Buyer Beware: Seeking damages under “contort” law?

Both contract and tort are civil wrongs affecting individuals…The distinction between contract and [tort] is an extremely difficult one to make and in many modern legal systems has become blurred… Considerable academic debate has concentrated on whether the distinction should be maintained.

– John Cooke and David Oughton

Lawyers and legal scholars strive to ascertain a framework of rules to better understand the means by which harms are rectified. One way to establish a cohesive structure is to organize areas of law into categories, though complexities are often involved in such a task. Unlike the Roman legal system of continental Europe, the unified, ‘common’ legal system created in England after the Norman Conquest defined legal procedure based on specific writs issued by the Chancery.

When considering the law of obligations, Cooke and Oughton note that because the ‘distinction between contract and tort is an extremely difficult one to make […] considerable academic debate has concentrated on whether the distinction should be maintained.’ [1] This is especially prominent in cases involving false statements resulting in economic loss, as recent legal precedents have held contracting parties liable under both contractual and tortious principles.

Narrowly construed, contractual relationships are definitive exchanges of undertakings and promises between parties. Contracts are independent from the parties’ prior or subsequent actions, and pre-contractual statements are largely deemed exogenous from the contract itself. [2] Conversely, successful tort claims can compensate a defendant harmed by the defendant’s conduct, even if no established contractual relationship exists between them. As the doctrine of privity [3] limits rights and obligations to persons who are contractually bound, actions in tort for pure economic loss have traditionally been limited. This justification is rooted in Classical Contract theory, stimulated by the self-regulated economic liberalism of the Industrial Revolution.

Up until the 19th century, juries were responsible for the relatively subjective assessment of damages for breach of contract. Prior to Hadley v Baxendale, [4] the law offered only limited rules by which verdicts could be controlled. Alderson LJ’s decision held that parties were liable only for losses that were generally foreseeable. [5] Though increased judicial willingness to curtail unfair contracts slowly granted remedies for false preliminary statements in contract, the general rule in tort remained that no duty of care exists for pure economic loss. [6] In Weller v FMDRI, [7] though disease-infected cattle were rendered unsaleable, the claim for economic loss under Rylands v Fletcher [8] failed.

The defendant research institute had no duty of care to the auctioneer claimant, and there was neither direct injury nor property damage. [9] The demarcation between contract and tort is not always straightforward however, and has blurred since the 1950s in the aftermath of several landmark cases. This essay will explore this phenomenon, and consider if the distinction should be maintained in cases of pure economic harm resulting from false preliminary statements.

MISREPRESENTATION

A contract cannot be regarded as a true agreement if parties have been misled. If an actionable misrepresentation has been made, the contract will become void or voidable as courts mandate that a party that makes groundless misrepresentations must be held accountable for the consequences. Firstly, the statement in question is compared to mere sales puff and terms of contract. Puff is often an extravagant sales claim but affords no remedy, as no reasonable person would take the statement seriously. [10]

Representations are further distinguished from terms, which form part of the contract and incur obligations. The statement is likely a term if it is of vital contractual importance,[11] or the party stating it has higher skills and knowledge than the recipient.[12] As the truth of the term is guaranteed, if a term proves false, the claimant may seek remedies under breach of contract.

By contrast, misrepresentations are false [13] statements of fact made to the claimant, which induce [14] them into entering contractual relations with the party making the statement. Bisset v Wilkinson [15] established a false opinion is not misrepresentation, though an exception occurs when the statement maker could not have reasonably believed his statements. [16] This distinction between fact and opinion will be important in our discussion of remedies below. Silence likewise is not misrepresentation, as there is generally no duty of disclosure in English law under the caveat emptor principle. However, half-truths analogous to the misleading explanation of a receipt in Curtis v Chemical Cleaning [17] will be a misrepresentation.

REMEDIES

Once conditions are satisfied, misrepresentations are further classified as either wholly innocent, fraudulent, or negligent, each with their own remedies. Damages awarded for breaches of contract are to place the innocent party ‘in the same situation […] as if the contract had been performed [18] By contrast, tortious damages are retrospective in approach. They aim to ‘put the claimant in the same position as he would have been in if he had not sustained the wrong.’ [19] Respecting the purview of this essay, neither defences available, nor innocent misrepresentations, nor rescission ab initio are discussed.

TORT OF DECEIT: Fraudulent misrepresentations

Fraudulent statements are false statements [20] made to the claimant, where the defendant knows it is false or is reckless as to its truth, and intends that the claimant act upon the statement. [21] If the claimant does act and suffers damage, the tort of deceit has occurred. The courts will not apply the normal tortious remoteness rule in deceit, opting instead for a generous test of directness, regardless of reasonable foreseeability. [22]

In Smith New Court[23] Steyn LJ defended the strategy to impose wider liability in deceit as ‘moral considerations militate in favour of requiring the fraudster to bear the risk of misfortunes,’ and made ’no apology for referring to moral considerations [for] the law and morality are inextricably interwoven.’ A successful claim for fraud may recover loss profits, though in the leading authority of Derry v. Peek [24] Lord Herschell defined fraud narrowly. Given that the allegation is very serious, the burden of proof ultimately rests with the claimant.

Statutory remedies are also available for non-fraudulent misstatements, provided under s.2(1) of the Misrepresentation Act 1967. In these scenarios, a special relationship is not requisite and the remoteness test is the same as fraud above, [25] with damages likewise in deceit. Unlike fraud however, the burden of proof is on the defendant to show he has not been negligent. It is considered advantageous for a claimant to pursue damages under this statute when possible.

TORT OF NEGLIGENCE: Non-fraudulent misrepresentations

Although concerning professional auditors, the absence of both contract and fraud in Candler v Crane Christmas [26] rendered the court unwilling to find a duty of care. Economic loss was consequently held unrecoverable in the tort of negligence, but Lord Denning’s dissent was revitalised a decade later in Hedley Byrne v Heller. [27] Advertisers Hedley Byrne had no contract with Heller, but suffered financially as a third party after relying on the bank’s negligent advice regarding Easipower.

While a disclaimer defeated the firm’s suit, the House of Lords departed from previous authorities in their judgment, making it possible to sue for economic loss if a claimant relies on careless but honest statement of fact or opinion. This case proved a bellwether, though liability is contingent upon an assumption of responsibility [28] and reasonable reliance, constituting a special relationship. Absent sufficient proximity, a claim for economic loss under negligent misstatement will be defeated. [29] Caparo [30] offers refined criteria for assumed responsibility, effectively expanding the fundamental neighbour principle in Donoghue v Stevenson.[31]

LAW OF CONTORT?

To demonstrate a special relationship, it is important to consider assumptions of responsibility. It is potentially misleading however to generalise that in contract law, parties voluntarily create their obligations. [32] For instance, the Sale of Goods Act 1979 and other consumer protection measures regulate modern contracts, but occur by operation of law. Likewise, there are problems with the assumption that all claims in tort rise out of breach of duty or rights, imposed or conferred by [common] law rather than by agreement.’ [33] The vicarious liability in tort depends on the relationship between employer and employee, which is voluntary.

Post-Hedley cases have arguably indiscriminate interpretations of special relationship. The meaning of ‘reasonable grounds for belief’ [34] varies, as does the level of knowledge required for a statement of fact to be distinguished from opinion. [35] Legal rules distinguishing claims in tort from those in contract may therefore be weakly defined.

The court recognises that unless the contract explicitly prevents it, contractual relationships do not prevent claimants from relying upon a more advantageous remedy in tort. [36] Given the bilateral influence of contract law and tort upon each other, modern claims for pure economic loss may signal hybrid, albeit sui generis actions under “contort.” [37] While tort and contract are distinct, the distinction itself may be ‘accorded less weight than it has been at any point in the last two centuries.’

As ‘torts are infinitely various, not limited or confined,’[38] a widely circulated negligent misstatement could open the floodgates to high volumes of expensive claims. Referring to the privity of contract doctrine, in dictum for Winterbottom v Wright, [39] Abinger CB argued that unless recovery was limited to contracted parties, ‘the most absurd and outrageous consequences’ would ensue. In an American tort law case, Justice Cardozo similarly asserted that the law should not admit ‘to a liability in an indeterminate amount for an indeterminate time to an indeterminate class.’ [40] These opinions underscore that the availability of remedies for interpersonal wrongs must be balanced with potential harm to the public interest if a particular duty of care is recognised. [41]

Contract law may still restrict remedies in negligence. Chaudhry v Prabhakar held that social situations do not give rise to duties of care, unless an assumption of responsibility has been made. Further, as contracts are generally meant to be definitive statements between parties, the court’s imposition of additional rights through negligence is relatively uncommon. In Tai Hing Cotton Mill [42], the Privy Council has decided there was ‘nothing to the advantage of the law’s development […] in searching for liability in tort when the parties are in a contractual relationship.’ Despite this and other limitations however, the requirements to establish duty of care continue to widen. Donoghue v Stevenson, Hedley Byrne and Dorset Yacht formed an authoritative trilogy upon which the lenient two-part Anns test [43] for negligence was established.

Though the test was later abandoned following a more conservative approach in Murphy v Brentwood, [44] the courts maintain a flexible perspective via Hedley Byrne’ when considering economic loss.

As demonstrated above, the development of negligence gradually allowed claimants the opportunity to circumvent some restrictions found in contract law. Awarding damages in both contract and tort for false preliminary statements has highlighted the flexibility of judicial interpretations in latter half of the 20th century. The law today is one of concurrent liability, and therefore dynamic in approach.

Damages may be forward-looking in contract principles so as to protect the claimant’s reliance, and/or retrospective in remedying harm already suffered. Separating the functions of tort and contract in regards to false statements may be arduous, but principles explicated in casebooks are far clearer and law is ‘never as neat and tidy in the real world as it appears in a casebook.’ [45] In Donoghue v Stevenson, Macmillan LJ asserted the ‘criterion of judgment must adjust and adapt itself to the changing circumstances of life.’ [46]

In law as in medicine, it is not uncommon for a variety of ailments to be cured with the same remedy. While we do not attempt to casually merge diagnostic investigations simply because the end treatment might be the same, critiquing the broad applicability of certain medicines is likewise inappropriate. An understanding of tort and contract as distinct, albeit overlapping subjects successfully attests to the continual evolution of doctrines in English law.

This essay sought to determine if the distinction between contract and tort in the cases of false preliminary statements and available damages ‘should’ be maintained. The analysis presented suggests that the question of ‘should they be maintained’ may be challenged instead by ‘can they be maintained?’ Although it may have been an unavoidable by-product of increased legal complexity, the actions under ‘contort’ ought to be openly accepted and debated. Just as the law of equity emerged as a response to the inflexibility of the writ system, so too have tort and contract law converged when necessary to increase fairness in private relationships.

© NaturAdvocate, written May 2013

NOTE: I missed a “distinction” by a few marks for failing to mention –

  • Parsons v Uttley Ingham and Lord Denning’s obiter comment on remoteness
  • East v Maurer and the blurring of the distinction between tort and contract
  • Contributory negligence and effect on contract claim via s.13 SGSA

RESOURCES

[1] Cooke, John, and D. W. Oughton. The Common Law of Obligations. London: Butterworths, 2000, p. 6

[2] Ibid, at p. 42

[3] Winterbottom v. Wright (1842) 152 ER 402

[4] Hadley v Baxendale (1854) 156 ER 145

[5] Ibid at p.152

[6] Murphy v. Brentwood District Council [1991] 1 AC 398

[7] Weller v Foot and Mouth Disease Research Institute [1966] 1 QB 569, QBD

[8] Rylands v Fletcher [1868] UKHL 1

[9] Weller v Foot and Mouth Disease Research Institute [1966] 1 QB 569

[10] Dimmock v Hallet (1866) 2 Ch App 21

[11] Bannerman v White (1861) CBNS 844

[12] Dick Bentley Ltd v Harold Smith (Motors) Ltd [1965] 2 All ER 65

[13] Avon Insurance plc v Swire Fraser Ltd [2000] 1 All ER (Comm) 573

[14] Attwood v Small (1838) 6 CI & F 232

[15] Bisset v Wilkinson [1927] AC 177

[16] Smith v Land and House Property Corporation (1884) 28 Ch D 7

[17] Curtis v Chemical Cleaning & Dyeing Co Ltd. [1951] 1 KB 805

[18] Robinson v Harman (1848) 1 Ex Rep 850 per Parke B at 855

[19] Livingstone v Rawyards Coal company (1880) 5 App. Cas. 25, per Blackburn LJ at p. 39

[20] As per Esso Petroleum Co Ltd v Mardon [1976] EWCA Civ 4, deceit provides remedy for fraudulent statements of fact only – not opinion.

[21] Pasley v. Freeman (1789), 3 T. R. 51

[22] Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158

[23] Smith New Court Ltd v Scrimgeour Vickers (Asset Management) Ltd [1996] UKHL 3

[24] Derry v Peek (1889) 14 App Cas 337

[25] Royscott Trust Ltd v Rogerson [1991] 3 WLR 57

[26] Candler v Crane Christmas & Co [1951] 2 KB 164

[27] Hedley Byrne v Heller & Partners Ltd [1963] 2 All ER 575

[28] Caparo Industries v Dickman [1990] 1 All ER 568

[29] James McNaughton Papers Group Ltd. v Hicks Anderson & Co. (1991) 1 AER 134

[30] Caparo Industries v Dickman [1990] 1 All ER 568

[31] Donoghue v Stevenson [1932] AC 562

[32] Cooke, John, and D. W. Oughton. The Common Law of Obligations. London: Butterworths, 2000, p. 53

[33] Halsbury’s Laws of England Tort (5th Edition, LexisNexis 2010) 97 [401, n5]

[34] Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574

[35] Esso Petroleum Co Ltd v Mardon [1976] EWCA Civ 4

[36] Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 at 194 per Lord Goff

[37] O’Sullivan, Janet. “The Meaning of ‘damage’ in Pure Financial Loss Cases: Contract and Tort

Collide.” Journal of Professional Negligence 28.4 (2012): 248-65.

[38] Chapman v Pickersgill  Pratt CJ

[39] Winterbottom v Wright (1842) 152 ER 402

[40] Ultramares Corporation v. Touche, 174 N.E. 441 (1932)

[41] Robertson, Andrew. “On the Function of the Law of Negligence.” Oxford Journal of Legal

Studies 33.1 (2013): 31-58. LexisLibrary.

[42] Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd

[43] Anns v Merton London Borough Council [1978] AC 728

[44] Murphy v. Brentwood District Council [1991] 1 AC 398.

[45] Gilmore, Grant. The Death of Contract. Columbus: Ohio State UP, 1974, at p. 61

[46] Donoghue v Stevenson ([1932] AC 562) at 618

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