Chapter 2-Negligence and Risk

Chapter 2 Negligence and Risk Chapter 2-Negligence and Risk Chapter Structure: Meaning of a Tort What Law Applies to Negligence The Elements of Negligence Negligent Misstatement Pure Economic Loss Defences to Negligence Chapter Summary: Meaning of a Tort Definition Tort - a wrong by an individual against another. The law of tort protects individuals against infringements of their rights against person, property or reputation. There are many different torts including: - trespass defamation nuisance negligence. Basic Principle - members of society we all have a legal obligation to avoid causing injury to others by our actions or lack of action (carelessness). The law states that if an injury is caused to another by a person failing to take care, the wrongdoer should provide a remedy to the injured party, usually monetary compensation. What Law Applies to Negligence? The law of torts has historically evolved through the common law. Tort law crisis of the early 2000 s was a result of a huge increase in litigation and an inevitable rise in the cost of insurance premiums. This crisis saw many businesses and some non- profit organizations forced to close because they were unable to afford insurance. Elements of Negligence To establish the tort of negligence, there are three prerequisites:- 19

Corporations and Trusts Law 1. Duty of Care- The Good Neighbour Principle, Foreseeability, Proximity, The Vulnerability and Control Test 2. Breach of Duty of Care- QUESTION - Has there been a breach of duty? 3. Loss, injury or damage must have resulted as a result of that breach- Causation, Remoteness of Damage, Eggshell Skull Rule Duty of Care The common law position with respect to duty of care did not change under the civil liability reforms. The various pieces of legislation simply try to clarify what amounts to a duty of care and reiterate that negligence does not arise in every case where a foreseeable risk occurs. Defendants are entitled to disregard some risks as insignificant and then consider whether a reasonable person would have taken action to avoid or reduce the risk. Breach of Duty of Care- Standard of Care Once it has been established that a duty of care is owed by the defendant to the plaintiff, the plaintiff must then establish the standard of care that applies in the circumstances and whether that standard has been breached. Civil liability legislation uniformly sets out factors which should be considered by the court in deciding whether a reasonable person would have taken precautions against the identified risk. Civil Liability Act 2002 (NSW) s5b 5B General Principles (2) In determining whether a reasonable person would have taken precautions against a risk of harm, the court is to consider the following (amongst other relevant things): (a) The probability that the harm would occur if care were to be taken. (b) The likely seriousness of the harm. This is essentially a restatement of the gravity of harm concept. The more serious the harm is likely to be, the more likely a reasonable person would have taken precautions against the risk of the harm occurring. If the activity in which the plaintiff is concerned is particularly hazardous, a warning should be given. c) The burden of taking precautions to avoid the risk of harm. 20

Chapter 2 Negligence and Risk The plaintiff must identify the precautions the defendant should have taken, and then show, on the balance of probabilities, that the burden of cost, difficulty and inconvenience to the defendant was not unreasonable in the circumstances. (d) The social utility of the activity that creates the risk of harm. The social utility of the defendant s conduct must be assessed as against the seriousness of the risk of injury. In some situations, the benefit of the conduct may outweigh the risk of injury and may change the duty of care ascribed to the person involved. Wrongs Act 1958 (Vic) - s 49 Other Principles In a proceeding relating to liability for negligence: a) The burden of taking precautions to avoid a risk of harm includes the burden of taking precautions to avoid similar risks of harm for which the person may be responsible. b) The fact that a risk of harm could have been avoided by doing something in a different way, does not of itself, give rise to, or affect liability for the way in which the thing was done. c) The subsequent taking of action that would, (had the action been taken earlier), have avoided a risk of harm, does not of itself give rise to or affect liability in respect of the risk, and does not of itself constitute an admission of liability in connection with the risk. Res ipsa loquitur The Facts Speak for Themselves This is a rule of evidence that allows the plaintiff to treat the actual facts of the case as evidence of the defendant s negligence i.e. the facts speak for themselves. For res ipsa loquitur to apply, the following conditions must be present: 1. The injury suffered by the plaintiff would ordinarily not have happened if proper care had been taken. 2. The plaintiff was injured by an act or omission exclusively within the control of the defendant. 3. There is an absence of any other explanation and no room for interference. Standard of Care for Professionals Civil Liability Acts The state legislation addresses both the standard of care required of professionals and a defence for professionals if accused of breaching that standard of care. 21

Corporations and Trusts Law Essentially, a professional refers to a person practicing a certain profession and includes doctors. The standard of care required of persons professing a particular skill is to be determined by the court as that reasonably expected of a person professing that skill, in the circumstances at that time. Civil Liability Act 2002 (NSW) s5o S50 Professional Duty of Care 1) A person practicing a profession ( a professional ) does not incur a liability in negligence from the provision of a professional service if it is established that the professional acted in a manner that (at the time the service was provided) was widely accepted in Australia by peer professional opinion, as competent professional practice. 2) However, peer professional opinion cannot be relied on for the purposes of this section if the court considers that the opinion is irrational. 3) The fact that there are differing peer professional opinions widely accepted in Australia concerning a matter does not prevent any one or more (or all) of those opinions being relied on for the purposes of this section. 4) Peer professional opinion does not have to be universally accepted to be considered widely accepted. Establishing Causation As under common law principles, establishing causation between the breach of a duty of care and the loss or harm suffered by the plaintiff, is central to proving a claim in negligence. The civil liability acts provide definitions of harm and all include the following: Damage to property. Economic loss. Personal injury, including: Loss of life. Physical injury e.g. broken leg, disfigurement or disease. Psychological injury. Two elements must be established by the plaintiff: - 1. That the negligence was a necessary condition of the occurrence of the harm (factual causation). 2. That it is appropriate for the scope of the negligent person s liability to extend to the harm so caused (scope of liability). Civil Liability Act 2002 (WA) s5c 22

Chapter 2 Negligence and Risk 5C General Principles (1) A determination that the fault of a person (the tortfeasor) caused particular harm comprises the following elementsa) That the fault was a necessary condition of the occurrence of the harm (factual causation). b) That it is appropriate for the scope of the tortfeasor s liability to extend to the harm so caused (scope of liability). Factual causation This is essentially the but for test. If the defendant has acted carefully would the plaintiff still have suffered the damage? This question focuses on conduct. Scope of liability This is essentially the remoteness test. Is it appropriate for the liability of the negligent person to stretch as far as the particular harm suffered? This question focuses on outcomes and consequences. What is considered foreseeable should be based on the type of injury suffered. Negligent Misstatement If a person is giving advice in a professional capacity or holding themselves out as an expert, they owe a duty of care to the person they are advising. This clearly applies to doctors, lawyers, accountants, auditors, engineers etc. Being aware of this serious legal responsibility is of utmost importance in the professional and financial services world. As such, any client seeking tax, financial or business advice from financial service professionals is clearly owed a duty of care that the advice they receive is accurate, current, appropriately researched and reliable. To protect against the potential consequences many professionals obtain professional indemnity insurance policies. Pure Economic Loss In some situations the defendant s negligence will cause no physical injury or damage directly to the plaintiff or the plaintiff s property, but the plaintiff will incur financial loss as a result of the defendant s acts or omissions. Over time, the courts have allowed plaintiffs to recover pure economic loss in certain limited circumstances: - 1. Loss to the Plaintiff as a Consequence of Damage Suffered by a Third Party. 2. Loss as a Result of a Defective Product or Structure A plaintiff can recover pure economic loss if the loss suffered was a result of defective goods or substandard services. 23

Corporations and Trusts Law Contributory Negligence Is only a partial defence to a claim of negligence. Once negligence by the defendant is established, they may argue that the harm caused to the plaintiff was partly their own fault. To succeed in this argument, the defendant must establish that the plaintiff failed to take reasonable care for their own safety, or their own property, and that the failure to take care contributed to the damage suffered. The burden of proof falls upon the defendant, and the court apportions the damages awarded to the plaintiff based on comparing the plaintiff s apparent lack of care to the standard expected of the reasonable person. Volenti non fit injuria - Voluntary Assumption of Risk This is a particularly difficult defence to establish, however, at common law it is a complete defence. The defendant must prove that the plaintiff has voluntarily assumed the risk of negligence- that the plaintiff was specifically aware of the risk and danger of injury of the defendant s conduct and accepted that risk. If this is proved, the defendant is not liable in negligence. No wrong is done to the person who consents. Where activities carry inherent risk, the parties involved assume the risks associated with the normal pursuit of that activity only. Vicarious Liability Vicarious liability is where one party is liable for the actions of another, because of the relationship between the wrongdoer and the person held responsible. For example, an employer will be responsible for an employee s acts and omissions that occur within the employee s normal employment. 24

Chapter 2 Negligence and Risk Chapter Two True or False Questions T/F 1. Negligence is a form of breach of contract. FALSE 2. A plaintiff must suffer a personal injury to successfully bring an action against a defendant for negligence. FALSE 3. For the plaintiff to establish negligence against the defendant they must prove only that the defendant owes them a duty of care and that they have suffered damage. FALSE 4. Tax practitioners, advisors and accountants owe a duty of care to their clients to advise them carefully. TRUE 5. The standard of care owed by a professional is set out in the Civil Liability Acts. TRUE 6. For a plaintiff to be successful in proving negligent misstatement against a tax practioner, advisor or accountant it is not necessary for them to prove they relied upon the incorrect advice given. FALSE 7. The principle of remoteness of damage limits the damage for which the defendant may be liable in negligence to the kind of damage that was reasonably forseeable. TRUE 8. Professional indemnity insurance is an essential element of risk management for tax practioners and advisors. TRUE 9. Contributory negligence is a complete defence to negligence. FALSE I0. Vicarious liability is a defence to negligence. FALSE 11. An action for misleading and deceptive conduct under s18 of the ACL may be brought as an alternative to an action in negligent misstatement. TRUE 12. Pure economic loss may be suffered by a plaintiff as a consequence of damage suffered by a third party. TRUE 13. An obvious risk is a risk that in all the circumstances would have been obvious to a reasonable person in the position of the plaintiff. TRUE 14. Volenti non fit injuria will be a successful defence if the defendant can prove the plaintiff knew about the risk. FALSE 15. In negligence the plaintiff has a duty to mitigate the damages they have suffered.true 25

Corporations and Trusts Law Chapter Two Multiple Choice Questions 1. A tort is: (a) Both a civil wrong and a criminal wrong. (b) A civil wrong. (c) A form of criminal wrong. (d) An equitable wrong. Answer: (b) 2. When identifying duty of care the following question is being asked: (a) How careful should a defendant be towards a plaintiff? (b) Towards whom should a plaintiff be careful? (c) How careful should a plaintiff be towards a defendant? (d) Towards whom should a defendant be careful? Answer: (d) 3. The concept of duty of care was originally based on the: (a) mateship principle. (b) friend principle. (c) neighbour principle. (d) colleague principle. Answer: (c) 4. Which of the following statements is correct? The standard of care required: (a) Is a subjective standard. (b) Is determined by the defendant. (c) May change with technology and time. (d) Is always determined by the relevant professional body. Answer: (c) 5. Under the Civil Liability Acts, two elements must be established for the plaintiff to link the damages they have suffered to the breach of duty of care by the defendant. They are: (a) Factual liability and scope of causation. (b) Factual causation and scope of liability. (c) Causation of facts and scope of liability. (d) None of the above. 26

Chapter 2 Negligence and Risk Answer: (b) 6. The standard of care required of a professional in Australia is to be found in which state Acts? (a) The Sale of Good Acts. (b) The Civil Liability Acts. (c) The Partnership Acts. (d) The Fair Trading Acts. Answer: (b) 7. Of the various types of torts, which poses the greatest risk for tax practioners? (a) Negligent misstatement. (b) Defamation. (c) Nuisance. (d) Trespass. Answer: (a) 8. The defence of contributory negligence can be established if it can be proven that: (a) The plaintiff was fully aware of the risk and had given their consent. (b) The plaintiff did not take appropriate care for their own safety. (c) The defendant was a volunteer. (d) The defendant also suffered harm. Answer: (b) 9. When bringing an action in negligent misstatement, a plaintiff may also bring an action for misleading and deceptive conduct under s18 of: (a) The ASIC Act. (b) The Corporations Act. (c) The ACL. (d) The Civil Liability Act. Answer: (c) 10. Volenti non fit injuria means: (a) No wrong is done to the person who consents. (b) Ignorance of the law is no excuse. (c) The facts speak for themselves. (d) None of the above. Answer: (a) 27

Corporations and Trusts Law 11. An important tool in addressing risk management and potential liability in negligent misstatement for a tax practitioner is: (a) Their business card. (b) Their letterhead. (c) Their confidence. (d) Their letter of engagement. Answer: (d) 12. An inherent risk is: (a) Is a risk that in all the circumstances would have been obvious to a reasonable person in the position of the plaintiff. (b) Is a risk of which the plaintiff was unaware. (c) Is a risk of something occurring which cannot be avoided by the exercise of reasonable care and skill. (d) Is a risk to which the plaintiff consented. Answer: (c) 13. When the court is determining an award of damages for negligence, the duty of mitigation on the part of the plaintiff requires them to: (a) Take reasonable action to reduce their damages. (b) Explain in detail how the loss or injury they have suffered took place. (c) Negotiate with the defendant as to the sum of damages to be awarded. (d) Consider all reasonable offers made by the defendant to settle the matter out of court. Answer: (a) 14. Obvious risk includes: (a) Risks that are patent or matters of common knowledge. (b) Risks that have a low probability of occurring. (c) Risks that are not prominent, conspicuous or physically observable. (d) All of the above. Answer: (d) 15. Factual causation means that: (a) The negligence was a possible condition of the occurrence of the harm. (b) The negligence was a probable condition of the occurrence of the harm. (c) The negligence was a necessary condition of the occurrence of the harm. (d) The negligence was a likely condition of the occurrence of the harm. Answer: (c) 28

Chapter 2 Negligence and Risk Chapter Two Review Questions 1. For negligence to be established the following elements must be present: A duty of care must be owed by one person to another; There must be a breach of that duty; Loss, injury or damage, which is not too remote, must have occurred as a result of that breach of duty. 2. A tax practioner/advisor or accountant owes a duty of care to their clients because a duty of care is owed to those persons who should reasonably be in our thoughts when deciding whether or how to act, because our conduct could reasonably affect those people. As an accountant or tax agent your client should be in your thoughts when you decide how to conduct your practice as your client is clearly a neighbour for the purposes of negligence. 3. The uniform matters which are set out in the Civil Liability Acts in regard to establishing standard of care in a particular situation are: (a) The probability that the harm would occur if care were not taken. (b) The likely seriousness of the harm. (c) The burden of taking precautions to avoid the risk of harm. (d) The social utility of the activity that creates the risk of harm. 4. The standard of care to be met is objectively assessed to prevent ignorance being used as an excuse for conduct which ultimately causes injury. 5. The significance of Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 is that it illustrates that for a plaintiff to be successful in establishing negligence against the defendant they must prove that the breach of duty of care caused the damage suffered that there was a clear chain of causation. In this case the auditors did not dispute that they had breached their duty of care, but simply that their breach had not caused the loss that Cambridge had suffered. In other words, Cambridge s losses were independent of the auditor s breach of their duty of care. 6. The State Civil Liability Acts address both the standard of care required of professionals and a defence for professionals if accused of breaching that standard of care. Essentially, a professional refers to a person practicing a certain profession and includes doctors. (Note; the Western Australian provision is limited to health professionals ). The standard of care required of persons professing a particular skill is to be determined by the court as that reasonably expected of a person professing that skill, in the circumstances at that time. This is meant to discourage the use of hindsight when judging the conduct of a professional person. In other words, it is always easier to be wise after the event. 29

Corporations and Trusts Law A further defence has also been created to a claim of negligence against a professional. The court is required to accept a view widely held by Australian professional bodies, that a practice is standard and considered competent. The opinion must be widely, not just locally accepted (eg. a national or international standard). However, the various acts also recognise that an opinion widely held can still be without rational basis, and in these cases, a court may still find negligence. Also, the courts will not accept reliance on professionally recognised standards where it considers such reliance unreasonable or where there is a duty to warn of risk of physical injury or death. 7. No, Christopher and Fleur would not be successful if they sued Jayne for negligence. The standard of care Jayne was expected to meet as a person professing the skill of an accountant and business advisor must be determined by the court as that reasonably expected of a person professing that skill, in the circumstances at that time. At the time Jayne gave the advice, it was correct the law changed two years later and therefore there was not breach of duty of care at the time the advice was given by Jayne. 8. Factual causation This is essentially the but for test. If the defendant has acted carefully would the plaintiff still have suffered the damage? This question focuses on conduct. Scope of liability This is essentially the remoteness test. Is it appropriate for the liability of the negligent person to stretch as afar as the particular harm suffered? This question focuses on outcomes and consequences. What is considered foreseeable should be based on the type of injury suffered, i.e. one that a reasonable person would describe as real and quite likely, rather than highly unlikely and far-fetched. 9. The significance of Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound)(No. 1)(1961) AC 388 is in the issues raised and decided upon concerning remoteness of damage in negligence. The plaintiff was the owner of a wharf in Sydney Harbour and the defendant chartered a ship called the Wagon Mound, which was moored in the Harbour. The ship illegally discharged oil into the Harbour. Approximately sixty hours later the oil floated some 200m to the plaintiff s wharf where the plaintiff s employees were working with arc welders. After receiving expert advice that oil in water could not be ignited by sparks, the employees carried on welding. Some molten metal from the welding work fell onto cotton waste floating in the oil and started a fire, which caused extensive damage to the wharf. The wharf s slipways were also damaged by the oil. The plaintiff sued the defendant for the damage. 30

Chapter 2 Negligence and Risk The court held that the defendant was liable only for the losses caused by the damaged slipways, as this damage was reasonably foreseeable. The court found that the actual damage caused by the fire was too remote and not reasonably foreseeable. 10. Edie should bring an action in negligent misstatement against Greedy Guts Pty Ltd (Greedy Guts.) Bree is a financial advisor and as a professional, owes a duty of care to Edie to advise her carefully. The Civil Liability Acts provide that the standard of care required of persons professing a particular skill is to be determined by the court as that reasonably expected of a person professing that skill, in the circumstances at that time. Bree has not met the required standard and therefore breached her duty of care by failing to use current and correct information upon which Edie has relied, causing her to suffer loss. Refer to Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964) AC 465. The action will lie against Greedy Guts because of vicarious liability. Bree has acted for Edie in the course of her employment and so Greedy Guts is liable to Edie for Bree s negligence. Edie will be entitled to receive damages for the loss of her investment. However, she is not entitled to receive damages for the loss of the possibility that she would leave her employment in two years and write a successful novel as this would be considered too remote. 11. Once a tax practioner/advisor or accountant has clearly identified to whom they owe a duty of care, they should ensure that they understand the standard of care required and put in place processes to ensure compliance with that standard, bearing in mind that this standard may change. The tax practitioner/advisor or accountant should seek the guidance of the relevant professional association and the applicable codes of practice to ensure they meet the requisite standard of care in provision of their services. To minimise the likelihood and consequences of a breach, the following risk management practices should be applied: Ongoing monitoring and assessment of the probability of risk. Ongoing monitoring and assessment of the seriousness of the consequences if a risk event was to occur. Ongoing monitoring and assessment of the opportunities for and cost of elimination of the risk. A tax practitioner/advisor or accountant should carefully consider their letter of engagement. If appropriate in the context of the particular engagement, the terms should make clear circumstances under which liability will not be accepted. Clear qualification should always be made where general information is given without reflection and enquiry where specific advice would require such reflection and enquiry. Appropriate professional indemnity insurances should always be in place. 31

Corporations and Trusts Law 12. Usually, contributory negligence is a partial defence to a claim of negligence. Basically, once negligence by the defendant is established, the defendant may argue that the harm caused to the plaintiff was partly their own fault. To succeed in this argument, the defendant must establish that the plaintiff failed to take reasonable care for their own safety, or their own property, and that the failure to take care contributed to the damage suffered. The burden of proof falls upon the defendant, and the court apportions the damages awarded to the plaintiff based on comparing the plaintiff s apparent lack of care to the standard expected of the reasonable person. Civil liability acts across various jurisdictions have codified the defence of contributory negligence. 13. The common law defence of volenti non fit injuria requires the defendant to prove that the plaintiff has voluntarily assumed the risk of negligence that the plaintiff was specifically aware of the risk and danger of injury of the defendant s conduct and accepted that risk. If this is proved, the defendant is not liable in negligence. No wrong is done to the person who consents. The Civil Liability Acts have reconfirmed, and, in some respects, amended, this common law defence. A distinction is drawn between obvious risk and inherent risk. An obvious risk is a risk that in all the circumstances would have been obvious to a reasonable person in the position of the plaintiff and includes: Risks that are patent or matters of common knowledge. Risks that have a low probability of occurring. Risks that are not prominent, conspicuous or physically observable. Whether a risk is an obvious risk depends not only upon the particular facts of the case, but also on how those facts will be interpreted by the court. Where the defence is raised and the risk of harm is an obvious one, the plaintiff is presumed to have been aware of the risk, unless the plaintiff can prove, on the balance of probabilities, that they were not aware of the risk. In raising the defence, it is enough that the person was aware of the type or kind of risk. They do not need to be aware of its precise nature, extent or manner of occurrence. In relying on this defence, the defendant must establish that the risk was such that a reasonable person in the position would have taken steps to avoid it. A defendant does not owe a duty of care to a plaintiff to warn of an obvious risk, unless the plaintiff has asked for advice about the risk. There are some exceptions to this rule. A defendant is not liable in negligence for harm suffered by another person as a result of materialisation of an inherent risk. An inherent risk is a risk of something occurring which cannot be avoided by the exercise of reasonable care and skill. 32

Chapter 2 Negligence and Risk 14. A plaintiff may choose to take action for misleading and deceptive conduct under the ACL or the ASIC Act as well as or as an alternative to bringing an action in negligent misstatement because it may be easier to prove. 15. Examples of pure economic loss include; Loss to the plaintiff as a consequence of damage suffered by a third party as in the case of Caltex Oil Australia v The Dredge Willemstad (1977); Loss as a result of a defective product or structure as in the case of Junior Books Ltd v Veitchi Co Ltd (1983) 1 AC 520. 33

Corporations and Trusts Law Crossword Solution Across 1. Partial defence to negligence. (two words). 2. Pure economic loss may be recovered by plaintiffs in limited circumstances. Down 1. Negligence is a form of. 2. The major remedy for negligence. 3. Where one party is liable for the actions of another, because of the relationship between the wrongdoer and the person held responsible. (two words). 4. The causal link between the breach of duty of care and damage is called the chain of. 5. For a plaintiff to successfully claim damages in negligence the harm they suffer must be. 6. Under the ASIC Act if a person deals in a financial product they are providing a service. 7. The concept of duty of care was originally based on the principle. 8. In determining the standard of care of a professional it is wrong to use. 9. One element is determining the standard of care required is the utility of the defendant s conduct. 34

Chapter 2 Negligence and Risk SOLUTION Across 1. contributorynegligence 2. economic Down 1. tort 2. damages 3. vicariousliability 4. causation 5. forseeable 6. financial 7. neighbour 8. hindsight 9. social 35

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