LEGAL ASPECTS OF BUSINESS (Negligence)
Answer both questions (a) and (b)
Tutor workshop appointment
You must attend your tutor workshop appointment on the 22nd or 24th February and be ready to talk about your understanding of negligence and to explain what progress you have made so far on the coursework.
Note: If you are absent because of illness you will need to make a mitigating circumstances claim. In this case you should also notify your seminar tutor.
(a) Professionals need to be aware of the potential liability arising from negligent misstatement when providing advice. Explain how the law operates in this area and the potential steps a professional advisor should take to avoid such liability (50%)
(b) Roger and Sanjit are partners in an internet marketing company based in the Midlands. They are travelling by car to London to make a pitch to a client. Roger was driving and talking to Sanjit about the forthcoming meeting. Suddenly, Roger, for no apparent reason, lost control of the car and knocked over Tina who was crossing the road near to her school. Tina suffered a broken pelvis and was hospitalised for several months. Sanjit, who was not wearing his seat belt, suffered severe head injuries.
Explain what has to be proven to establish negligence liability and argue how likely it is that Sanjit and Tina will be successful in their claim against Roger.
Your answer should refer to relevant case law in support of your arguments. (40%)
LENGTH: 2000 words (discretion of 10% over / under the word limit) – so maximum word count 2200.
Plagiarism (i.e. direct copying from books etc. or representing other writers’ work as your own) will result in a FAIL.
Submission date: – Tuesday 1st March 2016 – by 13.00 hours
Submission of course work: See page 11 (above)
Legal Aspects of Business – custom textbook – see:
Chapters 13 and 14.
Relevant journal articles
Please note: The following journal articles can be accessed through the Library Search option. Type the journal name (eg ”New Law Journal”) into the box, click on the relevant search result and then log in through the resource (eg Lexis Library) to access the article.
1 “Personal Injury – Snail Trail” – Keith Patten
New Law Journal
162 NLJ 643
11th May 2012
(Eighty years on, Keith Patten traces the legacy of Donoghue v Stevenson)
2 “The sliding snail” – Jon Holbrook
New Law Journal
157 NLJ 168
2 February 2007
(Negligence has changed since Donoghue v Stevenson—and not for the better, argues Jon Holbrook).
3 “Personal Injury: Sliding Away” – Keith Patten
New Law Journal
161 NLJ 1124
12th August 2011
(Keith Patten observes the move away from compensation for claimants who were in part liable for their injury)
4 Stop or go? – Ruth Winterbottom
New Law Journal
156 NLJ 67
13 January 2006
(Ruth Winterbottom explains why a Court of Appeal decision in favour of motorists could have wider implications for the law of negligence).
5 Judgment in Knucklehead v Goodfellow
New Law Journal
157 NLJ 1122
3 August 2007
(Judge Irongirdle laments the inadequacies of claimants in person and district judges).
6 Morgan L. (2009) The law relating to negligent misstatement and its impact on professionals such as Accountants and Solicitors. University of Wales Newport (Article repoduced in full in Blackboard)
7 Pure Economic Loss http://fds.oup.com/www.oup.com/pdf/13/9780199289714.pdf
8 O’Farrell F. (2009) Professional negligence in the construction field
9 Stylianou M (2011) Pure economic loss in negligence – has England got it wrong? Has Australia got it right? 1 SSLR Southhampton University
10) The Curious Incident of the Dog that did Bark in the Night-Time: What Mischief does Hedley Byrne v Heller Correct?
Any additional reading items will be posted on Blackboard.
Format of answer and citation of sources used
1. Cite cases as follows: Smith v Patel (1968). Parties’ names should be italicised or underlined. If in doubt check handouts or the textbooks.
2. Use cases (i) to support a proposition of law, or (ii) to illustrate a point. Use as appropriate when stating and applying the law (for example by comparing the facts with the question to decide if the facts fall within or outside of the case).
eg (i) ‘A party may be fixed with notice of an exclusion clause by a regular course of previous dealings between the parties: Spurling v Bradshaw (1956)’.
eg (ii) ‘An advertisement can amount to an offer. In Carlill v Carbolic Smoke Ball Co (1892) an advertisement offered a £100 reward for anyone who used their smoke ball and contracted ’flu. In addition, the Smoke Ball Company stated that it had deposited £1000 in the bank “to show our sincerity in the matter”. The Court of Appeal held that the reward, combined with the bank deposit, showed a clear intention by the Smoke Ball Company to be bound by the terms of the advert, and so the advert constituted an offer.’
3. Write in essay, not report, style. Use paragraphs. Avoid sub-headings.
4. Cite original sources where possible. So, if quoting from a statute, or a case, do not cite the textbook in which you saw that quote. Simply cite the statute or case (which you will find in the textbooks). Remember the University’s plagiarism policy.
5. Don’t forget the technique for the problem (or ‘case-study’) questions (see seminar one): (i) identify the issues. (Start by stating who is suing whom and for what. Then select the likely contestable elements in your cause(s) of action); (ii) state the relevant law for each of these issues; (iii) subject those issues to that law (or ‘apply the law’); (iv) conclude. Note, if the facts are vague, then speculate, eg ‘If it were the case that … then Jones v Patel would apply because …..’ You may go further and suggest alternative outcomes: ‘On the other hand if….’
6 A bibliography of sources used must be listed at the end of the answer.
Negligence in the Business Environment
The business environment operates under the provisions of various legal aspects. One of the above is the law of torts which is the specific branch of law that focuses on civil wrongs such an as negligence. At both the individual and the business level, there is both the financial and legal liability resulting from the occurrence of negligent actions (Kaplan Financial Ltd, 2012). The determination of negligence depends on various factors such as the breach of duty which one party owes the other. In light of the above, negligence cases are lawsuits where either a business or an individual faces accusations from the plaintiff for the failure to act responsibly and thus resulting financial or physical harm to them. The foundation of negligence cases finds their basis upon the general assumption that there is a definite manner that responsible individuals should act. That is, the definition of negligence finds reason upon the guilt that comes with the absence of taking the necessary actions that a rationally reasonable person would do. Under the provisions of the law of tort, a case of negligence requires the plaintiff to show how the defendant’s lack of due responsibility facilitated the happening of the harm to the plaintiff (Hartman, 2016).
Business professionals must thus embrace the fact that there is a substantial liability that results from negligent misstatement that happens in the provision of professional advice. Regarding the law of negligence, a professional party such as a manufacturer is liable for defective products that he or she puts in circulation (Kaplan Financial Ltd, 2012). The same case applies to professional services as well. More so, the duty of care that forms the backbone of the law of negligence requires that a professional provider of products or services ensure that his or her products or services perform in the same way that he or she has depicted them to – unless he or she includes a clause that indicates otherwise.
The aspect of negligent misstatements stands out as an increasing focus area in the law of torts. In practice, however, it is important to note the fact that there is no tangible difference between the kind of legal liability resulting from negligent misstatement and the kind of legal liability resulting from negligent acts. The way an individual party suffers from damage by relying on incorrect advice is similar to the way he or she may suffer from the direct negligent conduct by another party. In the case of a negligent misstatement, however, the subsequent consequences are relatively far-reaching and have the tendency and the possibility to reach out to way too many people. Regarding the developments that have characterized case law over the time, such as decisions relating to the overruling of older provisions in the same field, the legal system has come to the conclusion that it is necessary to have a general relationship or relevant proximity between the injured party and the underlying misstatement that marks the negligence case.
Ideally, the essence of a contractual agreement in professional advice is not primarily necessary as is the liability towards what is reasonable within the contractual agreement. In light of the above, it is necessary to apply a two method system to ensure that not just anybody has the possibility to make claims based on misstatements (Kaplan Financial Ltd, 2012). First, it is necessary that the individual calling for injury compensation stand out as an authentic user of the statement the professional statements provided by the defendant. Second, the professional party that made the statement must be aware of the actual statements upon which the accusation finds its basis. The rationale for the second criteria finds its basis in the fact that a business professional usually provides numerous advice statements and must be duly notified the exact one that resulted in the occurrence of harm to the plaintiff (Kaplan Financial Ltd, 2012). The following example provides extensive description of the situation highlighted above. An accountant may negligently misquote the financial statements of his company and feature an overvalued figure of the company’s assets. The reason for doing so might be the awareness of the financial crisis of the company and its search for investors. Meanwhile, the company finds an investor who is ready and willing to merge with the company. However, the decision of the investor finds its basis on the overstated financial figures in the statement records manipulated by the accountant. In the long-run, the merger between the investor and the company fails. Ideally, there exists a duty of care between the investor and the company accountant. Notably, the accountant is liable for all the resulting losses by the investor. In claiming the loss, in this case, the investor features the use of misstated financial statements as the reason behind his losses – thus meeting the provisions of the first criteria above. Additionally, the accountant knows the overvalued asset value is the reason for the misstatement accusation, thereby meeting the provisions of the second criteria necessary to fully certify a case of professional misstatement negligence.
There are a number or ways and steps that a professional may apply in the pursuit of excluding as well as avoiding the liability that comes with professional misstatement negligence (InBrief, 2015). One of the most appropriate steps is the use of professional guidelines. Ideally, there are various professional procedures that exist across various industries that provide the legal standards that the professionals in the specific industrial sectors should apply in the undertaking of professional contracts with their clients.
The second step to avoid the liability arising from misstatement negligence is through the application of the provisions of the Unfair Contract Terms Act of the year 1977. According to the above act, there is a possibility to exclude liability especially if it is reasonable (InBrief, 2015). To successfully avoid the liability according to the provisions of the above act, it is necessary for the professionals to understand all the extents of the negligence and all the resources that would be necessary for the process.
The third step features the acquisition of professional negligence insurance. With the increase in the cases of professional misstatement negligence, there are quite some policies customized to meet professional indemnity relating to the above. Ideally, such indemnity policies spread the liability such that the professionals only bear a fraction of the entire risk while the rest is upon the insurer (InBrief, 2015).
Finally, the fourth step features the application of the provisions according to the Companies Act of the year 2006. Notably, the above act allows a company as well as its internal auditors to enter into an agreement that relatively reduces the extent of liability towards the auditors resulting from misstatement negligence cases (InBrief, 2015). However, the above Act requires the disclosure of such an agreement both in the director’s report as well as the company’s accounts.
Elements of Negligence in a Case: Sanjit & Tina vs. Roger
In the situation where a plaintiff seeks compensation for injuries arising from the negligent actions of the defendant, there are many provisions that must hold true for the defendant to be proven liable for the claims by the plaintiff. Ideally, the necessity to establish the above provisions comes from the fact that negligence, in its sense of law, stands out as a failure to act out in the manner that a reasonable person under the given circumstances would have done. In light of the above, it thus becomes necessary for the plaintiff to provide substantial proof that the defendant is by all means liable.
Consequently, Sanjit and Tina, in the pursuit of seeking compensation from Roger for his act of negligence, must be in a position to provide the following three aspects. First, Sanjit and Tina must prove that Roger owed them a duty of care. The second thing that Sanjit and Tina must prove to the courts in the pursuit of getting compensation from Roger is the fact that Roger breached the identified breach of the duty of care (if it is identified). Finally, the third thing that Sanjit and Tina must prove to the courts of law is that the personal injuries for which they seek compensation from Roger are as a result of the breach of the duty of care by Roger (Barnett v Chelsea and Kensington Hospital Management Committee, 1967). The success of the compensation claim by Sanjit and Tina against Roger depends on how well each of the above three things stands out in the case.
In light of the above, it is necessary to establish what facilitates the duty of care in cases concerning negligence. In the process of determining whether Roger owed the duty of care to Sanjit and Tina, the court must account for specific legal policy factors and principles. Some of the factors include the kind and extent of harm suffered by the plaintiff, the control over the situation by the defendant, as well as the vulnerability of the plaintiff (Paris v Stepney Borough Council, 1950). Additionally, the relationship between the defendant and the plaintiff as well as various ethical and moral considerations also feature as necessary factors necessitating the establishment of the duty of care. In some cases, it is relatively easy to establish the existence of the duty of care. However, it is significantly complex in others.
After establishing the existence of the duty of care, the next aspect important in the necessitating of compensation follows – the establishment of the breaching of the identified duty of care. Notably, there are some key aspects that facilitate proof for breaching the duty of care. Ideally, Sanjit and Tina must be in a position to prove that Roger knew about the risk of such an occurrence, that is, reasonable foreseeability (Donoghue v Stevenson, 1932). The other provision that Sanjit and Tina must be in a position to prove is that the significance of the risk. Finally, it is important for Sanjit and Tina to prove that a reasonable person in Roger’s position would have undertaken various precautionary measures in the pursuit of avoiding the risk (Chapman v Hearse, 1961; Swain v Waverley Municipal Council, 2005). Notably, the national statutes help in the establishment of the considerations for determining what a reasonable person would do in a given risk situation.
Upon the establishment of the duty of care and proving that the defendant breached the identified duty of care, it is finally important to illustrate that the injuries or damage upon which the plaintiff seeks compensation are a direct result of the defendant’s breach of contract (Bolton v Stone, 1951). That is, establishing the causation. The above conclusion means that there must be a direct connection between the defendant’s duty of care breaching allegation with the harm or injury sustained b y the plaintiff. It is a question of fact (Paris v Stepney Borough Council, 1950).
In light of the above, the pursuit of Sanjit and Tina in seeking
compensation from Roger for the injuries sustained in the accident may proceed
as follows. First, Roger owes care of duty to both Sanjit and Tina. As a
certified driver, Roger has sworn to drive with utmost care bearing in mind to
observe the driving regulations for the purpose of necessitating the security
of his life, the life of his passengers such as Sanjit, as well as the life of
pedestrians such as Tina. By losing control for no apparent reason, it means
that Roger was driving carelessly. Therefore, he breached the duty of care he
owed to both his passenger Sanjit and the pedestrians, such as the victim Tina.
The breach on the care of duty is strong since he was must have been aware of
the risk of unfocused driving. More so, the risk was significant concerning
injuries sustained by the victims as a result (Paris v Stepney Borough Council,
1950). More so, in the position of Roger, a reasonable would net drive without
focus, especially within the vicinity of a school. However, the causation
aspect varies between the two plaintiffs. For Tina, it is easy to get full
compensation for her injuries since Roger’s careless driving is the only
primary reason behind her injuries. However, the case for Sanjit is relatively
different. Although he might be in a position to receive compensation, it will
only be a fraction of the entire compensation. The rationale for the above
finds its basis in the fact that his lack of wearing the seat belt may have
played a significant role too in his sustenance of the head injuries as a
result of Roger’s negligence (Soper v GCCC, 2015).
Barnett v Chelsea and Kensington Hospital Management Committee, E.R. 1068 428 (Queen’s Bench Division 1967)
Bolton v Stone, E.R. 1078 850 (House of Lords 1951)
Chapman v Hearse, CLR 112 106 (High Court of Australia 1961)
Donoghue v Stevenson, Hist.Pols.258.2 562 (House of Lords 1932)
Hartman, D. (2016). Negligence & Business Duties. [online] Chron. Available at: http://smallbusiness.chron.com/negligence-business-duties-20835.html [Accessed 1 Feb. 2016].
InBrief. (2015). Professional Liability: Avoiding and Excluding Liability. [online]InBrief – UK. Available at: http://www.inbrief.co.uk/regulations/professional-liability.htm [Accessed 1 Feb. 2016].
Kaplan Financial Ltd. (2012). Professional Advice and Negligent Misstatement. [online]Kaplan Financial Ltd. Available at: http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Professional%20advice%20and%20negligent%20misstatement.aspx [Accessed 1 Feb. 2016].
Paris v Stepney Borough Council, E.R. 42 367 (House of Lords 1950)
Soper v Gold Coast City Council, QCA 118 1 (Court of Appeal 2015)
Swain v Waverley Municipal Council, HCA 4 256 (High Court of Australia 2005)
Potential Liability for Negligent Misstatement
According to Christensen, Duncan, and Walsh (2014), liability for negligence arises in cases where a duty of care owed to an individual is breached and a loss incurred or caused to the person as a result of the said breach. While there are various categories of negligence, liability incurred following negligent misstatement is of significant concern. Morgan (2009) assert that negligent misstatement arises where one party offers a careless statement to another whereby the relationship dictates that the former owes the latter a duty of care. Moreover, Christensen, Duncan, and Walsh (2014) state that the negligent misstatement is actionable in tort if the former (Party A), breaches a duty of care in such a way that the statement or advice causes damage or loss to or for the claimant. For instance, if the statement or advice makes the advisee to enter into a contract that leads to a loss or damage, the advisor is liable. However, as stated in Chaudhry v Prabhakar 1989, it is important for the party offering the advice should have special skills in the particular field failure to which, as stipulated in Mutual Life & Citizens Assurance v Evatt 1971, it is not liable to any loss the claimant incurs (Morgan, 2009).
The professional has the duty to provide accurate information for which the client acts upon. For instance, in the real estate industry, real estate agents have the duty to provide advice or information to potential buyers, value analysts must provide advice on the values to the client or any other third parties, and solicitors have the duty to provide third parties with accurate information on property as seen in Ross v Caunters 1980. The professional, in the given instances, should ask what advice the client requires due to the non-existence of a contractual duty. When the client suffers loss from the advice given, there is a need to analyze what the situation would have been had the professional given the correct information or advice. However, the determination of whether the professional was aware that the advice would be relied on is important as stated in JEB Fasteners v Marks Bloom & Co 1983 (Morgan, 2009). Moreover, in reviewing the case on the basis of causation, there is a need to determine what the client would have done if the negligent misstatement had not been made.
As stipulated in the case of Hedley Byrne v Heller & Partners 1964, significant proof that there is professional breach of duty to the client that caused loss to the client counts as negligence. The proof that the breach caused the loss and the consideration of the possible outcomes had the breach of contract not occurred serves an important role in the determination of the negligence. Liability occurring from the inability of the professional to advise the client accordingly or the failure of the professional to warn the client amounts to a breach of contract, in this case negligence misstatement. The law follows that the required information or advice should have been given in accordance to the contract. The professional must consider the different alternatives or options available before advising the client. Moreover, there is a need for balancing the probabilities and understanding that had the professional offered the true advice then the client would not have incurred a loss by entering a particular transaction or contract. However, as in Weller v Foot and Mouth Research Institute (1966), in cases of pure economic loss the claimant cannot recover their claims from the defendant.
Moreover, in the application of the causation to breach of professional duty, the test is subjective and dependent on proof that had the professional offered the correct or true advice then the client would have acted on the advice and refused to enter the transaction. The law, through the court system regards all of the circumstances to determine with certainty the state of mind of the client in the quest to determine the possibility of acting on or failing to act on the advice. If the proof shows that the client would not have taken the right professional advice in any event places certainty in denying the client compensation for any loss accrued from the breach of the professional duty. In addition, in cases where the professional fails to offer relevant advice or provides negligent advice, the client must prove that had s/he received the correct advice, s/he would have acted differently by failing to enter the relevant transaction (Christensen, Duncan, & Walsh, 2014).
Morgan (2009) identifies types of liability arising from civil or criminal offences. Criminal offences occur when the professional advisor breaches a government imposed law. Such laws govern the relationships between the state and entities. On the other hand, civil offences occur when the advisor breach a contract reached with the client. As such, liabilities occurring from criminal offences assert that the professional advisors commit acts like fraud and insider trading which breach a criminal law such as offering inappropriate audit opinion. Moreover, the breach of civil laws gives the claimant the chance to sue the professional advisor for negligence that causes the loss or damage to him or her.
The professional advisor can take various steps to avoid liability from negligent misstatement. To start with, the avoidance of negligence is critical for any professional and ensures the avoidance of liability that may arise from the reckless and careless advice. The professional must always follow the code of ethics and the contractual agreement or any other agreements to the latter. Apart from this, another critical way of avoiding liability is through exposure of the professional to litigation from other parties to whom s/he has not disclaimed liability. Auditors include a disclaimer of liability to the parties benefiting from the advice or statements made in their audit reports (Royal Bank of Scotland (RBS) vs Bannerman Johnstone MacLay). Additionally, liability limitation agreements are critical for avoiding liability. For instance, the application of liability limitation agreements reduces the threat clients pose of litigation (Christensen, Duncan, & Walsh, 2014).
conclusion, if the professional advisor offers a negligent advice or a
statement to another person in whom he or she owes a duty of care then the
advisor is liable and the determination of the different facts determines the possibility
of the claimant receiving compensation from the advisor. For instance, the
advice given must have been required for a purpose, generally described or
particularly stated, and which is made known either inferentially or actually to
the professional advisor at the time of giving the advice. Additionally, as
stipulated in Caparo Industries plc v.
Dickman and in JEB Fasteners v Marks
Bloom & Co (1983), the advisor must have knowledge that the
communication of the advice to the advisee will be used for the particular
purpose outlined. Also, the court must determine that the advice was used and
that it caused the detriment the client demands. However, the advisor and the
client must prove the arguments in consideration of what would have happened
had the right advice been given.
Christensen, S., Duncan, W. D., & Walsh, T. (2014). Professional liability and property transactions. Annandale: Federation Press.
Morgan, L. (2009). The law relating to negligent misstatement and its impact on professionals such as Accountants and Solicitors. The New Researcher, 1 , 24-27.
Chaudhry v. Prabhakar 1989
Mutual Life & Citizens Assurance v. Evatt 1971
Ross v. Caunters 1980
JEB Fasteners v. Marks Bloom & Co 1983
Hedley Byrne v. Heller & Partners 1964
Weller v. Foot and Mouth Research Institute (1966)
Caparo Industries plc v. Dickman 1990
Royal Bank of Scotland (RBS) v. Bannerman Johnstone MacLay