Negligence is Conduct which falls below the standard established by the Law for the protection of others against unreasonable Risk of harm.65


The decision of the House of Lords in Donoghue v Stevenson (1932, England) ‘treats negligence, where there is a duty to take care, as a specific tort in itself.’


In Donoghue v Stevenson Lord Atkin formulated the proposition which has come to be generally known as ‘the neighbour principle’:

In Loghgelly Iron and Coal Co. v M’Mullan (1934, England) Lord Wright said:

Therefore, where a ‘duty of care’ arises, conduct constituting negligence, whether in omission or commission, is a breach of that duty and creates a liability in damages to the person to whom the duty is owing.


The standard of Conduct required by the Common Law is that of the reasonable man.68


The reasonable man is sometimes described as ‘the man in the street’, ‘the man on the Clapham omnibus’.68A But, when the exercise of some special skill or competence, such as that of an architect or doctor, is in question, the test of the man on the Clapham omnibus is somewhat unreal. Where, as is the case with a professional person, the exercise of some special skill or competence is intrinsic to the practice of the profession, then, it is expected of such a professional person that he should show a fair, reasonable and competent degree of skill.68B If he does not do so, he will be guilty of professional negligence.

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For over thirty years now there has been a marked tendency, legislative as well as judicial, to expound the standard of care required in any particular case more in terms of Risk than in terms of reasonable foreseeability.69

A Risk is a chance of harm to others which the party whose Conduct has been called in question should have recognised.70

The Law in all cases exacts a degree of care commensurate with the Risk created.



There are two factors in determining the magnitude of a Risk — the seriousness of the injury risked, and the likelihood of the injury being in fact caused. The general principle is that before negligence can be established it must be shown not only that the event was foreseeable but also that there is a reasonable likelihood of injury.71


The reasonableness of the defendant’s conduct will also depend upon the proportion which the Risk bears to the Object to be attained. To expose others to a Risk of harm for a disproportionate Object is unreasonable, whereas an equal risk for a better cause may be lawfully run without negligence.72

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A Fiduciary Relationship

Traditionally, the general rule was that the Common Law duty to take care to avoid causing injury to others was restricted to physical injury either to person or property, and to financial losses consequent upon such injury.73



In Derry v Peek (1889, England) [see Section 2.3.2], the action of the plaintiffs had been based on fraudulent misrepresentation ['actual fraud']. It was assumed at the time, and for seventy years afterwards (until the 1964 Hedley Byrne v Heller case — related below), that the House of Lords in this case decided that no action would lie for negligent words, at least where reliance on them produced purely financial loss. It was therefore assumed that all non-fraudulent misrepresentations should be classed together as innocent misrepresentations.73A

There was, however, an important exception through Equity, in that an action would lie for negligent misrepresentation if there was a fiduciary relationship between the parties.73B

(The fiduciary is the party in whom the other party places trust / confidence.)

 

Note! Equity, as a branch of Law, means: the body of principles of justice constituting what is fair and right; the system of law or body of principles of justice originating in the English Court of Chancery and which supersedes the Common Law and Statute Law where there is conflict with natural justice. (Ref: Black's Law Dictionary.)

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A fiduciary relationship is also referred to as a confidential relationship.

The sole question in every case is whether the parties are so situated towards one another as to raise a presumption of confidence. If they were so situated, then, whatever be the correct definition of the relationship which in fact existed between them, or, whether such a relationship admits to any definition or classification at all, the case is within what Lord Eldon, Lord Chancellor, described in Gibson v Jeyes (1801, England) as "that great rule of the Court [of Chancery], that he, who bargains in matters of advantage with a person placing confidence in him is bound to shew that a reasonable use has been made of that confidence".73C

The basic principle on which much of the law of fiduciary duty is based is "the obligation not to profit from a position of trust, or, as it is sometimes relevant to put it, not to allow a conflict to arise between duty and interest ..."74

Note! In explaining the meaning of obligation in Law, Black’s Law Dictionary quotes from Glanville William’s edition of Salmond on Jurisprudence (10th edition 1947):

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Fiduciary Law may be best understood as a primary weapon of justice developed by the Court of Chancery (through Equity) to counter the 'abuse of position' by those in whom confidence is reposed.

In all cases of fiduciary misconduct, the fiduciary has a strong incentive to keep that misconduct secret. In every such case a type of deception is involved and, historically, these may all be derived from the underlying notion of 'equitable fraud' (related below) propounded by Lord Hardwicke, Lord Chancellor, in the foundation case of Chesterfield v Janssen (1851, England).74A

This underlying notion of ‘equitable fraud’ (a 'presumption of fraud') has had major significance in the development of law governing the circumstances and relationships between contracting parties. (This will become evident below and in Section 2.3.4, The Duty to Disclose and Silence as a Misrepresentation.)

 

But, in addition to its relevance to the equitable doctrines governing such relationships, the concept of ‘equitable fraud’ also impacts on yet another major doctrine of Equity.

For the concept of ‘equitable fraud’ is of paramount importance to the ‘postponement of the limitation period’ provisions within the Statute of Limitations applying in any particular jurisdiction. And it is through Equity that these respective ‘postponement provisions’ are to be interpreted. (See Section 2.9: The Time Limit for Legal Action.)

Before any further expansion on fiduciary law, a more comprehensive knowledge of the concept of ‘equitable fraud' is therefore warranted.

 

Note! Throughout this website-book, unless the term ‘equitable fraud’ is specifically used, the term fraud will always mean ‘actual fraud’, i.e. fraud  as defined in Derry v Peek. (See Section 2.3.2: Fraudulent Misrepresentation.)

 

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‘Equitable Fraud’

In Chesterfield v Janssen (1851, England), Lord Hardwicke, through the Court of Chancery, had set down ‘every species of Fraud’ (he listed four) against which Equity would grant relief.

Lord Hardwicke particularised one such species of fraud as applicable to certain circumstances and relationships, where, even though there may not be evidence of ‘an actual intention to cheat’74B (see Nocton v Ashburton below), Equity would invoke a ‘presumption of fraud’:

 

Note! While Lord Hardwicke incorporated ‘every species of fraud’ when he set down the jurisdiction of Equity on the matter of Fraud in 1851, the term ‘equitable fraud’ is most often used to distinguish Lord Hardwicke’s particular species of fraud where, from the circumstances and relationship between the parties, there is a 'presumption of fraud' (as cited above) — as distinct from where there is evidence of ‘actual fraud’.

 

Within the context of the prevailing circumstances and relationship between the contracting parties, the term ‘equitable fraud’ is therefore used to distinguish conscious (knowing or reckless) conduct by the one party, which, even though there may be no evidence of intention to deceive, nonetheless results in that party being presumed to have secretly taken advantage of the other.

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We now return to the evolution of modern Fiduciary Law.

It must now be clear that where a party in whom confidence is reposed knowingly (or recklessly) takes secret advantage of the trusting party, in the situation as described by Lord Hardwicke in Chesterfield v Janssen (above), it will often be difficult to prove (on the balance of probabilities) that this was done. It would therefore be difficult to prove that the circumstances giving rise to a 'presumption of fraud' exist.

Even though the trusting party has been wronged by the other party having secretly taken advantage of him, in the absence of evidence of knowledge (or recklessness) on his part, the party in whom trust has been reposed would still keep the benefit of his misconduct. There would therefore be no justice for the wronged party in such circumstances.

Worse still, such an application of Law would encourage and reward widespread fraud ('actual fraud'). It would make a mockery of all the relationships of confidence by which society must function, and it would run wholly contrary to the greater good.

This is the problem being addressed by Equity under Fiduciary Law.

In a relationship where one party must place trust / confidence in another, it will often not be known, or it will be unclear, whether or not the party in whom trust / confidence is being reposed (in this case — the fiduciary) has, knowingly or recklessly, done wrong. Therefore, if there has been misconduct (fraudulent, or otherwise), it is likely to remain concealed.

So, Equity, in applying the principles of Justice under Fiduciary Law, prohibits the fiduciary from even allowing the eventuality to arise where he could have an opportunity to secretly do wrong to the other party.

There must be no potential for the fiduciary to profit secretly from the transaction.

Under Fiduciary Law, when a fiduciary allows the eventuality to arise where he could be seen to have a covert opportunity to do wrong to (take advantage of) the trusting party, this becomes a misconduct of itself; and such misconduct (obviously, discounting there being evidence of 'actual fraud') is deemed to be a negligent breach of fiduciary duty.

However, it must now also be clear, from the particular circumstances giving rise to a 'presumption of fraud', as described by Lord Hardwicke in Chesterfield v Janssen (above), that for any party in whom trust / confidence is reposed (in this case — the fiduciary) the opportunity for perpetrating 'actual fraud' (be it 'common law fraud' or 'criminal fraud') against the trusting party —— is immediate.

Note! See Nocton v Ashburton below, where Viscount Haldane sets out the distinction in Law between 'actual fraud' and 'equitable fraud'.

(This issue of opportunity for perpetrating 'actual fraud' (both 'common law fraud' and 'criminal fraud') goes to the heart of what this website-book is about and will be discussed further in Section 2.3.4, The Duty to Disclose and Silence as a Misrepresentation, and in Section 2.3.6: Fraud and the Conman —— U.K. Law and Irish Law.)

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The key feature of a fiduciary or confidential relationship is therefore that one party is under a duty to act in the interests of another.74C The fiduciary, if contested, must be able to show that he has fulfilled that duty for the contract to be upheld by a court.

Fiduciary (or confidential) relationships can be divided into two categories —— those that are status based, e.g. principal and agent, solicitor and client, trustee and beneficiary, etc., —— and those where, in the absence of an inherently fiduciary status, the factual situation of the particular relationship between the parties gives rise to a fiduciary relationship.74D


The courts have always refused to confine this equitable jurisdiction to just the first category of status based relationships.75

Modern theory of Law and judicial practice, therefore, do not attempt to ascribe any specific legal meaning to the term 'fiduciary'.75A The courts are prepared to interfere in a contract wherever one party deliberately and voluntarily places himself in such a position that it becomes his duty to act fairly and to have due regard to the interest of the other party.75B

Professor Justice Finn, in his work on Fiduciary Obligations (1977), describes the work undertaken by the fiduciary (the party in whom trust is reposed) thus:

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As will be seen in Section 2.3.4, ‘under certain circumstances a duty may arise to disclose a material fact, and its non-disclosure may have the same effect as a representation of non-existence'.76

Those in a fiduciary (or confidential) relationship with another are under a duty to make full disclosure of all material facts which might be considered likely to affect a transaction with those to whom the duty is owed.76A

Note! A knowledge of the circumstances where 'the law of non-disclosure' applies is fundamental to your comprehension of what will be exposed in this website-book. These circumstances will be explored further below, under 'A Special Relationship', and in Section 2.3.4: The Duty to Disclose and Silence as a Misrepresentation.)

There are other fiduciary duties, which are not directly concerned with the law of non-disclosure, and which follow from the overriding principle that there must not be a situation WHERE THERE COULD BE a conflict between self-interest and duty.76B

Fiduciaries are under a duty not to take bribes, secret PROFITS or secret COMMISSIONS.

This is an absolute rule of Law.76C

In cases where there is a contention of misconduct by way of negligent misrepresentation by a fiduciary, all the party reposing trust has to establish is the existence of the fiduciary relationship. (Bear in mind that a fiduciary's not fulfilling any of the duties incumbent upon him, of itself, constitutes misconduct.)

The burden of proof rests with the fiduciary to establish that he has discharged all his fiduciary duties. If he cannot do so, he cannot hold the other party to the contract.

 

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'Fiduciary Relationship' and the evolution of the broader category of 'Special Relationship'

In Nocton v Ashburton (1914, England), Viscount Haldane, Lord Chancellor, came to the conclusion that there might be cases where there were duties of particular obligation. In educing this conclusion, Viscount Haldane ensured clarity of understanding by first setting out the distinction in Law with respect to the concepts of 'actual fraud' and 'equitable fraud' (seeChesterfield v Janssen above):77

 

Viscount Haldane then set out how such duties of particular obligation may arise:

Viscount Haldane effectively treated 'a fiduciary relationship' as a particular subset of a broader category of relationship, which he described as 'a special relationship'.77C

 

Lord Shaw, in support of Viscount Haldane's conclusion, cited Sir Roundell Palmer in Peek v Gurney (1873, England), prophetically stating that Sir Roundell Palmer's argument 'may well afford guidance as to the antecedent state of the law of Equity':78

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In Woods v Martins Bank Ltd. and Another (1959, England),78A Salmon J. held that the particular factual situation was such as to give rise to a fiduciary relationship between the bank and its customer.

But in his judgement Salmon J. also intimated that, even if the relationship (in this particular instance) had not extended to full fiduciary status, he would still have held that the relationship between the bank and the plaintiff was such that the bank would be under a duty of care when giving advice.


At the beginning of May 1950, the manager of a branch of Martins Bank, in reply to a request by the plaintiff (who had no real business experience) to be his financial adviser, said that the bank would be only too pleased to take care of the plaintiff's financial affairs.

A short time later (on 9^th May 1950), the plaintiff was induced to invest in shares in ‘Company A’, in consequence of advice given by the bank manager that the company, who were customers of the bank, were financially sound and that the investment was a wise one to make.

A month later again, relying on further advice from the bank manager, the plaintiff invested in more shares in 'Company A' and also made a loan available to the company.

And some twenty months after that, the plaintiff signed a guarantee of the overdraft of another company, ‘Company B', with the Martins Bank, again relying on advice from the bank manager that this company too was sound financially.


There were no grounds on which the bank manager could reasonably have advised that ‘Company A’ was in a sound or strong financial position, and still less could the investment in the shares be reasonably recommended as a wise one.

Unknown to the plaintiff, ‘Company A’ had a considerable overdraft with the bank, and the district head office of the bank had at all material times been pressing the branch manager to procure a reduction on this overdraft.

Nor were there any reasonable grounds for the bank manager giving the advice in relation to ‘Company B'.

 

Salmon J., in giving judgement, held that:

 

 

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A Special Relationship

In 1964 the House of Lords decided Hedley Byrne & Co. Ltd. v Heller and Partners Ltd. Here the plaintiffs (Hedley Byrne) were advertising agents who relied (to their eventual detriment) on statements made by the defendants (Heller and Partners Ltd.), who were the bankers of one of the plaintiffs’ clients, about the financial situation of these clients. The defendants made the statement negligently. The plaintiffs dealt with the bank’s clients as a result of the representations and lost money. The defendants were [however] protected from liability by an effective disclaimer.

 

The House of Lords decided that what was needed to create liability was a voluntary assumption of responsibility by the defendants towards the plaintiffs which resulted in reliance by the plaintiffs on the defendants’ statements. If the reliance was reasonable, the court may decide that a special relationship exists between the parties giving rise to a ‘duty of care’.79

N.B. Note the difference between a fiduciary or confidential relationship ——and the broader category of a special relationship, as decided by the House of Lords in Hedley Byrne & Co. Ltd. v Heller and Partners Ltd. (See the passages cited from Viscount Haldane's judgement in Nocton v Ashburton, above.)

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Some passages in the speeches from the House of Lords decision in Hedley Byrne are important as specifying in more detail the circumstances that give rise to the existence of a special relationship which will create a duty in law to take care in relation to the making of statements. [This statement, highlighting the importance of these speeches from the House of Lords, is taken from the judgement of Justice Keane in the Irish case of Doolan v Murray, Murray, Murray, Cheever, Aziz and Dun Laoghaire Corporation (1993), where J. Keane cites several passages from those speeches. This case is referenced further, below.]80

On the subject of special relationships —— Lord Reid said:

Lord Devlin put the matter thus:

Note! Consideration, in the legal context of a contractual agreement, means: anything given or promised or forborne by one party in exchange for the promise or undertaking of another. In effect, it means any form of payment.

Lord Denning M.R., when giving judgement for the Court of Appeal in Esso Petroleum Co. Ltd. v Mardon (1976, U.K.) (see Section 2.2.1), was clear-cut on the matter of a professional person giving advice, even in the absence of consideration. Having quoted from the judgement of Viscount Haldane, L.C. in Nocton v Lord Ashburton (see above), he put the matter thus:

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The then recent Hedley Byrne precedent was adopted into Irish Law by the High Court decision as stated by Davitt P. in Securities Trust Ltd. v Hugh Moore and Alexander Ltd. (1964), and was further ratified in Bank of Ireland v Smith (1966).


In Bank of Ireland v Smith, Justice Kenny, in the course of his judgement, said:

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While Hedley Byrne & Co. Ltd. v Heller and Partners Ltd. created precedent, it is the clear and logical application of judicial minds to precedent, as exemplified by the decision of the Court of Appeal in the case of Esso Petroleum Co. Ltd. v Mardon (1976, U.K.) (see Section 2.2.1) and subsequent analyses of same, that is most enlightening.



The decision of the Court of Appeal in Esso Petroleum Co. Ltd. v Mardon was based on the principle which had already been laid down in Hedley Byrne. This principle was summarised by Lord Denning as follows:

Omrod L.J., after analysing the principles which he said underlay the decision in Hedley Byrne, stated:

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In Stafford v Mahony, Smith and Palmer (1980, Ireland), Doyle J., when considering the legal situation regarding negligent misrepresentation, quoted from the judgements of both Lord Denning M.R. and Omrod L.J. in Esso Petroleum Co. Ltd. v Mardon (as written above), and further clarified the position by quoting from the speeches of both Lord Devlin and Lord Morris, in the Hedley Byrne v Heller decision, as follows:

Doyle J. then cited the clearly stated Hedley Byrne principles as had been laid down in Irish Law by Davitt P. in Securities Trust Ltd. v Hugh Moore and Alexander Ltd. (1964) and, in his own judgement, stated the position as follows:

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In Doolan v Murray, Murray, Murray, Cheever, Aziz and Dun Laoghaire Corporation (1993, Ireland), Keane J., when expressing his understanding of the liability that arises in Law in Ireland from a non-fraudulent misrepresentation, said:

Justice Keane further clarified the position by quoting from the speeches relating the House of Lords decision in Hedley Byrne (including the above passages quoted from the speeches of Lord Reid and Lord Devlin, on the subject of special relationships.) He then cited the judgement of Lord Denning M.R. in the Court of Appeal on Esso Petroleum v Mardon, where Lord Denning said :

Justice Keane then, significantly, affirmed the position in Irish Law (with regard to Lord Denning’s statement above) when he said:

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We may therefore adopt the following statement as a definition of Negligence appropriate to the subject matter of this website-book :

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N.B. The burden of proving Negligence or Negligent Misrepresentation, under Common Law, rests with the party alleging the negligence or negligent misrepresentation.


However, as will be seen in Section 2.3.4, where a fiduciary or confidential relationship exists, the person in whom the confidence is reposed, and who thus possesses influence over the other, cannot hold that other party to the contract unless he satisfies the court that it is ADVANTAGEOUS to the other party — AND — that he has disclosed all material facts within his knowledge.90

Also, it will be seen that, where a special relationship exists, the duty of care thereby arising will be such as to obligate similar disclosure of all material facts to the relying party. And the party upon whom reliance has been placed will be burdened with showing that this obligation has been fulfilled.

A person who has been induced to enter into a contract as a result of a negligent misrepresentation made to him by the other party to the contract is entitled to rescind the contract as in the case of fraud. He may also be entitled to recover damages in respect of any loss which may have been suffered by reason of the negligence.91

There will however be instances where, under power of Statute Law, the court may declare the contract subsisting and award damages in lieu of rescission. Also, as a non-fraudulent misrepresentation, the negligent misrepresentation may constitute statutory misrepresentation and, as such, may afford a right of action under Statute Law. (These matters will be discussed later in this Chapter, in Section 2.3.5, Section 2.8.1 and Section 2.8.3.)

 

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