Introduction to Business Law Assignment

Maxs friend Charlie wishes to purchase a restaurant. One evening he finds a Greek restaurant, Brunos, for sale, located on Kings Avenue, around the corner from Maxs restaurant, The Hercules. The restaurant is full of customers. A few days later, Charlie speaks to Max about his plans. Charlie explains that he is very keen to buy the business but that he has never owned a restaurant or even worked in the industry before, and he would appreciate Maxs advice and guidance. Max assures Charlie that Brunos appears to be a very successful restaurant and that he is almost guaranteed to make a profit in the first 12 months. Charlie immediately decided to purchase the restaurant with his brother Harley. One year later they are on the verge of bankruptcy; the restaurant was not as popular or as profitable as they expected, and turnover has declined even further since they took over the business. Are Charlie and/or Harley able to take any action against Max?

This essay will discuss the requisite elements for establishing negligent misstatement and the issue of liability to third parties. This area of business law is supported by a number of cases, which have established and clarified the factors required to mount an argument for damages based on negligent misstatement. Specifically, the essay will argue, with reference to relevant case law, that, in the scenario provided, there is sufficient evidence to establish that: Max held special expertise in the area in which he provided advice; the advice was provided in a serious context; and that Max should have realised that Charlie would rely on the advice. These findings lead to the conclusion that Charlie could pursue damages against Max, based on the negligent misstatement. The essay will also discuss whether Harley, Charlies brother and business partner, is able to take action against Max and will find that he is not able to.

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] established, by way of obiter, that a negligent misstatement that caused pure economic loss could give rise to an action for negligent misrepresentation, outside of a contractual relationship.1 In the scenario provided, one party (Charlie) acted upon advice provided by another (Max), by entering into a financial transaction, which resulted in economic loss. While Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] laid the essential groundwork for torts in the area of
1

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465: The claimant in Hedley Byrne was an advertising agency, which incurred a large contractual liability by booking advertising space for a client, based upon a credit reference given by the clients bank. The advice included a dis claimer. Although the Court found the defendant not liable by virtue of the disclaimer, it accepted that liability could arise for negligent misstatement which caused financial loss, where a special relationship existed.

Introduction to Business Law Assignment

negligence,2 further cases provided additional clarification of the elements required to establish an argument for awarding damages based on negligent misstatement. The first element this essay will examine is the finding in Mutual Life and Citizens Assurance Co Ltd v Evatt [1971] that the person who provided the advice had, or claimed to have, some special skill or knowledge.3 This finding was further extended in L. Shaddock & Associates Pty Ltd v Parramatta City Council, where it was held that the advice or information need not be provided by a professional advisor.4 In the scenario provided, at the time of providing the advice, Max was the owner of a restaurant, called The Hercules. There is no information provided about the profitability of The Hercules, or whether Max currently owned, or had owned, any other restaurants. Given the ethnicity of the name The Hercules, it may be inferred that this is also a Greek restaurant, like the restaurant Brunos, which Charlie was seeking advice about, which would strengthen the argument that Max has specialist knowledge in the subject matter. Maxs restaurant is in close proximity to Brunos. It may be argued that Max, due to his position as the owner of a restaurant within a close proximity, could be privy to special information regarding the profitability of similar businesses, which was not ordinarily available.

The second element is that the advice was provided in a serious business or professional context, although the existence of a contract is not required. Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) found that when a person provides information or advice in serious circumstances they come under a duty to exercise reasonable care when providing the information or advice.5 It is stated that Max and Charlie are friends, but no further information is provided as to the context in which the advice was provided. However, information as to whether there was a social relationship may not be essential to mounting a case that there was a serious context. In Chaudhry v Prabhakar [1989], a pre-existing social relationship was held not to impede the existence of a business or serious context for provision of advice.6 Charlie made Max aware that he was very keen to buy the business.

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Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556: the insurance company provided financial information that was relied upon by Evatt. The insurance company held that it did not represent itself as having special skill or knowledge as a financial adviser and therefore should not be held liable. 4 L. Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225: A construction company sought information from a local council regarding future road widening plans. Subsequent to the information being provided, road widening was undertaken and the construction company suffered a loss as a result. 5 Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556. 6 Chaudhry v Prabhakar [1989] 1 WLR 29: advice was provided by a close friend, which was relied upon for the purchase of a car. The defendant was not a mechanic, but had some knowledge of cars. The plaintiff requested that the car should not have been in an accident. Prabhakar recommended a car, although he

Introduction to Business Law Assignment

This should have indicated to Max that Charlie was requesting the advice in relation to a serious financial commitment. In addition, the purchase of a restaurant involves a substantial amount of money, further supporting the argument that the advice was provided in a serious context. In Mutual Life and Citizens Assurance Co Ltd v Evatt [1971], the court found that it is required that the person claiming action for negligent misstatement acts in reliance of the information or advice.7 This is the third element, that is, that it was reasonably foreseeable that the person to whom the advice or information was provided would rely on that advice or information. As already mentioned, Charlie had explained to Max that he was very keen to buy the business. It is known that Charlie is also aware, from his own reconnaissance, that the restaurant was full of customers on the evening he passed by. However, it is not stated whether Charlie provides this information to Max when requesting the advice. It is known to Max that Charlie has never owned a restaurant or worked in the industry before. It may be reasonable, therefore, to assume that Charlie, with no or little relevant personal knowledge, would rely on the information provided. In the case of L. Shaddock & Associates Pty Ltd v Parramatta City Council, the information provided was not widely available from other sources and was unable to be externally verified.8 In this case, Charlie was seeking insider information as to the future profitability of the restaurant. While he may have been able to obtain information as to the current profitability from the previous owners when negotiating the sale, it is unlikely that they would be able to speculate as to future profitability, without making themselves liable for misrepresentation. Further supporting this argument, the judgement in Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) found that duty of care extends to advice provided about the future.9 It should be noted that, in contrast to Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964], Max made no attempt to limit his liability when making the statement.10 There is the further question of whether Harley, Charlies brother and partner in the business, is able to make a claim against Max. There is no indication that Charlie advised Max that he intended to enter a partnership with Harley and that he would share the advice
knew there were indications that it had been in an accident. The defendant was held to have owed a duty of care in this situation. 7 Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556 at 571: the speaker must realise or the circumstances be such that he ought to have realised that the recipient intends to act upon the information or advice in respect of his property or of himself in connexion with some matter of business or serious consequence.. 8 L. Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225. 9 Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556. 10 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.

Introduction to Business Law Assignment

with him. In Tepko Pty Ltd v Water Board (2001), landowners accessed a letter the Water Board had written to a third party and subsequently provided it to their bank, who acted in reliance of the advice in the letter.11 The Water Board was not aware of that the landowners may have intended to use the information provided in the letter. Based on the facts provided, there does not appear to be any way for Max to have been aware that the information would be provided to Harley and thus be held liable by Harley for the negligent misstatement.

This essay has established, with reference to relevant case law, the factors necessary to argue a case for negligent misstatement, and has applied them to the legal facts as provided in the scenario. It can be seen that Max held expertise in the area in which he provided advice, the advice was provided in a serious context and it was reasonably foreseeable that Charlie would act in reliance of the advice. In light of this argument, Charlie could pursue damages against Max. However, Charlies brother, Harley is unlikely to be able to take action against Max, as Max would not have been aware that the information was likely to be shared with Harley and thus relied upon by him.

11

Tepko Pty Ltd v Water Board (2001) 206 CLR 1.

Introduction to Business Law Assignment

Bibliography Articles and Books

Blay, Sam, Andrew Gibson and Bernadette Richards, Torts Law in principle (Lawbook Co, 2005)

Ciro, Tony and Vivien Goldwasser, Cases, Material & Commentary on Law and Business (Oxford University Press, 2004)

Gamble, Roger, Jean Du Plessis and Luke Neal, Principles of Business Law (Thomson Lawbook Co, 2008)

Gibson, Andy and Douglas Fraser, Business Law (Pearson, 2012) Ipp, David, Themes in the law of torts (2007) Australian Law Journal 81

Lambiris, Michael, First Principles of Business Law Source Materials (CCH Australia, 2008)

Law, Jonathan and Elizabeth Martin, A Dictionary of Law (Oxford University Press, 2012)

Trindade,Francis, Peter Cane and Mark Lunney, The Law of Torts in Australia (Oxford University Press, 2007)

Walmsley, Stephen, Alister Abadee and Ben Zipser, Professional Liability in Australia (Lawbook Co, 2007)

Cases

Chaudhry v Prabhakar [1989] 1 WLR 29

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465

L. Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225 Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556 at 571

Tepko Pty Ltd v Water Board (2001) 206 CLR 1 5