Hedley Byrne & Co Ltd v Heller & Partners Ltd  UKHL 4
This landmark case established the principle of pure economic loss in English law. The House of Lords judgment provided that a duty of care arose when pure economic loss was provoked by certain conditions. While the case was in tort, its codification of principles of economic loss hold significance for contractual relationships, especially between professional parties in the course of their business dealings.
The judgment can be found here.
Heller & Partners (a bank) assured Hedley Byrne (an advertising agency) that a client firm, Easipower Limited, could pay for their services, and was creditworthy. Hedley Byrne therefore took out £17,000 of advertising space on behalf of Easipower, who subsequently defaulted on the payment. Hedley Byrne sued Heller & Partners on the grounds that it had provided negligent advice, which Hedley Byrne had reasonably relied upon, leading to its financial detriment. The bank successfully defended itself by pointing to a disclaimer in its advice that absolved it of responsibility.
Although the case on the facts was settled, the court went on to discuss obiter the grounds by which a duty of care would arise when negligent advice was given which resulted in economic loss.
There are three requirements for this:
- Reasonable reliance
- Assumption of responsibility
- Special relationship of trust and confidence between the parties
The key question for the court is the extent to which it was reasonable for the claimant to rely on the advice given by the defendant. This test is objective – a question of fact, from the respective of a reasonable person – rather than subjective. The secondary question is whether the defendant knew, or ought to have known, that their advice was being relied upon by the claimant. Again, this is an objective question – would a reasonable person in the defendant’s position have anticipated that their advice would be relied upon by the claimant?
The concept of a ‘special skill or knowledge’, whether possessed by the defendant or the claimant, is important for this test. A specialist business giving faulty advice to a layperson might be considered to have that special skill (Esso Petroleum Co Ltd v Mardon  QB 801), but a defendant who should know better might also be considered to have it – for instance, an estate agent buying an unsafe house in their personal capacity should have known better (Stevenson v Nationwide Building Society  1 WLUK 706). The greater the ratio of skill or knowledge in favour of the defendant, the more likely the claimant is to succeed in having the court find reasonable reliance.
Assumption of responsibility
The defendant must have voluntarily assumed responsibility in a relationship equivalent to a contract (i.e. but for the absence of consideration it would be a contract). This is particularly relevant in cases where third parties detrimentally rely on poor advice. In Caparo v Dickman  UKHL 2, the claimants were investors in a third party company’s equity, having relied upon the defendant’s audit of the firm’s finances. The House of Lords ruled that there was no duty of care as the defendant had not voluntarily assumed responsibility for the claimant – an audit was not intended to be relied upon as investment advice and the auditor had not reasonably foreseen the likelihood of this arising. Similarly, in Manchester Building Society v Grant Thornton  UKSC 20, the Supreme Court found that giving financial advice incorrectly resulting in loss would satisfy the assumption of responsibility threshold as it was acted upon for the purpose in which it was given.
Special relationship of trust and confidence between the parties
In Hedley Byrne the court established that a relationship of this nature arises where the advice-seeker trusted the advice-giver to exercise a degree of care, in a reasonable way, and it was reasonably known that this reliance existed. Defendants can disclaim responsibility in their statements – as happened on the facts in this case. These exemption clauses are now harder to use with the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015 on the statute books, although both post-date Hedley Byrne (see Smith v Eric S. Bush  2 WLR 790).
This case established that pure economic loss can be recoverable if caused by a negligent statement. PEL can also be recoverable in tort in two other specific contexts – wills and references (White v Jones  2 AC 207 and Spring v Guardian Assurance  2 AC 296 respectively).
Hedley Byrne serves as a warning to professional services firms that they can have a responsibility to more than just their direct clients. While inadequate or negligent advice to a client may be actionable in contract, there could also be a class of third parties whose losses may also be recoverable in tort.Contact Us