Henderson v Merrett Syndicates Ltd (1994)

Hedley Byrne v Heller (1964) is usually taught as a case about negligent statements: a banker's careless reference. Henderson shows that the principle behind it is wider. According to Lord Goff, it rests on an assumption of responsibility by one party and reliance by the other. It therefore covers the negligent performance of services, not only advice and information.

The case settles two further points:

• Once a case falls within Hedley Byrne, there is no separate hurdle for pure economic loss. The court does not need to ask again whether liability is "fair, just and reasonable".
• A duty in tort can exist alongside a contractual duty covering the same ground. The claimant may choose whichever remedy is more advantageous, unless the contract excludes or limits the tort duty.

The claimants were Names, the underwriting members of Lloyd's, who had suffered very large losses after catastrophic events, mainly in the United States. They sued their underwriting agents. Every Name had to act through an underwriting agent, which could act in one of three capacities:

• members' agents advised Names on which syndicates to join and placed them there;
• managing agents actually underwrote insurance on behalf of the Names in the syndicates they managed, arranged reinsurance and paid claims;
• combined agents did both.

A direct Name was in a syndicate managed by its own (combined) agent, so it had a contract directly with the managing agent. An indirect Name was in a syndicate managed by some other agent. Its own members' agent appointed that managing agent as its sub-agent, so the indirect Name had no contract with the managing agent at all.

The Names alleged negligent underwriting, including negligent closing of years of account by reinsurance to close. They wanted to establish a duty of care in tort. Indirect Names needed it for a direct claim against the managing agents. Direct Names wanted it so they could rely on the more favourable limitation rules in tort, because in one action there was a limitation issue.

Saville J decided the questions of principle as preliminary issues in favour of the Names. The Court of Appeal unanimously affirmed. The agents appealed.

1. Did managing agents owe a duty of care in tort to the Names in their syndicates, although the loss was purely economic?
2. For direct Names, did the contract between Name and agent exclude a concurrent duty in tort?
3. For indirect Names, did the chain of contracts (Name → members' agent → managing agent as sub-agent) exclude a direct duty in tort from the managing agent?
4. Did the "absolute discretion" given to the agents exclude any duty of care?

The appeals were dismissed with costs. Lord Goff answered all the questions in the same way as Saville J and the Court of Appeal.

The Hedley Byrne principle: assumption of responsibility

Lord Goff held that Hedley Byrne was more important for its principle than for its facts. The principle "rests upon a relationship between the parties, which may be general or specific to the particular transaction, and which may or may not be contractual in nature. All of their Lordships spoke in terms of one party having assumed or undertaken a responsibility towards the other."

It is not limited to words: "the principle extends beyond the provision of information and advice to include the performance of other services." Reliance can take the form of entrusting one's affairs to another: "where the plaintiff entrusts the defendant with the conduct of his affairs, in general or in particular, he may be held to have relied on the defendant to exercise due skill and care in such conduct."

Pure economic loss needs no further test

"for if a person assumes responsibility to another in respect of certain services, there is no reason why he should not be liable in damages for that other in respect of economic loss which flows from the negligent performance of those services. It follows that, once the case is identified as falling within the Hedley Byrne principle, there should be no need to embark upon any further enquiry whether it is "fair, just and reasonable" to impose liability for economic loss". Lord Goff also noted the limits. There may be no assumption of responsibility where the service is given on an informal occasion, and an assumption of responsibility may be negatived by an appropriate disclaimer.

Applied to managing agents at Lloyd's

The relationship between Name and managing agent "appears to provide a classic example of the type of relationship to which the principle in Hedley Byrne applies." The managing agents held themselves out as having special expertise, and the Names relied on it by authorising the agents to bind them to insurance contracts. So "there is in my opinion plainly an assumption of responsibility in the relevant sense by the managing agents towards the Names in their Syndicates."

Concurrent liability in contract and tort

Lord Goff held that "the common law is not antipathetic to concurrent liability, and that there is no sound basis for a rule which automatically restricts the claimant to either a tortious or a contractual remedy." Stating the conclusion: "an assumption of responsibility coupled with the concomitant reliance may give rise to a tortious duty of care irrespective of whether there is a contractual relationship between the parties, and in consequence, unless his contract precludes him from doing so, the plaintiff, who has available to him concurrent remedies in contract and tort, may choose that remedy which appears to him to be the most advantageous."

Direct Names: the contract contained an implied duty of care that was no different from the duty in tort, and "the contract does not operate to exclude the tortious duty, leaving it open to the Names to pursue either remedy against the agents."

Indirect Names: the chain of contracts did not exclude a direct duty in tort. "I for my part cannot see why in principle a party should not assume responsibility to more than one person in respect of the same activity."

Absolute discretion

The words "absolute discretion" went to the scope of the agents' authority. They did not exclude a duty of care: "Clear words are required to exclude liability in negligence".

Lord Browne-Wilkinson

Drawing on how equity treats fiduciary duties, he agreed that a contract does not automatically exclude a Hedley Byrne duty. But the contract shapes it: "the nature and terms of the contractual relationship between the parties will be determinative of the scope of the responsibility assumed and can, in some cases, exclude any assumption of legal responsibility to the plaintiff for whom the defendant has assumed to act."

Where a person assumes responsibility to another for the performance of services, and that other relies on him, a duty of care arises in tort under the Hedley Byrne principle. It covers services as well as statements, and it extends to pure economic loss without any further "fair, just and reasonable" enquiry. The duty can co-exist with a contractual duty covering the same ground, and the claimant may choose the more advantageous remedy. The only exception is where the contract excludes or limits the tort duty, or is so inconsistent with it that the parties must be taken to have agreed to exclude it.

• Hedley Byrne and economic loss: Discuss liability for negligent misstatement and pure economic loss. After Hedley Byrne, cite Henderson for three points: the principle rests on assumption of responsibility, it extends to the performance of services, and no separate "fair, just and reasonable" test is needed once it applies.
• Tort and contract: Can a plaintiff sue in tort when he has a contract with the defendant? Answer with Lord Goff's concurrent-liability holding. Add the qualification that the contract may exclude or limit the duty in tort. Explain the practical point from the case: the Names wanted the tort claim to get the benefit of the limitation period.
• Professional negligence: use the list of professions to which the principle has been applied (bankers, solicitors, surveyors and valuers, accountants, insurance brokers) and add Lloyd's managing agents.
• Problem question: a professional sub-contracted by the claimant's own agent performs services negligently. Identify the assumption of responsibility and the reliance. Then consider Lord Goff's warning that a contractual chain will often exclude a direct duty in tort.
• Say it is a House of Lords decision. It is not an Indian decision.