Henderson v Merrett Syndicates [1994] UKHL 5 (25 July 1994)

Lloyd's Names sued their managing agents for negligent mismanagement. The agents had a contract with the Names. The House of Lords held that the agents also owed a concurrent duty of care in tort, establishing the principle of concurrent liability.

Facts

The appellants were underwriting members of Lloyd’s, known as ‘Names’. The respondents were underwriting agents who acted as managers for various syndicates of which the Names were members. The relationship between the Names and their agents was governed by an agency agreement, creating a contractual link. The Names suffered substantial financial losses and brought actions against the agents, alleging that the agents had been negligent in their management and underwriting of the syndicates’ business. The agents contended that because a contract existed between the parties, their duties were exclusively governed by that contract, and no parallel duty of care in tort could arise.

Issues

The central legal issue before the House of Lords was whether a claimant, who has a contractual relationship with a defendant, can concurrently sue that defendant in the tort of negligence for losses caused by the defendant’s negligent performance of their contractual obligations. Specifically, did the managing agents owe the Names a duty of care in tort that was co-extensive with their contractual duties, or was the Names’ remedy confined to a claim for breach of contract?

Judgment

The House of Lords unanimously dismissed the agents’ appeal, affirming the Court of Appeal’s decision. Lord Goff of Chieveley delivered the leading judgment, with which the other Lords agreed. The court held that a duty of care in tort could arise from a relationship even where that relationship was also governed by a contract. The existence of a contract did not preclude a concurrent and co-extensive duty of care in tort.

The ‘Assumption of Responsibility’ Principle

Lord Goff’s reasoning was founded on the principle of ‘assumption of responsibility’, famously articulated in Hedley Byrne & Co. Ltd. v Heller & Partners Ltd. [1964] A.C. 465. He held that this principle was not confined to cases of negligent misstatement but extended to the performance of professional services. By agreeing to act as managing agents for the Names, the respondents had assumed a responsibility for the professional management of the syndicates’ affairs. The Names, in turn, relied on the agents’ specialist skill and judgment. This relationship of assumption of responsibility and reliance gave rise to a duty of care in tort.

Rejection of the ‘Contractual Fallacy’

The court explicitly rejected the argument that a contract automatically excludes tortious liability (the so-called ‘contractual fallacy’). Lord Goff conducted a detailed historical analysis of the relationship between contract and tort, tracing their common roots in the old action of assumpsit. He concluded there was no sound basis in modern law for a rule that would force a claimant to choose between the two remedies, provided the tortious duty is not inconsistent with the terms of the contract.

My own belief is that, in the present context, the common law is not antipathetic to concurrent liability, and that there is no sound basis for a rule which automatically restricts the claimant to either a tortious or a contractual remedy. The result may be untidy; but, given that the tortious duty is imposed by the general law, and the contractual duty is attributable to the will of the parties, I do not find it objectionable that the claimant may be entitled to take advantage of the remedy which is most advantageous to him, subject only to ascertaining whether the tortious duty is so inconsistent with the applicable contract that, in accordance with ordinary principle, the parties must be taken to have agreed that the tortious remedy is to be limited or excluded.

Implications

The decision in Henderson v Merrett is of fundamental importance in the law of obligations. It firmly established the doctrine of concurrent liability in tort and contract in English law. This allows a claimant to choose the cause of action that is most advantageous, for example, with respect to limitation periods or the rules for the assessment of damages. The case significantly expanded the scope of the Hedley Byrne principle beyond information and advice to encompass the performance of any professional or quasi-professional service. It confirmed that the test for imposing a duty of care in cases of economic loss is the voluntary assumption of responsibility by the defendant for the claimant’s interests.

Verdict: The appeal was dismissed. The court held that the underwriting agents owed a duty of care to the Names in tort, concurrent with their contractual duties.

Source: Henderson v Merrett Syndicates [1994] UKHL 5 (25 July 1994)