Ashraf Ghani completed a diploma in Cooking and Baking at William Anguish College. Immediately after graduating he set up his own bakery in Dandenong that he called “Kabul Breads”. A few months later, as things were going well, Ashraf decided to expand his business. Around that time, he met an old Afghani friend, Shah Masood, who was an accountant and a financial adviser. They discussed Ashraf’s expansion plans, and Shah quickly offered to review his financial situation and to prepare a business plan. As Ashraf was financially ignorant and needed expert guidance, he accepted Shah’s offer and gave his financial records. Shah prepared a financial report and advised Ashraf that he was in a sound financial position, and that he could expand his business. He recommended that Ashraf borrow money in order to set up a new bakery on fashionable Lygon Street, in Carlton (a suburb of Melbourne). Ashraf trusted his friend and decided to act on the advice. He borrowed $500,000 from “For You Only”, a small credit union located in Springvale that provides loan and overdraft facilities. “For You Only” used the financial report prepared by Shah to offer a loan to Ashraf. Ashraf signed a five-year lease. Soon after opening his new shop, Ashraf realised that people who visit the Lygon Street area generally only buy traditional Italian food and bread – there was no market for Afghani bread. Ashraf came under financial stress, and blamed Shah for his situation. Shah admitted that he had not adequately factored in Ashraf’s pre-existing debts, and had underestimated the significant costs associated with setting up the new business. Shah advised Ashraf to terminate the lease and inform “For You Only” that he would be unable to repay the loan. “For You Only” is faced with significant losses. (b) Does Shah owe “For You Only” a duty of care? Refer to relevant cases.
Question
Ashraf Ghani completed a diploma in Cooking and Baking at William Anguish College. Immediately after graduating he set up his own bakery in Dandenong that he called “Kabul Breads”. A few months later, as things were going well, Ashraf decided to expand his business. Around that time, he met an old Afghani friend, Shah Masood, who was an accountant and a financial adviser. They discussed Ashraf’s expansion plans, and Shah quickly offered to review his financial situation and to prepare a business plan. As Ashraf was financially ignorant and needed expert guidance, he accepted Shah’s offer and gave his financial records. Shah prepared a financial report and advised Ashraf that he was in a sound financial position, and that he could expand his business. He recommended that Ashraf borrow money in order to set up a new bakery on fashionable Lygon Street, in Carlton (a suburb of Melbourne). Ashraf trusted his friend and decided to act on the advice. He borrowed $500,000 from “For You Only”, a small credit union located in Springvale that provides loan and overdraft facilities. “For You Only” used the financial report prepared by Shah to offer a loan to Ashraf. Ashraf signed a five-year lease. Soon after opening his new shop, Ashraf realised that people who visit the Lygon Street area generally only buy traditional Italian food and bread – there was no market for Afghani bread. Ashraf came under financial stress, and blamed Shah for his situation. Shah admitted that he had not adequately factored in Ashraf’s pre-existing debts, and had underestimated the significant costs associated with setting up the new business. Shah advised Ashraf to terminate the lease and inform “For You Only” that he would be unable to repay the loan. “For You Only” is faced with significant losses. (b) Does Shah owe “For You Only” a duty of care? Refer to relevant cases.
Solution
In order to determine whether Shah owes a duty of care to "For You Only", we need to consider the principles established in the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. This case established that a duty of care can arise where one party relies on the professional skill and judgement of another, and the professional is aware of this reliance.
In this case, Shah, as a financial adviser, provided a financial report to Ashraf, who then used this report to secure a loan from "For You Only". It could be argued that Shah should have foreseen that "For You Only" would rely on his report in deciding whether to provide a loan to Ashraf. However, it is not clear whether Shah knew that his report would be used in this way.
Furthermore, in the case of Caparo Industries plc v Dickman [1990] 2 AC 605, it was established that for a duty of care to arise, the harm caused must be a reasonably foreseeable result of the defendant's conduct, there must be a relationship of proximity between the defendant and the claimant, and it must be fair, just and reasonable to impose a duty of care.
In this case, it could be argued that Shah did not have a relationship of proximity with "For You Only", as his primary relationship was with Ashraf. Furthermore, it may not be fair, just and reasonable to impose a duty of care on Shah, as this could potentially expose financial advisers to an indeterminate amount of liability.
Therefore, based on the principles established in Hedley Byrne and Caparo, it is unlikely that Shah would owe a duty of care to "For You Only". However, this would ultimately be a matter for the courts to decide based on the specific facts of the case.
Similar Questions
*Question 1 (12 minutes) Ashraf Ghani completed a diploma in Cooking and Baking at William Anguish College. Immediately after graduating he set up his own bakery in Dandenong that he called “Kabul Breads”. A few months later, as things were going well, Ashraf decided to expand his business. Around that time, he met an old Afghani friend, Shah Masood, who was an accountant and a financial adviser. They discussed Ashraf’s expansion plans, and Shah quickly offered to review his financial situation and to prepare a business plan. As Ashraf was financially ignorant and needed expert guidance, he accepted Shah’s offer and gave his financial records. Shah prepared a financial report and advised Ashraf that he was in a sound financial position, and that he could expand his business. He recommended that Ashraf borrow money in order to set up a new bakery on fashionable Lygon Street, in Carlton (a suburb of Melbourne). Ashraf trusted his friend and decided to act on the advice. He borrowed $500,000 from “For You Only”, a small credit union located in Springvale that provides loan and overdraft facilities. “For You Only” used the financial report prepared by Shah to offer a loan to Ashraf. Ashraf signed a five-year lease. Soon after opening his new shop, Ashraf realised that people who visit the Lygon Street area generally only buy traditional Italian food and bread – there was no market for Afghani bread. Ashraf came under financial stress, and blamed Shah for his situation. Shah admitted that he had not adequately factored in Ashraf’s pre-existing debts, and had underestimated the significant costs associated with setting up the new business. Shah advised Ashraf to terminate the lease and inform “For You Only” that he would be unable to repay the loan. “For You Only” is faced with significant losses. (a) Advise Ashraf about his prospects of success in an action against Shah in the tort of negligence. Refer to relevant cases and statutes. (14 marks) (Approximately 28 minutes of writing time) In Hedley Byrne & Co Ltd v Heller & Partners Ltd: The plaintiff might have succeeded in negligence, had there not been a disclaimer.
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