H hired E to prepare financial statements; the statements were required by statute. H claimed that E was careless in preparing the statements and that, as a result, H suffered:
** A. Economic loss as a result of relying on the statements in other investments
** B. Economic loss based on their existing shareholdings
At trial, the court found in favour of E (no duty of care was owed). On appeal, the court affirmed trial decision.
Did Ernst & Young owe Hercules a duty of care?
** Is the duty of care test in cases of negligent representation and pure economic loss the same as in cases of negligence causing physical damage?
In cases of negligent representation, the reasonable foreseeability component of the Anns Test is replaced with "reasonable reliance."
** 1. The defendant ought reasonably to foresee that the plaintiff will rely on their representation
** 2. Reliance by the plaintiff would, in the particular circumstances of the case, be reasonable
A note on indeterminate liability: if it cannot be shown to exist on the facts of the case in cases of negligent misrepresentation, a duty of care can be found to exist
Ann’s two-stage test applies here:
I: Prima facie duty of care?
** Special kind of proximity here; looking at the relationship between a representor and representee
*** In regular physical damage cases, we’re looking at reasonable foreseeability: determining whether harm to the plaintiff was reasonably foreseeable to the defendant alone is enough for deciding proximity
*** In negligence misrepresentation cases, we’re looking at reasonable reliance: the plaintiff’s claim stem from their detrimental reliance on the defendant’s negligent statement; and it is clear that reliance on the statement or representation of another will not, in all circumstances, be reasonable
** So, in negligent misrepresentation cases: proximity pertains to the relationship of reliance. There is proximity when there is reasonable reliance:
*** 1. The defendant ought reasonably to foresee that the plaintiff will rely on their representation
*** 2. Reliance by the plaintiff would, in the particular circumstances of the case, be reasonable
** Therefore: Yes, duty of care here
II: Policy considerations
** Fear of indeterminate liability: we don’t want to expose potential defendants to (as per Cardozo): “liability in an indeterminate amount for an indeterminate time to an indeterminate class”
** The auditor reports may be reasonably relied upon by many parties, not just the appellants: Only for oversight mechanisms (reliance had to be for the purpose by which the statements were made); Problem of increased liability (lower economic efficiency: higher insurance costs, opportunity costs and general costs to protect themselves -- thus, supply of accounting services would decrease, and costs to consumers would increase)
Decision in favour of defendant: a duty of care was owned, but was negated for policy reasons (indeterminate liability)