Simon Lewis examines a case that clarifies the rules on when a duty of care can be owed to third parties
As is well known, a professional such as an engineer or architect can owe a duty of care in tort (that is, not based upon a contractual relationship) to a third party. The precise circumstances in which such a duty of care arises are obviously heavily fact-specific, but some general guidelines have been established in a number of legal cases. What is the position, however, if the third party who relies on the work supplied by the professional does not in fact exist at the time the work was supplied? This interesting issue, and a review of the principles establishing the existence of a duty of care in these circumstances, was recently considered in Valley Brook Investments Ltd and Another vs Huam Ltd  EWHC.
This case concerned a plan to develop an office building in Crewe into residential units. The defendant was an architecture practice that prepared various plans and drawings of the property, three of which were sent to the second claimant, Mr Mines. The drawings in fact overstated the area available for conversion by some 30% and as a result the property could not be converted into the number of residential units required by Mr Mines and the first claimant. The first claimant was a special purpose vehicle (SPV), a company formed by Mr Mines specifically to carry out this development.
The questions to be decided were whether the defendant owed either or both of the claimants a duty of care and, if it did, the scope of that duty of care. Having gone through the history of the discussions and communications passing between the defendant and Mr Mines, the judge found that the defendant regarded the SPV as at least a potential client and that the dispatch of the drawings to Mr Mines (in fact a week before the SPV was created) was made on that basis.
It may seem strange at first sight to consider that a duty of care can be owed to a party that doesn’t exist when that duty of care is established …
The court noted that establishing whether a duty of care existed or not would have to be decided by reference to the relationship between the parties and the extent to which it would be reasonable to anticipate that either claimant would rely on the information from the defendant. The closer the relationship was to that of adviser and client, the more appropriate it would be for reliance to be found. In the circumstances, the court came to the conclusion that this was the case and that consequently a duty of care was owed to the SPV. Was this duty affected by the fact that the SPV did not exist until a week after the drawings had been sent?
The court decided that this did not affect the establishment of the duty of care. A duty can be owed to persons whose identity is unknown to the professional provided that reliance by such persons on the professional’s statement is reasonable and can be reasonably anticipated and if the circumstances give rise to an assumption of responsibility. This “assumption of responsibility” test goes all the way back to Hedley Byrne vs Heller  AC465, the founding case of what has come to be known as negligent misstatement. The subsequent case of Playboy Club London vs Banca Nazionale del Lavoro  UKSC 43 confirmed that the principles established in Hedley Byrne will apply even if the professional in question does not know the precise identity of the third parties that rely on their work or on the statements they have made. What is important is that the identity of those third parties is capable of being ascertained in the context of the relevant transaction.
… but the cause of action accrues not at the point at which the statement is made but when the loss occurs in reliance upon that statement
Consequently, it was clear that the duty of care could extend to the SPV. It was reasonable for the defendant to assume the SPV would rely upon the “statements” as to the available floorspace made in the drawings sent to Mr Mines. Did it make any difference that the SPV did not exist until a week after the drawings were supplied? In fact it did not. A cause of action in the tort of negligence accrues on the date when the loss was suffered by reason of reliance on the statement. In this case that was the date of the purchase of the property. At that point the SPV clearly existed. It was reasonable in the circumstances for the SPV to have relied upon the drawings.
It may seem strange at first sight to consider that a duty of care can be owed to a party that does not exist when that duty of care is established. The answer lies in the nature of the duty in Hedley Byrne, which extends to those third parties that are capable of being identified even if they are not at the time the relevant statement is made, and secondly the fact that the cause of action accrues not at the point at which the statement is made but when the loss occurs in reliance upon that statement. Valley Brook vs Huam is another reminder of the care that needs to be exercised by professionals when giving advice or making statements upon which third parties may rely. The reach of Hedley Byrne is longer than you might expect.
Simon Lewis is a partner in the construction and engineering team at Womble Bond Dickinson (UK)