PRE-CONTRACT NEGLIGENT MISREPRESENTATION

D. W. McLAucHLAN*

I. INTRODUCTIONIt used to be a settled rule of the law ofcontract that ordinarily a person

who was induced to enter into a contract by the other party's misrepre-sentation could not recover damages unless the representation wasfraudulent or contractually binding, either as a term of the principalcontract or a collateral contract. The leading case was Heilbut, Symon~\'&Co.v. Buckleton 1 where all members of the House of Lords joined LordMoulton in emphasising that it was "of the greatest importance ... that thisHouse should maintain in its full integrity the principle that a person is notliable in damages for an innocent misrepresentation, no matter in what wayor under what form the attack is made."2 For the purpose of this'fun-damental principle an "innocent" misrepresentation was simply one thatwas "non-fraudulent." In addition, it was held that whether the repre-sentation was a term of the contract must etepend on the intention of theparties to be d'etermined from the totality of the evidence. The requirementofintention to warrant has been criticised as being based on a mistaken viewof the previous authorities,3 but the decision in Heilbut settled the moderndoctrine and subsequently became the starting-point for numerous cases inwhich the question arose whether a pre-contract representation was con-tractually binding as a "warranty" so as to give the plaintiff a right ofactionin damages if it turned out to be false. 4

Then, in 1963, Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. 5 wasdecided. As is well-known, it was held by the House of L,ords that a duty ofcare will be owed in the giving of information or advice where there existsa "special relationship" between the representor and representee, breach ofthat duty giving a right of action in damages for economic loss. Thecircumstances in which a special'relationship will exist were not spelled outin their Lordships' speeches but the basic requirement was that of an"assumption of responsibility" on the part of the representor.

Hedley Byrne immediately gave rise to considerable speculation, notonly as to the nature of .the new principle, but also its wider implications.One question which attracted a good deal ofattention was whether a person

* LL.M. (Wellington). Senior Lecturer in Law, Victoria University of Wellington.1 [1913] A.C. 30.2 Ibid., 51.3 See e.g. Williston, "Representation and Warranty in Sales - Heilbutv. Buckleton" (1913)

27 Harv. L. R. 1; Greig "Misrepresentations and Sales of Goods" (1971) 87 L.Q.R. 179;Atiyah, "Misrepresentation, Warranty and Estoppel" (1971) 9 Alberta L.R. 347,348-349.

4 See e.g. Turnerv. Anquetil[1953] N.Z.L.R. 952; Routledgev. McKay [1954] 1W.L.R. 615;Kemp v. Dalziel [1956] N.Z.L.R. 1030; Oscar Chess Ltd. v. Williams [1957] 1 W.L.R. 370;Coffey v. Dickson [1960] N.Z.L.R. 1135; Dick Bentley ProductionsLtd. v. Harold Smith(Motors) Ltd. [1965] 2 All E.R. 65.

5. [1964] A.C. 465.

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who had entered into a contract relying on an "innocent", albeit careless,misrepresentation by the other party migh t now be able to recover damages.It was argued that if A could recover damages from B for a carelessmisrepresentation which induced A to enter into a contract with C, thesituation should be no different where the contract is with the representorB. The introduction of this new category of negligent misrepresentationinducing contract was seen as having the effect of enabling representees inmany cases to recover damages without having to establish that therepresentation was a term of the contract, although not in all cases becausesome "innocent" misrepresentations might be truly innocent, i.e.non-careless.

Generally, academic writers favoured the application of the HedleyB~yrne principle to pre-contract representations. However, they varied,considerably in their views as to the extent of its operation and its practicalsignificance. Some writers6 made its application subject to independentproof of a special relationship. Some7 went further and suggested that apre-contract relationship, by its very nature, would be a "special rela-tionship". Others,8 while not denying the possible application of HedleyByrne, viewed the new principle as being limited to representations byprofessional or skilled persons and thus not applicable in the majority ofcontract situations. In addition, they saw little practical significance for thenew remedy because, in situations where the tort test ofliability was met, thelaw of contract, independently of Hedley Byrne, would be able to imposeliability in damages by .categorising the statement in question as a warranty.

During the period 1963-1970, the question ofthe application ofHedleyByrne to pre-contract representations received little attention from thecourts. On the two occasions it did arise for consideration it was simplyasserted, without reasons, that the traditional contract rules had survivedHedley Byrne unqualified. Thus, in Oleificio Zucchi S. P.A. v. Northern SalesLtd. 9 McNair J. stated obiter:

I consider the submission advanced by the buyers, that the ruling in [Hedley Byrne]applies as between contracting parties, is without foundation.

A si!llilarview was expressed -by the Supreme Court ofNew South Wales inRural Bank ofN.S. W v. King.l o

However, over the last seven years as the volume of authorities hasincreased, the attitude of the courts has gradually changed. In the first case,the question was left open. I I This was followed by two cases in which,although the action in tort for alleged pre-contract misrepresentation failedon the facts, it was cautiously suggested that the Hedley Byrne principlecould in some circumstances impose a duty ofcare in respect ofpre-contract

6. E.g. Stevens, "Hedley Byrnev. Heller: Judicial Creativity and Doctrinal Possibility" (1964)27 M.L.R. 121, 156.

7 E.g.Anson,LawofContract(22nded. 1964)219; Weir, "LiabilityforSyntax"[1963]C.L.J.216,220; Millner, Negligence in Modern Law (1967) 40, 141.

8 Coote, "The Effect of Hedley Byrne" (1967) 2 N.Z.U.L.R. 263, 276; Honore, (1965) 8J.S.P.T.L. 184,296.

9 [1965] 2 Lloyd's Rep. 496, 519. IIOUnreported, 25 July 1966.II Presserv. Caldwell Estates Pty. Ltd. [1971] 2 N.S.W.L.R. 471.

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statements. 12 Now, in recent Canadian,13 New Zealand,14 and English l5

decisions, plaintiffs have finally succeeded in being awarded damages fornegligent misrepresentation inducing contracts. As a result, the law hasdeveloped to a stage where it can be stated with some confidence that,provided the essential ingredients for the application of the Hedley Byrneprinciple, as qualified by the Privy Council in M.L. C. Ltd. v. Evatt, 16 arepresent, the remedy of damages is 'available in respect of a careless pre-contract misrepresentation, irrespective ofwhether the representation formspart of the contract. The extent of the limits placed on the Hedley Byrneprinciple by Evatt is a matter ofconsiderable difficulty and furthermore therecent cases have far from clarified the situation. The writer does notpropose to deal with that question. It has been fully discussed elsewhere. I 7This article will be confined to a consideration of the narrower topic of theapplication of Hedley Byrne to pre-contract representations. All that needsto be said here with respect to Evatt is that one of its effects is that the mereexistence of a pre-contract relationship is not sufficient to create a "specialrelationship" giving rise to a duty ofcare. The Evatt requirements, whateverthey may be, must first be satisfied.

In view of the recent decisions of the Commonwealth courts, it isperhaps an opportune time to reflect on the current state of the law and theway in which it has developed. In the writer's opinion, a convincing case hasyet to be made out for allowing the recovery ofdamages in tort for carelesspre-contract misstatements, the effect of which is to enable plaintiffs inmany cases to circumvent the previously established rule that, in theabsence of fraud, a statement must be contractually binding before it isremediable in damages. The speeches of the Law Lords in Hedley Byrne donot support this fundamental alteration of the law. Indeed, it seems that atleast two oftheir Lordships envisaged that the "contract" rule would remainunchanged. In addition, although partly as a result of the latter point, thereasoning employed by the courts to justify the reception of Hedley Byrneinto the contract-making arena is open to serious question. Perhaps moreimportantly, the need for a remedy in tort in respect of pre-contractmisstatements is not readily apparent. The principles of the law ofcontractwhich govern whether or not misleading statements are contractuallybinding.have now developed to a stage where, correctly understood andapplied, they are sufficiently flexible to enable the courts to award damagesin most, if not all, cases where they ought to be awarded, without thenecessity to enlist the aid of the Heqley Byrne principle.

12 Dillingham Constructions Pty. Ltd. v. Downs [1972] 2 N.S.W.L.R. 49 (S.C.); Ellul and Ellulv. Oakes (1972) 3 S.A.S.R. 377 (F.C.).

13 Sealand ofthe Pacific v. Ocean Cement Ltd. (1973) 33 D.L.R. (3d) 625 (B.C.S.C.); WalterCahall Construction Ltd. v. The Queen (1974) 44 D.L.R. (3.d) 82 (F.C.).

14 Capital Motors Ltd. v. Beecham [1975] I N.Z.L.R. 576 (S.C.).15 Esso Petroleum Co. Ltd. v. Mardon [1975] Q.B. 819 (D.C.), [1976] Q.B. 801 (C.A.).16 [1971] A.C. 793.17 See Smillie, "Liability for Negligent Misstatements: Continuing Uncertainty" (1976) 3

Otago L.R. 512. Nor is it proposed to consider here the question ofliability under HedleyByrne for post-contract negligent misstatements; i.e. misstatements made after the contractis formed but during the course of the parties' contractual relationship. In the writer's view,that question, although very much related to the subject of this article, raises different and,in some respects, wider issues. For a discussion ofboth topics together see Symmons, "TheProblem of the Applicability of Tort Liability to Negligent Misstatements in ContractualSituations" (1975) 21 McGill L. J. 79 and Ziegel, "Tortious Liability for Pre-contractualand Intra-contractual Misrepresentations" (1976) 1 Can. Bus. L.J. 259.

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An attenlpt will be made in the following pages to substantiate theabove points. It will not be suggested, however, that the recent decisionsought to be rejected outright. Indeed, it will be concluded that, subject toone important qualification, the Hedle.-v B.vrne principle can legitimately beinvoked sometinles in respect of pre-contract misstatements.

II. THE JUSTIFICATION FOR THE NEW REMEDY

1. The Hedle.-y B.yrne SpeechesPrior to Hedle~y B)Jrne it was assumed that daclages could not be

recovered for financial loss caused by a careless misstatement unless therepresentor was in either a contractual or fiduciary relationship with therepresentee. When the House of Lords set out to remedy this situation, theprincipal obstacle to be overconle was its earlier decision in Derry v. Peek. 18That case had been regarded as confining the remedy of damages formisrepresentation, in the absence of a contract or.fiduciary relationship, tonlisrepresentations nlade dishonestly. Once Derr.v v. Peek had been ex-plained as not precluding liability where there existed some other "specialrelationship'" between the parties, nothing else stood in the way of theHouse reaching its desired conclusion. Certainly, there was no need toqualify the generally accepted ra tio of Heilbut, s.-vmons & Co. v. Buckleton 19which, like Derry v. Peek, was binding on the House at that time. Althoughobviously strongly influenced by the decision in Derry v. Peek, and thephilosophy behind it, Heilbut ~vnl0ns did not provide an obstacle in HedleyB.yrne because it covered a different situation. There the question waswhether the obligations assumed by the parties to a contract for theallotment of shares extended to an alleged misstatement by the defendantimmediately prior to the conclusion of the contract. It was held that themisstatement (which~ incidentally, was regarded by Lord Atkinson ashaving been made carelessly20) was not remediable in damages because itwas not intended by the parties to constitute a warranty. Thus, the rule oflaw established by the case was that where a person induces another to enterinto a contract with him by making a non-fraudulent misstatement damagesare not recoverable unless the statement was intended to constitute awarranty.

Not only was there no need to limit Heilbut Symons, but also nolimitation was attempted. The case was binding and there was no easy wayaround it. Even counsel for the plaintiffs in Hedley Byrne conceded that, inrespect of pre-contract statements, the requirement of intention to warrantmust remain. 21 It seems that the House proceeded on the same assumption.Perhaps their Lordships were also influenced by the fact that in the case ofpre-contract misstatements the representee did not have to embark on thevery difficult task ofestablishing fraud in order to recover compensation. Awarranty or collateral contract could be found in cases where the speakerought to be held responsible. Certainly this was Lord Reid's view. Early onin his speech his Lordship stated: 22

18 (1889) 14 App. Cas. 337.19 [1913] A.C. 30.20 Ibid., 43.21 [1964] A.C. 465,478. Gardiner Q.C. submitted that the requirement ofintention to warrant

was "irrelevant because that is in the realm of contract, while this is in the realm of tort."22 Ibid., 483 (Emphasis added).

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The most natural requirement [for liability in respect of negligent misrepresentation]would be that expressly or by implication from the circumstances the speaker or writerhas undertaken some responsibility, and that appears to me not to conflict with anyauthority which is binding on this House. Where there is a contract there is no difficultyas regards the contracting parties: the question is whether there is a warranty.

His Lordship thus clearly indicates that the necessity for a contracting partyto prove a warranty in order to recover damages in respect ofa pre-contractmisstatement remained unaffected by his speech.

The other speeches in the House of Lords are more equivocal. Overall,they neither support nor exclude the possibility of the new principleapplying to pre-contract misstatements. However, it is the lack of supportwhich is most significant in light of the fact that the House was faced withits earlier binding decision in Heilbut Symons.

Lords Morris and Devlin say nothing with respect to pre-contractmisstatements. Although the former does refer to Heilbut Symons,23 bothspeeches are neutral. Accordingly, in light of the established contract rule,they must be regarded as lending no support to a limitation of the warrantyrequirement.

Lords Hodson and Pearce do refer, albeit rather indirectly, to thequestion of pre-contract misstatements. Lord Hodson stated: 24

I do not overlook the point forcefully made by Harman L. J. in his judgment andelaborated by counsel for the respondents before your Lordships, that it may in certaincases appear to be strange that, whereas innocent misrepresentation does not sound indamages, yet in the special cases under consideration an injured party may sue in torta third party whose negligent misrepresentation has induced him to enter into thecontract. As was pointed out by Lord Wrenbury, however, in Banbury v. Bank ofMontreal,25 innocent misrepresentation is not the cause of action but evidence of thenegligence which is the cause of action.

This passage is very obscure and difficult to interpret, particularly the lastsentence. Lord Wrenbury in Banbury v. Bank ofMontreal was, of course,speaking in a totally different context - the meaning of section 6 of theStatute of Frauds Amendment Act 1828 (Lord Tenterden's Act).26Furthermore, the validity of the statement that innocent misrepresentationis evidence ofnegligence is open to question. Is the fact that A makes a falsestatement to B evidence that the statement was made carelessly and in

23 Ibid., 502.24 Ibid., 511.25 [1918] A.C. 626, 713.26 That section provides: "No action shall be brought whereby to charge any person upon, or

by reason of, any representation made or given concerning or relating to the character,conduct, credit, ability, trade, or dealings ofany other person, to the intent or purpose thatsuch other person may obtain credit, money or goods, unless such representation orassurance be made in writing signed by the party to be charged therewith." It was held inBanbury that the section applies to fraudulent misrepresentation only. Lord Wrenbury said(at 713) that in the case of fraud "the charge is made upon the tort committed by thefraudulent misrepresentation. The same is not true of an innocent representation. Aninnocent representation per se constitutes no cause of action. If there existed a duty, anaction lies for negligence and breach of duty, and in that action the fact that there wasmisrepresentation, although innocent, is. material. But an action cannot be maintainedupon an innocent representation simpliciter. It is maintained upon the breach ofduty. Theinnocent misrepresentation is not the cause ofaction, but evidence ofthe negligence whichis the cause of action."

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breach of a duty owed to B? These points aside~ it seenlS that Lord Hodsondoes not rule out the possibility of an action in tort for careless pre-contractnlisstatenlents. Bue does he support it? There are arguments both ways.

It nlight be argued that Lord Hodson should be treated as implicitlysupporting the possibility of such an action in view of his statement that~where negligence (breach ofa duty ofcare) is found~ it is "negligence whichis the cause of action "~ not innocent nlisrepresentation. If correct, the samereasoning nlust be equally applicable to an action for damages in respect ofa pre-contract careless nlisstatenlenc if a duty exists~ danlages are awardedfor negligel;ce. The rule that there can be no danlages for mere innocentnlisrepresentation is thus cin:unlvented but not contradicted.

It isditlicult to accept that J/eilhllt ~l'nl0nSCan beconfined,orthat LordHodson intended to confine it by saying, in effect: It is true that you cannotrecover danlages for innocent nlisrepresentation inducing a contractbet\veen the representor and representee unless the representation belongsto the higher category of tenn of the contract: but you can recover wherethere is a breach of a duty of care for then the cause of action is negligence,not innocent nlisrepresentation. This is really playing with \\lords. Thedistinction is without foundation, although adnlittedly it is the sort ofdistinction which occasionally proves attractive to a judge wishing tooverconle an inconvenient precedent. Heilhut 5.l'/HOnS held that there mustbe a warranty in the absence of fraud - it excluded a duty of care.

The writer prefers the argunlent that Lord Hodson does not support theapplication of the Hell/e.l' !3.1'fne principle to pre-contract nlisstatenlents.Indeed, it nlay be possible to go further and suggest that by inlplication, heis positively against it. At the beginning of the passage Lord Hodson isreferring to Harnlan L. J.'s statenlent in the Court of Appeal that it is a'lofundanlental proposition" that nlere innocent (i.e. non fraudulent) nlis-representations in connection with contracts do not sound in damages 27 andalso to counsel for the respondenCs argunlent that lo'danlages cannot beobtained for innocent nlisrepresentation unless there is a warranty. "28 LordHodson apparently regards Harnlan L. J. and counsel as saying~ in effect,that given there is no renledy, in the absence of a warranty, where anon-fraudulent misrepresentaton induces a contract between the repre-sentor and representee, the same rule should apply where the contract isentered into with a third party. 29 It seems, therefore, that Lord Hodson's firstreference to "innocent misrepresentation" nlcans a nonjraudu/enl pre-contract statement. Viewing the passage in this light, it can be argued thathis Lordship is admitting that it does seem strange that you can, "in thespecial cases under consideration" ~ sue a third par~v whose negligentmisrepresentation induces you to enter into a contract, but not the other

27 [1962] 1 Q.B. 396.415.28 [1964] A.C. 465.475.29 Stevens. supra n. 6 at 155 states that the rule that there is "no remedy for a non-fraudulent

misrepresentation not incorporated in a contract ... was a cardinal element in the ar-gument against liability on the part of the respondents in Hedley Byrne, who insisted thatit would be absurd to refuse an action for damages where a representation had been madebetween parties who eventually concluded a contract. but to allow a remedy where a thirdparty was involved." This is. of course, the converse of the general argument often putforward since Hedley Byrne in favour ofallowing the new principle to be invoked in respectof pre-contract misstatements; see supra pp. 23-24.

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contracting party who makes a non-fraudulent but careless statementinducing youto contract with him. By acknowledging the artificiality, hisLordship at least infers that he is not dealing with representations betweenparties about to contract and arguably accepts the underlying premise oftheargument addressed to him, viz. that non-fraudulent pre-contract missta-tements do not give a right to damages. In other words, ,Lord Hodson isacknowledging the force of counsel and Harman L. J.'s proposition (andpossibly the validity of its premise), but denying that it is a ground forprecluding liability in tort in "the special cases under consideration" ofthirdparty negligent misrepresentation. Thus, it is with respect to the latter casesthat Lord Hodson comments that negligence, not innocent misrepresen-tation, is the cause of action.30

Lord Pearce's reference to pre-contract misstatements is also some-what difficult to interpret. His Lordship stated: 31

It is argued that [to impose a duty of care where there is a special relationship] wouldcreate confusion in many aspects of the law and infringe the established rule thatinnocent misrepresentation gives no right to damages. I cannot accept that argument.The true rule is that innocent misrepresentation per se gives no right to damages. If themisrepresentation was intended by the parties to form a warranty between twocontracting parties. it gives on that ground a right to damages (Rei/but Symons & Co.v. Bucklelon). Ifan innocent misrepresentation is made between parties in a fiduciaryrelationship it may. on that ground. give a right to claim damages for negligence. Thereis also. in my opinion. a duty ofcare created by special relationships which, though notfiduciary. give rise to an assumption that care as well as honesty is demanded.

It must be acknowledged that it would not be inconsistent with this passageto allow a contracting party to recover damages in tort from the other partyfor a careless misrepresentation which did not amount to a warranty,provided that the parties were in the required special relationship giving riseto a duty ofcare. However, it is suggested that, in light ofcounsel's argumentand the fact that Heilbut S)lmOnS was a binding decision establishingthewarranty requirement, it is more likely that Lord Pearce intended thatrequirement to remain unaltered. Certainly, a more unequivocal statementwas required ifit was intended to lend support to an important qualificationof what Harman L. J. in the Court of Appeal described as a "fundamentalproposition".

In conclusion then, none of their Lordships support the extension ofthe Hed/~v Byrne principle to pre-contract relationships and it can beargued that two are positively against it. With this in mind, it is nowappropriate to consider the subsequent authorities which have taken thecontrary viewpoint.

2. Dillinghaln Constructions Pt.y. Ltd. v. Downs32

This was the first case in which the court was required to rule on thequestion. The facts were as follows. The plaintiffs contracted with the NewSouth Wales Government to deepen Newcastle harbour. When work

30 If this is the correct interpretation. it is to be noted that Lord Hodson's comment hardlymeets the point raised by counsel and Harman L. J.

31 [1964] A.C. 465. 539.32 [1972] 2 N.S.W.L.R. 49.

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began, the plaintiffs did not attain the anticipated rate of progress becausethe blasting operations designed to break up the harbour floor wereunsuccessful. Other methods ofworking had to be adopted with consequentdelay and expense. There were disused coal mine workings under theharbour and the plaintiffs concluded that these were the reason for theineffectiveness ofthe blasting. The Government had known ofthe workingsall along. The plaintiffs sued the Government claiming damages for breachof warranty and negligent misrepresentation inducing entry into the con-tract. With respect to the latter, they alleged that the Government owed andwas in breach of a duty to take reasonable care in the assembly of materialrelevant to the condition of the work site, a duty which obliged theGovernment to disclose the presence of the coal mine workings. Hardie J.,in the New South Wales Supreme Court, found for the defendant in respectof both the contract and tort claims.

The major interest of the case is that, although Hardie J. found for thedefendant on the facts, his Honour did reject its argument that "under no 'circumstances can the relationship between parties negotiating a contractbe brought within the category of special relationships imposing upon oneor other of those parties a duty to be careful in the supply of facts orinformation relative to the subject matter of the negotiations".33 HisHonour acknowledged that: 34

A person in pre-contract negotiations is entitled to and usually does seek to make the mostadvantageous deal he can. The other party does likewise; thus each is at liberty to haveregard solely to his own interests. The policy of the common law is to uphold contractsfreely made and not vitiated by any recognised invalidity factor. Thus a pre-contractrelationship would not normally qualify as a special relationship of the type which wouldsubject one or other ofth~ parties to a duty ofcare in the assembly or,presentation offacts,figures or other information as to the subject matter of the contract.

However, it was held that there might be special circumstances indicatingthat one party had undertaken responsibility for giving full and accurateinformation: 35

In the present case the contract involved substantial work on and beneath the floor of theNewcastle Harbour. Prior to calling for tenders the Departm~nt for many years had hadthe management and control of dredging and rock removal from the harbour; over aperiod of about two years prior to calling for tenders it had had extensive surveys,soundings and borings carried out by contractors to provide basic material for incor-poration in the specification and attached drawings. In view of the very special nature ofthe contract and the matters just mentioned and other features of the transaction I am ofthe opinion that the mere fact that the parties were in a pre-contract relationship at thetime when the duty was said to have been created, and to have been breached, did not initself necessarily preclude the application of the principle under consideration.

On the facts it was found that taking into account "the materialprovisions ofthe contract documents, the position, conduct, knowledge andintention ofeach of the parties, and the communications between the~",36the defendant had not assumed responsibility for providing full and ac-curate information.

33 Ibid., 55.34 Id.35 Ibid., 56.36 Id.

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In the writer's view, itis unfortunate that the suggestion thatthe HedleyByrne principle can apply to pre-contract misrepresentation should haverequired decision for the first time in the context of a dispute such as thatwhich carne before the court in the Dillingham case. Furthermore, theapproval, albeit qualified, given to that suggestion is unconvincing for at nostage ofhis judgment does Hardie J. grapple with the central issues affectingit.

Dillingham was not a typical case of careless misrepresentation in-ducing entry into a contract. Indeed, it seems from the report that there wasno misrepresentation at all. Nothing actually stated in the tender documentsor during the conversations between the parties misled the plaintiffs. Norwas it suggested that anything left unstated rendered what was statedmisleading and thus an actionable half-truth. The plaintiffs were aggrievedby the defendant's failure to supply all the material information withrespect to the work site which it had in its possession and they, in effect,sought to impose a positive legal duty to disclose that information. Theaction was essentially for negligence in failing to disclose information ratherthan negligent misrepresentation.

Viewed in this light, it becomes apparent that the plaintiffs faced theinsuperable difficulty of overcoming the general rule that a contractingparty is not subject to a dU,ty of disclosure and that mere silence cannotamount to misrepresentation.37 Although this rule is subject to a fewexceptions, none of them applied on the facts of the Dillingham case whichinvolved an ordinary commercial contract.38 It seems that even if it hadbeen proved that the defendant knew or suspected that the plaintiffs hadunderestimated the difficulties, it would still have been contrary to settledlaw to have imposed a duty to warn them.39 The obstacles in the way of theplaintiffs succeeding in their action were thus even more deep-rooted than'in the ordinary case involving an actual misstatement.

Furthermore, since the plaintiffs were attempting to impose a duty ofdisclosure on the defendant, much of Hardie J.'s reasoning is inapplicableto the situation where the question is whether damages ought to be availablefor an actual pre-contract careless misstatement. For example, his Honoursuggested that a pre-contract relationship would not normally qualify as aspecial relationship because "a person in pre-contract negotiations is en-titled to ... make the most advantageous deal he can" and "the policy ofthecommon law is to uphold contracts freely made and not vitiated by anyrecognised invalidity factor".4o These statements obviously explain thedifficulty in the way of imposing a "tort" duty of disclosure, but they arequite irrelevant where the question is whether a contracting party ought tobe liable in damages for an actual misrepresentation. The latter situation isone where the law states that a contracting party is not entitled to haveregard solely to his own interests and where there is a "recognised invalidityfactor" - the false statement inducing the contract. Here the considerationswhich affect imposition .of liability in damages are entirely different.

37 See Cheshire & Fifoot. The Law ofContract (4th N.Z. ed. 1974) 224.38 In particular. a building or engineering contract is not a contract uberrimae fidei. See

Hudson. Building and Engineering Contracts (10th ed. 1970) 42.39 Hudson. op. cit.. 31-6.40 [1972] 2 N.S.W.L.R. 49. 55.

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Plain~iffs are faced with the established rule that a non-fraudulent mis-representation, while it may give a right to rescission in equity, does notsound in damages unless it can be categorised as a term of the contract.

Finally with respect to the Dillingham case, it is noteworthy that thevery factors which were regarded as negating an assumption of respon-sibility on the part of the defendant to supply full and accurate informationas to the condition of the work site were precisely the same as those whichnegated a contractual obligation, whether express or implied, to supply theinformation. The evidence showed that there was no express or impliedunderstanding between the parties that the defendant was to supply fullinformation. The tender documents stated that the tenderer must fullyinform himselfas to the site conditions. The information that was given wasshort and obviously incomplete and this, combined with other clauses in thedocuments, indicated "reasonably clearly that it was not intended that theinformation supplied ... was to be a complete and exhaustive statement ofall relevant material".41 Furthermore, in the course of pre-tender discus-sions between the parties, there was no attempt by the plaintiffs to obtainfurther information. Indeed, they were confident that they had the expertiseto assess the problems associated with the project and thus did not rely onthe defendant to supply information. There is little doubt that, if theevidence had been to the contrary and did show substantial reliance on thedefendant to supply full information, a contractual obligation could havebeen imposed by way of, at least, an implied term. Certainly a finding ofassumption of responsibility and thus liability in tort would have stoodrather uneasily v~Tith a finding that there was no equivalent contractualobligation.

3. Ellul and Ellul v. Oakes42

In this case the plaintiffs were induced to buy the defendant's house bya representation that the property was sewered. When it was discovered thatthe house was in fact served by a septic tank, they sued for damages forbreach of warranty or, alternatively, negligent misrepresentation. In theSupreme Court of South Australia the plaintiffs recovered damages forbreach of warranty amounting to $550 being the cost of connecting thehouse to the sewer. However, the claim for negligent misrepresentationfailed on the ground that it had not been established that the plaintiffs hadsuffered financial loss as a result of their entry into the contract. The tortmeasure ofdamages is the difference between the value ofwhat is receivedunder the contract and the price paid for it and the plaintiffs had not provedthat the house unsewered was worth less than the price paid for it. Inaddition, one of the three judges, Zelling J., indicated that even if damagehad been proved, the plaintiffs still could not have succeeded because thedefendant:

was not a person holding himself out as possessing a special skill or ability ... and themere fact that he had a financial interest in the transaction in which the statement wasmade was not sufficient to convert it into the sort ofadvice which attracts the interventionof the Court in cases of negligent misrepresentation.43

41 Ibid.. 59.42 (1972) 3 S.A.S.R. 377.43 Ibid., 392.

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His Honour thus took a strict view ofthe Evatt requirements and limited theapplication of the Hedley Byrne principle to persons possessing special skill.

This case illustrates that the Hedley Byrne principle, ifand when it doesapply to pre-contract misrepresentations, will not always provide aneffective substitute for an action for breach ofwarranty.44 The latter action,if successful, entitles the plaintiff to recover damages in respect of his lost"expectation" - the difference between the value of what he received andwhat he would have received if the representation had been true. The objectof tort damages, on the other hand, is restitutio in integrum - the plaintiffis only entitled to be put in the position he would have been in if the tort hadnot been committed and, in the case of negligent misrepresentation in-ducing contract, this is the position he would have been in if he had notentered into the contract. Thus, in cases such as Ellul v. Oakes where theplaintiff has not suffered a loss in his pre-contract net wealth but he wishesto be put in the position he would have been in had the contract beenperformed and thus reap the benefit he had won for himself, he mustestablish breach of contract.

However, more important for present purposes is the approval givenby all three members of the Supreme Court to the suggestion that HedleyByrne can apply to pre-contract misstatements. Only Bray C. J. was in anyway hesitant on the matter. His Honour had "no doubt that such a claimmay succeed in some circumstances notwithstanding that the representa-tion is connected with a contract between the parties".45 But he also felt that"the law ofvendor and purchaser is so familiar and well developed, and somany claims for damages in respect of innocent misrepresentations inrelation to the sale ofland, often disguised as claims for breach ofwarranty,have failed, that it might be difficult now to apply the new Hedley Byrne &Co. Ltd. v. Heller principle to such claims. In many such cases such innocentmisrepresentations must have been made negligently".46

The otherjudges had no such reservation. Zelling J. strongly disagreed withthe dictum of McNair J. in the Oleificio case,47 saying: 48

Causes ofaction have overlapped for centuries in the law, and always there has been thiscry that there ought to be only one cause ofaction arising out ofa given set offacts. It wasso when assumpsit superseded debt, it was so when trover and later conversion super-seded detinue, and there are many other such examples. The fact is that the same set offacts may give rise to a number ofcauses ofaction and the plaintiff elects which one willbest enable him to win his case or gives him the better measure ofdamages as the case maybe.

Wells J. took a similar approach, declaring that "an uncompromisinginsistence upon mutually exclusive categories has long ago been abandonedin principle".49

44 Sometimes it may do. See the discussion of the damages awards in Capital Motors f..-td. v.Beecham (infra p. 37. ) and Esso Petroleum Co. Ltd. v. Mardon (infra p. 54 ).

45 (1972) 3 S.A.S.R. 377, 380.46 Id.47 Supra o. 9.48 (1972) 3 S.A.S.R. 377, 390.49 Ibid., 393.

34

Do the above comments provide a satisfactory justification for ena-bling Hedley Byrne to be invoked in respect of pre-contract misrepresen-tations? It is true, of course, that "the same set of facts may give rise to anumber ofcauses ofaction". In particular, there are many occasions wherea plaintiff has alternative actions in contract and tort, notable examplesbeing the numerous cases involving negligent employers, carriers, baileesand suppliers of goods and services.50 It was these cases that Lord Mac-millan had in mind when he said in Donoghue v. Stevenson: 51

The fact that there is a contractual relationship between the parties which may give riseto an action for breach of contract, does not exclude the co-existence of a right of actionfounded on negligence as between the same parties, independently of the contract,though arising out of the relationship in fact brought about by the contract.

However, does it follow that, because there can be concurrent liability incontract and tort in some cases, there should be liability in tort for carelesspre-contract misrepresentation? Does the opposition to imposing liabilityin tort for pre-contract misrepresentation simply stem from a failure torecognise that sometimes plaintiffs may have claims in contract and tort? Inthe writer's view, the answer to these questions must be in the negative. Itis noteworthy that all the cases referred to above involved consistent andcomplementary actions in contract and tort. 52 It follows, therefore, thatthere can be little objection to allowing a contracting party an action in tortagainst the other party for negligent misrepresentation in respect of astatement which is acknowledged or established to be a contractual war-ranty (as it was in Ellul). However, it is an entirely different matter to allowthe action in tort in respect of a statement which the contract rulesspecifically declare· does not give a right to damages, particularly if aplaintiff's entitlement to rely on concurrent causes ofaction is subject to theproviso that "they are not inconsistent with one another".53

4. Sealand ofthe Pacific v. Ocean Cement Ltd. 54The essential facts, for present purposes, were as follows. The plaintiff

company wished to raise the level of its sea life display vessel. Thedefendant's sales representative advised that the company had alightweight concrete with a dry density of30 lbs per cubic foot which woulddo the job. The plaintiff ordered the concrete and the work was carried outbut the concrete turned out to be much heavier than represented with theresult that the vessel settled even deeper into the water. The plaintiffclaimeddamages for negligent misrepresentation and breach of warranty. McKayJ., in the British Columbia Supreme Court, found for the plaintiff underboth heads. The defendant was liable in tort because it owed and was inbreach ofa duty ofcare in giving the advice. It was liable in contract becausethe representative's statement amounted to a warranty. McKay J. also

50 See generally Millner, Negligence in Modern Law (1967) 131-133; Guest, "Tort or Con-tract?" (1961) 3 Malaya L.R. 191, 193-194.

51 [1932] A.C. 562, 610.52 For recent illustrations, see Vacwell Engineering Co. Ltd. v. B.D.H. Chemicals Ltd. [1971]

1 Q.B. 88; Coats Patons (Retail) Ltd. v. Birmingham Corporation (1971) 69 L.G.R. 356;Gabolinscy v. Hamilton City Corporation [1975] 1 N.Z.L.R. 150.

53 Ziegel, supra n. 17 at 261. .54 (1973) 33 D.L.R. (3d) 625.

35

found that it was an implied condition of the contract under the Sale ofGoods Act that the product was reasonably fit for its purpose. As a result,the plaintiffwas awarded damages covering, inter alia, the cost of replacingthe concrete with a substance which would raise the level of the vessel andthe loss ofprofits for the period the vessel would be out ofcommission whilethe new work was carried out.

The decision in the plaintiff's favour was affirmed by the BritishColumbia Court ofAppeal,55 although it was found unnecessary, in view ofthe warranty finding, to deal with the negligence issue. An interesting aspectof the decision is the Court's observation that the plaintiff could not haverecovered the cost of replacing the concrete with a substance which wouldraise the level of the vessel if there had been no warranty and the plaintiff'sclaim was solely in negligence. As noted earlier, the object of tort damagesis to restore the plaintiff to the status quo ante, to put him in the position hewould have been in if the representation had never been made. Thus, on thehypothesis posed above, the plaintiff in Sealand could have recovered thecosts of restoring the vessel to its earlier state, but not the added costs ofraising its level. The latter costs could, however, be recovered once awarranty was found since the object of contract damages is to put theplaintiffin the position he would have been in ifthe representation had beentrue and the consequent benefits accrued. The facts ofthe Sealandcase thusprovide a further situation where, even if Hedley Byrne does apply, theaction in tort will not provide an entirely effective substitute for a breach ofwarranty action.

More importantly, however,Sealand is not a strong authority forallowing the recovery of damages in respect of careless pre-contract mis-statement. The central arguments against the imposition of tort liability inthis area do not appear to have been canvassed in the course of argumentand they certainly were not discussed in McKay J.'s judgment. Indeed, .hisHonour's judgment did not recognise that there were any peculiardifficulties in the way ofapplying Hedley Byrne to pre-contract, as opposedto post-contract, representations. He simply referred to counsel's argument"that the Hedley Byrne principle did not apply where the relationship oftheparties is governed by a 'contract" and then asserted: 56

The short answer is that the representation ... was made months before any contractualarrangement was entered into.

5. Capital Motors Ltd. v. Beecham57

In this case, the plaintiff (Beecham) purchased a used car from thedefendant motor vehicle dealer in reliance· on the salesman's carelessmisrepresentation that the car had not had more than two previous owners.The plail}tiff claimed damages in tort for negligent misrepresentation andin the Magistrate's Court was awarded $100, being the difference betweenthe price paid for the car and its market value at the time of the purchase.The decision was upheld by Cooke J. in the Supreme Court. His Honourheld that the essential ingredients for the application of the Hedley Byrneprinciple were present and that liability was not ruled out by the fact that the

55 Sea/and ofthe Pacific v. Robert C. McHaffie Ltd. (1975) 51 D.L.R. (3d) 702.56 (1973) 33 D.L.R. (3d) 625,633.57 [1975)1 N.Z.L.R. 576.

36

statement was made in the course of pre-contract negotiations. Bothfindings are open to question but it is only the latter that is the concern ofthe present article. 58

As in the previous cases, the issue as to whether there can be liabilityin tort for careless pre-contract misstatements did not receive the detailedattention and analysis it deserved. Indeed, Cooke J. expressly stated hisunwillingness to do other than state his conclusions briefly since, in his view,the occasion seemed "to call for decision rather than disquisition".59 Thus,after referring to Presser v. Caldwell Estates Pty. Ltd.,60 where the questionwas left open, the Sealand case and the decision ofLawson J. at first instancein Esso Petroleum Co. Ltd. v. Mardon, which will be considered shortly, hisHonour was content to say:61

None of those three decisions is binding on this Court. In any event each is inconclusiveas to the present kind of question, and of the last only a brief report is yet available. Butsomething of a trend does emerge. Encouraged by those cases from three common lawjurisdictions, I am prepared to hold that the circumstance that a statement which hascaused economic loss has been made by a prospective seller of goods to the prospectivebuyer in pre-contract negotiations does not ipso facto rule out a duty of care ....

In the writer's view, the occasion did call for "disquisition". Admittedly theamount in dispute was trifling, but Cooke J. was faced with a commoncontractual situation which had given rise to a considerable volume ofcase-law over the preceding 100 years and that case-law required theplaintiff to establish that the defendant's statement constituted a warrantyor collateral contract. Nevertheless, his Honour preferred to follow two firstinstance decisions which considerably qualified that requirement. The basisof these decisions was Hedley Byrne, some "disquisition" of which wouldhave shown that the House of Lords did not sanction an alteration of therules applicable to the situation in question.

There are two other aspects of the Beecham case which require com-ment. First, unlike the previous cases discussed, the plaintiff did not claimalternatively for breach ofwarranty. In one respect, ofcourse, such a claimwould have been easier to sustain in that there would have been ])0 need toprove carelessness. However, it was probably decided not to sue in contractbecause the printed conditions of sale signed by the plaintiff contained thefollowing clause:

5. I acknowledge that I have inspected the vehicle and have relied on such inspection andmy own judgment in contracting for the same and that no warranties representations orpromises have been made by you or your servants except those given in writing andendorsed hereon ....

Whether such a clause is effective to preclude the setting up of an oralwarranty is a matter upon which there is little reasoned authority. There aretwo parts to the clause. The first part is an acknowledgment by the buyer thathe relied on his own judgment. The second part is a "merger" clauseacknowledging that the document contains the parties' whole contract.

58 For a discussion ofthe former finding see Smillie, supra n. 17 and the writer's note in [1976]N.Z.LJ.323.

59 [1975] 1 N.Z.L.R. 576, 578.60 Supra n. 11.61 [1975] 1 N .Z.L.R. 576, 580.

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Both parts commonly appear either together or by themselves in writtencontracts, particularly standard form contracts. Although Cooke J. was notconcerned with the effect of the clause with respect to alleged oral terms, hisHonour did observe that "a possible interpretation is that .it is confined tothe state (as distinct from the history) ofthe vehicle".62 Some support for thisview, at least with respect to the first part ofthe clause, is to be found in Kempv. Dalziel63 where North J. stated that a clause similar to the first part wouldapply only to representations by a vendor "in respect of matters which thepurchaser could see for himself and thus form his own independentopinion."64

The writer has discussed in detail elsewhere the question of thecontractual effect of clauses such as that in Beecham. 65 I t was there sug-gested that they are not conclusive of the parties' intention and that, inappropriate cases, oral agreements can still be enforced.66

The only matter which needs to be considered here with respect to theclause is its possible effect on tort liability. Cooke J. stated that "therelevance ofsuch a condition in tort as shown by Hedley Byrne is that it maybe part of the material from which one deduces whether a duty ofcare wasassumed; or, put more shortly, did it operate as a disclaimer?"67 His Honourlater concluded that the clause was not an effective disclaimer of respon-

. sibility. It is questionable, however, whether the clause was only relevant tothe tort issue as a possible disclaimer. There are other essential requirementsfor the operation of the Hedley Byrne principle apart from assumption ofresponsibility and one of these is reliance by the representee. The first partof the clause was an acknowledgment by the plaintiff that he relied solely onhis own judgment. If this acknowledgment was contractually binding, thenit prevented the plaintiff proving this other essential ingredient of theHedley Byrne action. So, in this sense, the contractual effect of the clauseshould have been in issue in the Beecham case.

Finally, it is interesting to consider the damages award in Beecham. Atfirst glance it appears that, unlike Ellul and Sealand, the action for negligentmisrepresentation did, in so far as the amount ofdamages recoverable wasconcerned, provide the plaintiff with an effective substitute for an action incontract in that on the facts the tort and contract measures led to the sameresult. The plaintiff had paid $1400 for a car which had a market value of$1300 as a result of its having had more than two owners. He recovered intort the difference of$loo. This put him in the position he would have beenin if the tort had not been committed and the contract not entered into.Applying the contract m.easure, the amount required to put the plaintiff in

, the position he would have been in if the representation had been true wasthe same - $100.

62· Id.63 [1956] N.Z.L.R. 1030.64 Ibid., 1032.65 The Parol Evidence Rule (1976) 73-79.66 However, the comment by Sealy, "Hedley Byrne and Contracting Parties" [1975]C.L.J.

194, 196 that "had MrBeecham's lawyers seen fit to plead awarranty,CookeJ.couldsimplyhave followed Bannerman v. White (1861) 10 C.B.N.S. 844" is an oversimplification oftheissue as it ignores the difficulties created by the merger clause.

67 [1975] 1 N.Z.L.R. 576, 580.

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There is, however, one complication which raises an interesting pointofdamages law. It seems that the principal reason for the depreciation in thevalue of the car was not the fact that it had had more than two owners butthat the first owner was a rental-car company. Cooke J. stated that "thesuccession of owners went back to a rental-car company, the car havingbeen used for rental purposes for about the first 20,000 miles, and theMagistrate found that in the light of this history the true market value wasonly $1300."68 It follows from this that if an action had been brought forbreach of warranty, the plaintiff would have been entitled to nominaldamages only because the cause of the loss was not the breach ofcontract.If the representation had been true and the car had had only two owners, .hewould still have suffered the loss. He had made a bad bargain.69

The question then arises whether the damages of$IOO ought to havebeen recoverable in tort. In other words, was the plaintiff entitled to recoupthe loss resulting from his bad bargain by proceeding in tort as Cooke J.found? It could be argued that damages were not recoverable because there·was no causal connection between the misrepresentation and the loss. If therepresentation had been true the plaintiff would still have suffered the loss.Although a plaintiff can sometimes recoup the consequences of his badbargain by suing in tort, it must still be shown that the misrepresentationcaused some of the loss.70 In Beecham Cooke J. stated that "it was rea-sonably foreseeable ... that if it had been known that there were moreowners [than two] the market value of the car might well have beendiminished".71 That was certainly so, but on the facts as stated the greaternumber of owners did not account for the decrease in value.

The answer to the question depends on whether, in order to recoverdamages in tort for misrepresentation, it is enough that the misrepresen-tation induces an alteration of position (such as entry into a contract) andloss flows from that alteration, or whether there must be some moreimmediate causal connection between the misrepresentation and the loss.While there is some authority for the latter view that damages must beconfined to the amount by which the contract was less valuable by virtue ofthe misrepresentation,72 it would appear that the former is the moreaccepted view. 73 Accordingly, Cooke J. 's award ofdamages in Beecham was

68 Ibid., 581.69 It is an open question whether a plaintiff in an action for breach ofcontract can elect to claim

damages in respect of his reliance interest (wasted expenses) - in effect, the tort measureofdamages - where that would protect him against the consequences of his bad bargain.However, the better view seems to be that he cannot and the writer has proceeded on thisbasis; see the discussion in Ogus, The Law ofDamages (1973) 351-352. Even if the positionwere otherwise, it is to be noted that the situation in Beecham (assuming that the $100 canbe treated as wasted expenses) differs from the example discussed by Ogus at p.351 and theearlier example at p.287. In Beecham, the defendant's breach ofcontract did not cause anypart of the $100 to be lost, whereas in the examples given by Ogus there is a causalconnection between the failure to perform and the wasting of a substantial part of theexpenses claimed.

70 See the examples cited by Treitel, The Law ofContract (4th ed. 1975) 236 and Ogus, supran. 69 at 287 where this requirement is satisfied.

71 [1975] 1 N.Z.L.R. 576, 581.72 Kerr on Fraud and Mistake (7th ed. 1952) 496; Spencer Bower and Turner, The Law oj

Actionable Misrepresentation (3rd ed. 1974) para 144, but cf. para. 206 n.l, citing Toteffv.Antonas (1952) 87 C.L.R. 647 with apparent approval.

73 Toteffv. Antonas ibid.; Canavan v. Wright [1957] N.Z.L.R. 790, 802; Moncrieff on Fraudand Misrepresentation (1891) 15-17, 186-188; Ogus, supra n. 69, 251-252; McGregor onDamages (13th ed. 1972) paras. 1358-1360.

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correct. 74 The plaintiffwas induced by the defendant's misrepresentation toenter into a contract which he would not otherwise have entered into and asa result suffered loss - he paid $1400 for a carworth $1300. According to thetort measure of damages he was entitled to be put in the financial positionhe would have been in if the tort had not been cOlnmitted - the amount bywhich the value of the car was less than the price paid. .

The Beecham case thus discloses a situation where the action fornegligent misrepresentation goes further than providing an effective sub-stitute for an action for breach ofwarranty. For damages to be recoverableat all, the plaintiff must sue in tort.

6. Walter Cabott Construction Ltd. v. The Queen 75

The facts of this case are a little complicated and require setting out insome detail. In 1970 the Canadian Government decided to build a fishhatchery near the Capilano river. The construction was to take place inseveral stages with each being the subject of a separate contract. Theplaintiff company's tender for contract no. I was accepted. The contractdocuments gave no- indication as to the timing of the other contracts, theplans merely referring to the work to be undertaken in these contracts as"future". The plaintiff tendered on the assumption that it would haveexclusive possession of the work site for the duration of the contract.

Shortly after the commencement of work on contract no. 1 tenderswere invited for contract no. 3, whereupon the plaintiff expressed concernthat this would obstruct the progress of contract no. 1. The defendant toldthe comp'lny that ifit wanted compensation it should tender for and obtaincontract no. 3 and include compensation for the extra cost of completingcontract no. I in its price. The plaintiff decided that it could not increase itsprice and still remain competitive but that its difficulties would be com-pounded if a third party was awarded the contract. Accordingly, theplaintiff tendered in the normal way for contract no. 3 and that tender wasaccepted. Like contract no. I, contract no. 3 contained no reference to thetiming of subsequent contracts and the plaintiff assumed that, apart fromthe continuing work on contract no. 1, there would be no unusual inter-ference from outside in the performance of the contract. In fact, soon afterthe defendant advertised contract no. 4. This contract was awarded to athird party. As a result, the hatchery site became congested. The plaintiffincurred extra costs in carrying out contract no. 1 by virtue of contract no.3 being carried out alongside. The commencement ofwork on contract no.4 also impeded the carrying out ofcontracts nos. 1 and 3 and caused furtherloss to the plaintiff.

The plaintiff sued for damages alleging breach of contract in thedefendant's failure to provide sufficient exclusive and uninterrupted pos-session of the work site and negligent misrepresentation in the failure toadvise that other work would be carried out on the site. Mahoney J., in theFederal Court, found for the plaintiff and awarded damages as follows: 76

74 However, it is difficult to go along with his Honour's suggestion (at 581) that it was notnecessary to consider the difference between damages in contract and damages in tort.

75 (1974) 44 D.L.R. (3d) 82.76 Ibid., 99.

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a. For breach of contract no. I - $25,000b. Additional damages in respect ofcontract no. I as a result of the defendant's negligent

misrepresentation vis-a-vis contract no. 3 - $10,000c. Additional damages in respect ofcontract no. I as a result of the defendant's negligent

misrepresentation vis-a-vis contract no. 4 $500d. Damages in respect of contract no. 3 as a result of the defendant's negligent mis-

representations vis-a-vis contract no. 4 - $2,000

With respect to the negligent misrepresentation claim, it was held that: 77

... the defendant's failure to disclose its intentions with regard to contracts nos. 3 and 4when it called tenders for contract no. 1and its failure to disclose its intentions with regardto contract no. 4 when it called tenders for contract no. 3 were omissions that constitutednegligent misrepresentation ....

The fact that these "misrepresentations" occurred prior to the creation ofthe contracts did not cause Mahoney J. any difficulty. After referring toHeilbut, S.ymons & Co. v. Buckleton 78 and Lord Devlin's suggestion inHedle.y B"vrne that a duty ofcare may arise "whenever there is a relationshipequivalent to contract",79 his Honour concluded that: 80

... the .relationship between the person who invites tenders on a building contract andthose who accept that invitation is such a particular relationship as to impose a duty ofcare upon that person so as to render actionable an innocent but negligent misrepre-sentation in the information which he conveys to those whom he intends to act upon it.I am further of the view that, where the information is clearly material and obviously verymuch in the mind of the party withholding it, as in this instance, the failure to disclose itis a breach of the duty owed.

In the writer's view, the judgment and reasoning of Mahoney J. areopen to serious question in several respects, and as a result, the Cabott caseought not to be regarded as a persuasive authority in favour of allowingactions in tort in respect of pre-contract misrepresentations. First, hisHonour merely asserts that Hedley Byrne can apply in this area. Thejudgment does not recognise that there is a question peculiar to pre-contractrepresentations.

Secondly, there does not appear on the facts to have been an actual"misrepresentation". As noted earlier in the context of the Dillingham case,it is well-settled that in general silence cannot amount to an actionablemisrepresentation. A duty of disclosure will arise where the contract isuberrimae fidei, but a building contract is not such a contract.81 Further-more, it does not appear from the report that the failure to disclose thetiming of the other contracts rendered one or other of the defendant'sstatements in the tender documents misleading so as to amount to half-truths. Consequently the defendant, according to settled law, was entitledto retain the benefit of his own knowledge. It is suggested that the HedleyByrne principle cannot appropriately be stretched to impose duties ofdisclosure which the law ofcontract has inexorably set itself against. Thus,in the absence of a contractual obligation to disclose the· relevant infor-

77 Ibid., 97.78 Supra n. 19.79 [1964] A.C. 465, 530.80 (1974) 44 D.L.R. (3d) 87,98.81 See Hudson, supra. n. 38.

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mation or to provide exclusive possession of the work site, the defendant inCabott could not be liable for the plaintiff's loss.

The essential question in the Cabott case was whether the defendantwas contractually bound by way of an implied term to provide uninter-~uptedpossession of the site. If there was no such contractual obligation andIf, therefore, the defendant was entitled to have work commenced on theother contracts, then there could be no real question of him being under aduty of disclosure. The writer's earlier comments with respect to theD,illingham case apply equally here, viz., even if an employer suspects thathIS contractor has underestimated the difficulties, he is under no duty towarn him. The invocation of Hedley Byrne in both cases was entirelymisconceived and clouded the real issues. Although, as it turned out, it wasfound in the Cabott case that there was an implied term that "the plaintiffwould have a sufficient degree ofun in terrupted and exclusive possession ofthe site to permit it to carry out.its work unimpeded and in the manner ofits choice",82 there is evidence that the concurrent consideration of liabilityunder Hedley Byrne did occasion some confusion, particularly when it cameto the damages award.

First, there is the award of damages of $2,500, under heads (c) and (d)outlined earlier, in respect ofcontracts 1and 3 as a result of the defendant'snegligent misrepresentation vis-a-vis contract 4. Mahoney J. found that theimplied terms in contracts 1and 3 as to exclusive possession of the work sitewere not breached upon the defendant's entry into contract 4. His Honourheld that the plaintiffwas not "entitled to regard any portion of the locationofcontract no. 4 as part of the site ofeither contracts nos. 1or 3."83 However,later in the judgment, it was stated that the commencement of work undercontract 4 did impede the progress of contracts 1 and 3.84 This finding ledto the award of damages under heads (c) and (d). It is suggested that it isdifficult to reconcile this award ofdamages for negligent misrepresentationvis-a-vis contract 4 with the earlier finding that the contractual obligationhad not been breached. How can you consistently hold:

(a) the defendant is not in breach of his implied contractual obligation toprovide exclusive possession of the work site, yet

(b) the plaintiff can recover damages in tort for the defendant's failure toinform the plaintiff that it would not have exclusive possession?85

The essence of conclusion (a) is that by allowing work to progress undercontract 4 the defendant did not fail to provide "a sufficient degree ofuninterrupted and exclusive possession of the site to permit it to carry outits work unimpeded and in the manner of its choice".86 The latter seems topreclude a finding that the alleged tort duty was breached.

There is also another difficulty with the damages award in Cabottwhich further lessens the persuasiveness of the decision. The award asoutlined earlier fails to take into account that the causes -of action werealternatives. With respect to contract 1, the defendant was held liable for

82 (1974) 44 D.L.R. (3d) 82, 94.83 Ibid.84 Ibid., 96.85 See Schwartz, "Annnual Survey ofCanadian Law - Contracts" (1976) 8 Ottawa L.R. 588,

622.86 (1974) 44 D.L.R. (3d) 82, 94.

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hoth hreach of the inlplied ternl and for negligent nlisrepresentation. Forthe fornler~ danlages of $25~OOO were awarded and for the latter~ anadditional $IO~OOO. By classifying essentially the same onlission as a breachof contract and a tort and awarding an extra $IO~OOO for the latter~ theplaintif[ on the f~lce of things~ was overconlpensated by $lO~OOO. If~ how-ever~ the actual loss to he conlpensated was $35~OOO~87 then that was the sumwhich should have heen awarded a/lernaliveh' for breach of contract ornegligent nlisrepresentation. .

7. Esso Pclro/clIlIl Co. LId. v. Mardon 88

The judgnlents of the English High Court and Court of Appeal in thiscase are the first to contain anything like a full discussion ofthe applicabilityof lied/e.r !3.rrnc to pre-contract representations. The essential facts of thecase were as follows. Mardon entered into a tenancy of one of EssoPetroleunl \ new petrol stations in reliance on the statenlent by theconlpany\ representative: ""we estinlate that the throughput of the stationin its third year of operation will anl0unt to 200~OOO gallons"'. This forecastwas given carelessly and only ahout half of the throughput estinlated wasever achieved. When Esso sued to recover nl0neys due under the tenancy .agreelnent. Mardon counter-clainled for danlages for breach of warrantyand negligent nlisrepresentation.

In the Queen ~s Bench Division~ Lawson J. rejected the claim for breachofwarranty. Esso's statement was held to be a mere estimate, not a promiseor assurance that the throughput would be achieved. However~his Lordshipdid find for Mardon on the alternative claim for negligent misrepresenta-tion, holding~ inter alia, that a duty ofcare was not ruled out by the fact thatthe statement was made in the course of pre-contract negotiations. In theCourt ofAppeal, Lawson J.'s decision on the contract issue was reversed onthe ground that, while it was true that Esso had not promised that thethroughput would be achieved, their statement did in the circumstancesamount to an assurance that the forecast was sound and reliable in the sensethat it had been made with reasonable skill and care. However~ Lawson J.'sdecision on the tort issue was affirmed~ in particular~ his conclusion thatthere was no ground for excluding Hedley B.yrne liability in relation topre-contract misstatements. It is now proposed to consider the reasons putforward by both courts in reaching their decisions on this aspect of the case.

Lawson J. gave two principal reasons. First, the speeches in Hed/~yByrne did not exclude the duty of care from pre-contract situations.89Secondly, "as a matter of principle" there was nothing wrong in imposinga duty of care in relation to pre-contract misstatements.9o Neither of thesereasons is satisfactory.

With respect to the former, the full text of Lawson J .'s comment is asfollows: 91

87. It.seems that this was the case. Mahoney J. stated (at 99) that ifhe had not found a breachof contract he would have awarded $35,000 in respect of the negligent misrepresentationvis-a-vis contract J.

88 [1975] Q.B.819, [1976] Q.B.801 (C.A.).89 [1975] Q.B. 819, 831.90 Ibid., 832.91 Ibid.~ 831.

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It is also possible to contend that the observations ofthe House of Lords in Hedley Byrne& Co. Ltd. v. Heller & Partners Ltd. [1964]A.C. 465 assumed that statements made inpre-contractual negotiations between parties who ultimately came to contract wereexcluded from the duty ofcare principle: see, for example, what Lord Reid said, at p. 483:"Where there is a contract there is no difficulty as regards the contracting parties: thequestion is whether there is a warranty." There are, however, other relevant passages inHedley Byrne, and, taking the speeches as a whole, in my judgment it is not right to regardHedley Byrne as containing anything which excludes the duty of care relationship in apre-contractual negotiation situation. It seems to me that Lord Devlin's observations, atpp. 516-517 and 526-527, are a clear indication to the contrary, because he was dealingin those passages with the situation in which one has running alongside a contractualrelationship a relationship which gives rise to a duty of care.

The suggestion that none of their Lordships in Hedley Byrne exclude theduty ofcare from the pre-contract situation bypasses the central issue. That,issue, as suggested earlier,92 is whether the speeches in Hedley Byrne supportan important qualification of the settled rule that in order to recoverdamages for non-fraudulent pre-contract misrepresentation, it must beestablished that the representation was contractually binding. The answerto that question, again as suggested earlier, was that the House ofLords werenot only not asked to and did not sanction an undermining of the contractrule, but also they could not do so in view ofthe binding decision in Heilbut,Symons & Co. v. Buckleton. 93 By posing the question as being whether thespeeches in Hedley Byrne excluded the duty of care from pre-contractnegotiations Lawson J. subtly, but wrongly, shifted the onus on to therepresentor to establish that Hedley Byrne had not changed the pre-existinglaw with respect to the warranty requirement

Furthermore, while it may be true that most of their Lordships inHedley Byrne did not exclude the duty of care from the pre-contractsituation, it is not easy to place Lord Reid into this category. His Lordship'sstatement, quoted above by Lawson J., is not merely indicative of anassumption on his part that pre-contract statements are excluded from thenew principle. It is an express acknowledgement that the warranty requi-rement remains unaffected.

Lawson J.'s invocation of Lord Devlin's speech as positively sup-porting his conclusion is rather strange; The writer stated earlier that LordDevlin at no stage addressed himself to the pre-contract issue.94 Lawson J.refers to pp. 516-517 and 526-527 which deal "with the situation in whichone has running alongside a contractual relationship a relationship whichgives rise to a duty ofcare." The writer has studi~d the pages cited but cannotdiscover anything pertinent to the prese.nt issue in them. It seems that

-Lawson J. may have had in mind a later passage95 which arguably indicatesthat Lord Devlin did envisage certain contractual relationships, such assolicitor and client and banker and customer, giving rise to concurrentduties in contract and tort. However, even so, it is difficult to see how itfollows that, because there can be concurrent liability in tort and contractin such cases, there should be liability in tort for pre-contract misrepre-sentation. The latter is an entirely different situation. There is no contract in

-92 Supra p.27.93 Supra n. l-g.94 Supra p. 27.95 At p.530.

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existence when the duty of care is said to arise. Further differences will benoted shortly when the Court ofAppeal"s decision in Mardon is considered.

After referring to the reasoning and decision of Hardie J. in theDilling/llllJl case as ""very helpfur'. which certainly it is not if the writer's.previous analysis is accepted. Lawson J. continued: 96

As a nlaUer of pr;nciple. I cannot think there is anything wrong in holding that the dutyof care in relation to the nlaking of statements may arise in a pre-contractual situation.For exaillple. it is well established that a seller of goods which are dangerous to theknowledge of the seller. can be liable to the buyer in damages for negligence as well asin daillagcs for breach of the contractual term in relation to the merchantability or fitnessof the goods ....

It is difficult to see how the exanlple given furnishes support for Lawson J.'s""nlatter of principle" argunlent. It deals with a situation where there areconlplenlentary and consistent actions in contract and tort. The situation inMart/on. at least as Lawson J. viewed it. was the opposite. His Lordship wasseeking to inlpose liahility in tort to pay danlages in respect of a statementwhich ""contract" law declared did not give a right ofaction in danlages. Hewas seeking to override the contract rule by inlposing tort liability. A nloreappropriate exanlple in the context of Lawson J:s judgnlent would havebeen one which led hinl to the opposite conclusion viz.. the sale contractwhich clearly excludes liability for negligence. It is well-established that insuch a situation the exenlption clause cannot be OVerC0l11e sinlply by suingin tort. 97 The exanlple given by Lawson J. involves a situation where anactio~ nlay be brought in contract and tort to enforce dissinli1arduties. albeitarising fronl the sanle t~lctS. How does it support extending the Hedle.l' !3.l'rneprinciple to pre-contract representations? Does it not beg the very questionin issue as to whether there is a tort of negligent pre-contract nlisrepre-sentation? One can accept that the sanle set of facts nlay occasionally giverise to dual liability in contract and tort but. as suggested earlier in relationto the Ellul case. this does not justify pernlitting a representee to sue in tortfor danlages in respect of a nlisrepresentation which contract law declaresdoes not give a right to danlages.

In the Court of Appeal. the principal submission by counsel for Essoagainst the application of Hedle"Y B~yrne in a pre-contract situation was that"once parties enter into a contract any pre-contractual promises merge intothe contract"98 and accordingly, the contract alone governs their rela-tionship. They relied particularly on Clark v. Kirb"y-Smith 99 which held thata negligent solicitor may be liable to his client in contract but not in tort.They might also have relied on Bagot v. Stevens Scanlon & Co. Ltd. I whichapplied the Clark principle to architects. The reasoning behind thesedecisions was that, since the allegations against the defendants were offailures to do the very things they had contracted to do, the only dutiesallegedly broken were contractual and the plaintiff's actions thereforesounded in contract alone. Earlier cases in which it was held that a similar

96 [1975] Q.B. 819,832-833.97 White v. John Warwick & Co. Ltd. [1953]1 W.L.R. 1285; Gillespie Bros Ltd. v. Roy Bowles

Ltd. [1973] Q.B. 400.98 [1976] Q.B. 801, 813.99 [1964] Ch. 506.

1 [1966] 1 Q.B. 197.

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duty of care was owed both under contract and independently of contractwere explained as "cases where the law in the old days recognised eithersomething in the nature of a status like a public calling (such as commoncarrier, common innkeeper, or a bailor and bailee) or the status of a masterand servant". 2 In such cases, "there existed from the mere status a rela-tionship which gave rise to a duty ofcare not dependent upon the existenceof a contract between the parties".3 That principle did not apply toprofessional relationships such as that between architect and client andsolicitor and client "where someone undertakes to exercise by contract hisprofessional skill in relation to the matter."4

Lord Denning M.R., who delivered the main judgment in the Court ofAppeal, rejected counsel's argument and held that Clark and Bagot were:

... in conflict with other decisions ofhigh authority which were not cited in them. Thesedecisions show that, in the case of a professional man, the duty to use reasonable carearises not only in contract, but is also imposed by the law apart from the contract, and istherefore actionable in tort. 5

The true position was as stated by Lord Campbell in Boorman v. Brown: 6

... wherever there is a contract, and something to be done in the course of the em-ployment which is the subject of that contract, if there is a breach ofa duty in the courseof that employment, the plaintiff may either recover in tort or in contract.

In Lord Denning's view, it followed that, since Clark and Bagot were wrong,counsel's argument that Hedley Byrne did not apply to pre-contractrepre~entationsmust be rejected. 7

There is much to be said for Lord Denning's conclusion that Clark andBagot were wrong8 and it will be interesting to see whether the New ZealandCourt ofAppeal is prepared to reconsider its decision in McLaren M aycroft& Co. v. Fletcher Development Co. Ltd. 9 which followed Bagot. But, thataside, the question which now arises is: if the law be that a professional whofails in his duty to exercise reasonable care may be sued in contract or tort,does this justify extending the Hedley Byrne principle to pre-contractrepresentations? Does it follow that, because there can be concurrentliability in contract and tort in such cases, there should be liability in tort forpre-contract representations?

The answer to this question must be no. The cases which uphold theprofessional man"s concurrent liability in contract and tort cannot logicallybe appealed to as supporting the availability of an action in tort in respectof careless pre-contract misrepresentations. Basically, it begs the essential

2 Ibid .. 204-205 per Diplock L. J.3 Ibid .. 205.4 'Id.5 [1976] Q.B. 801. 819.6 (1844) 11 Cl. & Fin. 1. 44.7 [1976] Q.B.801. 820.8 See Poulton .....Tort or Contract" (1966) 82 L.Q.R. 346.9 [1973] 2 N.Z.L.R. 100. Cf. McMahon v. Cave (unreported judgment, 21 May 1974,

Hamilton'Registry A.242j72) where Wild C. J. suggests that an accountant, who had beenemployed over a perjod ofyears by the plaintiff to prepare annual accounts and taxretums,might be sued in tort for gratuitous careless advice on investments since that advice was"·outside the terms of the contract".

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question whether there is such a tort. Furthermore, the two situations areentirely different. Let us now compare them. Under the professionalnegligence cases, where a breach of contract occurs which also happens tosatisfy the ingredients of the tort of negligence, the plaintiff may proceedalternatively in contract and tort. The action in tort is founded on thedefendant's failure to do the very thing he contracted to do. The principleis that "the contract creates a duty, and the neglect to perform that duty, orthe nonfeasance, is a ground of action upon a tort." I 0 It follows that theplaintiff cannot succeed in tort if the alleged breach of duty did notconstitute a breach ofcontract. The extent ofthe tort duty will depend uponan analysis of the terms of the contract. There is no doubt that if, forexample, the contract clearly limited the obligations and responsibilitiesundertaken to a certain sphere, a failure to do work outside that spherecould not be the subject of tort liability. I I

Contrast the situation where an action is brought for negligent mis-representation inducing a contract. The alleged duty of care must. ariseindependently of the obligations undertaken pursuant to the contract.There is simply no contract in existence when the alleged duty ofcare arisesand is breached. In other words, the negligence, when it occurs, does notconstitute a breach ofcontract. Furthermore, even ifone were to disregardthe chronological point, the action in tort is still not based on the defendant'sbreach of contract. Indeed, in the usual case, the alleged tort and 'contractduties are dissimilar. The contractual obligation is that the representationis true. Once it is proved that the representation was a warranty and that itwas false, the representor is strictly liable. In tort, however, the duty isdifferent. The plaintiff must establish, in addition to acceptance of re-sponsibility, reliance and falsity, that the defendant failed to take reason-able care. The Mardon situation was one of the few exceptions. There thealleged tort and contract duties did coincide. The actionablerepresentation/warranty was not that the petrol throughput would beachieved but that the estimate was soundly based and, therefore, notnegligently prepared.

Finally, if the professional negligence cases are the basis for imposing.liability in tort in respect of negligent pre-contract misrepresentations,strictly it would follow that the plaintiffwould first have to establish that therepresentation was contractually binding, i.e. a warranty or a collateralcontract. Of course, in most cases that would defeat the very purpose of hisproceeding in tort, which is to avoid having to establish that the repre-sentation was contractually binding. It is noteworthy that in Mardon LordDenning decided the question of tort liability "assuming that there was nowarranty" .12 If the professional negligence cases are the explanation for tortliability in respect ofcareless pre-contract misrepresentation then, on LordDenning's assumption ofno contractual liability, it was logically impossibleto find for the plaintiff.

10 Boorman v. Brown (1842) 3 Q.B. 511, 526 per Tindal C. J. This passed is cited with approvalby Lord Denning in Mardon at 819.

II See Sutcliffe v. Thackrah [1974] 1 All E.R. 859.12 [1976] Q.B. 801, 818.

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III. THE NEED FOR A REMEDY IN TORTOne could perhaps be forgiven for turning a blind eye to the reasoning

deficiencies in the above cases if to allow Hedley Byrne to be invoked inrespect ofpre-contract misrepresentations would enable the courts to awarddamages in deserving cases where they would otherwise be unavailable.This would not be the first time in the history of the modern law ofcontractthat a series of decisions, based on tenuous grounds and ignoring thedoctrine of precedent, have been successful in subverting or severelydenting a hitherto well-established rule which often led to unwelcomeresults. The promissory estoppel cases beginning with Central LondonProperty Trust Ltd. v. High Trees House Ltd. 13 provide a classic example.However, the situation with respect to careless pre-contract misrepresen-tations is entirely different. In most cases there will be no need for the courtto invoke the Hedley Byrne principle in order to enable it to do justicebetween the parties by awarding the representee damages. The few caseswhere there may be such a need will usually result from the different rulesrelating to the measure ofdamages in contract and tort. As suggested earlier,the contract rules have now developed to a stage where they are sufficientlyflexible to enable damages to be awarded for pre-contract misrepresenta-tion in appropriate cases by holding that the representation was a term ofthe contract or a separate collateral contract. Indeed, it i~ difficult to imaginecircumstances where, if the tort test of liability is satisfied, the statementcannot be held to be contractually binding. 14

1. The Contract and Tort Requirements for LiabilityThe accepted test for determining whether a pre-contract statement is

contractually binding is "the intention of the parties". The question thecourt must ask itself is: did the parties intend the statement to be a term oftheir contract? Here, as in other branches of the law of contract, the courtsuse an objective standard. "If an intelligent bystander would reasonablyinfer that a warranty was intended, that will suffice."15 Under the guise ofthis test of intention the real question which the courts ask themselves is: isit reasonable to regard the representor as having accepted responsibility forthe accuracy of his statement?16 Or, in other words, is it reasonable toimpose on him a liability to pay damages if the statement turns out to befalse? There are several factors which seem to influence the courts inreaching their decisions. One of the most important, for example, is therespective skill and knowledge of the parties. 17 If the representor has aspecial skill or has greater knowledge or means of knowledge with respectto the subject matter of the statement than the representee, this will stronglysupport a conclusion that it is reasonable to regard him as acceptingcontractual responsibility for the accuracy ofhis statement. Conversely, thefact that the representor was not in a better position will be against such aconclusion, although not conclusive. In the latter situation, it may only be

13 [1947)1 K.B. 130.14 See Coote. "The Effect of Hedley Byrne" (1967) 2 N.Z.V.L.R. 263, 277; Glasbeek,

""Limited Liability for Negligent Misstatement" in Studies in Canadian Tort Law (1968)115.131-132.

15 Oscar Chess Ltd. v. Williams [1957] 1 W.L.R. 371, 375 per Denning L. J.16 See Schawel v. Reade [1913] 2 I.R. 64, 86 per Lord Moulton. .17 The other factors are outlined by the writer in The Parol Evidence Rule (1976) 54-57.

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reasonable to regard the representor as expressing an opInIon on thematter. IS If the intelligent bystander were to ask the representor whether heguaranteed his statement, he would say "ofcourse not, I know only as muchas he does".

Nowadays, where it is found that the representor ought to be regardedas having accepted responsibility for his statement, there are few obstaclesin the way of the court concluding that the statement was contractuallybinding and then proceeding to award damages. 19 If the Contracts En-forcement Act 1956 applies it can be easily overcome by the court classi-fying the statement, not simply as a term of the contract, but as a separatecollateral contract. Furthermore, the parol evidence rule, which prohibitsthe addition of oral terms to written contracts, is no longer the force it usedto be. The courts either disregard it altogether, as in Mardon, or find that itdoes not apply either because the statement is a term ofa partly written andpartly oral contract or a collateral contract. 20

It should now be apparent that the test for contractual liability inrespect ofmisstatements inducing the contract is similar to the basic test forliability under the Hedley Byrne principle. Leaving aside the difficultiescreated by M.L. C. Ltd. v. Evatt, there will be a "special relationship" underHedley Byrne giving rise to a duty of care where the speaker can in all thecircumstances reasonably be regarded as assuming responsibility for thestatement. Although the tests do not correspond exactly, as will be notedshortly, they are close enough to at least require some explanation for afinding that a statement (a) was not contractually binding but (b) was madein circumstances satisfying the tort requirements for liability. No suchexplanation appeared, for example, in the judgment of Lawson J. inMardon where his Lordship held, in effect, that Esso had "assumed re-sponsibility" in tort but not in contract.

The overlap is readily apparent from the following description of thetort "special relationship" by Barwick C. J. in M.L. C. Ltd. v. Evatt: 21

It seems to me that it is this element of trust which the one has of the other which is at theheart of the relevant relationship. I should think that in general this element will arise outofan unequal position ofthe parties which the recipient reasonably believes to exist. Therecipient will believe that the speaker has superior information, either in hand or at hand,with respect to the subject matter or that the speaker has greater capacity or opportunityfor judgment than the recipient. But I do not think it can be said that this must always beso, that inequality in these respects must necessarily in fact be present or be thought to bepresent ....

As noted earlier, the same considerations relating to respective skill andknowledge are equally relevant to the term/mere representationdistinction.

1