1. THE LAW OF COMMERCIAL CONTRACT Negligent Advice Sweeney & O’Reilly 1 st Ed. pp 42 – 50 2 nd Ed. Pp 63 - 70

2. THE LAW OF COMMERCIAL CONTRACT Elements of Negligence 1.Defendant owed a duty of care to the plaintiff to take reasonable care to prevent him for suffering injury, loss or damage 2.There was a breach of the duty of care by failing to adhere to the standard of care expected 3.The breach of duty caused damage to the plaintiff 4.The plaintiff suffered damage that was of a kind which was reasonably foreseeable i.e. was not too remote

3. THE LAW OF COMMERCIAL CONTRACT Duty of Care – Negligent Advice  When is a duty of care owed for negligent advice:  Prior to 1963 – Never  Hedley Byrne & Heller established there could be a duty of care in giving advice  High Court has confirmed in L Shaddock & Assoc v Parramatta City Council (S&O p 43\64)

4. THE LAW OF COMMERCIAL CONTRACT Duty of Care – Negligent Advice (cont.) “Whenever a person gives information or advice to another upon a serious matter in circumstances where the speaker realises, or ought to realise, that he is being trusted to give the best of his information or advice as a basis for action on the part of the other party and it is reasonable in the circumstances for the other party to act on the information or advice, the speaker comes under a duty to exercise reasonable care in the provision of the information or advice he chooses to give” - per Barwick CJ in MLC v Evatt (S&O p 44\64)

5. THE LAW OF COMMERCIAL CONTRACT Elements 1.Give information or advice 2.On a serious matter 3.Speaker realises, or ought to realise, he is being trusted 4.It is reasonable for recipient to act on advice See Tepko v Water Board S&O 2 nd Ed. p 64)

6. THE LAW OF COMMERCIAL CONTRACT Duty of Care – Negligent Advice (cont.)  A duty of care can exist between parties:  During pre contractual negotiations  Esso v Mardon (S&O p 44\65)  As part of a concluded contract  After the contract?  Kite v Malycha (1998) SASC 6702

7. THE LAW OF COMMERCIAL CONTRACT Duty of Care of Auditors  Information is not provided at the request of the recipient  Contract is between company and auditor  Audit report is a public document  May be relied on by others  No contract between auditor and others

8. THE LAW OF COMMERCIAL CONTRACT Duty of Care of Auditors (cont.)  Audit Report may be relied on by  Company  Shareholders  Investors  Bankers  Creditors

9. THE LAW OF COMMERCIAL CONTRACT Duty of Care of Auditors (cont.)  A duty of care may exist  San Sebastian Pty Ltd v The Minister (1986) 162 CLR 340  A precise description when and to whom an auditor owes a duty of care has proved to be elusive  It is not easy to establish a duty of care for an auditor

10. THE LAW OF COMMERCIAL CONTRACT Duty of Care of Auditors (cont.)  English Approach Caparo Industries v Dickman (S&O 1 st Ed p 45) 1.Advice is required for a purpose which is made known to the advisor 2.The advisor knows that his advice will be communicated to the recipient 3.The advisor knows that the recipient will act on the advice without further inquiry 4.The recipient acts on the advice to its detriment

11. THE LAW OF COMMERCIAL CONTRACT Duty of Care of Auditors (cont.)  Caparo Industries v Dickman (S&O p 45)  Based on English requirement for a “special relationship” to exist before can claim for pure economic loss  Perre v Apand has expand class of potential claimants in Australia

12. THE LAW OF COMMERCIAL CONTRACT Duty of Care of Auditors (cont.)  Australian Approach  Esanda Finance Corporation v Peat Marwick Hungerfords (S&O p 47)  R Lowe & Lipman v AGC (Advances) (S&O p 47)  These decisions were before Perre v Apand

13. THE LAW OF COMMERCIAL CONTRACT Duty of Care of Auditors (cont.)  However, creditors or shareholders can wind up company and liquidator can sue auditor  Such actions are often funded by creditors or shareholders on basis they receive a greater share of the distribution  e.g. Southern Equities Corp v Arthur Andersen & Co [2002] SASC 148

14. THE LAW OF COMMERCIAL CONTRACT Factors Affecting Duty of Care  Did recipient request advice (Shaddock’s case)  Did defendant assume responsibility for risk being taken by recipient (Esanda case)

15. THE LAW OF COMMERCIAL CONTRACT Factors Affecting Duty of Care (cont.)  Otherwise  Was advisor aware that recipient could by injured by advisors words or conduct  Degree of recipient’s vulnerability (Perre v Apand)  Advisor’s knowledge of recipient’s vulnerability (Perre’s case)  Did advisor intend recipient to act on the advice  Can the class of recipients be ascertained (Hill v Van Erp (S&O p20\30)

16. THE LAW OF COMMERCIAL CONTRACT Standard of Care  That which the community reasonably expects from a person of those qualifications  Persons professing to be specialists within a profession have a higher standard of care  Rogers v Whittacker (1992) 175 CLR 479

17. THE LAW OF COMMERCIAL CONTRACT Remoteness of Damage  Recipient must prove that  Losses were not too remote; and  Losses were caused by the negligent advice  Kenny & Good v MGICA (S&O p 49\71)  Advisor may be liable for primary loss but not consequential loss

18. THE LAW OF COMMERCIAL CONTRACT Disclaimers  A disclaimer may remove the duty of care  Hedley Byrne v Heller (S&O p 49\69)  As against a contracting party, a disclaimer acts as an exclusion clause and the usual rules apply

19. THE LAW OF COMMERCIAL CONTRACT Exam Problems Semester 1, 2001