Negligent Misstatements DEVELOPMENTS IN THE LAW RELATING TO NEGLIGENT MISSTATEMENTS: ANY RECOURSE FOR INVESTORS AND CREDITORS?

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1 Negligent Misstatements 333 Introduction DEVELOPMENTS IN THE LAW RELATING TO NEGLIGENT MISSTATEMENTS: ANY RECOURSE FOR INVESTORS AND CREDITORS? Traditionally, the courts have been reluctant to award damages for pure economic loss which is not a consequence of physical damage to the plaintiff s person or property. The main exception is when the loss is caused by a negligent misstatement. However, given that statements may be widely disseminated and their effects are more far-ranging than that of physical acts, the courts have been very cautious in imposing liability on the maker for fear of exposing him to liability in an indeterminate amount for an indeterminate time to an indeterminate class. 1 Recovery for economic loss resulting from negligent misstatements was first allowed in the landmark case of Hedley Byrne & Co Ltd v. Heller & Partners Ltd. 2 Since then, much litigation has ensued on the scope of the new liability. Most of the cases have turned on the question of the circumstances which would give rise to a duty of care. In order to keep liability within reasonable bounds, the courts have generally required the existence of a special relationship between the maker and recipient of the statement. This special relationship is said to exist if: (a) the maker of the statement possesses (or professes to possess) special skill or information), (b) the maker knows or ought to have known that the recipient would rely on the statement, and (c) it was reasonable for the recipient to rely. Recent cases have indicated a major shift in judicial policy, brought about by the fear of placing an unduly heavy burden on the professions. Whereas earlier cases 3 had allowed recovery on the basis of Lord Wilberforce s test of foreseeability and policy consideration laid down in Anns v Merton LBC 4, this test has been decisively rejected by the House of Lords in Caparo Industries plc v. Dickman and others. 5 The single general principle approach previously used to determine the existence and scope of a duty of care in every situation has been discarded in favour of a more cautious and restrictive case-by-case approach, using the concepts of foreseeability, proximity and fairness per Cardozo CJ, Ultramares Corp v. Touche (1931) 255 NY 170 at 179. [1964] AC 465. Scott Group Ltd v. McFarlane & Robinson [1978] NZLR 553, JEB Fasteners Ltd v. Marks Bloom & Co (a firm) [1981] 3 All ER 289, Twomax Ltd v. Dickson McFarlane & Robinson 1982 SC 113. [1977] 2 All ER 492. [1990] 1 All ER 568.

2 334 Singapore Academy of Law Journal (1992) Given the somewhat narrow ambit of the Caparo decision, and the varied commercial situations to which professionals lend their advice, the new approach has been criticised as giving rise to uncertainty and inconsistency in the law. Many of the recent cases concerned the issues of whether and to whom an accountant or auditor owes a duty of care when he is preparing or auditing a set of acounts. It is pertinent to note that accountants today do more than traditional book-keeping and preparation of accounts. They also give advice as consultants on a wide range of activities from tax planning, corporate structuring, information systems planning to takeovers and mergers. In doing so, their exposure to the risk of liability for negligent misstatements is far greater than ever before, and raises interesting questions concerning their liability for professional negligence. The aim of this article is to examine the cases decided in the aftermath of Caparo, and to try and extract some principles which may help in identifying the situations in which members of the accounting profession (accountants and auditors) and other financial advisors may be held to owe a duty not to make inaccurate and misleading statements which may cause economic loss to a recipient who relies on them. Caparo and other cases In Caparo Industries plc v Dickman, The House of Lords had the opportunity to review the caselaw relating to the duty of auditors for statements made in a company s annual audited reports. Caparo Industries plc (Caparo), who were shareholders of Fidelity plc, purchased additional shares in the company and subsequently took over the company in reliance on the company s audited reports. After the takeover, Caparo brought an action against, inter alia, the auditors of Fidelity plc, alleging that the auditors owed them a duty of care, either as potential bidders or as existing shareholders. It was argued that the auditors had breached this duty of care in preparing accounts that were inaccurate and misleading as the stocks were overvalued and after sales credits had been underprovided for, thus reflecting a profit when it should have shown a loss. At the trial of a preliminary issue as to whether the auditors owed a duty of care to Caparo, Sir Neil Lawson held that no such duty of care existed to individual shareholders, although a duty may be owed to the shareholders as a class. On appeal, the Court of Appeal by a majority (O Connor LJ dissenting), allowed the appeal in part on the ground that the auditors owed a duty to the respondents as existing shareholders because there was sufficient proximity between an existing shareholder and the auditors who were considered to have voluntarily assumed a direct responsibility for the accuracy of audited accounts. However, it was decided that no duty of care was owed to Caparo as potential investors.

3 Negligent Misstatements 335 The auditors appealed from this decision to the House of Lords which unanimously allowed the appeal and held that no duty of care was owed by the auditors to Caparo, whether as an individual shareholder or as a potential investor. The law lords emphasised the importance of the need for proximity of relationship between the parties in addition to the requirement of foreseeability. Proximity was to be determined by the circumstances in and the purposes for which the statements were made. Since the statements in question had been contained in the company s audited accounts, it was decided that the statements had been made for the purpose of fulfilling the statutory requirements of the Companies Act The purpose behind the statutory requirement for audited accounts, their lordships reasoned, was to provide existing shareholders of the company with reliable information to enable them to exercise their class rights at the company s general meeting. As such, the auditors owed no duty of care to the takeover bidder because the accounts had not been prepared specifically for the purpose of giving financial advice in relation to a takeover bid. Nor was there a duty of care owed to Caparo in their capacity as an existing shareholder because the audited accounts had not been prepared for the purpose of assisting existing shareholders in deciding whether or not to acquire additional shares. Immediately after this judgement, there was a great deal of speculation as to how the decision of the House of Lords would be interpreted and applied in subsequent cases 6. It did not take long for the courts to be faced with another case on negligent misstatement within the context of another takeover scenario. Applying Caparo, the Court of Appeal in James McNaughton Paper Group Ltd v Hicks Anderson & Co 7 applied the concepts of foreseeability, proximity and reasonableness and held that a firm of chartered accountants who had prepared a set of draft accounts for a corporate group did not owe a duty of care to a takeover bidder who had relied on the accounts. This was so in spite of the fact that the accountants had met with the potential investor during negotiations for the takeover and had made an oral representation concerning the financial status of the company in question. The court placed a great deal of emphasis on the fact that the accounts presented to the potential investor had been merely draft accounts and thus it was not foreseeable that the bidder would rely on them in the same way as one would rely on final accounts. 6 Robert Baxt, The Shutting of the gate on shareholders in actions for negligence the Caparo decision in the House of Lords 1990 Companies & Securities Forum, CCH 2; Hugh Evans, The Application of Caparo v Dickman 1990 Vol 6 PN No 2 76; John G Fleming, The Negligent Auditor and Shareholders 1990 V106 LQR [1991] 1 All ER 134.

4 336 Singapore Academy of Law Journal (1992) As for the accountants oral representation to the effect that the company was breaking even or doing marginally worse, it was decided that this was merely a general statement. According to Neill LJ, this general statement did not affect the specific figures in the draft accounts and the accountants could not have foreseen that the takeover bidder would rely on it without further inquiry or advice. The Court of Appeal did not seriously consider the question of proximity because the takeover bidder had failed to satisfy the court that it was foreseeable that they would rely on the draft accounts and the oral representation. In a matter of months, the Court of Appeal had further opportunity to consider the same issue in Morgan Crucible Co plc v Hill Samuel & Co Ltd 8, which arose out of similar facts. Here, the takeover bidder sought to amend his statement of claim (in view of the decision in Caparo) to allege that there was the necessary proximity for the defendants (including the company s directors, a firm of financial advisors and a firm of auditors) to owe him a duty of care in relation to financial statements made after the bid was announced. It was agreed by all parties to the action that no duty of care could have arisen before the bidder was identified. The court then decided that the moment the initial bid was made, there was an arguable case for liability of the directors, financial advisors and auditors. Caparo was distinguished on the ground that here there was an identified bidder and this could give rise to sufficient proximity. Referring to the pre-bid statements, Slade J rejected the argument that they could be regarded as continuing representations which if not withdrawn, could give rise to liability once the bid was first made. However, he felt that there was an arguable case for liability for representations made after the takeover bidder was identified and this being a question of critical importance for the trial judge to consider, he allowed the takeover bidder to amend his statement of claim and referred the case to trial. Unfortunately, the case was eventually settled by the parties just before the hearing of the trial. Since then, the Caparo approach has been applied to situations other than takeover bids. In Al-Nakib Investments (Jersey) Ltd v Longcroft, 9 the issue was the extent of the directors duty of care for financial statements other than the information provided in the annual audited report. The directors of a company were held not to owe a duty of care to shareholders who had purchased shares in the market in reliance on alleged misstatements in a prospectus and an interim report issued in relation to the incorporation of a 8 [1991] 1 All ER [1990] 1 WLR 1390.

5 Negligent Misstatements 337 subsidiary company. The reason for the court s decision was once again based on the ground of a lack of proximity between the directors and the shareholders as the prospectus and interim report had been sent by the directors to the existing shareholders of the parent company for the purpose of enabling them to decide whether or not to take up an offer of a rights issue and not to assist them in deciding whether to purchase shares in the market. This requirement for proximity has also been applied and extended in Al- Saudi Banque v Clarke Pixley 10 to negate the existence of any duty of care by auditors to existing or potential bank creditors of a company even though it may be foreseeable that banks might give credit in reliance on the company s audited accounts. Millett J concluded that there was no close or direct relationship between the auditors and the banks and thus the element of proximity was lacking. This judgement was given after the Court of Appeal decision in Caparo but before the final decision of the House of Lords. However, it is consistent with the House of Lords view that the purpose of the auditors report is only to enable the shareholders to make an informed decision at the company s general meeting. Some important principles can be extracted from the abovementioned cases and these will be dealt with in turn below. Principles to be applied in determining whether a duty of care exists 1. Foreseeabttity is not the sole criterion of liability. Foreseeability of damage, per se, is not sufficient to impose a duty of care on the maker of a statement. Additionally, there must be a relationship of proximity between the maker and the recipient, and it must be fair, just and reasonable to impose the liability. 11 These three requirements are necessary to keep the law of negligence within the bounds of common sense and practicality. 12 Foreseeability of damage to the recipient is not difficult to establish. In the 10 [1989] 3 All ER This has been tirelessly reiterated in Caparo, ibid, at pp , , McNaughton Papers Group Ltd v. Hicks Anderson & Co (a firm) supra, at , Morgan Crucible Co plc v Hill Samuel Bank Ltd and others supra, at Lord Oliver in Caparo, supra, at 585e. The learned judge was concerned that given the far-reaching effects of statements which could be circulated with or without the consent or knowledge of the maker, there was a need to impose some discernible limits to liability in such cases. To apply as a test of liability only the foreseeability of possible damage without some further control would be to create a liability wholly indefinite in area, duration and amount and would open up a limitless vista of uninsurable risk for the professional man. at 593c.

6 338 Singapore Academy of Law Journal (1992) words of Lord Oliver, it is almost always foreseeable that someone, somewhere and in some circumstances, may choose to alter his position on the faith of the accuracy of a statement or report which comes to his attention and it is always foreseeable that a report, even a confidential report, may come to be communicated to persons other than the original or intended recipient. 13 Invariably, it is the requirement of a relationship of proximity between the maker and the recipient of the statement that poses the greatest obstacle to recovery for the plaintiff. Proximity has been ascribed as being no more than a covenient label to describe circumstances from which the law will attribute a duty of care. Such a duty is not a duty to take care in the abstract but a duty to avoid causing to the particular plaintiff damage of the particular kind which he has in fact sustained The duty only extends to the particular transaction in the maker s mind at the time of making the statement, ie. the maker s liability is restricted to the purpose for which the advice or information was required to be given. In order for proximity to exist between the maker of the statement and the plaintiff, the maker when giving the advice or information must have known that his statement would be communicated to the plaintiff, either as an individual or as a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind, and that the plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter on that transaction or on a transaction of that kind. 15 Lord Bridge observed that this was the salient feature in all the cases allowing recovery to the plaintiff. 16 Therefore, the mere possibility of reliance on a statement by strangers for any one of a variety of different purposes which the maker had no specific reason to anticipate would not impose a duty of care on the maker to the recipient. In cases where the advice has not been given for the specific purpose of the recipient acting on it, it should only be in cases where the adviser knows that there is a high degree of probability that some other 13 Caparo, supra, at 593b c. 14 Lord Oliver in Caparo, supra, at 599e f. 15 Lord Bridge in Caparo, supra, at 576h. 16 Ibid, at 576c. He was referring to Cann v Wilson (1988) 39 Ch D 39, Denning LJ s dissenting judgement in Candler v Crane Christmas & Co Ltd [1951] 1 All ER 426, the Hedley Byrne case, supra, and Smith v Eric S Bush (a firm) [1989] 2 All ER 514, Harris v Wyre Forest DC [1989] 2 WLR 790.

7 Negligent Misstatements 339 identifiable person will act on the advice that a duty of care should be imposed. 17 The above points are summarised in Neill LJ s list of the factors to be considered in determining whether a duty of care is owed by the maker to the recipient. 18 They include: (a) the purpose for which the statement was made; (b) the purpose for which the statement was communicated; (c) the relationship between the maker, the recipient and any relevant third party; (d) the size of any class to which the recipient belongs; (e) (f) the state of knowledge of the maker; and reliance by the recipient. 3. It must be fair, just and reasonable to impose liability on the maker. The courts have not dwelt at length on this point. Much of their attention has been focused on foreseeability and proximity. However, Lord Oliver in Caparo, ventured to suggest that what have been treated as three separate requirements are... in most cases, in fact merely facets of the same thing, for in some cases the degree of foreseeability is such that it is from that alone that the requisite proximity can be deduced, whilst in others the absence of that essential relationship can most rationally be attributed simply to the court s view that it would not be fair and reasonable to hold the defendant responsible. 19 What the cases have made abundantly clear is that it would not be fair and reasonable to impose liability on a maker of a statement to unknown or unintended recipients who have relied on his statement for one or more of a variety of purposes which the maker had no reason to anticipate at the time he made the statement. 17 Lord Oliver in Caparo, supra, at 591c. This high degree of probability was found to be present in the cases of Smith v Eric S Bush (a firm), supra, and Harris v Wyre Forest, supra, the appeals of which were heard together. Although the purpose of the surveyor s report was to advise the mortgagee on whether to make advances for proposed purchases, it was highly probable that the purchaser would in fact act on its contents in deciding whether or not to enter into a contract to purchase a house. The evidence adduced showed that surveyors knew that approximately 90% of purchasers did so rely, and also that a surveyor only obtains the work because the purchaser is willing to pay his fee. 18 James McNaughton Papers Group Ltd v Hicks Anderson & Co (a firm), supra. 19 Supra, at 585f-g.

8 340 Singapore Academy of Law Journal (1992) Circumstances in which the maker of a statement may be liable to the recipient Given that the above principles are to be applied on a case-by-case basis, the question of the existence of a duty of care in each case will depend on its own particular facts. Notwithstanding this, it is possible, given some judicial clues, to identify the circumstances in which a duty of care may be held to be owed by accountants, auditors and financial advisers to investors and creditors in general. a. Investors (shareholders and takeover bidders) It is clear from Caparo, that an auditor owes no duty of care to an existing shareholder, a potential shareholder or a takeover bidder, who has relied on audited accounts to sell or to buy shares and suffered economic loss. The original, central and primary purpose of the auditors report, statutorily required under the Companies Act, is to enable the shareholders, as a body, to exercise informed control of the company. 20 As such, any use of the auditor s statement by any person for purposes other than the statutory purpose would not attract any liability on the part of the auditor. 21 This poses significant problems for the average shareholder who invariably has no option but to rely on the audited statements as his primary, or perhaps, even as his sole source of information in investment decisions 22. He would therefore be investing in the stock market at his own risk, without recourse to anyone if he relied on audited reports. As for other financial statements made by accountants and other financial advisers, it would appear from McNaughton s case that the scope of liability would be determined in the same way, that is, by looking at the specific purpose for which the statement was required. As the draft accounts in that case had been prepared for the company and not the plaintiffs, the defendants were not liable when the plaintiffs, who were unintended recipients, acted on the draft accounts to their detriment. In ascertaining the purpose of the maker, the state of his knowledge at the time of making the statement is relevant. It depends on whether he knew 20 Lord Oliver in Caparo, supra, at 584d e. 21 The decision in Caparo has been heavily criticised for being out of step with commercial reality. See Accountancy, Mar One author has noted that a reference to Hansard would easily rebut the statutory purpose of the audit as divined by the House of Lords See Mullis & Oliphant, Auditors liability, PN Mar Baxt, see note 6. As the average shareholder would not easily or cheaply be able to obtain any additional information to determine whether to retain his investment or increase it, the author argues that it would not be unreasonable for the shareholder to rely on the auditor, since the auditor is appointed to look after the interests of all shareholders. However, no duty is owed to a potential investor who is not a shareholder of the company.

9 Negligent Misstatements 341 the purpose for which the statements were required and for whose use the statements were intended. In Morgan Crucible, Slade LJ conceded that there was an arguable case for liability of the financial advisers and the auditors for statements made after the takeover bidder had been identified. The defendants had intended the bidder to rely on the statements and they owed the bidder a duty of care not to be negligent in making representations which might mislead him. Caparo s case was distinguished on the ground that it concerned an unidentified bidder. Thus, it can be seen that if a bidder is identified and statements were made to him thereafter, intending that he should rely on them for the purpose of deciding whether or not to make an increased bid, and he did so rely, the maker will be liable. However, this did not appear to be the view held by the court in McNaughton s case, decided a few months before Morgan Crucible. In McNaughton, apart from the draft accounts, the defendants had also inaccurately stated, in response to a question by the plaintiff, that the company, as a result of rationalisation was breaking even or doing marginally worse. The court held that the statement was a very general answer and the defendants could not have reasonably foreseen that the plaintiff would rely on that statement without any further inquiry or advice. With respect, the authors disagree. The defendants were aware that the plaintiff was intending to make a takeover bid for the company. As such, the plaintiff was an identified bidder. Given that the defendants were the company s accountants, and therefore the persons who were the most well-acquainted with the company s financial situation, it can be argued that the defendants knew that the plaintiff would rely on the statement without further inquiry or advice, and that it was reasonable for them to so rely. In any case, one questions whether, in reality, independent inquiry by the plaintiff would turn up any more information than what the company s own accountants are willing to divulge. Had McNaughton s case come up for determination after Morgan Crucible, perhaps the judge would have decided differently. The specific purpose approach has also been applied to other situations involving statements contained in prospectuses and interim reports. In Al- Naklb Investments (Jersey) Ltd v Longcroft, it was decided that the directors of a company owed no duty of care to shareholders who had purchased shares in the market in reliance on alleged misstatements in a prospectus and interim report issued in connection with the incorporation of a subsidiary company. This was so because the purpose of the prospectus had been to enable the shareholders to decide on whether to take up an offer of shares by way of rights issue, while the interim reports had been issued for the purpose of informing the shareholders of the

10 342 Singapore Academy of Law Journal (1992) activities of the subsidiary company. However, the use of these documents for a different and unrelated purpose would not attract any liability as the necessary proximity is lacking. b. Creditors It is common for creditors to examine a company s audited accounts when deciding whether or not to grant credit facilities. The auditors, when certifying that the company s accounts present a true and fair view, do not owe a duty of care to a bank which lends money to the company in reliance on audited reports, regardless of whether the bank is an existing creditor of the company making further advances or is only a potential creditor of the company. 23 Millett J. likened the position of the banks which were not already existing creditors to that of the potential investors in Caparo, to whom no duty of care was owed by the auditor because the element of proximity between them was lacking 24. As for the banks which were already existing creditors, their position was not the same as that of the existing shareholders in Caparo, because the auditors were under no statutory obligation to report to them nor did they do so. In the absence of direct contact between the parties, mere knowledge on the auditor s part, that some person or persons may rely on the report, would not establish the necessary proximity. The learned judge also hastened to add that even if the requirement of proximity were satisfied, it would not be just and reasonable to impose liability on the auditors 25. Although there would be no danger of exposing the auditors to an indeterminate class (where the creditors were known to them), they would be exposed to liability for an indeterminate amount. The problem is all the more acute where the company is insolvent and the advance is irrecoverable. The auditors maximum liability would fall to be measured by the amount of the advance, which would be unknown to the auditors and could not have been foreseen by them. In relation to other financial statements made by persons other than auditors, the ambit of the duty of care to creditors is likewise to be restricted by the transaction in which the maker intended the statement to be relied on, and the recipient or class of recipients to whom the maker made the statement or to whom he intended or knew that it was intended to be communicated. The same considerations of justice and reasonableness in imposing liability on the maker would probably apply. It would 23 Al Saudi Banque and others v Clark Pixley (a firm), supra. 24 at 370h. 25 at 371 j.

11 Negligent Misstatements 343 not be fair to extend the duty of care to a prospective lender unless the amount or at least the scale of the proposed loan was known to the maker. Conclusion In the light of the potentially wide dissemination of financial statements and their far-ranging effects, the judges in Caparo and subsequent cases have adopted a restrictive approach to imposing liability on the makers of such statements. This approach has been considered as an overly cautious one given that there are many factors which have to be proved before liability for negligent misstatements can arise 26. In addition to proving the existence of a duty of care, there has to be an actual breach of that duty of care by the accountants, auditors or financial advisers. The standard of care required is that which is to be expected of an ordinary skilled professional, thus accounting standards and practices would be relevant in considering the issue of breach of duty. Next, the plaintiff would have to establish that the loss suffered had been caused by actual reliance on the statement made, using the but-for test, which does not follow as a matter of course since it is possible that the error may not have had any influence at all on the decision made by the plaintiff 27. Furthermore the type of damages claimed must also have been forseeable in the circumstances. This restrictive approach is said to be justified on policy grounds, it being unfair to expose the maker of a statement to liability which is indeterminate in scope and amount. Hence, the maker would be liable only if he intended a known or identified recipient to rely on the statement for a specific purpose and the recipient did so rely to his detriment. However, this specific purpose approach does have its drawbacks. It has been criticised as being too simplistic. While it works well where there is a single, defined purpose behind the transaction in question, it ignores the fact that there may be more than one purpose behind a document. Defence documents, for instance, are intended to fulfil several purposes in practice. 28 When addressed to the shareholders of a company, they may help the management to persuade the shareholders not to accept a takeover bid. On the other hand, the information contained in the defence document may be intended to elicit an increased offer from the bidder. The latter purpose was clearly recognised in Morgan Crucible with regard to financial statements made after the bidder had been identified. The court took a step in the right direction when they conceded that a duty of care 26 Robert Baxt, see note 6 at FEB Fasteners Ltd v Bloom & Co (a firm) [1981] 3 All ER 289 at 305g. 28 Mary Percival, After Caparo Liability in Business Transactions Revisited, 54 MLR 739.

12 344 Singapore Academy of Law Journal (1992) might be owed to an identified bidder in such a situation. Unfortunately, the case was settled before the trial, otherwise it would have proved most illuminating in this confused area of the law. Much depends on what constitutes the original, central and primary purpose of financial statements other than those contained in audited reports. Given the uncertainty that shrouds the question of whether there is sufficient proximity to found a duty to take care, the business community has devised a means to side-step Caparo. Institutional lenders in England have attempted to established the requisite proximity between them and a company s auditors by asking the latter to sign privity letters 29. These letters, in effect, amount to a confirmation by the auditors that the proposed lender can rely on the auditors report for the purpose of assessing whether or not to grant a specified credit facility to the company concerned. It would thus create the required proximity between the parties since the auditors report (which had originally been prepared for statutory purposes) is now being relied on by an identified party, for the purpose of deciding whether to grant a particular credit facility, with the consent and knowledge of the auditors. The privity letter would also ensure that the auditor has knowledge of the details of the loan, such as the repayment period and the amount of the loan. In the case of a takeover bidder who has made a bid and has been identified, it is questionable whether he would be likely to succeed in obtaining a privity letter from the company s accountants or auditors in relation to the audited reports and other financial information provided by them, especially in the case of a hostile takeover. In any case, the privity letter is essential to create proximity between the parties, which would otherwise not exist, because at the instance prior to the disclosure of the identity of the bidder and his intentions, the auditor would not realise that a potential investor is relying on the accounts for the specific purpose of a possible takeover bid. However, it must be noted that the privity letter would, at most, only create proximity in relation to actions taken by the bidder after the acknowledgement from the accountants or auditors has been secured. So it would not create any proximity in relation to the initial bid which had already been made, as it is unlikely that the courts will accept the idea of a privity letter that is designed to be retrospective in effect. The ordinary stock market investor, who lacks the clout of an institutional lender, would probably be unable to obtain a privity letter from the 29 Neil Cuthbert & Alan Berg, After Caparo:can banks rely on audited financial statements? 1990 Apr IFLR 17.

13 Negligent Misstatements 345 company s accountants or auditors. In any case, it may not be a practicable safeguard because investment decisions in the stock market are usually decisions in which timing is crucial. The ordinary investor s other source of information are reports prepared by financial analysts in stockbroking firms. Invariably, however, these reports are published with a disclaimer, and reasonably so, since they are mostly based on information culled from a company s audited report. Thus the ordinary stock market investor is left largely unprotected as far as his rights in negligence against the accountants, auditors and financial advisers are concerned. This group of investors belong to an indeterminate class, which raises numerous policy issues, which, at this state of the development of the law, are perhaps, more appropriate for the legislature to consider. Given that the law since Hedley Byrne seems to have come full circle, the burden of appropriating the loss in stock market investments between investors and accountants, auditors and financial advisors should no longer be left to the courts. Instead, it may be timely for Parliament to decide whether statutory reform in this area of the law is necessary. ANGELINA LIM CHAN HUI LIAN* ERIN GOH LOW SOEN YIN * Both lecturers at the Division of Legal Studies and Taxation, School of Accountancy and Business, Nanyang Technological University.