This topic is designed as a reference on the rules and regulations governing advisory services in the Malaysian capital market. Examination candidates should review the notes for the Module 19 (SIDC – Advisory services) and complete the self-assessment questions and answers in the topics.
Objectives
Learners are expected to have good knowledge, understanding and ability to apply in the following areas:
• The principles of contract law and relevant issues
• The laws which are relevant to the advisory services in the Malaysian capital market
• The system and procedures of licensing of persons who carry on the investment advisory business in Malaysia
• The features and prohibitions of investment advisory activities
• The regulations governing the issue and offer of equity securities, listing of corporations and quotations of securities on the Main Market of Bursa Malaysia Securities Berhad (Bursa Securities) (Main Market) and proposals which result in a significant change in the business direction or policy of corporations listed on the Main Market under the Securities Commission Malaysia’s Equity Guidelines
• The regulations setting out who can act as principal advisers for the submission of corporate proposals and the competency standards required
• The regulations governing the conduct of due diligence for corporate proposals by issuers, advisers and experts
• The activities and current trends connected to money laundering and terrorism financing and the Malaysian regulatory approach towards them
• The characteristics and regulations governing take-overs in Malaysia
• The regulations governing valuations of property assets in conjunction with corporate proposals for submission to the Securities Commission Malaysia or for inclusion in prospectuses and circulars
• The regulations governing the issuance and registration of prospectuses
• The regulations governing the issue, subscription, purchase, invitation to subscribe or purchase corporate bonds or sukuk to retail investors
• The regulations that must be observed for the purposes of exclusively making available unlisted capital market products to sophisticated investors in Malaysia or persons outside Malaysia
• The regulations governing the issuers of structured warrants
• The regulations governing listing of securities under the Bursa Securities Main Market Listing Requirements, Bursa Malaysia Securities Berhad ACE Market Listing Requirements and Bursa Malaysia Securities Berhad LEAP Market Listing Requirement.
Outcomes
These define clearly what you should be able to do on the successful completion of each topic. You should read them carefully before you begin. On completion, check whether you have achieved the objectives.
Glossary:
Negligent Misstatement
An action for negligent misstatement arises where Party A has carelessly made a statement to Party B, where the relationship between the parties is such that Party A owes Party B a duty of care. A negligent misstatement claim is brought at common law in tort.
The terms “negligent misrepresentation” and “negligent misstatement” are often confused. Generally, an action for any form of misrepresentation is between contracting parties, whereas an action for negligent misstatement may be invoked whether or not a contractual relationship exists.
For more detail, see Practice note, Negligent misstatement. For a checklist of the essential ingredients of a claim in negligent misstatement, see How to state your case: negligent misstatement…Read more
The tort of negligent misstatement
A tort can be defined as a wrongful act or omission which gives rise to a civil action in a court of law against the party that committed the wrongful act. The tort of negligent misstatement is defined as an “inaccurate statement made honestly but carelessly usually in the form of advice given by a party with special skill/knowledge to a party that doesn’t possess this skill or knowledge” (Willesee Bill, Law management 252, Curtin Handbook 2010). In today’s society we can observe that there are various forms of tort, some of which have roots back in medieval times and have been recognised by courts since.
Contents
Negligence
Defences
General liability of stockbrokers
False and misleading statements under securities laws
Self-Assessment Questions and Answers
Negligent Misstatement
One must take reasonable care to avoid acts or omissions which one can reasonably foresee would be likely to injure one’s neighbor – Donoghue v Stevenson.
In this topic, we will examine the concept of negligence under the common law. We will also examine the law relating to negligent misstatement under the various laws affecting investment advisers.
Tort of negligence
The common law of tort governs the law of negligence. W.V.H Rogers, defined tortious liability as:
“A liability that arises from the breach of a duty primarily fixed by law; this duty is towards persons generally and its breach is redressable by an action for unliquidated damages.”
The principles were enunciated in the landmark case of Donoghue v Stevenson, that an action for negligence will succeed if the plaintiff can prove:
(a) a duty of care is owed by the defendant to the plaintiff;
(b) a breach of that duty by the defendant;
(c) some resulting damage which is not too remote.
2.1 Negligence
“Negligence” can be defined in three categories:
1. A STATE OF MIND SHEREBY AN ACT IS NEGLIGENT WHEN IT IS DONE, NOT WITH THE DESIRE OF PRODUCING A PARTICULAR RESULT, BUT ACTUALLY PRODUCING THAT RESULT BY CARELESSNESS OR INDIFFERENCE.
2. IN THE SENSE OF CARELESS CONSUCT WITHOUT REFERENCE TO ANY DUTY BEING IMPOSED TO TAKE CARE. THE CASE OF BLYTH VS BIRMINGHAM WATERWORKS CO., IN PARTICULAR, ALDERSON B, DEFINES THIS AS:
3. THE THIRD ASPECT OF NEGLIGENCE IS USED IN AN OBJECTIVE SENSE AND REFERS TO A BREACH OF A DUTY TO TAKE CARE, IMPOSED EITHER THROUGH COMMON OR STATUTE LAW.
“Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do or doing something which a prudent and reasonable man would do.”
General principle for the tort of negligence
The development of the tort of negligence has given rise to a substantial body of case law. The basic principle for the tort of negligence, also known as the “neighbour” principle, was first formulated by Lord Atkin in Donoghue v Stevenson as follows:
1.2 Essential components of the tort of negligence
The tort of negligence consists of the following essential components:
1. DUTY – There must be a duty owed by the defendant to the complaint
2. BREACH OF DUTY – The re must have been a failure to attain that standard of care, prescribed by the law; and
3. DAMAGE OR INJURY RESULTING FROM THAT BREACH – Some direct and consequential loss must have been suffered by the complainant. The damage must be both causally connected to breach in particular and mkust be recognised by the law. A reasonable proximate connection between the breach and the injury must exist.
(i) What is “Duty of care”
With regard to the element of duty, this essentially means an obligation or a burden, imposed by law, which requires a person to conform to a certain standard of conduct. Whether or not any duty arises depends on whether there exists any foreseeability of harm or the extent arises from a risk of direct injury to a person is owned only to those whose persons or property may foreseeably be injured by failure to take care.
The test of reasonable foreseeability demands an objective standard, albeit such a test must be decided with reference to the person to whom it was to be applied. As indicated in the case of McLoughin v O’Brian.
“…foreseeability, which involves a hypothetical person looking with hindsight at an event which had occurred, is a formula adopted by English law, not merely for defining, but also for limiting, the persons to whom the duty may be owned, and the consequences for which an actor may be held responsible.”
As for the issue of relationship, the question is what determines whether an injured party is either a foreseeable plaintiff, who will be recognised by the law, or an unforseeable plaintiff, who will not be so recognised. This aspect is regulated by the concept of “proximity” between the defendant and plaintiff (i.e the injured party). A duty to take reasonable care will emerge whenever a reasonable man would foresee that, had he not taken any care, he will cause danger or injury to another person or property of another. If the answer is “yes”, then the requirement of proximity would be satisfied. Therefore, the defendant must foresee that if he fails to exercise reasonable care, then there would be a likelihood that he would injure the particular plaintiff.
(ii) Breach of duty
The plaintiff must prove that the defendant had been in breach of that duty. The test for determining whether the defendant had been in breach of that duty is the test of “reasonable man”. In other words, the basic question is whether the defendant’s conduct fell below the standard of care which is expected of the reasonable man. In Bolam v Friern Hospital Management Committee, Mcnair J said that the reasonable man is the man “in the street” or the “man on the top of Clapham omnibus”. To decide on the standard of care required in an individual case, the court looks at the external or “objective standards” of conduct are of general application.
In Candler v Crane Christmas & Co, the courts held that there was no duty owned by the defendants in the absence of a contractual or fiduciary relationship between the parties. the case concerned the negligent preparation of company accounts by the defendants with the knowledge that the accounts were to be shown to prospective investors. However, Denning LJ in his dissenting judgement argued that the defendants owed a duty of care to employer and clients “and any third person to whom they themselves show the accounts so as to induce them to invest money or take some other action upon them”.
This principle was later discussed in the case Hedley Byrne v Heller & Partners Ltd. In this case, prior to entering into a contract, an adeverising agent had requested information regarding the financial status of the Eastpower Ltd. through its bankers. Its bankers contacted the banker of Eastpower Ltd. and obtained the financial references with a standard disclaimer. The statement given by Eastpower Ltd’s banker was in a positive tone. Acting in reliance of this statement, the appellants lost over £17,000. The House of Lords held that there would have arisen a duty to take care in the making of statements had there been no disclaimer by the defendant and would have led to liability if there is a breach of that duty. in this case, the disclaimer on the preface of the document saved the company from negligent misstatement.
In summary, an ability to foresee indirect or economic loss to another person as a result of the defendant’s conduct does not automatically impose on the defendant a duty to take care to avoid that loss.
Note:
(1) What need to to be prove by the PLANTIFF
Duty of care
Breach of duty
Essential Damages
(2) Res ispa lo quitor
(e) Professionals
In the context of professionals providing special skills or expertise, the law imposes a higher duty of care that that of an ordinary man on the street. they are required not only to exercise reasonable care but must, in addition measure up to the standard of skill expected from persons of such profession. It is his professional duty to ensure that the work he completes is fit for its tended purpose and accordingly, it is an implied item term of the contract that it would be. It is not sufficient for the professional person to show that he exercised the ordinary skill of his profession (as opposed to a reasonable level skill) in executing the work hi did. This is best illustrated in Bolam v Friern Hospital where McNair J said.
“In the case of a medical man, negligence means failure to act in accordance with the standards of reasonably competent medical men at the time. There may be one or more perfect proper standards, and if he conforms with one of these proper standards, then he is not negligent.”
(f) Limiting liability
It is common in practice for parties to present a disclaimer to another party or to the general public to avoid or limit liability. Please see the law on exclusion clauses above. A person may contract out of liability of his own negligence. However, in certain situations, contracting out liability for negligence may be prohibited either at common law or by statute.
2.2 Defences
(a) A plaintiff who manage to prove all the necessary ingredients of the particular tort may still fail if the defendant shows that he is entitled to rely upon some specific defence. One possible defence is volenti non fit injuria. this legal maxim in essence means no injury is done to one who consents. this is where a person consents or at least assents, whether expressly or by implication, with another to run the risk of harm, which has been created by that other person. As such, t6he injured cannot recover any damage so suffered by him in consequence of the doing of the act which caused his harm. Hence, whether or not a defendant can succeed to waive his right of action against the defendant in respect of that breach.
The maxim volenti non fit injuria affords no defence where the plaintiff can prove that the injury suffered was the direct consequence of a breach by the defendant of his express statutory duty.
Under Malaysian law, the approach adopted when dealing with exclusion clauses in general, is similar to that in the United Kingdom and the courts would determine the reasonableness of the clause under construction. The test of reasonableness is that the term must have been a fair and reasonable one to be included having regard to the circumstance which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.
(b) Res ipsa loquitor
Res ipsa loquitor basically means an action “speak for itself”. It is a Latin maxim used under the common law in a situation where the mere fact of the event happening is sufficient to proof liability. Kennedy LJ ruled in the case of L.Russel v L.SW. (1908) 24 TLR 548
“…in the circumstances of the particular case, some evidence which, viewed not as matter of conjecture, but of reasonable argument, makes it more probable that there was some negligence, upon the facts shown and undisputed that the occurrence took place without negligence.”
Kennedy LJ continued by stating in this case, the circumstances of the event happening are more consistent, reasonably interpreted without further explanation, with the negligence of the party accused than with any other cause of the accident happening.
2.3 General liability of stockbrokers
A stockbroker’s duty can be subjected to contractual principles. From a tort perspective, a stockbroker may be liable for failing to use skill and diligence, which a reasonably competent and careful stockbroker would exercise. Common law denotes that if a customer suffers loss by the stockbroker’s breach of duty, it matters not whether the stockbroker had acted innocently or fraudulently.
The law on negligent misstatement is highly relevant in the securities industry, stockbroking companies, corporate advisers and company directors. This is a company of the issuance new securities, it often makes statements directed at potential investors. Care must be exercised to ensure that statements are accurate as they may be relied upon by a third party in making his investment decisions.
Pursuant to the legal principles found in Hedley Byrne & Ltd Heller & Partners Ltd. A stockbroker may owe a duty in tort to his customer. Likewise, a stockbroker may have no contractual relationship with a third party, but if she or he gratuitously and negligently gives advice or material information upon request to such a third party and has reason to believe that it is going to be acted upon, then the stiockbroker may be liable for loss or damage suffered as a result of such negligence. This is provided that there is no clear disclaimer of responsibility put forth by the stockbroker.
However, in the investment market, the mere fact of losses suffered by a third party cannot in itself be evidence of negligence on the part of the broker, since (as discussed above) the doctrine of res ipsa loquitor will not apply to such a matter.
CASE
Stafford v Conti Community Services Ltd.
The plantiff, an investor o the London commodities futures market, after discussions with the defendants, who were well-known brokers dealing on the market, gave them a substantial sum to invest on the market. There was no written agreement between the parties. Between January and August 1976 the defendants gave the plaintiff advice and brought to his notice different points of view regarding a proposed transaction but the plaintiff usually made his own decision and often rejected the defendant’s advice. The 46 transactions resulted in a loss of over 19,000. Only 10 of the transactions made a profit for the plaintiff. He brought an action for damages against the defendants alleging that in breach of the oral agreement between the parties they had negligently failed properly to advise on and handle transactions. In the particulars of the claim the plaintiff relied on the losses incurred and the failure to release profits as showing that there had been failure to exercise due care and diligence and thus, in effect, relied on the doctrine of res ipsa loquitor as establishing negligence.
In the judgement, it was held that an error of judgement in giving advice on the part of the broker dealing on an unpreditable market like the commodities market would not necessarily be negligence since, in relation to such market, the broker on the commodities market in relation to an individual transaction. But in any event, since the plaintiff usually made his own decision, it was impossible to say that the losses had been caused byb the defendants’ bad advice. It followed that the doctrine of res ipsa loquitor did not apply.
2.4 False and misleading statements under securities laws
This part will look into statutory of care and liability against negligent misstatement under the securities laws.
(b) Prohibited Conduct – Futures contracts
Division 2 of Part V of the CMSA on prohibited conduct for futures contracts also regulates wrongful dissemination of information.
Section 202 of the CMSA provides a person shall not create or cause to be created or do anything that is calculated to create:
(i) a false or misleading appearance of active trading in futures marketl or
(ii) a false or misleading appearance of the market for, or the price of trading in, futures contracts on the futures market. Section 202 of the CMSA must6 be read in line with section 204 of the CMSA where the dissemination of information about false trading is prohibited. The effect of section 204 and section 202 combined is thus that the creation of a false or misleading appearance (section 202 of the CMSA) can include the circulation, dissemination or authorisation to disseminate information claiming that the price of trading in a classes of future contracts will rise or fall because of the market operations of another person which he knows conducted in contravention 202 of the CMSA.
Similarly, a person shall not make any false statement of a material fact or omit state a material fact in order to make the statements already made, not misleading – section 205(c) of the CMSA. Section 206 addresses the employment of devices to defraud in connection with a transaction involving the trading in futures contract.
Section 207 of the CMSA also relates to false and misleading statements. Here, a person is prevented for the purposes of inducing the purchase of sale of a futures contract, from making any statements that is:
(a) false, misleading and deceptive with respect to any material fact at the time and in the spirit of circumstances in which it is mage; or
(b) by reason of the omission of a material fact, is rendered false or misleading
Penalties for contravention of the above provisions are found in section 209 of the CMSA. A person held to have committed such an offence shall be liable on conviction to imprisonment for a term not exceeding ten years and to a fine of not less than one million ringgit.
The CMSA also imposes civil liability for contravention under the Act as provided for under section 210 of the CMSA. Section 210 provides a remedy to a person suffering loss or damage by reason of, or relying on the conduct of another person who has contravened section 207 (false or misleading statements), 202 (false trading), 203 (dissemination of information about false trading) or section 206 (use of manipulative and deceptive devices). The pursuit of the civil action does not require:
1. the potential defendant to be charged with an offence in respect of the contravention mentioned above; or
2. the contravention to be proved against the potential defendant.
(c) Prospectus
The making of false and misleading statements is also prohibited under Division 3 of Part VI of the CMSA on prospectus both in relation to submissions made to the SC in respect of corporate proposals as well as the issue of a prospectus. Section 246(1) of the CMSA prohibits a person from authorising or causing the issue of a prospectus which contains:
(a) any statement or information that is false or misleading
(b) any statement or information from which there is a material omission.
The penalty for such an offence is a fine not exceeding RM 3 million years or both (see section 246(s) of the CMSA).
An innocent party who acquires, subscribes for or purchases securities and suffers loss and damage due to false or misleading statements in prospectuses or statements containing a material omission, may recover the amount or loss or damage from the following parties (section 248(1)(a) to (f):
(a) a principal adviser of (section 248(1)(d) of the CMSA);
(b) a person named in the prospectus with his consent as having made a statement in the prospectus (section 248(1)(e) of the CMSA; or
(c) a person named in the prospectus with his consent as a stockbroker in relation to the issue of, offer for subscription or purchase od, or invitation to subscribe for or purchase, of securities and who has made a statement that is included in the prospectus (section 248(1)(f) of the CMSA).
Section 249 of the CMSA relates to civil liability for misleading or deceptive acts. A person shall not act in a manner that is misleading or deceptive or likely mislead or deceive in connection with:
(a) any prospectus issued (section 249(1)(a) of the CMSA; or
(b) the allotment of subscribe for a purchase, securities (section 249(1)
(b) of the CMSA; or
(c) the carrying on of negotiations, the making of any arrangements or the doing of any other act preparatory to or in any other way related to any referred to in para (a) 0or (b) (section 129(1)(d) of the CMSA).
Section 214 of the CMSA
Section 214 applies in relation any statement or information submitted in connection with any proposal submitted to the SC by an applicant, its officers or associates, any adviser or expert or other person in respect of a proposal under section 212. It is important to note that the duty imposed by section 214 only extends to statements made or information given by, or to conduct of, the parties mentioned above in respect of a proposal submitted under section 212.
Section 214(10 of CMSA provides that where any statement or information is required to be submitted to the SC under this Division relating to any proposal submitted pursuant to section 212, a financial adviser (among others) shall not:
(a) submit (or cause to be submitted) any statement or information that is false or misleading or
(b) submit (or cause to be submitted) any statement or information from which there is a material omission; or
(c) engage in or aid or abet conduct that he knows to be misleading or deceptive or is likely to mislead or deceptive or is likely to mislead or deceive the Commission.
Any person in contravention of section 214(1) or (3) shall be guilty of an offence which would warrant a fine not exceeding RM 3 million or to imprisonment for a term exceeding 10 years or both.
Question 1
Describe the essential components of the tort of negligence listed below:
1. DUTY:
Answer: There must be a duty owned by the defendant to the complainant
2. BREACH OF DUTY:
Answer: There must have been a failure to attain that standard of care, prescribed by the law.
3. DAMAGE OR INJURY RESULTING FROM THAT BREACH:
Answer: Some direct and consequential loss must have been suffered by the complainant which is causally connected to breach in particular and must be recognized by the law
Question 2:
Identify whether the following statements on the general liability of stockbrokers are TRUE or FALSE?
1. A stockbroker’s duty can be subjected to contractual principles. TRUE / FALSE
2. From a tort perspective, a stockbroker may be liable for failing to use skill and diligence, which a reasonably competent and careful stockbroker would exercise. TRUE / FALSE
3. Common law provides that if a customer suffers loss by a stockbroker’s breach of duty, it must be proven that the stockbroker had acted fraudulently.TRUE / FALSE
4. In the investment market, the mere fact of losses suffered by a third party can in itself be evidence of negligence on the part of a broker.TRUE / FALSE
Question 3
Any of parties as set out in Section 248 of the Capital Markets and Services Act 2007.
1. The issuer and each director of the issuer at the time issue of the disclosure document or prospectus.
2. A person who consented or caused himself to be named and was named in the disclosure document or prospectus given to an investor as a director or as having agreed to become a director either immediately or after an interval of time.
3. A promoter, for any loss or damage arising from the disclosure document or prospectus or any relevant portion of the disclosure document or prospectus in respect of which he was a party to the preparation thereof.
4. A person other the issuer, who was responsible for preparing the disclosure document or prospectus, or responsible for conducting the due diligence of the information or statement contained in the disclosure document or prospectus, by whatever name called and may include the principal adviser or lead arranger.
5. A person named in the disclosure document or prospectus with his consent, as having made statement, that was included in the disclosure document or prospectus or on which a statement made in the disclosure document or prospectus was based, for any loss or damage caused by the inclusion of the statement in the disclosure document or 387 prospectus.
6. A person named in the disclosure document or prospectus with his consent as a stockbroker, sharebroker, underwriter, auditor, banker or advocate of the issuer in relation to the issue od, offer for subscription or purchase od, or invitation to subscribe for or purchase, securities and who had made a statement that was included in the disclosure document or prospectus or on which a statement made in disclosure document or prospectus was based, for any loss or damage caused by the inclusion of the statement in the disclosure document or prospectus; or
7. A person who authorized or caused the issue of any disclosure document or prospectus in contravention of section 246, for any loss or damage caused by such contravention.
Question 4
ABC Investment Bank is the Adviser for a corporate transaction undertaken by Company X. As a result of the ABC Investment Bank’s negligence in providing advice on the transaction, Company X incurred certain hardships and financial losses amounting to RM1,500,000. Company X filed and won a lawsuit against ABC Investment Bank. The court judgement required ABC Investment Bank to pay Company X RM1,500,000 for the loss incurred. The court also required ABC Investment Bank pay RM2,000,000 to Company X, to make an example of the Bank’s wrongful behaviour. What type of damages are ABC Investment Bank paying?
I. General damages
II. Special damages
III. Nominal damages
IV. Punitive damages
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
Explanation:
General damages – General damages amount to financial compensation that is issued by a court to compensate for injuries suffered, for which no real dollar value can be calculated. Examples of general damages can include financial compensation for pain and suffering, or for a shortened life expectancy. General damages may also arise from a breach of contract claim. To explore this concept, consider the following general damages definition.
Special damages – Special damages are a type of damages awarded in some civil lawsuits. But, the exact specifics of what they refer to vary depending on the type of case that you are involved in.
Nominal damages – Nominal damages refer to a small sum of money awarded to a plaintiff to commemorate the fact the plaintiff won their civil case in court. These damages are awarded when a plaintiff proves that their legal rights have been violated but does not demonstrate they are actually entitled to receive monetary compensation. Simply put, it is a trivial sum of money awarded to a plaintiff.
Nominal damages – Nominal damages refer to a small sum of money awarded to a plaintiff to commemorate the fact the plaintiff won their civil case in court. These damages are awarded when a plaintiff proves that their legal rights have been violated but does not demonstrate they are actually entitled to receive monetary compensation. Simply put, it is a trivial sum of money awarded to a plaintiff.
Punitive damages, also known as exemplary damages, are damages that are awarded in personal injury lawsuits in addition to compensatory damages. They can be awarded by courts and juries.
While cases in which punitive damages have been awarded often make the latest news headlines, punitive damage awards are actually made much less frequently than compensatory damages.
The majority of states permit plaintiffs to seek punitive damages in civil cases, although each state has its own rules and regulations governing the types of cases in which punitive damages can be sought, as well as other limitations. For example, some states only permit punitive damages if the defendant acted with intent to harm.
What are Civil Damages
In the legal system, civil damages are an award of money given to an individual as compensation for a loss or injury caused by the act of another, whether intentional or negligent. Rules governing the type and amount of civil damages that may be awarded vary by jurisdiction, as well as the type of claim presented by the plaintiff. There are many types of civil damages, though they are generally categorized as either compensatory or punitive in nature.
Compensatory Damages
Compensatory damages compensate an individual for losses caused by the defendant. These are further broken down into three sub-categories:
Special Damages – financial losses directly caused by the defendant’s actions, including such things as medical bills, ambulance bills, lost wages, and costs to repair or replace damaged property.
General Damages – money awarded for things for which the value is more difficult to determine. These include such things as pain and suffering, mental anguish, future problems from an injury, shortened lifespan, loss of reputation, loss of companionship, or loss of anticipated business.
For example: Don leaves the bar after having a “few drinks” with the guys. He runs a stop sign, plowing into a car driven by Angela, severely damaging the car, and seriously injuring its driver. Don was arrested at the scene of the accident for driving under the influence (DUI), after his blood alcohol level tested at 1.8 percent, more than twice the legal limit.
Angela hires an attorney to file a civil lawsuit against Don. In the lawsuit, Angela asks the court to award special damages in the amount of $141,000 to cover her medical bills and lost wages for the weeks she was off recovering from her injuries. She requests additional special damages in the amount of $11,500 to cover the value of her totaled car. General damages are requested in the amount of $5 00,000 for pain and suffering, and the humiliation of living with a large, permanent scar on her face.
When the matter goes to trial, the amount of special damages will be proven by receipts, bills, and other documents. General damages, however, are subjective, and may be awarded in an amount the judge deems appropriate.
Punitive Damages
Punitive damages, also referred to as “exemplary damages,” serve two purposes: (1) to punish the defendant, and (2) to set a public example. Not every defendant or situation warrants the imposition of punitive damages. These are generally ordered only when a defendant has acted in a blatantly negligent, malicious, or grossly reckless manner, those actions being the cause of the plaintiff’s damages. In some situations, the amount of punitive damages may be greater than the amount of compensatory damages. This might occur in such cases as discrimination or sexual harassment.
For example, in the above case, the judge may order Don to pay punitive damages to Angela because he knowingly drove his car while under the influence of alcohol, fully understanding that he could cause serious injury or even death to another person.
Negligence / Damages
Example questions/Explanations
Q1
A teenager was riding a bicycle when she saw a classmate walking toward her. The teenager rode quickly toward the classmate, knowing that he would think she would run into him on her current trajectory. The teenager was not purposefully trying to harm or touch him. The classmate saw the teenager riding toward him and yelled at her to stop. The teenager swerved at the last moment and avoided hitting him. The classmate had a panic attack because he thought that the teenager would hit him. Is the classmate likely to succeed if he sues the teenager for assault?
A. No, because the teenager did not make contact with the classmate.
B. No, because the teenager did not purposefully try to harm or touch the classmate.
C. Yes, because the teenager acted with the requisite intent.
D. Yes, because the teenager’s conduct was extreme and outrageous.
Explanation
Assault occurs when a defendant’s intentional act causes a plaintiff reasonable apprehension of imminent harmful or offensive bodily contact. The intent requirement is met when the defendant acts with either:
(a) purpose – the desire to cause apprehension of contact or
(b) knowledge – the substantial certainty that such apprehension will result.
Here, the teenager rode her bicycle directly at her classmate, causing him to think that she would hit him (reasonable apprehension of imminent contact). The teenager did not purposefully try to harm or touch the classmate (Choice B). But the teenager knew with substantial certainty that the classmate would think she would run into him, so she acted with the requisite intent. As a result, the classmate is likely to succeed in a suit against the teenager for assault.
(Choice A) Assault merely requires that the plaintiff be placed in apprehension of imminent contact. Actual bodily contact is not required. Therefore, the fact that the teenager did not make contact with the classmate is irrelevant.
(Choice D) Extreme and outrageous conduct (ie, conduct that is unacceptable in civilized society) is an element of intentional infliction of emotional distress — not assault, which only requires intentional conduct.
Q2
A mother went to a retail toy store to purchase a birthday gift for her eight-year-old daughter. Without inspecting it, a toy-store employee sold an electric toy oven to the mother. The toy oven could bake small batches of real food using heat generated from light bulbs located in the interior of the oven. The instructions that came with the toy oven clearly stated that adult supervision was required when operating the oven, so the mother helped the daughter use the oven to bake brownies. While the brownies were baking, a six-year-old boy who lived next door came over to play with the daughter. When the brownies were done baking, the mother allowed the boy to open the oven and remove them. As he was doing so, a broken light bulb inside of the oven suddenly caught on fire, causing second-degree burns on the boy’s hands.
The boy’s father subsequently filed a negligence action against the
manufacturer of the toy oven. At trial, it was established that had the manufacturer or the toy store exercised reasonable care in the inspection of the toy oven, the broken light bulb would have been discovered. Who is likely to prevail?
A. The boy’s father, because the manufacturer breached its duty of reasonable care toward the boy.
B. The boy’s father, because the manufacturer is strictly liable for the toy oven’s defect.
C. The manufacturer, because it was not reasonably foreseeable that the boy would be injured by the daughter’s defective toy oven.
D. The manufacturer, because the toy store’s negligent failure to inspect the toy oven before selling it to the mother is a superseding cause of the boy’s injuries.
Explanation
A commercial manufacturer, distributor, retailer, or seller of a product owes a duty of reasonable care to any foreseeable plaintiff (ie, purchaser, user, bystander). Failure to exercise reasonable care in the inspection or sale of a product constitutes a breach of that duty. If the breach causes the plaintiff physical harm (ie, personal injury or property damage), the plaintiff will prevail in a negligence action.
Here, the manufacturer owed a duty of reasonable care to the boy as a user of the toy oven because it was foreseeable that other children might play with the daughter’s toy (Choice C). Had the manufacturer exercised reasonable care in the inspection of the oven, it would have discovered the broken light bulb and the boy would not have suffered second-degree burns. Therefore, the boy’s father will prevail because the manufacturer breached its duty of reasonable care toward the boy and caused his injuries.
(Choice B) A strict products liability action requires proof that the product was defective, the defect existed when it left the defendant’s control, and the defect caused the plaintiff’s injuries. But here, the father filed a negligence action—not a strict products liability action.
(Choice D) The toy store’s failure to inspect the toy oven before selling it to the mother is not a superseding cause that would relieve the manufacturer of liability for the boy’s harm. That is because the toy store’s failure to inspect the toy oven was foreseeable.
Educational objective:
Commercial manufacturers, distributors, retailers, and sellers of a product owe a duty of reasonable care to any foreseeable plaintiff (ie, purchaser, user, or bystander). The failure to exercise reasonable care in the inspection or sale of a product constitutes a breach of that duty.
Q3
A pregnant woman, whose due date for the delivery of her viable fetus was less than a month away, was walking in a parking lot and looking at her cell phone. She was hit by a car driven by a police officer, who had just received word of an emergency and carelessly failed to see the woman. Several days later, the woman gave birth to a child who suffered neurological damage as a result of the accident.
The woman, on behalf of her child, brought a negligence suit against the police officer for damages associated with the physical injuries suffered by the child. The woman and the police officer were found to be equally at fault for the accident.
The jurisdiction has adopted a modified comparative fault statute that bars a plaintiff from recovery against a defendant whose fault is less than or equal to that of the plaintiff. In the child’s suit against the police officer, will the child be likely to recover for her injuries?
A. No, because the child was in utero at the time of the accident.
B. No, because the firefighters’ rule applies to police officers.
C. Yes, because the child was viable at the time of the accident.
D. Yes, because the woman was not at greater fault than the police officer.
Explanation
| Scope of defendant’s duty of care | |
| Cardozo view (majority rule) | Duty owed only to persons who might be foreseeably harmed as a result of defandant’s negligence (ie, persons within zone of foreseeable harm) |
| Andrews view (minority rule) | Duty owed to everyone on earth if anyone might be foreseeably harmed as a result of defendant’s negligence |
To recover in a negligence action, the plaintiff must establish four elements: duty, breach, causation, and damages. The majority rule is that the defendant owes a duty of care to the plaintiff only if the plaintiff is a member of the class of persons who might be foreseeably harmed as a result of the defendant’s negligent conduct (sometimes called “foreseeable plaintiffs”). If a pregnant woman is a member of this class, then a duty is also owed to her unborn child—but only if the fetus was viable at the time the injury occurred.
Here, the police officer owed a duty of care to the pregnant woman because it was foreseeable that someone in the parking lot might be harmed by the police officer’s negligent driving. As a result, the police officer also owed a duty to the woman’s child, who was unborn (ie, in utero) but viable at the time of the accident (Choice A). And since the police officer breached that duty by carelessly failing to see the woman and caused the child’s neurological damage, the child can recover from the police officer for her injuries.*
*The result would be the same under the minority rule (Andrews view) because the scope of duty under this rule is much broader—it extends to everyone if anyone might be foreseeably harmed.
(Choice B) Although the firefighters’ rule applies to police officers (and other emergency professionals), it does not excuse their negligence. Instead, it bars emergency professionals from recovering damages for injuries attributable to the special dangers of their job.
(Choice D) The woman and the police officer were equally at fault for the accident. So had the woman been the plaintiff, she could not recover under this jurisdiction’s modified comparative fault statute. But the plaintiff in this action is the child—not the woman. And since a negligent parent’s fault is not imputed (ie, assigned) to a child plaintiff in a suit against a third party, the woman’s relative fault is of no consequence here.