F4-chapter 6

ACCA
Instructor: Gabrielle
Chapter 6
The law of torts and
professional negligence
Chapter 6 The law of torts and professional negligence
Chapter Guide
•a) Explain the meaning of tort.
•b) Explain the tort of‘passing off.’
•c) Explain the tort of negligence including the duty of care and its breach.
•d) Explain the meaning of causality and remoteness of damage.
•e) Discuss defences to actions in negligence.
•f) Explain and analyse the duty of care of accountants and auditors.
Slide 143Definition of Tort The law of Torts Duty of care Breach of
duty Causation Defences
Neighborhood principle Donoghue v Stevenson Auditors Fails to act reasonably Adjusting the standard of care Res ipsa loquitur Civil
wrongdoing Passing off Avoid Reduce
Limit 'but for ' test Remoteness of damages
Novus actus
interveniens Chapter 6 The law of torts and professional negilgence Overview
Slide 144Limitation of auditors’
liability
Accountants and auditors
Restriction of neighbourhood
principle Caparo v Dickman
Special
relationships
Hedley Byrne v
Heller Professional
Negligence
Negligent
misstatements
Chapter 6 The law of torts and professional negilgence Overview
Chapter 6 The law of torts and professional negligence
1.Explain the meaning of tort
•A tort is‘a wrongful act against an individual which gives rise to a civil claim’.
•As a tort is a breach of a legal duty, there is no liability unless the law recognizes that the duty exists.
Chapter 6 The law of torts and professional negligence
2. the tort of ‘passing off.’
•In such cases one party is accused of misrepresenting themselves to the public in a calculated manner designed to allow them to benefit from parties goodwill. These actions are most commonly associated with trademarks and company names per Stringfellow v McCain (1) and HFC Bank v Midland Bank (2).
Chapter 6 The law of torts and professional negligence
2. the tort of ‘passing off.’
•Where it can be proved in passing-off cases that there is a chance of‘genuine public confusion’all lost trading profits can be awarded to the injured party in addition to an injunction over the use of names.
3. Explain the tort of negligence
including the duty of care and its breach.
•3.1 Negligence is the breach of a legal duty to take care, which results in damage to another. •In order for an action in negligence to succeed, the claimant must prove the following:
• (a) A duty of care is owed to the claimant •(b) There has been a breach of that duty of care, being that the defendant has failed to act reasonably
•(c) The breach of duty caused the harm to the claimant
3. Explain the tort of negligence
including the duty of care and its breach
•3.2 Duty of care
•A person is not automatically liable for the wrongful acts they commit. The first step in establishing liability is to prove that the defendant owed a duty of care to the injured party.
•A person’s duty of care in tort was initially defined in Donoghue v Stevenson(3) via the neighbour principle:
•‘you owe a duty of care to anybody who it may be reasonably foreseen will be affected by your negligent acts or omissions’
3. Explain the tort of negligence
including the duty of care and its breach
•A consequence of the Donoghue ruling was that the scope of duty of care was extremely wide. The courts have subsequently narrowed this duty in many areas as seen in follow on auditors.
•The current qualification of the duty of care was laid down in Caparo v Dickman(4) via a three stage test:
•Was the harm caused reasonably foreseeable?
•Is there sufficient proximity between the
defendant and the claimant?
•Would it be fair, just and reasonable to impose
Chapter 6 The law of torts and professional negligence
3. Explain the tort of negligence
including the duty of care and its breach
•3.3 Breach of duty of care
•Once it has been successfully proved a duty of care exists the claimant next has to prove that this duty has been breached. In order to do this it must be proved that the defendant‘failed to act reasonably’per Blyth v Birmingham (5). This is an objective test, but not one intended to condone the incompetence of the wrongdoer.
including the duty of care and its breach
•The standard of care owed by an individual defined in Blyth can be adjusted by the following:
•(a) Skilled persons–i.e. a qualified accountant owes
a higher duty of care to a client than an unqualified
bookkeeper–though all qualified accounts owe the
same standard of care
•(b) Likelihood of injury–where this is high the more the defendant will have to do to fulfil his duty–Bolton v Stone (6)
•(c) The seriousness of the risk–the more serious
the risk the more the reasonable man would do to
mitigate this–Paris v Stepney (7)
•(d) Cost and practicability–the foreseeable risk must
including the duty of care and its breach
•(e)Common practice
•Where an individual can prove their actions were in line with common practice or custom it is likely that they would have met their duty of care. This is unless the common practice itself is found to be negligent.
•(f) Social benefit
•Where an action is of some benefit to society, defendants may be protected from liability even if their actions create risk. For example, a fire engine that speeds to a major disaster provides a social benefit that may outweigh the greater risk to the public.
3. Explain the tort of negligence
including the duty of care and its breach
•Ordinarily the burden of proof in tort lies with the claimant. However where the facts speak for themselves the burden may be reversed‘Res Ipsa Loquitur’. It is now up to the defendant to prove they have not acted negligently.
4.Explain the meaning of causality and remoteness of
damage.
•4.1 The next hurdle in tort is for the claimant to prove a clear link between the harm caused, and the breach of duty of care. This is a
two-limbed test:
•4.1.1 Causation in fact
•The‘but for’test is used to establish a physical link between the
breach and the harm suffered i.e. the claimant must prove that‘but
for’the defendant’s actions the damage would not have occurred
anyway–Barnett v Chelsea (9).
•4.2.2Causation in law
•Next the claimant must prove that there is no break in the chain of causation a‘novus actus interveniens’. These are unforeseen events
that break the link between the defendant’s tort and the eventual harm suffered and include:
•(a) A natural event–earthquakes, floods fires etc
Chapter 6 The law of torts and professional negligence
4.Explain the meaning of causality and remoteness of damage.
•4.2 Remoteness
•4.2.1 The claimant must finally prove that losses sustained were‘reasonably foreseeable’–The Wagon Mound (12).
•(NOTE Hadley v Baxendale in Chapter 6 relates to foreseeability in contract law only–it holds no relevance in the law of tort)
•4.2.2 The‘thin skull principle’may overrule the law of remoteness allowing the tortfeasor to be held
liable for acts that would ordinarily be unforeseeable per the Wagon Mound test. The principle states that
Chapter 6 The law of torts and professional negligence
5.Discuss defences to actions in negligence
•The defendant has the following defences available where liability for tort has been established by the claimant:
•(a) Avoid–an employee can claim under the law of vicarious liability that it is their employer who is liable for their own negligence per Limpus v London General Omnibus Co (14) and Beard v London General Omnibus Co (15).
•(b) Avoid–‘Volenti non fit injuria’ (that to which you consent) applies when there is a known risk on behalf of the claimant, such as accepting a lift from a drunk driver. In such cases though it must be proved that the claimant knew of, and voluntarily consented to, such risks (all 3 elements must be proven).
•(c) Reduce–the contributory negligence of the claimant can result typically in a reduction in damages of between 10-75% where it can be proved that the claimant had contributed to their injury in some way Fitzgerald v Lane & Patel (16).
•(d) Limit–The Limitation Act 1980 states that claims in tort should be
Chapter 6 The law of torts and professional negligence
6.Explain and analyse the duty of care of
accountants and auditors.
•Professional
negligence
•Professional
negligence
Accountants
and auditors
Accountants
and auditors
Negligent
misstatements
Negligent
misstatements Caparo v Dickman
Limitation of auditors’ liability
Limitation of auditors’ liability
Hedley Byrne v Heller
•6.1 Negligent misstatements
• Historically it was not possible to sue for torts where the negligence amounted to incorrect statements or advice . It was not until the case of Hedley Byrne v Heller (1 that a duty of care for ‘negligent
misstatements’ was established . In such instances the claimant must prove they were in a ‘special relationship’ with the defendant to establish a duty of care i .e .
•(a ) A client requested a professional opinion from their
accountant /auditor
•(b ) The accountant /auditor gave an opinion acting in a professional capacity . The client relied upon the opinion , when it was deemed reasonable to do so
•(c ) The client suffered an economic loss as a result of reliance upon the opinion
• In such cases the tortious auditor /accountant may be liable for 6.Explain and analyse the duty of care of accountants and auditors.
•
6.2 Accountants and auditors •
The ruling in Hedley Byrne v Heller established that actions for negligent misstatement were possible . However it is still necessary to establish that you were owed a duty of care at the time the negligent misstatement occurred . When performing audit services the duty of care was defined in Caparo v Dickman : •
‘The duty of care when accounts are prepared extends only to the members of a company . This does not extend to members as individuals , or to potential purchasers of shares in a company .’ • However this presumption can be rebutted where the accounts were prepared after express representations that they would be used for the purposes of a takeover – Morgan Crucible v Hill 6.Explain and analyse the duty of care of accountants and auditors.
•6.3 Limitation of auditors’ liability
• Per the Companies Act 2006 (CA 2006) it is now possible for an auditor to limit their liability for ‘negligence , default , breach of duty or breach of trust occurring in the course of the audit of
accounts’ to a stated amount .
• Limited liability is not , however , a right and in order to secure such indemnity the members of the
company must approve such agreements by
resolution before the date that such an agreement becomes effective .
Chapter 6 The law of torts and professional negligence
6.Explain and analyse the duty of care of accountants and
auditors.
•In the event that an auditor comes to rely on such a clause they may then be required to prove the liability amount is ‘fair and reasonable’. In
determining such amounts the courts will have regard for :
•(a ) The auditor’s responsibilities
•(b ) The nature and purpose of the auditor’s contractual obligations to the company
•(c ) The professional standards expected of him •The liability limitation agreement must be approved on an annual basis ; with the company able to Chapter 6 The law of torts and professional negligence 6.Explain and analyse the duty of care of accountants and auditors.
Lecture example 1
Tong decides to have a night out at a newly opened night-club. On the way to the club his friend Reckless pulls up in a car and offers him a lift to the club. Before Tong gets into the car Reckless tells him that he has consumed a substantial amount of alcohol that night. Tong accepts the offer of a lift anyway.
Reckless’ driving is erratic and he knocks a cyclist, Sasha, off his cycle. Sasha was wearing dark clothing and the lights on his bike were not working. Sasha suffered a broken leg and Tong suffered whiplash caused by Reckless' driving.
• Required
(a) Explain what type of liability Reckless may have in law.
(b) Reckless is told that he could be facing prosecution. Explain who would bring such action and where the case would be heard.
(c) Explain the burden and standard of proof in criminal cases.
(d) Will a criminal conviction have any bearing on whether or not Tong or Sasha receive compensation for their injuries?
(e) If Tong and Sasha sue Reckless explain:
(i) where the case will be heard;
(ii) the standard and burden of proof that must
be discharged;
(iii) what will have to be proved to the court's satisfaction?
(f) Explain what defences are likely to be available to Reckless. Is he likely to be successful?
•Sally is the audit partner of Accountants 4U and regularly advises on takeovers. She was asked to speak at a board meeting of GWZ Ltd which was planning a takeover of THT Ltd (a client of Sally’s) as the latest audit report showed very good profits. During the meeting she said that she absolutely stood by the results of THT Ltd which she had signed off.
•The takeover went ahead, but soon after GWZ Ltd found that THT Ltd was in fact close to insolvency rather than being profitable. It is now looking to sue Accountants4U for negligence.
•Advise Sally as to whether or not her firm would be
Judgment requirements •Require your opinion •Reply on your opinion •Suffer a loss
•Causality
Lecture example 3
•Bee injured her eye after failing to close a safety gate on a machine as instructed. She was also not wearing mandatory safety goggles as required by her contract of employment.•Which of the following is this an example of?
•A Novus actus interveniens
•B Volenti non fit injuria
•C Res ipsa loquitur
•D Contributory negligence
Lecture example 4
•What is the effect of a finding of contributory negligence in the law of tort?
•A It removes the requirement to pay damages •B It reverses the payment of damages
•C It decreases the level of damages
Lecture example 5
•Contributory negligence arises as a result of the fault of which of the following?
•A The claimant
•B The respondent
•C A third party
Lecture example 6
•Ann got trapped in a public toilet due to the lock being faulty. Rather than wait for help, she tried to climb out of the window but fell and broke her leg.
•Which of the following is this an example of?
•A Res ipsa loquitur
•B Volenti non fit injuria
•C Novus actus interveniens
•D Contributory negligence
Lecture example 7
•In relation to the law of negligence, a finding of volenti non fit injuria arises from the action of which of the following?
•A The claimant
•B The respondent
•C A third party
•D An unforeseeable event(2 marks)
•Nick works as a foreman in a cement factory. Dangerous chemicals used to clean raw materials are kept in containers located in a separate part of the factory. During production Nick happens to be walking through the storage facility when, due to poor maintenance of the shelving they have been stored on, a container of the chemicals falls into a nearby vat causing Nick to be splashed by some acid, with him suffering mild burns as a result. Seconds later the vat explodes, due to a reaction between the chemicals and vat contents previously unknown to mankind. Nick is lucky to survive the explosion and subsequently raises an action in tort against his employer. Will he succeed?
•Splash
Explosion
•A No–too remote No–too remote
•When an auditor audits a limited company, what standard of care does he owe?
•A That of a common man
•B That of a reasonable and competent auditor
•C That which can be reasonably expected from him, personally, as an auditor
•D Foreseeable care
Lecture example 10
•An investor buys shares in a company based upon its annual accounts. Why does the auditor not owe the investor a care of duty?
•A Damage is too remote
•B The purpose of an audit is not to help people make investment decisions
•C There is no general liability for losses
suffered by third parties
•D Third party claims are excluded by
statute
Section Topic Summary
1Definition of
tort A tort is a wrongful act that gives rise to a civil claim.
2Duty of care You owe a duty of care to anyone who it is
reasonably foreseeable will be harmed by your
negligence per Donoghue v Stevenson.
3Breach of
duty of care The duty of care is breached where the defendant fails to act reasonably. The duty of care can be increased due to skills likelihood of injury, or risk. The burden of proof can be reversed by res ipsa loquitur.
Section Topic Summary
4Causation A clear link must be established between the
breach and duty and harm per the ‘but for’ test
and the rules on remoteness of damage. This link
can be broken by novus actus interveniens.
5Defences Damages for negligence can be avoided, reduced
or limited by the defences of, vicarious liability,
contributory negligence, volenti non fit injuria,
and
The Limitation Act.
Section Topic Summary
6Accountants
and
auditors
Accountants and auditors owe a duty of care to the members of a company only, in respect of accounts prepared, per the ruling in the Caparo case.7Negligent
misstatements Accountants and auditors can be liable for misstatements where a Special Relationship is
deemed to exist.
8Limitation of auditors’liability
With the permission of shareholders a company
may agree to limit the liability of the company’s
auditors. Such limits must be ‘fair and
reasonable’.
Case Summaries
1Stringfellow v McCain
The owner of the famous‘Stringfellows’nightclubs failed to prevent a manufacturer of long, thin oven chips calling their product by the same name.
2HFC Bank v Midland Bank When Midland Bank in the UK rebranded as HSBC they were subject to a passing -off claim from the long established HFC Bank . The case failed on the grounds of insufficient chance of public confusion .
Chapter 6 The law of torts and professional negligence Case Summaries
3Donoghue v Stevenson Donoghue ordered an ice cream float from a Paisley cafe . The proprietor brought the ice -cream in a tumbler and poured some 'D . Stevenson ' ginger beer over it . Mrs D . took a drink and found the decomposed remains of a snail in the ginger beer . Suffering from severe gastro -enteritis , she issued a writ against David Stevenson , claiming £500 in damages . The case reached the House of Lords where the historic Chapter 6 The law of torts and professional negilgence Case Summaries
4Caparo v Dickman
5 Blyth v Birmingham Water Works
6 Bolton v Stone
7 Paris v Stepney BC
8 Smith v Leech
9 Latimer v AEC Ltd
10 Barnett v Chelsea
11 The Wagon Mound
12 Knightly v Johns
13 McKew v Holland
14 Limpus v London General Omnibus Co
15 Beard v London General Omnibus Co
16 Fitzgerald v Lane & Patel
17.Caparo v Dickman
18.Morgan Crucible v Hill Samuel Bank
19.ADT v BDO Binder Hamlyn
20.Hedley Byrne v Heller
You should now be able to attempt the following key questions from the Golden Global Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the Golden Global Learning Media Practice and Revision Kit.Question practice – end of Chapter
Quick Quiz
1.What is the duty of care adjusted for in tort?
4 defences against negligence
Quick Quiz
Answers
1.Skills & experience, likelihood of injury & degree of
risk
2.Contributory negligence, limitation acts, volenti non fit
injuria, vicarious liability
EN
D。