ICAEW BL · Chapter 5

Negligence and professional liability MCQs with Answers

10 multiple-choice questions on Negligence and professional liability for ICAEW BL Business Law. Try each one before revealing the answer and explanation.

1. Question 1

   To succeed in a claim in the tort of negligence, which three elements must a claimant prove?

   • A) A contract with the defendant, breach of a term, and loss
   • B) A duty of care owed by the defendant, breach of that duty, and resulting damage that is not too remote
   • C) Intention to cause harm, an act by the defendant, and loss
   • D) A statutory duty, a breach of statute, and a criminal conviction
   Show answer & explanation

   Answer: B) A duty of care owed by the defendant, breach of that duty, and resulting damage that is not too remote

   Negligence requires a duty of care, a breach of that duty, and damage caused by the breach that is not too remote. No contract is needed, which is what distinguishes negligence from breach of contract. Negligence does not require intention, and it is a common-law tort, not dependent on a statutory duty or a conviction.

2. Question 2

   A court is deciding whether a duty of care exists in a novel situation not covered by previous authority, using the approach in Caparo Industries v Dickman. It has found that damage to the claimant was reasonably foreseeable and that there was a relationship of proximity between the parties. What further question must it ask?

   • A) Whether it is fair, just and reasonable to impose a duty of care
   • B) Whether the defendant intended to cause the damage
   • C) Whether the defendant is insured against the liability
   • D) Whether the claimant contributed to the damage by her own carelessness
   Show answer & explanation

   Answer: A) Whether it is fair, just and reasonable to impose a duty of care

   Under Caparo, a duty of care arises in a novel situation where damage was reasonably foreseeable, there was sufficient proximity, and it is fair, just and reasonable to impose a duty. Later cases such as Robinson v Chief Constable of West Yorkshire stress that the courts develop the law incrementally by analogy with established categories, but these factors remain central in genuinely novel cases. Negligence does not require intention, insurance is not part of the test, and contributory negligence affects the amount of damages, not whether a duty exists.

3. Question 3

   Imogen qualified as a chartered accountant three months ago. She makes an error in a client's tax computation that a reasonably competent accountant would not have made. She argues that she should be judged by the standard of a newly qualified accountant. Which statement is correct?

   • A) She is judged by the standard of a newly qualified accountant, as she argues
   • B) She is judged by the standard of the most experienced accountant in her firm
   • C) She cannot be negligent because she followed her firm's internal procedures
   • D) She is judged by the standard of a reasonably competent accountant, whatever her experience
   Show answer & explanation

   Answer: D) She is judged by the standard of a reasonably competent accountant, whatever her experience

   A professional is judged by the standard of the ordinary skilled member of that profession exercising the skill in question (Bolam). Inexperience does not lower the standard. Courts have refused to apply a lower standard to learners (Nettleship v Weston, Wilsher). The standard is that of a reasonably competent practitioner, not the most expert one. Following internal procedures is relevant evidence but not a complete defence.

4. Question 4

   An investment adviser negligently fails to warn a client about a fund's risks. The client invests and loses money. Evidence shows the client had already firmly decided to invest and would have done so even if properly warned. What is the most likely result?

   • A) The claim succeeds because the adviser breached its duty of care
   • B) The claim succeeds, but damages are reduced by half for contributory negligence
   • C) The claim fails because the breach did not cause the loss on the 'but for' test
   • D) The claim fails because advisers never owe clients a duty of care in tort
   Show answer & explanation

   Answer: C) The claim fails because the breach did not cause the loss on the 'but for' test

   Breach alone is not enough: the claimant must show that, but for the breach, the loss would not have happened (Barnett v Chelsea and Kensington Hospital). The client would have invested anyway, so the failure to warn did not cause the loss. Contributory negligence reduces damages only where liability is established. Advisers can owe a duty of care in tort as well as in contract.

5. Question 5

   Jakub already owns 3% of the shares in Ravensworth plc. Relying on its published accounts, which carry an unqualified audit report from Pell & Co, he buys a further 20% of the shares. The auditor had negligently failed to spot that inventory was overstated, and the value of Jakub's shares falls when this comes to light. Pell & Co knew nothing of Jakub's plans. Applying Caparo, does Pell & Co owe Jakub a duty of care in respect of his new purchase?

   • A) Yes, because he is a shareholder and the statutory audit report is addressed to the shareholders
   • B) No, because the statutory audit is for the shareholders as a body to oversee management, not to guide individual decisions to buy shares
   • C) Yes, because the auditor's negligence was the direct cause of his loss
   • D) No, because auditors can never be liable in negligence to anyone other than the board of directors
   Show answer & explanation

   Answer: B) No, because the statutory audit is for the shareholders as a body to oversee management, not to guide individual decisions to buy shares

   In Caparo the claimant was already a shareholder when it bought more shares relying on the audited accounts. The House of Lords held that the statutory audit report is prepared for the shareholders as a body so that they can exercise their governance rights, not to help individual shareholders or investors decide whether to buy shares. Being a shareholder therefore does not give Jakub a duty of care for his investment decision. Foreseeability and causation are not enough without proximity, and auditors can owe a duty to particular third parties where they know the accounts will be relied on for a specific transaction.

6. Question 6

   Wexcombe Ltd asks its accountants, Quill LLP, to prepare management accounts. Quill knows these will be sent to Northgate Bank, which will rely on them in deciding whether to grant a specific £2m loan. The accounts are negligently prepared, and the bank lends and suffers loss. Is Quill LLP likely to owe the bank a duty of care?

   • A) Yes, because Quill knew the accounts would be given to an identified party for a specific purpose and that the party would rely on them without independent enquiry
   • B) No, because the bank had no contract with Quill LLP
   • C) No, because pure economic loss can never be recovered in negligence
   • D) Yes, but only if the bank also held shares in Wexcombe Ltd
   Show answer & explanation

   Answer: A) Yes, because Quill knew the accounts would be given to an identified party for a specific purpose and that the party would rely on them without independent enquiry

   Under the Hedley Byrne principle, as developed in Caparo, a duty of care for negligent misstatement arises where the adviser knows the statement will be passed to an identified recipient for a specific transaction and that the recipient is likely to rely on it. Here Quill knew all of this, so there is sufficient proximity and an assumption of responsibility. No contract is needed, and pure economic loss is recoverable in negligent misstatement cases.

7. Question 7

   An accountant gives a lender a reference about a borrower's finances, stating that it is given 'without responsibility'. The reference is negligent and the lender suffers loss. How is the disclaimer likely to be treated?

   • A) It is always effective, so no duty of care can arise
   • B) It is effective only if it satisfies the reasonableness test in the Unfair Contract Terms Act 1977
   • C) It is always void, because professionals cannot limit liability for negligent advice
   • D) It is effective only if the lender signed a copy
   Show answer & explanation

   Answer: B) It is effective only if it satisfies the reasonableness test in the Unfair Contract Terms Act 1977

   Hedley Byrne itself shows that a disclaimer can prevent a duty of care arising. However, UCTA 1977 applies to notices excluding liability for negligence, and such a disclaimer must satisfy the reasonableness test (Smith v Eric S Bush). Professionals are allowed to limit liability, subject to that test. A signature is not required for a notice to be considered.

8. Question 8

   In a negligence claim, the defendant pleads, in the alternative, volenti non fit injuria (voluntary acceptance of risk) and contributory negligence. Which statement correctly contrasts the two defences?

   • A) Both are complete defences that defeat the claim entirely
   • B) Contributory negligence defeats the claim if the claimant was more than half to blame, whereas volenti merely reduces damages
   • C) Neither defence can apply where the claimant has suffered only financial loss
   • D) Volenti, if established, defeats the claim entirely, whereas contributory negligence only reduces damages to the extent the court thinks just and equitable
   Show answer & explanation

   Answer: D) Volenti, if established, defeats the claim entirely, whereas contributory negligence only reduces damages to the extent the court thinks just and equitable

   Volenti non fit injuria is a complete defence: a claimant who freely, and with full knowledge, agreed to run the risk of the defendant's negligence recovers nothing, although the courts apply it narrowly. Contributory negligence under the Law Reform (Contributory Negligence) Act 1945 is only a partial defence: damages are reduced to the extent the court thinks just and equitable, having regard to the claimant's share in responsibility. There is no rule that a claimant more than half to blame loses everything. Both defences can apply to claims for financial loss.

9. Question 9

   A client's financial loss caused by an accountant's negligent advice is assessed at £80,000. The court finds the client 25% responsible for the loss because he ignored an obvious warning in a draft report. How much will the client recover?

   • A) £60,000
   • B) £80,000
   • C) £20,000
   • D) £64,000
   Show answer & explanation

   Answer: A) £60,000

   Damages are reduced in proportion to the claimant's share of responsibility. A 25% reduction of £80,000 is £20,000, so the client recovers £80,000 − £20,000 = £60,000 (that is, 75% × £80,000). £20,000 is only the amount of the reduction. £64,000 wrongly applies a 20% reduction, and £80,000 ignores the contributory negligence.

10. Question 10

    A firm negligently installs a heater in an office, and a fire is a foreseeable result. The fire spreads far more widely than anyone would have expected and destroys an adjoining archive. Applying The Wagon Mound principle, is the firm liable for the damage to the archive?

    • A) No, because only damage of a foreseeable extent can be recovered
    • B) Yes, because a defendant is liable for every direct consequence of its negligence, whether foreseeable or not
    • C) Yes, because the type of damage (fire damage) was reasonably foreseeable, even though its extent was not
    • D) No, because damage to the property of a third party is pure economic loss
    Show answer & explanation

    Answer: C) Yes, because the type of damage (fire damage) was reasonably foreseeable, even though its extent was not

    The Wagon Mound (No 1) held that a defendant is liable only for damage of a reasonably foreseeable type. Once the type of damage is foreseeable, the defendant is liable for its full extent, even if that was not foreseeable (Hughes v Lord Advocate, Vacwell). The 'direct consequences' test in Re Polemis was rejected. Physical damage to property is not pure economic loss.