Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. (1964)

Before 1963 English law had a hole in it, and everybody knew where the hole was.

If you carelessly did something and injured me, you paid. If you carelessly said something and I lost money by relying on it, you did not — unless you had been fraudulent, or unless there was a contract between us, or unless you stood in a fiduciary relationship to me. Careless words that caused only financial loss were, in effect, free.

Hedley Byrne closed the hole. It established two propositions at once, and they are the two things Indian textbooks describe as the case's contribution: that a duty of care can attach to a statement as well as to an act, where there is a special relationship between the parties; and that where such a duty exists, damages can be recovered for pure economic loss — financial loss unaccompanied by any physical injury to the claimant or his property.

It matters for a second, less obvious reason. Hedley Byrne is the standard example of a case in which the party who lost the appeal won the law. The claimants recovered nothing, because the bank had used a disclaimer. Everything said about the duty of care was therefore, strictly, obiter dictum. That fact is a favourite examiner's trap, and a candidate who states it correctly and explains why the obiter nevertheless became law is showing exactly the understanding of precedent the paper rewards.

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Hedley Byrne & Co. Ltd. were advertising agents in London. In 1958 they were asked to place a substantial programme of advertising — on television and in the newspapers — for a company called Easipower Ltd.

That is where the difficulty began. An advertising agent placing orders with television companies and newspapers does not merely act as a conduit. Hedley Byrne placed the orders on terms that made them personally liable to the television contractors and the press for the cost. If Easipower failed to pay, Hedley Byrne would be out of pocket for the whole amount. Before committing themselves to those orders they naturally wanted to know whether Easipower was good for the money.

So they did what any prudent business would have done. They asked their own bankers, the National Provincial Bank, to make enquiries of Easipower's bankers.

There were two enquiries.

The first, in August 1958, was made by telephone. National Provincial rang Heller & Partners Ltd., Easipower's merchant bankers, and asked in confidence, and without responsibility on the part of Heller, what Heller's opinion was of the respectability and standing of Easipower Ltd., and whether Easipower would be good for an advertising contract of some £8,000 to £9,000. Heller answered that Easipower was "a respectably constituted company, considered good for its ordinary business engagements."

The second, in November 1958, was made in writing, and asked whether Easipower was trustworthy, in the way of business, to the extent of £100,000 per annum. Heller replied on a letter headed with the words on which the entire case turned:

"CONFIDENTIAL. For your private use and without responsibility on the part of this bank or its officials."

The substance of the reply was again favourable: Easipower was respectably constituted and considered good for its ordinary business engagements, with the observation that the figures mentioned were larger than the bank was accustomed to see.

National Provincial passed the substance of the replies on to Hedley Byrne. Relying on them, Hedley Byrne went ahead and placed the orders.

Easipower Ltd. went into liquidation. Hedley Byrne were left personally liable to the television contractors and the newspapers, and lost over £17,000 — a very large sum in 1958.

Hedley Byrne sued Heller & Partners in negligence. They did not, and could not, allege fraud: there was never any suggestion that Heller's officials did not honestly believe what they said. There was no contract between Hedley Byrne and Heller — Hedley Byrne had not even dealt with Heller directly, the enquiry having gone through National Provincial. And there was no fiduciary relationship of the Nocton v. Lord Ashburton kind. The claim was in negligence, pure and simple, for money lost by relying on careless words.

McNair J. found as a fact that Heller had been negligent in giving those references, but held that they owed Hedley Byrne no duty of care. The Court of Appeal dismissed the appeal, holding itself bound by Candler v. Crane, Christmas & Co. (1951), in which a majority had refused to impose a duty on accountants who negligently prepared accounts for a prospective investor, over a powerful dissent by Denning L.J. Hedley Byrne appealed to the House of Lords.

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1. Can a duty of care in the tort of negligence arise in respect of a statement — information or advice — as distinct from a negligent act?
2. If so, in what circumstances? What is the "special relationship" required?
3. Can damages in negligence be recovered for pure economic loss — loss of money with no accompanying physical damage?
4. Did the words "without responsibility on the part of this bank or its officials" prevent any duty from arising, or exclude liability if it did?

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For Heller & Partners, the argument was one of authority, and it looked very strong. Derry v. Peek (1889) had settled that an action for a false statement lies only in deceit, and that deceit requires dishonesty. A merely negligent statement, honestly believed, gave no cause of action at all. Candler v. Crane, Christmas had applied that reasoning to accountants only twelve years earlier. Beyond authority came the policy point later put memorably by Lord Pearce: words are more volatile than deeds. A negligent act is usually confined in its effects; a careless remark can be repeated, passed on and relied on by an indefinite number of people for an indefinite time and for purposes never contemplated. And in any event, they said, the disclaimer was decisive.

For Hedley Byrne, the argument was that Derry v. Peek decided only what constitutes fraud; it did not decide, and could not have decided, that there is no such thing as a duty to take care in speech. The reasoning of Denning L.J.'s dissent in Candler was pressed: where a person with a special skill undertakes to apply that skill for another who he knows will rely on it, why should the law distinguish between the careless surveyor's report and the careless surgeon's knife?

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The appeal was dismissed. Hedley Byrne recovered nothing.

But every member of the House held that, but for the disclaimer, a duty of care would have been owed. The reasoning, in outline:

(a) Derry v. Peek is not an obstacle. That case decided what must be proved to establish deceit. It did not decide that a careless statement can never give rise to liability on some other basis. To read it as closing off negligence altogether was, the House held, to read it far too widely — and Candler v. Crane, Christmas was, to that extent, wrongly decided. Denning L.J.'s dissent was approved.

(b) A duty of care can arise from a special relationship. Lord Morris of Borth-y-Gest gave the formulation that is quoted most often:

"If someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise."

Lord Reid explained the same idea from the other end — from the position of the person asked. Where a reasonable man knows he is being trusted, or that his skill and judgment are being relied on, three courses are open to him. He can keep silent or decline to answer. He can answer with a clear qualification that he accepts no responsibility, or that the answer is given without the reflection or enquiry that a careful answer would require. Or he can simply answer without qualification — and if he takes that third course he must be taken to have accepted a duty to be careful.

(c) The relationship must be "equivalent to contract." Lord Devlin's formula was that wherever there is a relationship equivalent to contract, there is a duty of care — meaning an assumption of responsibility for the task in circumstances in which, but for the absence of consideration, there would have been a contract.

(d) Pure economic loss is recoverable where such a duty exists. This is the doctrinal breakthrough. Damage in negligence had previously meant physical injury to person or property; Hedley Byrne accepted money loss standing alone as actionable damage in this class of case.

(e) But the disclaimer defeated the claim. The words "without responsibility on the part of this bank or its officials" were an express disclaimer of the very responsibility which the law would otherwise have implied. Lord Devlin's reasoning is the crispest: a man cannot be said voluntarily to be undertaking a responsibility if at the very moment when he is said to be accepting it he declares that in fact he is not. Because the duty rests on an assumption of responsibility, an effective disclaimer prevents the duty from arising at all.

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Be precise here, because it is exactly what the question will test.

The ratio decidendi — the reasoning necessary to the actual decision — is narrow: an express disclaimer of responsibility, communicated to the person to whom the information is given, prevents any assumption of responsibility and therefore prevents any duty of care from arising. That, and that alone, decided the appeal.

Everything said about the existence of a duty of care for negligent misstatement was strictly obiter dictum. Once the House concluded that the disclaimer was effective, it was unnecessary to decide whether a duty would otherwise have existed. Their Lordships said so themselves; they considered the question because it had been fully argued and because the state of the law was unsatisfactory.

Why, then, is Hedley Byrne a leading case? Because obiter of this quality binds nobody but persuades everybody. Five Law Lords, unanimous, addressing a question of general importance after full argument, in a case decided precisely so that the point could be settled — that is obiter of the highest possible authority. It was applied within a decade by courts in England, the Commonwealth and India, and has been treated as the foundation of the law ever since. The correct examination sentence is: "The observations on duty were obiter, the case having been decided on the disclaimer; but they have been universally accepted and are now the law."

The principle in its settled modern form. A duty of care arises in respect of a statement where:

1. the defendant possessed some special skill or knowledge, or the enquiry was of a kind that called for a considered answer;
2. the defendant knew, or ought to have known, that the claimant was relying on him for that information or advice;
3. it was reasonable in the circumstances for the claimant to rely on him;
4. the defendant assumed responsibility for the accuracy of what he said — expressly, or by the circumstances in which he said it; and
5. there was no effective disclaimer.

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The gap left by Derry v. Peek

Derry v. Peek (1889) is the necessary background, and no answer on Hedley Byrne is complete without it.

A tramway company's prospectus stated that the company had the right to use steam power instead of horses. The directors honestly believed this. In fact the right depended on the consent of the Board of Trade, which the directors assumed would be a formality; it was refused, the company was wound up, and the shareholders sued the directors in deceit.

The House of Lords held there was no deceit. Lord Herschell laid down what remains the definition of the tort:

Fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false.

An honest belief, however unreasonable, is a complete answer to a charge of deceit. Carelessness is not dishonesty.

The decision was correct on the tort pleaded, but it was widely read as deciding something much larger — that a merely negligent misstatement gives no cause of action at all. Parliament thought the result so unsatisfactory in the case of prospectuses that it passed the Directors Liability Act 1890 the very next year to reverse it in that field. But outside prospectuses the gap remained, and for seventy-four years the person who lost money by relying on a professional's careless words had no remedy unless he had a contract.

Hedley Byrne did not overrule Derry v. Peek; it confined it. Derry v. Peek is still the law of deceit. What Hedley Byrne said is that deceit is not the only tort in the field.

Why words are treated more carefully than deeds

Lord Reid and Lord Pearce both explained why the law could not simply extend Donoghue v. Stevenson to speech. A negligently made ginger beer bottle can injure only the person who drinks it. A negligent statement is different in three ways: it can be repeated and relied on by people the speaker never contemplated; it is often given casually, in social or informal settings, where no one expects legal consequences; and the loss it causes is financial, which means it can be indefinitely large.

The answer to all three problems is the special relationship. The requirement of reliance, known to and accepted by the speaker, does the work that physical proximity does in the ordinary negligence case. It excludes the remark at the dinner table, the advice given off the cuff, and the stranger who happens to overhear.

Why the disclaimer worked

Because the duty is built on a voluntary assumption of responsibility, a clear statement that responsibility is not being assumed removes the foundation. Notice the structural consequence, which is worth stating in an answer: in Hedley Byrne the disclaimer did not exclude a liability that existed; it prevented the duty from arising. That distinction later became critical, because a statute that controls exclusion clauses may or may not catch a device that prevents a duty from arising in the first place.

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1. Mutual Life and Citizens' Assurance Co. Ltd. v. Evatt (1971) PC. A policyholder asked his insurance company for advice about the financial soundness of an associated company. He invested on the strength of it and lost. The Privy Council, by a majority, held that no duty was owed: the Hedley Byrne duty arises only where the defendant carries on the business or profession of giving advice of that kind, or has otherwise let it be known that he claims to possess the requisite skill. Lord Reid and Lord Morris — two of the Hedley Byrne Law Lords — dissented vigorously, saying that the majority had cut the principle down to a fraction of its intended scope.

English law has followed the dissent, not the majority. In Esso Petroleum Co. Ltd. v. Mardon (1976) the Court of Appeal held Esso liable for a negligent forecast of a filling station's throughput given to a prospective tenant, plainly outside the "business of giving advice" limitation. Evatt is best treated in an answer as an aberration that shows how uncertain the boundaries of the principle were in its first decade.

2. Caparo Industries plc v. Dickman (1990) HL — the purpose of the statement. This is the most important modern qualification. Caparo bought shares in a company and then mounted a takeover, relying on audited accounts which, it alleged, had been negligently prepared and gave a misleadingly favourable picture. It sued the auditors, both as an existing shareholder who bought more shares and as a takeover bidder.

The House of Lords held that no duty was owed. Statutory audited accounts are prepared for a specific statutory purpose — to enable the body of shareholders as a whole to exercise informed control over the company in general meeting. They are not prepared to guide investment decisions by individual shareholders or by outside investors. Since the accounts were not made for that purpose, and the auditors did not know that this claimant would rely on them for that transaction, there was no proximity.

The rule to take away is that the purpose for which the statement is made defines the persons to whom, and the transactions for which, a duty is owed. The maker of a statement does not become an insurer for every use to which his words are put. Caparo is also, of course, the source of the three-stage test for duty of care generally — foreseeability, proximity, and whether it is fair, just and reasonable to impose a duty.

3. Smith v. Eric S. Bush (1990) HL — disclaimers cut down. A purchaser of a modest house applied to a building society for a mortgage. The society instructed a valuer, who inspected the house and reported that no essential repairs were needed. The report was passed to the purchaser, who paid the valuer's fee through the society. Both the society's form and the report itself carried a disclaimer of responsibility for accuracy. The valuer had missed a serious defect; a chimney breast later collapsed.

The House of Lords held the valuer liable. On duty, the valuer knew perfectly well that the purchaser would rely on his report and would probably not commission a second survey — reliance was foreseeable, known and reasonable. On the disclaimer, the House applied the Unfair Contract Terms Act 1977, which subjects a notice excluding liability for negligence to a test of reasonableness. In the context of a modest residential purchase, where the purchaser had paid for the valuation and could not realistically afford a second one, and where the valuer carried insurance, the disclaimer was unreasonable and therefore ineffective.

Note the contrast with Hedley Byrne itself and state it: in 1963 there was no legislation controlling such notices, so the bank's disclaimer took effect according to its terms. Today an English court would ask whether the disclaimer was reasonable, and the answer would depend on the parties. Between two commercial parties, a banker's "without responsibility" reference would very probably still be upheld; between a professional and a consumer, it very probably would not.

4. The modern position — assumption of responsibility. In Henderson v. Merrett Syndicates Ltd. (1995) the House of Lords confirmed that the Hedley Byrne principle is not confined to statements at all: it extends to the negligent performance of services where responsibility has been assumed, and it can operate concurrently with a contractual duty. In Spring v. Guardian Assurance plc (1995) it was applied to an employer giving a careless job reference about a former employee. In Williams v. Natural Life Health Foods Ltd. (1998) the House emphasised that the assumption of responsibility must be personal — a director of a company does not assume personal responsibility merely by being the source of the company's advice.

5. The Indian reception. Indian courts have cited Hedley Byrne with approval, but it is important to be honest with the examiner: there is no Supreme Court decision that is to India what Hedley Byrne is to England. The reasons are structural. In India, most of the ground covered by Hedley Byrne is occupied by statute and by other remedies:

• Contract. Where the statement induced a contract, the Indian Contract Act 1872 gives a remedy without any need for a tort. S. 18 defines misrepresentation to include a positive assertion, not warranted by the information of the person making it, of that which is not true though he believes it to be true — which is very close to an innocent-but-careless statement. S. 19 makes a contract induced by fraud or misrepresentation voidable at the option of the misled party, who may either rescind or insist on performance and be put in the position he would have been in if the representation were true.
• Consumer law. Where the maker of the statement was rendering a service for consideration, the misstatement is generally litigated as a "deficiency in service" under s. 2(11) read with s. 2(42) of the Consumer Protection Act 2019 — the route by which claims against banks, valuers, insurers and professionals actually reach the commissions in practice. The 2019 Act's definition of "deficiency" expressly includes any act of negligence and the deliberate withholding of relevant information.
• Company law. For misstatements in a prospectus, the Companies Act 2013 provides civil liability (s. 35) and criminal liability (s. 34) — the Indian successors to the Directors Liability Act 1890.

The safe examination statement is therefore: Hedley Byrne is accepted in India as a correct statement of common-law principle and has been cited by Indian courts, but Indian claimants ordinarily proceed under the Contract Act, the Consumer Protection Act or the Companies Act, and there is no Indian equivalent of Caparo on the duty of auditors.

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This contrast is a standard MU question and is worth setting out as a list.

| | Deceit (Derry v. Peek; ICA 1872, s. 17) | Negligent misstatement (Hedley Byrne) | |---|---|---| | State of mind | Dishonesty — knowingly false, without belief in its truth, or reckless | Carelessness; honest belief is no defence | | Duty required? | No; the tort is committed by anyone who deceives | Yes; a special relationship / assumption of responsibility must be shown | | Remoteness | Defendant liable for all direct consequences, foreseeable or not | Ordinary negligence rules; foreseeability of the kind of loss | | Contributory negligence | Not a defence | A defence, reducing damages | | Disclaimer | Cannot protect a fraudster | Can prevent the duty arising, subject to statutory control of unfair terms | | Indian statutory route | ICA 1872, s. 17 (fraud) — contract voidable under s. 19 | ICA 1872, s. 18 (misrepresentation); CPA 2019, s. 2(11) deficiency |

On s. 17 of the Indian Contract Act 1872, note how closely the drafting tracks Derry v. Peek. Fraud includes "the suggestion, as a fact, of that which is not true, by one who does not believe it to be true" — the second of Lord Herschell's three categories, in almost the same words. A statement made carelessly but honestly is not fraud under s. 17; it falls under s. 18 as misrepresentation. That is the Indian version of exactly the gap Hedley Byrne had to fill.

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