Sample Answer using ILAC
Hypothetical Question – Negligent Misstatement
Percy Jones is a well respected, very experienced and “hip” financial advisor. He is paid by Yahoo FM to do a 30 minute radio stint during which Gen Y listeners seek his advice on a range of financial issues. Trista, a DJ at Yahoo, corners Percy at one of Yahoo’s industry parties. She asks Percy whether purchasing shares in Downhill Mines Ltd (which is listed on the ASX) has great investment potential. Percy replies “yes” and quickly shuffles off to the bar (in fact Percy finds Trista quite boring, but has the decency not to say it to her face). At 10:00 am the following day, Trista logs on to her online share trading account and purchases $10,000 worth of Heavenly Donut shares. Six weeks later, Downhill Mines Ltd goes into liquidation and the liquidators advise Trista that she is unlikely to receive anything back.
Advise Trista whether she can take action against Percy under the tort of negligence.
ANSWER
Issue: Did Percy owe a duty of care to Trista?
Law:
- MLC v Evatt (discuss the three-step test for proving duty of care and existence of ‘special relationship’ between the advisor and client)
- Mohr v Cleaver or Tepko v Water Board (context or environment where the advice is given)
- Hedley Byrne & Co v Heller & Partners (special skill of advisor)
- Shaddock & Associates v Parramatta City Council (request for advice by client)
- San Sebastian v Minister Administering the Environment Planning and Assessment Act (factors determining ‘reasonable reliance’ on the advice)
Application of law:
In the Application of law, you need to discuss the following points by referring the legal principles discussed in the case law above. Remember that you should refer to the names of cases when applying the law to the facts of the questions.
Did Percy established a ‘special relationship’ with her client Trista which is a requirement of ‘duty of care’.
Was the advice relate to a serious business matter? If so what was the advice about? ( refer to MLC v Evatt)
In the circumstances (being at an industry party), did Percy assume responsibility for providing the correct advice?
Did Percy know that Trista would act on his advice purchasing $10,000 worth of shares the next day? ( refer to Shaddock v Parramatta City Council)
Was it reasonable for Trista to rely on Percy’s advice?
What was the context or atmosphere in which the advice was given: (refer to rules in San Sebastian v Minister Administering the Environment Planning and Assessment Act )
Did Trista request the advice and Percy have a special skill to provide the relevant advice? (refer to Hedley Byrne & Co Ltd. v Heller & Partners Ltd)
Where was the advice given? (Mohr v Cleaver or Tepko v Water Board)
Did Trista have a long-term professional relationship with Percy?. Did Percy charge a fee for providing advice and how long did they have the discussion for? Did Percy give reason as to why Downhill Mines Ltd had great investment potential?.
Did Trista make proper inquiries from Percy or seek a second opinion from another financial advisor before making a decision to invest 10,000 worth of shares in Downhill Mines Ltd?
On the other hand, what arguments would Trista rely on to establish that Percy owed her a duty of care to provide sound investment advice?
Conclusion:
On the balance of probabilities, it is likely that QCAT would decide that Percy does not owe a duty of care to Trista, as the investment advice was given in an informal atmosphere, and it would be unreasonable for Trista to rely on an off-the-cuff opinion, without making further inquiries from Percy before investing in shares. Therefore, Trista will not be able to claim damages, being the loss of value of her shares in Downhill Mines Ltd, in an action in negligence.
(Note: In this answer, the defendant advisor Percy does not owe a duty of care to the plaintiff Trista therefore, we do not need to assess the ‘breach of the standard of care’ under sections 9(1), s9 (2) (a, b, c) , s 22, and ‘causation and damage’ under s11(1)(3)(4) of the Civil Liability Act 2003 (Qld) to prove negligence against the defendant. If it was established that Percy did owe a duty of care to Trista, then you should discuss the other elements of negligent misstatement under the above sections of CLA and prove liability of Percy to pay damages to Trista.)
