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Liability for Negligent Professional Advice 代寫


 
Liability for Negligent Professional Advice 
 
Objectives - to understand:

  • the difference between a breach of contract action and an action in tort
  • the elements required to be proved in an action for negligence
  • liability for negligent mis-statement at common law
  • the need for statutory intervention
  • liability for negligent professional advice under the CCA and FTAs (misleading or deceptive conduct).
 
 
 
 
 
 
The Law of Negligence cont’d ... 
What is a tort?
  • a civil wrong (as opposed to a criminal wrong), other than a breach of contract, which the law will redress by an award of damages
  • distinguish between an action for breach of contract and an action in tort for negligence
Also note underlying policies:
  • criminal law: punishes the offender
  • tort liability: primarily compensates person injured.
 
 
 
 
 
 
 
 
 
 
The Law of Negligence cont ... 
Elements: traditional order of analysis -
  The injured party (plaintiff) must prove that:
(i)  the defendant owed them a duty of care
    Donaghue v Stevenson, per Lord Atkin (‘snail in the bottle’ case)
(ii) the defendant breached required standard of care – and
(iii) the breach caused the damage which was not too remote
 
 
 
 
 
 
 

 
 
 
The Law of Negligence cont ... 
 
Defences:
  • voluntary assumption of risk (consent to risk) by plaintiff - if so, defendant not liable
  • contributory negligence by plaintiff – ie. conduct by injured party which prevents their right to full recovery for loss suffered - if so, damages are apportioned.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Law of Negligence cont ... 
 
Liability for negligent mis-statement at common law: 
  • traditional reluctance to grant remedy for negligent advice leading to purely financial loss
  • concern not to ‘open the floodgates of litigation’
  • but see Hedley Byrne & Co Ltd v Heller & Partners Ltd (House of Lords): -
cause of action depends on the existence of a ‘special relationship’ between the parties
  • this concept an extension of neighbour principle of Donaghue v Stevenson.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Law of Negligence cont
Negligent mis-statement at common law (cont): 
  • note test in Shaddock & Associates Pty Ltd v Paramatta City Council where High Court broadened scope of duty of care: -
special relationship can exist even where advisor does not profess to possess any actual skill or judgment. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Law of Negligence cont ... 
Negligent mis-statement at common law (cont): 
  • test requires:
       (i) advice upon a serious matter and
(ii) circumstances justifying reasonable reliance (eg. financial advice, but not when given in social context). 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
Law of Negligence -v- TPA 
The need for statutory intervention arose out of difficulties at common law
(i) plaintiff must establish three pre-conditions of liability
    ie. duty of care; breach of required standard of care/negligence; and consequential loss or damage
(ii) doubt as to whether professional liability (eg. of auditors) extends to third parties: -
     - courts in both England and Australia have adopted a test which may make it hard (but not impossible) for third parties to successfully sue auditors and other professional advisors:
See: Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (HC).
 
 
 
 
 

 
The need for statutory intervention (cont):
High Court in Esanda established a test for duty of care to a third party-
To be successful, third party (C) must prove: 
  • communication: defendant auditor (A) knew (or ought reasonably to have known) that the information or advice given to B (A’s client) would be communicated to C (or a class of which C is a member), and
  • purpose: would be very likely to lead C to enter into a transaction of the kind C usually enters into, and
  • reliance: it would be very likely that C would enter into such a transaction in reliance on the information or advice from A and thereby risk suffering economic loss. (See case note over page)
·       Esanda Finance Corporation Ltd v Peat Marwick Hungerford (1997) 23 ACSR 71 (HCA) (In this case the High Court sets out public policy reasons for setting limits to potential liability of accountants and auditors to non-client plaintiffs who may later rely on certified financial statements but with whom the defendant has had no direct contact)
Date: May 1997
Title: Case Note on the Esanda Finance Case
Conclusion: Accountants, auditors and other professional advisers et al have cause to celebrate as third party liability has been severely restricted by the High Court of Australia
Ever since the classic decision of the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners ([1964] AC 465) which established that there may be liability in tort for a negligent mis-statement in circumstances where information or advice is provided by a person who possesses some special skill or judgment – and that person knows, or ought to know, that reliance is being placed on that information or advice – there has been a real concern as to how far that particular finding might go. So, for example, does an auditor who provides a report to a company have a responsibility to others who might rely on that report – eg. investors, lenders etc? What if the report is used by the company in seeking funds from a third party? It provides the lender with information about the company's financial position including the auditor's report. Is the auditor liable to that third party if the report is prepared negligently? Certainly the auditor will be liable to the company for whom the report is prepared, but will the auditor be liable to the third party? The High Court of Australia has now provided some guidance on this question – Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (Reg) (judgment delivered on 18 March 1997).
There are many situations in which a report is prepared or information is gathered by a person with skill and that report is relied on, not only by the person for whom it has been prepared, but also by others in circumstances where it might be said to be reasonable for that other person to rely on that report or information. These persons include banks, investment analysts, and even local councils. The classic scenario is in cases involving auditors whose reports are of course relied on not only by the company for whom it is prepared, but also by shareholders in the company and possibly by others. The New Zealand Court of Appeal ruled in a vital decision of Scott Group Ltd v McFarlane in 1977 ((1978) 1 NZLR 553) that the auditor's liability could be extended to third parties – someone who obtained the auditor's report and relied on it even though the report was not prepared directly for that person. Following the decision in Scott Group Ltd there was vigorous debate in this country and elsewhere as to how far the law should go in extending the liability of an auditor, or a person in the auditor's position, to third parties. There is a classic statement by Justice Cardozo in the US Federal Court in Ultramares Corporation v Touche (174 NE 441 (1931)) where he noted that to allow third parties to sue the auditor in the type of situation being discussed would be to expose auditors to "liability in an indeterminate amount for an indeterminate time to an indeterminate class". In those circumstances Cardozo J was not prepared to hold that as a general principle a person in the position of an auditor would be liable in those circumstances to third parties.
The decision in Hedley Byrne was followed by a number of important Australian decisions in which the courts adopted the general principle that liability for negligent mis-statement can arise where there is a special relationship between the parties. In particular the High Court developed appropriate statements in cases such as Mutual Life & Citizens Assurance Co Ltd v Evatt ((1968) 122 CLR 556) and San Sebastian Pty Ltd v The Minister ((1986) 162 CLR 341).
Contrary to the widely accepted view, the High Court now accepts that reasonable foreseeability of a risk of harm alone is not sufficient to create a duty of care and diligence. If reasonable foreseeability of a risk of economic harm was the only criterion then there would be a real risk, in the view of McHugh J, that many cases would create the kind of liability that Cardozo J referred to in his classic statement set out above. So, in the San Sebastian case the court held that there was no duty of care owed to a developer who claimed damages from a council in obtaining authority on the basis that it had suffered loss by relying on representations contained in documents adopting a scheme to redevelop a suburban area of Sydney. The defendant Minister had done nothing in adopting the scheme to accept responsibility to the plaintiffs. That sort of situation is quite different from a situation where the auditor is preparing a report which is likely to be relied on by a group of persons including the shareholders of the company and potential investors.
The House of Lords was given an opportunity to consider this matter directly in the context of a company auditor in the important decision of Caparo Plc v Dickman ([1990] 2 AC 605). In that case the House of Lords unanimously held that the auditor's report was prepared to provide information to the company and to the shareholders so that they might exercise their rights in those respective capacities, but not to provide information to others – investors in the company.
But as summarised by Dawson J in the Esanda case:
"Informing potential investors in the company lay outside the purpose of the report and no duty of care was owed by the auditor to those parties."
In Australia the Caparo decision was followed in Victoria in the case of R Lowe Lippman Figdor & Franck v AGC Ltd ([1992] 2 VR 671), but at about the same time it was rejected and distinguished by a New South Wales Supreme Court Justice in Columbia Coffee & Tea Pty Ltd v Churchill ((1992) 29 NSWLR 141) in circumstances quite similar to the circumstances that finally came to the High Court in the Esanda case.
This case is an important one even though it is basically one limited to a claim to have pleadings struck out at an early stage. The summary of the facts is taken in part from the judgment of Chief Justice Brennan in the High Court. Five separate judgments were delivered by the High Court from six judges – a most unfortunate scenario because when the judges do not agree on all relevant factors, the statement of what the case stands for becomes a bit confused.
The issues in this appeal arise on the pleadings in an action in which the appellant (Esanda) sued the respondent company Peat Marwick Hungerford (PMH) claiming inter alia damages for pure economic loss resulting from the negligence of PMH in connection with its auditing of the accounts of a corporation (Excel). In its pleadings Esanda alleged that PMH were the auditors of Excel and furnished to the members of Excel a report stating that it had audited the accounts of Excel for the year ended 30 June 1989 in accordance with the Australian Auditing Standards and Reporting. The auditors indicated that the accounts were properly drawn up and gave a true and fair view of the affairs of the company.
Esanda was not a shareholder of Excel; it was a financier which entered into a number of transactions involving Excel or corporations associated with Excel. Esanda claimed that PMH were negligent in preparing their report, that they had relied on it, and that therefore they could sue for damages. The South Australian Supreme Court struck out certain paragraphs from the Statement of Claim which were based on the alleged negligence of PMH. In doing so the South Australian Full Supreme Court ruled that there was no duty owed by PMH to Esanda. The plaintiff argued that because the report had been prepared in accordance with the generally accepted accounting principles referred to earlier, and this prescribed the standard of skill, care and competence which an auditor who purports to be performing a professional duty is required to observe, it was reasonable for Esanda to rely on the report.
The High Court had to consider whether an auditor owed a duty to a third party such as Esanda in circumstances of this kind. That had certainly been the view taken by Rolfe J in the Columbia Coffee case referred to earlier but had been distinguished by the South Australian Full Supreme Court. The Victorian Full Court in the Figdor case referred to earlier had indicated that it would not support such reasoning, relying on the Caparo case to reach that view.
In an unanimous judgment dismissing Esanda's appeal the High Court held that there was no liability owed by PMH to Esanda.
The judgments range from a very strong statement by Brennan CJ to a decision by Toohey and Gaudron JJ, a joint judgment which suggests that we will see the Esanda case distinguished where appropriate if the facts are relevant.
Brennan CJ held that in every case where information or advice is given by someone like PMH to a client (in this case Excel) and then passed on by that company to a third party, that third party in order to prove that it can rely on the statement to claim damages must allege and prove a number of matters. To succeed the plaintiff had to show that the auditors knew or ought to have known that:
1. The statement provided etc, was given on the basis that it would in fact be conveyed to that third party (whether by the company or by someone acting on behalf of that company).
2. That it would be conveyed for a purpose which was likely to be relied on by the third party.
3. That the third party would be very likely to act in reliance on that advice, thus running the risk of suffering loss if the statement was untrue or the opinion was unsound.
That approach was supported to a large extent by Dawson J.
The other three judges however went off on different tangents. McHugh J felt that policy considerations were instrumental in his decision not to extend liability to the auditor in such circumstances. In the first place, any extension of liability would lead to a reduction in the supply of auditing services because auditors would be fearful that they could be at risk in litigation of this kind. This would also result in a reduction in the demand for auditing services because the fees would be increased. Perhaps even the quality of the auditing work undertaken would be affected.
Other public policy grounds relied on by McHugh J to reach his conclusion were the fact that lengthy claims against auditors would be brought and this would tend to clog up the courts in a way that was completely unsatisfactory. Creditors and shareholders already have an indirect remedy against the auditors; further, the liquidator could bring an action on behalf of the company in the appropriate case – thus there was no need to extend liability to another group of persons. In any event, every case would be a very difficult one on the facts and this would again be counter-productive in the context of the provision of auditing services and the way in which people would react to judgments of this kind.
Gummow J also was driven by policy considerations. In his view a supplier of information such as an auditor should be made liable in negligence to a third party only if it intends to provide the information for the benefit of one or more third parties in the specific transaction. However, as this was only a strike out action (that is an action to strike out the pleadings) he was not prepared to lay down firm criteria to deal with every scenario.
Finally (and this is where some doubt is thrown on the strength of this decision), Toohey and Gaudron JJ in a joint judgment said that there could be a separate situation when the auditor would be liable.
"It may be accepted that, as Excel's auditors, PMH were in a particularly advantageous position to know or to assess Excel's true financial position. However, there is nothing to suggest that Esanda was not itself able to have accountants undertake the same task on its behalf as a condition of its entertaining the possibility of entering into financial transactions with Excel. And, 

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