Business Law - 2302 Words

Elvis and Dionne have a claim against Mercury Partners who prepared an audit of Holly plc. that overvalued their assets. This overvaluation lead to the pair purchasing (additional) shares in Holly plc, and consequently suffering monetary losses. The law of negligence can only be applied to the audit prepared by Mercury if we establish a duty of care owed by mercury, a breach of said duty and a consequent loss to Elvis or Dionne as a result. These three conditions, once satisfied can be used...

Elvis and Dionne have a claim against Mercury Partners who prepared an audit of Holly plc. that overvalued their assets. This overvaluation lead to the pair purchasing (additional) shares in Holly plc, and consequently suffering monetary losses.

The law of negligence can only be applied to the audit prepared by Mercury if we establish a duty of care owed by mercury, a breach of said duty and a consequent loss to Elvis or Dionne as a result. These three conditions once satisfied can be used to impose tortuous liability onto Mercury. Quoting Baron Alderson:

“Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinary regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do.”

This definition gives us a benchmark of conduct when dealing with negligence cases. Lord Atkin developed the ‘neighbor’ test for establishing a duty care, stating that reasonable care must be taken to prevent injury to your neighbor, a neighbor being the persons who may be directly affected by the actions that are being undertaken, as derived from Donoghue v Stevenson (1932) . A development of the neighbor principle comes from Caparo v Dickman (1990). The three-stage test developed from this case states three criteria that must be satisfied in order for the claimant to qualify as a neighbor and be under a duty of care of the defendant. The stages being proximity (in time, geography and relationship), the foreseeability of harm and fairness, all of which need to be satisfied.

Dealing with the issue of proximity, the Caparo v Dickman (1990) case (directly applicable to this situation) derived the ruling that auditors of company accounts owed no duty of care to the general public or shareholders, removing the auditor’s liability. This issue is also supported by the case of Bourhill v Young (1943) , which limits the duty of care owed by parties to a direct sphere of influence deeming it unfair and unjust to impose a duty of care extending beyond the scope of reasonable foresight. The

removal of liability due to lack of a special relationship between Dionne or Elvis with Mercury means the condition of proximity for a duty of care to exist is not met, therefore Dionne or Elvis do not have a claim against Mercury. For economic loss to be recoverable, the House of Lords revealed that a special relationship must exist in conjunction with the neighbor test for a duty of care to arise. The law is very clear on this point and there is little ambiguity or room for interpretation here. Unfortunately, this directness of the law on this matter makes it highly unlikely that Mercury is liable for losses incurred.

Had Elvis or Dionne contacted Mercury directly for a final audit (as in Hedley Byrne & Co Ltd v Heller & Parners Ltd (1964) ), the defendant would have been made aware of the claimant, a special relationship would have arisen and a duty of care would have existed. This duty would have arisen from the condition of reasonable foresight as an audit being used in some sort of financial venture is well within reasonable foresight. The justification of liability would be for the courts to decide but one could argue that in those circumstances it is fair for the auditors to be held liable for their client’s loss as a result of their negligent statement.

An argument may be presented whereby it was claimed that Holly plc. owed a duty of care to its shareholders and the public to make sure their audits were in order as it is reasonably foreseeable that they may act upon such reports. However Holly plc. failing to verify the audits would be an omission, not an act and the case of Argy Trading v Lapid Developments (1977) removes liability for omissions.

It is unlikely that a duty of care could be established and therefore there only exist weak grounds upon which the law of negligence can be applied to Elvis and Dionne’s claim against Mercury.

The second claim is one in which Ivy plc. suffered a similar loss due to a negligent statement made by Mercury in the form of carelessly prepared audit. Ivy had directly contacted Mercury for an audit, stating they were considering a takeover of Holly plc. Mercury obliged, the takeover was made

and Ivy plc. suffered substantial monetary losses due to an overvaluation of £7 million.

This claim deals with the same part of law as the first claim. Again, to establish whether a duty of care is owed, the Caparo test is relied upon. This can be dealt with, however this case falls under professional negligence, which changes the criteria by which a duty of care is determined. This change being that a higher standard of care would be expected as a professional entity was called upon for their services and so will be judged against a similar institution offering the same service.

With professional services, Lord Morris stated that persons with a particular skill using said skill in the assistance of others reasonably relying on that skill is bound by a duty of care regardless of a contract. Hedley Byrne & Co Ltd v Heller & Parners Ltd (1964) led to the ruling that a negligent statement made by the defendant that causes economic loss to a claimant within reasonable foresight can be held liable for that loss.

Firstly, proximity by means of a special relationship has been established through direct correspondence between Ivy plc. and Mercury where Mercury was made aware of Ivy. Secondly, the neighbor principle; it is within reasonable foresight that a direct request from Ivy, stating explicitly that they were considering a takeover of Holly plc. would use the audits (amongst other factors) in determining whether a considerable investment was to be made. The justification of the imposition of liability would ultimately fall under the court’s discretion. However, given the circumstances and the explicit statement of Ivy that implied significant investment, it can be said that Mercury are very likely to be held liable for Ivy’s losses. Additionally, there is a duty of care imposed by Ivy relying on Mercury’s professional services through a formal request.

The duty of care would be to ensure correct and factual information was passed onto Ivy about Holly regardless of the takeover knowledge. It can be reasonably expected that a similar institution would ensure their audits were correct. Failure to ensure correct auditing was a breach of said duty

and Ivy suffered a large financial loss as a result.

In consideration of the law of negligence combined with the facts of the claim, it can be said that Mercury are likely to be held liable for Ivy’s losses.

The final claim brought forward is Edward and Kate claiming against Elvis, who, as a motorist ignored a red light on the presumption they weren’t functioning properly and consequently collided with a cyclist. The cyclist suffered a heart attack as a result of the collision and an existing heart condition and Edward’s passenger, Kate was also injured.

Concerning motorists, drivers are immediately put under a duty of care simply by being a driver owing a duty of care to avoid harm to any person or property that can be reasonably foreseen to come into danger as a result of the driver’s actions. This sphere of influence that the motorist is responsible for is limited as seen in Bourhill v Young (1943) but this is usually decided by the courts

This claim is subject to many aspects of the law of negligence. Besides the laws previously stated, for damages to be recoverable, causation must be proved which lumbers the claimant with the burden of proof. The claimant must then establish that the damage suffered was a direct result of the defendant’s breach of duty. This usually takes the form of the ‘but for ’ test which states that had it not been ‘but for’ the actions of [A], no harm would have been suffered by [B]. This test is illustrated by Barnett v Chelsea and Kensignton Hospital Management Committee (1969) , despite the claimant not being awarded damages.

Under the Law Reform Act 1945 regarding contributory negligence, under certain circumstances liability can be shared between defendant and claimant if it were found that both parties acted negligently i.e. both parties had failed to uphold a reasonable standard of care as would be expected from a reasonable person in that situation.

Negligence of the claimant would be such that, had the claimant carried out his reasonable duties, damages suffered may have been avoided or lessened. This is illustrated in O’Connell v Jackson (1971) where the claimant failing to wear a crash helmet resulted in reduced compensation on the grounds of contributory negligence.

For contributory negligence to be imposed onto the claimant, the defendant must prove there was an act or omission of the claimant that forfeited their safety given the circumstances. Lord Denning expanded the definition of contributory negligence from simply being contribution to the accident to including contribution to the resulting damage. He went further and provided a precise formula directly applicable to the case brought forward stating that a 15 percent reduction in the damages awarded will be issued if the wearing of a seatbelt would have reduced the severity of the accident. Quoting directly from Lord Denning MR : “Just as actionable negligence requires the foreseeability of harm to others, so contributory negligence requires the foreseeability of harm to oneself. A person is guilty of contributory negligence if he ought reasonably to have foreseen that, if he did not act as a reasonable, prudent man, he might be hurt himself: and in his reckonings he must take into account the possibility of others being careless.”

The final principle relating to this case is the ‘egg shell principle ,’ stating that if an injury is caused through negligence, the defendant is responsible for the state in which the claimant is after injury i.e. the defendant must take the claimant as he finds him, regardless of pre-existing ailments the claimant has. From the case of Smith v Leech Brain & Co (1962) , Lord Parker founded that as long as the damage caused was within reasonable foresight, then the extent of that damage is irrelevant.

Applying the law to the claim brought forward, a duty of care of Elvis to Kate and Edward did exist. Firstly, as a passenger in his car and a cyclist on the road, both parties were within geographical proximity of Elvis. Secondly, the harm cause had to be reasonably foreseeable and one can proffer that a collision, although not necessarily expected, is always a

possibility whenever motorists are driving on public roads, therefore the collision was within reasonable foresight. Finally, the justification of the duty imposed. It is in my opinion that a court would deem it just to impose a duty of care to cyclists and passengers onto the driver. This was illustrated in Lunt V Khelifa (2002) where Latham LJ said courts have “consistently imposed on the drivers of cars a high burden to reflect the fact that a car is potentially a dangerous weapon“.

The duty itself would be to ensure safe transit of all those using the roads including his passengers. Harm to Edward and Kate is a breach of this duty. From this we can extract that Elvis had been acting negligently and should therefore be held responsible for appropriate recuperations of damage. The fact that he was advised by Kate to run the light is in my opinion irrelevant, as the operation of the car was still ultimately under Elvis’ control.

Under English law it is the responsibility of the passenger, not the driver to ensure they are wearing a seatbelt to prevent injury. Additionally, it is in the Law RVLR regs 13, 18 & 24 that at night cyclists must have lights on the front and rear of their bike and it is suggested they always wear high visibility clothing. From this we can impose contributory negligence onto Edward and Kate due to the parties failing to obey the law. It is very likely that the injuries suffered by Kate may have never existed had she been wearing a seatbelt as Elvis didn’t suffer injury in the same circumstances, implying he was wearing a seatbelt. Furthermore, the facts state Elvis ran the light after checking for oncoming traffic and did not see any, birthing the strong likelihood of Edward being seen by Elvis had he installed the correct equipment onto his bike. Had this been the case, the collision may not have happened at all. Applying the ‘but for’ test, it could be said that the collision may not have occurred had it not been ‘but for’ the lack of lights on Edward’s bike, imposing almost full liability onto Edward. Full liability probably wouldn’t be imposed as despite the apparent malfunctioning of the traffic light, Elvis did break the law by passing through it.

Although it could be said a reasonable man may have also taken the same action given his past experience of traffic light waiting times, it is my view that the courts would not relieve Elvis of his liability as it wouldn’t be justifiable to impose complete liability onto Edward due to the breach of Elvis’ duty by disobeying a red light.

Considering the facts and law, it is likely that some liability would fall onto Edward and Kate on the grounds of contributory negligence but Elvis, in my opinion would still be held accountable for most of the damages. Bibliography

Textbooks

Wild, Charles & Weinstein, Stuart. Smith & Keenan’s English Law, 16e, Pearson Education Ltd, 2010.

Journals

Judgement in Knucklehead v Goodfellow. New Law Journal. 157 p.1122.

Holbrook, J. (2007). The sliding Snail. New Law Journal. 157 p.168.

Winterbottom, R. (2006). Stop or go?. New Law Journal. 156