reliance, causation, and remoteness work in these claims
• The effect of disclaimers and the Unfair Contract Terms Act 1977
• How later cases (Smith v Bush, Spring v Guardian Assurance, Caparo) shape the duty
• Key differences between negligent misstatement, deceit, and the Misrepresentation Act 1967
• Practical steps for assessing, bringing, or defending a claim
• Common remedies, limitation issues, and risk management tips for professionals

Core Concepts

Duty of care and assumption of responsibility

• Origin: Hedley Byrne v Heller [1964] AC 465 recognised a duty of care for careless statements causing pure economic loss.
• Assumption of responsibility: A duty can arise where:
  • The maker has, or holds themselves out as having, special skill or knowledge.
  • They know (or ought to know) the claimant will rely on the statement for a specific purpose.
  • The statement is given in circumstances implying responsibility for its accuracy (unless effectively disclaimed).
• Relationship akin to contract: Lord Devlin described the duty as arising in a relationship similar to contract, without the need for consideration.
• Purpose and audience: The statement must be made for the purpose for which the claimant actually relied on it, and the claimant must belong to the class of persons the maker had in mind.
• Incremental approach: Caparo v Dickman adds a check that, on the facts, it is foreseeable, sufficiently proximate, and fair, just and reasonable to impose a duty.

Reliance, causation, and economic loss

• Reasonable reliance:
  • The claimant must prove they actually relied on the statement and that such reliance was reasonable in context.
  • Reasonableness depends on the maker’s role, the precision of the statement, whether it was given for a known purpose, and any warnings or qualifications.
• Causation:
  • “But for” test: Would the claimant have acted differently but for the statement?
  • The loss must result from the reliance (not from independent market events or unrelated risks).
• Remoteness and scope of duty:
  • Loss must be reasonably foreseeable and within the scope of the duty undertaken.
  • The SAAMCo principle (South Australia Asset Management Corp v York Montague [1997] AC 191) limits recovery to losses the duty was meant to guard against. Information cases only cover the consequences of the information being wrong; advice cases can extend further.

Disclaimers, scope, and limits

• Disclaimers:
  • A clear disclaimer can negate a duty or limit liability (as in Hedley Byrne), but it must be effective in law.
  • Under the Unfair Contract Terms Act 1977 (UCTA), clauses excluding or restricting liability for negligence must satisfy the reasonableness test. In consumer contexts, the Consumer Rights Act 2015 fairness test may apply.
• Reasonableness factors (UCTA):
  • Clarity and prominence of the wording
  • The parties’ bargaining power and alternatives available
  • Whether the claimant knew or should have known of the term
  • Consistency with industry practice and the report’s purpose
• Purpose and class (Caparo):
  • No duty for general statements not aimed at guiding the claimant’s specific decision (e.g., published audit reports used by the investing public).
• Contributory negligence:
  • If the claimant’s own carelessness contributed to the loss, damages may be reduced under the Law Reform (Contributory Negligence) Act 1945.
• Limitation:
  • Generally six years from the date of loss (Limitation Act 1980).
  • For latent damage in negligence (non-personal injury), s.14A provides a three-year period from the date of knowledge, subject to a fifteen-year long-stop.

Key Examples or Case Studies

• Hedley Byrne v Heller [1964] AC 465

  • Context: Bank gave a credit reference “without responsibility”; the claimant relied and suffered loss.
  • Ruling: No liability due to an effective disclaimer, but the House of Lords recognised a duty of care for negligent misstatements in appropriate cases.
  • Takeaway: Assumption of responsibility creates a duty; disclaimers can defeat it.

• Smith v Bush [1989] 2 All ER 514

  • Context: House purchaser relied on a valuation report prepared for a lender; the report contained a disclaimer.
  • Ruling: The surveyor owed a duty to the purchaser; disclaimer failed the UCTA reasonableness test.
  • Takeaway: Duty can extend beyond the immediate client if reliance is foreseeable and the purpose is known.

• Spring v Guardian Assurance [1994] 3 All ER 129

  • Context: Ex-employer provided a negligent reference, harming a former employee’s job prospects.
  • Ruling: Duty of care owed in preparing references; negligent references can lead to liability.
  • Takeaway: Special knowledge and expected reliance can create duties in employment contexts.

• Caparo v Dickman [1990] 2 AC 605

  • Context: Investors alleged auditors owed them a duty regarding a published audit report.
  • Ruling: No duty to the investing public for general audit reports.
  • Takeaway: Duty depends on purpose, known class of recipients, and proximity.

• Chaudhry v Prabhakar [1989] 1 WLR 29

  • Context: Advice on buying a car given in a social setting by someone claiming knowledge.
  • Ruling: Duty found due to claimed skill and reliance for a serious purpose.
  • Takeaway: Non-commercial settings can still produce liability where responsibility is assumed.

• Problem scenario: Pink Gin (Fiona and Graham)

  • Facts: Fiona, an experienced breeder, told Graham, a trainer, that horse “Pink Gin” had top-class breeding and potential. This prompted a £100,000 purchase. Later, parentage was wrong and the horse proved worthless. Fiona had earlier warnings about a breeding mix-up but did not check.
  • Analysis:
    • Duty: Fiona held herself out as having specialist knowledge; she knew Graham would rely for a purchase decision.
    • Breach: Failure to take reasonable care to verify parentage and performance claims.
    • Reliance and causation: Graham’s purchase flowed from the statements; reliance appears reasonable given Fiona’s role.
    • Loss: Difference between price paid and true value, plus foreseeable consequential losses (e.g., wasted training fees).
    • Other routes: Facts may also support fraud (if dishonesty is shown) or a claim under s.2(1) Misrepresentation Act 1967. Remedies differ.

Practical Applications

• Analysing a potential claim

  • Identify the purpose of the statement and the class of persons it was aimed at.
  • Assess whether the maker assumed responsibility (expressly or by context).
  • Check for disclaimers and evaluate reasonableness under UCTA 1977 (and fairness under the CRA 2015 if a consumer is involved).
  • Test reliance: was it actual and reasonable in the circumstances?
  • Prove causation and quantify loss, applying SAAMCo to stay within the scope of duty.
  • Consider contributory negligence and mitigation steps taken by the claimant.

• Defending a claim

  • Argue no assumption of responsibility or lack of proximity for the specific purpose.
  • Point to clear, prominent disclaimers; show they are reasonable under UCTA.
  • Challenge reliance as unreasonable (e.g., statement was opinion, not fact; warnings were given; independent advice was available).
  • Causation: show the loss would have occurred anyway due to market movements or unrelated risks.
  • Apply SAAMCo to limit recoverable losses to those the duty was meant to guard against.

• Risk management for professionals

  • Use precise, purpose-limited wording; avoid broad assurances.
  • Include clear, prominent disclaimers tailored to the service and audience; review for UCTA compliance.
  • State the limits of the information (date, scope, data sources, assumptions).
  • Keep thorough records of instructions, purpose, limits, and caveats.
  • For references or informal advice, consider whether to decline, or give only factual, verifiable statements.

• Remedies and limitation

  • Damages aim to put the claimant as if the statement had not been made (reliance loss).
  • Expectation loss is generally not available in tort.
  • Limitation: usually six years from loss; consider latent damage rules (s.14A).
  • Rescission is typically a contract remedy; consider the Misrepresentation Act 1967 where a contract exists.

• Exam or interview checklist

  • Identify duty (Hedley Byrne), then apply Caparo.
  • Work through reliance, causation, remoteness, SAAMCo.
  • Address disclaimers and UCTA.
  • Compare with misrepresentation and deceit where relevant.

Summary Checklist

• Is there an assumption of responsibility for the accuracy of the statement?
• Was the statement made for the claimant’s specific purpose and known class?
• Did the claimant actually rely on it, and was that reliance reasonable?
• Was there a clear breach of the standard of care expected for the maker’s role?
• Can the claimant show “but for” causation and foreseeable loss within the scope of duty (SAAMCo)?
• Do any disclaimers apply and are they reasonable under UCTA (and fair under CRA for consumers)?
• Are there defences such as contributory negligence or failure to mitigate?
• Is the claim within time (Limitation Act 1980; s.14A for latent damage)?
• Would a contract route (Misrepresentation Act 1967 or breach of contract) offer better remedies?

Quick Reference