Hedley Byrne v Heller

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 is the House of Lords decision that established a duty of care in tort for negligent misstatements causing pure economic loss, founded on a special relationship and an assumption of responsibility by the maker of the statement.

Definition §

Hedley Byrne & Co Ltd v Heller & Partners Ltd is the leading authority for the proposition that a duty of care in tort may be owed by the maker of a statement to a recipient who relies on that statement and suffers pure economic loss as a result ^[1]. The decision was the first in English law to recognise such a duty in the absence of a contractual or fiduciary relationship and is foundational to the modern law of professional negligence.

The House of Lords held that liability arises where there is a 'special relationship' between the parties characterised by an assumption of responsibility by the defendant for the accuracy of the statement, foreseeable reliance by the claimant on the statement, and reasonableness of that reliance in the circumstances ^[1]. The decision overcame the earlier orthodoxy in Derry v Peek (1889), which had limited liability for misstatement to cases of fraud, and the more recent restrictive approach in Candler v Crane, Christmas & Co [1951] 2 KB 164, which Denning LJ had dissented from.

Importantly, on the facts the defendant bank avoided liability because it had given the credit reference 'without responsibility', which the House of Lords held effectively negatived the assumption of responsibility. The decision therefore both established the duty and acknowledged the validity of express disclaimers of responsibility, a distinction of continuing practical importance to professional advisers.

Hedley Byrne is the foundation of liability in professional negligence for advice and information given to clients and, within the limits set by Caparo Industries plc v Dickman ^[2], to third parties. It is the doctrinal underpinning of much of the work indemnified by professional indemnity insurance.

Legal / Regulatory basis §

The case concerned a request by Hedley Byrne, a firm of advertising agents, for credit references on a customer, Easipower Ltd. Hedley Byrne's bank sought the references from Easipower's bankers, Heller & Partners, who provided favourable references but expressly stated they were given 'without responsibility'. Hedley Byrne extended credit to Easipower on the strength of the references, Easipower went into liquidation, and Hedley Byrne lost £17,000.

The House of Lords (Lords Reid, Morris of Borth-y-Gest, Hodson, Devlin and Pearce) unanimously held that, but for the disclaimer, a duty of care would have been owed by Heller & Partners to Hedley Byrne ^[1]. The reasoning of Lord Reid is particularly influential: a duty arises where 'a person takes it upon himself to give information or advice to, or allows his information or advice to be passed on to, another person who, as he knows or should know, will place reliance upon it'. Lord Devlin spoke of an 'equivalent to contract' relationship characterised by the assumption of responsibility.

The duty does not arise in social or informal contexts but is confined to situations where the maker of the statement either does so in a business or professional capacity, or otherwise in circumstances that signal a willingness to be relied upon. The classic indicators are the holding-out of expertise, the seriousness of the context in which the statement is given, and the foreseeability of reliance for the particular purpose.

The principle was significantly developed in Caparo Industries plc v Dickman, which added the requirement of 'fairness, justice and reasonableness' to the duty enquiry and confined the Hedley Byrne duty to a class of persons to whom the statement was directed for a purpose actually known to the maker ^[2]. The principle was extended to disappointed beneficiaries in solicitor will-drafting in White v Jones ^[3] and to mortgage purchasers in respect of valuers' reports in Smith v Eric S Bush ^[4]. Henderson v Merrett Syndicates Ltd confirmed that the Hedley Byrne duty can co-exist with concurrent contractual duties ^[5].

The principle stands alongside the broader negligence duty under Donoghue v Stevenson ^[6] but applies the specific apparatus of assumption of responsibility, reliance and reasonableness developed for pure economic loss cases.

How it works in practice §

For PI underwriters and brokers, Hedley Byrne is the doctrinal basis for the great majority of professional liability claims that engage cover. A solicitor sued by a client for negligent advice, an accountant sued by a lender on the strength of audited accounts, an insurance broker sued by a client for a placement error — each of these claims, when framed in negligence rather than contract, owes its foundation to Hedley Byrne.

The practical questions on which Hedley Byrne analysis turns in PI claims are usually two. First, did the defendant assume responsibility for the statement made? An assumption of responsibility is generally inferred where the statement is made by a professional, for a fee, in the course of the firm's normal business and on facts known to the firm. Disclaimers of responsibility can negative the assumption, but their effect is constrained by the Unfair Contract Terms Act 1977 in cases involving consumers and small businesses; on the facts of Smith v Eric S Bush the House of Lords held a valuer's disclaimer was not reasonable in the context of a residential mortgage valuation ^[4].

Second, was reliance on the statement reasonable, and was the claimant within the class of persons the defendant should have foreseen would rely on it for the relevant purpose? Where the statement is provided privately to a client for a specific transaction, the Hedley Byrne duty is straightforward. Where the statement is published or passed on, Caparo limits the duty to those for whose purposes the statement was given.

These questions inform underwriting in two ways. Engagement letters and terms of business that clearly delineate the scope of advice, the persons entitled to rely on it, and any limits of liability are central tools for managing the Hedley Byrne duty. Insurers therefore look carefully at the standard retainer terms used by the insured, and brokers should keep these under review.

Common variations §

Advice to client. The classic Hedley Byrne case. Advice given by a professional to a paying client engages the duty without need for elaborate analysis.

Advice to a third party at the client's request. Where a professional report is commissioned by one party and addressed to another (for example, a valuation provided to a mortgage lender on the application of a borrower), the Hedley Byrne duty is owed to the addressee and, applying Caparo, may be owed to the borrower as well ^[4].

Advice published to the world. Statements made in published reports, marketing materials or public lectures generally do not engage a Hedley Byrne duty to all readers, because the Caparo purpose and class requirements are not satisfied ^[2].

Disclaimer of responsibility. A clear, prominent and reasonable disclaimer can defeat the duty, but its effect is constrained by statute and by judicial scepticism where the recipient is a consumer.

Gratuitous advice. Hedley Byrne does not require payment; the duty turns on assumption of responsibility and reliance, not on consideration. However, the absence of payment can in some contexts make the assumption of responsibility harder to infer.

Example §

An illustrative example: an accountant prepares draft accounts for a small private company at the directors' request. The directors send the accounts to their bank in support of an application for an extension of an overdraft facility. The bank advances the additional funds. The accounts contain an arithmetical error that overstates retained profit. The company defaults, and the bank suffers a loss of £200,000 (illustrative only).

Whether the accountant owes the bank a Hedley Byrne duty depends on whether the accountant assumed responsibility to the bank for the accuracy of the accounts, and whether the bank's reliance was reasonable for the purpose for which the accounts were used. If the accountant knew the accounts were being prepared for the bank's lending decision, the duty is likely to be engaged within the Caparo framework ^[2]. If the accounts were prepared for general management purposes and passed on without the accountant's knowledge, the duty is unlikely to extend to the bank. The claim, if pleaded in negligence, falls within the scope of a civil liability PI wording.

See also §

• /wiki/caparo-v-dickman/ — the tripartite test refining Hedley Byrne
• /wiki/breach-of-duty-of-care/ — the second element of negligence
• /wiki/negligent-act-error-or-omission/ — narrower PI trigger
• /wiki/civil-liability/ — broader PI trigger
• /wiki/bolam-test/ — standard of care
• /wiki/professional-indemnity-insurance/ — parent product
• /wiki/dishonesty-exclusion/ — interaction with deliberate misstatement

References §

1. ↑ Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL)
2. ↑ Caparo Industries plc v Dickman [1990] 2 AC 605 (HL)
3. ↑ White v Jones [1995] 2 AC 207 (HL)
4. ↑ Smith v Eric S Bush [1990] 1 AC 831 (HL)
5. ↑ Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 (HL)
6. ↑ Donoghue v Stevenson [1932] AC 562 (HL)