Exploring Duty to Third Parties in Professional Negligence

The essay explores the duty to third parties within business law, emphasizing the role of tort law in establishing duties of care that protect against harm to others' physical, mental, or economic well-being. It reviews key cases like Donoghue v Stevenson and Caparo Industries plc v Dickman which define and refine these legal principles. Furthermore, it examines professional negligence as a facet of tort and contract law, discussing landmark cases such as Hedley Byrne & Co Ltd v Heller & Partners Ltd and Henderson v Merrett Syndicates Ltd, highlighting the standards and liabilities professionals must adhere to. Additionally, it compares international perspectives on auditor liability in Canada, New Zealand, Singapore, Australia, and Malaysia through various legal frameworks and precedents.

Running head: BUSINESS LAW
Duty to Third party
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Duty of care is an essential thing in case of any business or profession. It
particularly attracts the provision of the Tort Law and it requires everyone to act in a manner
so that the interest of others should not be harmed. According to the provision of the English
Tort Law, everyone has a duty to take care of others and if this duty has been breached, the
wrongdoer has to face punishment. The principle of duty of care was established in the case
of Donoghue v Stevenson (1932) AC 562. Duty of care can be breached if the act of a person
harm the other party either physically, mentally or economically. Duty of care is the first
essential of negligence. However, the harm should be foreseeable in nature and justified as
stated in Caparo Industries plc v Dickman [1990] UKHL 2.
Professional negligence is a part of the English law of Tort. It has been stated
that every professional should have to act as a prudent person. They owe certain duties to the
customers and to the third parties. However, in case of the professional negligence, provision
of the Tort law and Contract law will apply in parallel ways. Every professional should meet
the standard of care to others and should act in accordance with the terms and conditions of
the contract. In case of Hedley Byrne & Co Ltd v Heller & Partners Ltd1 , it was decided that
if a person rely on the acts of a professional and the professional is unable to perform his
duties properly, he shall be liable for the breach of duty. However, it has been observed in
case of Henderson v Merrett Syndicates Ltd2 that in case of concurrent liability, the
compensation will be given for the actual loss and not for other co-related losses.
In Customs & Excise Commissioners -v- Barclays Bank Plc3, it has been
observed by the court that if there is any assumption regarding the liability of one person to
any third party, he will be held liable in case of breach of the duty. In that case, three
essentials of responsibility have to be established such as foreseeability, proximity and
1 (1964) AC 465
2 [1995] 2 AC 145
3 [2006] UK HL28

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reasonableness. In case of Arrowhead Capital Finance Limited (In Liquidation) -v- KPMG
LLP, Court observed that if all these essentials have been fulfilled, the third party can claim
damage under professional negligence.
The provision of professional negligence for the auditors is different in
different countries. In Canada, section 310 of the Companies Act 1985 regulates the liability
of the Auditors to the third party and enables to limit their liability if breach of duty has been
proved against them. However, the accountant could not get liable under Contract but under
Tort. In Smith v Eric S Bush (1990) 1 AC 831, it was held that the auditors will be
responsible if their acts cause financial loss to the third party. The case of Law Society v
KPMG Peat Marwick (2000) 4 All ER 540 establish the duty of the auditor to the third party.
The doctrine of privity test is applied in Canada through the case of Haig v Bamford4.
In case of Scott Group Ltd v Macfarlane [1978] 1 NZLR 553, the New
Zealand court held that if the breach of duty by an auditor is foreseeable in nature, he shall
be held liable to the third party. It has also held that if a third party is wholly liable upon the
auditor and the auditor failed to perform his duties properly, he shall be held liable under
professional negligence.
In Singapore, one leading technology group named DMX Technologies Group
had brought an action against its auditor firm Deloitte & Touche under professional
negligence and alleged that the firm was unable to detect fraud regarding its auditing. Based
on the commission report, High Court of Singapore held the firm liable and decreed that the
auditors of the firm had failed to maintain their standard of duty.
4 [1976] 72 DLR (3d) 68.

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Australia has adopted the principle of privity test established in Ultramares
Corporation v Touche 174 NE 441 (1931). In Malaysia, the base of professional negligence
for the auditors has been discussed in JSI Shipping (S) Pte Ltd v. Teofoongwonglcloo5. It
has been held that the auditor must work with accuracy to avoid any fraud and need to keep
record regarding the all account works. If these rules have not been followed up properly, he
will be liable under the professional negligence.
5 [2007] 4 SLR (R) 460

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Reference:
Customs & Excise Commissioners -v- Barclays Bank Plc [2006] UK HL28.
Haig v Bamford [1976] 72 DLR (3d) 68.
Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964) AC 465.
Henderson v Merrett Syndicates Ltd [1995] 2 AC 145.
JSI Shipping (S) Pte Ltd v. Teofoongwonglcloo [2007] 4 SLR (R) 460.
Rosenblum Inc v Adler 461 A 2d 138 (NJ 1983).