This tort of negligent misrepresentation is about when you go and see a professional for advice, where there is a duty of care owed to you and there is negligence when providing that advice that causes you financial loss.
That would provide you a cause of action when the person makes a negligent statement or provides negligent advice which you rely upon
to your financial detriment, the key is to show that a duty of care existed to prevent economic loss.
Indeterminacy of liability
It is important to understand the principle of ‘indeterminacy of liability’ which deals with determining whether duty of care exists as a policy consideration where if it were recognised in some cases it would impose indeterminate liability on the defendant. For example inaccurate information can be passed from one person to another and there is a risk that liability in negligence would expose the defendant to liability ‘in an indeterminate amount for an indeterminate time to an indeterminate class': Ultramares Corporation v Touche (1931) 255 NY 170, 179 (Cardozo J).
In short the extent of the liability must have its limits as least to the number, nature and size of the liability due to the negligence : Perre v Appand (1999) 198 CLR.
You can imagine this scenario would apply to people who provide financial advice for instance and make statements about what they advice, they may not be able to control how far that advice is passed on with people relying upon it. A clearer example may be an audit report of a companies accounts, which may be used by a variety of groups and for a myriad of purposes including current and prospective shareholders, lenders, employee's, suppliers and customers. This makes it difficult to determine precisely who will rely upon those reports and for what precise purpose, the liability may be indeterminate.
‘Salient features’ that will determine the existence of a duty of care to prevent economic loss
To prove negligence in this case, you must prove that firstly it was reasonably foreseeable that you would suffer economic loss from relying on the representations, and its necessary to show that the relationship between the parties possessed certain ‘salient features’ that give rise to a duty of care.
In this category of case, the ‘salient features’ that must be established are:
- The defendant knew, or the circumstances must be such that the defendant should have known, that the recipient of the information or advice intends to act on that information or advice in connection with some matter of business or serious consequence; and
- It was reasonable in all the circumstances for the recipient to rely on that information or advice.
In making the determination of whether it was reasonable in the circumstances to rely on the information and advice, the Courts will consider :
a) The Nature of the Subject Matter : Was the information or advice on a serious topic? (1981) 140 CLR 245.
b) The circumstances in which the advice was conveyed : (1981) 140 CLR 22.
c) Whether the advice was requested or unsolicited? : (1986) 162 CLR 241.
d) Whether the defendant is in the business of providing advice of that kind : (1968) 122 CLR 556.
e) The relative capacity of the parties to obtain information : (1981) 140 CLR 22.
f) The vulnerability of the plaintiff : (2001) 206 CLR 1, (2014) 244 FCR 1.
g) The effect of a disclaimer of liability clause : (1964) AC 465, (2014) 244 FCR 1. - Much will depend on the wording of the disclaimer and whether it negates the precise factual representation that has been made. Essentially a defendant who is a professional in the business of giving advise to be relied upon can not avoid liability merely with a standard form disclaimer.
Example 1 : Where there was no duty of care.
In Tepco Pty Ltd v Waterboard (2001) 206 CLR 1, Tepco wanted to obtain some land but was advised he needed to obtain the agreement of the waterboard to connect water to the land in order to rezone from rural to residential. Tepco made a number of requests to the Waterboard about costs involved in connecting the water, the board eventually came back with an estimate of $2.5M to connect water.
The Bank of Tepco decided on the basis of the Waterboard's estimate that the project was not viable and withdrew finance. Tepco later discovered that the cost of connecting the water was much less than the $2.5M estimated and sued the Waterboard, however High Court held that the Waterboard owed no duty of care to Tepco to provide an accurate estimate, because the board was not informed the precise purpose of the estimate (for the bank finance), secondly the estimate was made clear to be only provisional and ballpark implying its not to be relied upon and finally it was held Tepco was not vulnerable as they were receiving expert advice from land development consultants, who were just as competent to provide an expert of land costs.
Example 2 : Where there was a duty of care.
In ABN Amro Bank NV v Bathhurst Regional Council (2014) 224 FCR 1, Investment Bank ABN Amro developed a product which it intended to sell to local councils through an intermediary, called Local Government Financial Services (LGFS), they engaged a credit ratings agency Standard & Poor's to give the product a credit rating, for which they earned the highest AAA credit rating, that rating was negligent and misleading as S&P had not taken into account the volatility of the product and S&P later downgraded the rating to BBB+ and the product flopped in value by 75% (35% of their tax value). ABN Amro, LGFS and the Council suffered loss when they cashed out of the investment following the GFC, they commenced proceedings against S&P for negligently misrepresenting that the products were a AAA investment.
S&P was held to be negligent and owed a duty of care to the parties despite the disclaimer S&P had on their rating of the product.