F. Liability in Tort

• Author: John D. McCamus
• Profession: Professor of Law. Osgoode Hall Law School, York University
• Pages: 348-354

Page 348

One who is induced to enter into an agreement on the basis of a false statement of fact made by the other contracting party may be able to pursue a claim in tort. If the statement was fraudulently false, a claim may lie in the tort of deceit. If the statement was made negligently or carelessly, a claim may lie in the tort of negligence. The claim in deceit has a longer history.¹⁰²In the leading case of Derry v. Peek,¹⁰³ Lord Herschell set out the requisite intention for establishing the tort of deceit in the following terms:

First, in order to sustain an action of deceit, there must be proof of fraud and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an incident of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement from being fraudulent, there must, I think, always be an honest belief in its truth.¹⁰⁴The claim in Derry v. Peek was brought on the basis of an allegation that the directors of a corporation had made fraudulently false statements in a prospectus that had induced the plaintiff to subscribe for shares in the company. A successful defence of honest belief was raised. The claim was thus one brought against a defendant whose fraud had allegedly induced the plaintiff to enter into an agreement with a third party, the company. It is well established, however, and, indeed, it is the paradigm case, that recovery is possible where the injury suffered from

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the defendant’s fraud is to have been induced by the fraud to enter into an agreement with the defendant.¹⁰⁵Recognition of liability in negligence for carelessly made pre-contractual misstatements is, however, a more recent phenomenon. Indeed, liability for economic loss resulting from negligently false statements as a more general matter was established only in the latter half of the twentieth century. In 1963, in the leading case of Hedley Byrne & Co. v.Heller & Partners,¹⁰⁶the House of Lords recognized for the first time that liability in negligence for economic loss could be attracted by a carelessly false statement. The defendant bank had been approached by the plaintiff for gratuitous advice concerning the creditworthiness of one of the bank’s customers, with whom the plaintiff proposed to deal. The defendant gave a positive reference although, at the same time, it clearly disclaimed any liability for the accuracy of its advice. Relying on this advice, the plaintiff entered into dealings with the customer and suffered economic loss. Although the disclaimer led to the dismissal of the claim, the House of Lords nonetheless indicated that, in its absence, a claim could lie for negligent misrepresentation forseeably relied upon with resulting economic loss. Canadian courts quickly followed the House of Lords in recognizing this new liability in tort.¹⁰⁷In the immediate wake of the decision in Hedley Byrne, however, it was not immediately apparent that this form of tort liability would be applicable in the context of pre-contractual misstatements inducing contracts with the misrepresentor. Initial resistance to the idea that it might so apply rested on an assumption that once the parties have entered into a contract, the contract itself ought to be the exclusive source of their mutual rights and responsibilities. Thus, in Hedley Byrne itself, Lord Reid observed: "[w]here there is a contract there is no difficulty as regards the contracting parties: the question is whether there is a warranty."¹⁰⁸

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It seemed likely, however, that the Hedley Byrne form of liability would be extended into the pre-contractual sphere. Hedley Byrne itself, after all, was a case in which it was accepted that a negligently false statement made by A, which induced B to enter into a contract with C, could expose A to tort liability in a suit brought by B. It would not be a dramatic extension of the doctrine then to impose liability in a case where the careless inducement is uttered by C rather than A. This step was first taken by the English Court of Appeal in Esso Petroleum Co. v. Mardon.¹⁰⁹In that case, a prospective tenant of an Esso service station was given a forecast by Esso of the estimated annual consumption of petrol at the particular location, which induced Mardon to enter into the service station lease. In the event, however, the volume of sales was much lower than had been predicted and Mardon, therefore, lost large sums of money. In a claim brought by Esso to enforce the lease, Mardon successfully counterclaimed for damages on the alternative grounds of negligent misrepresentation and collateral contract.¹¹⁰With respect to the former claim, Lord Denning M.R., observed as follows:

[I]f a man, who has or professes to have special knowledge or skill makes a representation by virtue thereof to another - be it advice, information or opinion - with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and the advice, information or opinion is reliable. If he negligently gives unsound advice or misleading information or expresses an erroneous opinion, and thereby induces the other side into a contract with him, he is liable for damages.¹¹¹Two years later, the new doctrine was applied by the Ontario Court of Appeal in Sodd Corporation Inc. v. Tessis.¹¹²In...