If you have ever been involved in a personal injury case, you probably heard the word “duty” or the phrase “duty of care” used a lot. Duty is a key concept in negligence claims. Broadly speaking, it is the legal obligation that one person owes to another to act as a “reasonable person” to avoid unreasonable risks of harm. Duty looks at what a reasonable person would do in a particular situation to avoid injuring another.

For example, a driver has a duty to act as a reasonable driver while operating his or her vehicle. The plaintiff in an accident case will say the defendant was negligent by breaching the duty to act as a reasonable driver.

Service providers also owe a duty of care when they deal with customers. This is not the same as a breach of contract, when one party violates the terms of an agreement. Rather, it is the service provider’s obligation to act as a “reasonable person” to protect the customer against unreasonable risks of harm.

Normally, we talk about the duty that is owed between the parties to the transaction, the service provider and the customer. But in some situations, the service provider’s duty can extend to third parties who are not part of the original transaction. This may seem counterintuitive. How can a service provider have any obligation to a third party who was not a customer and to whom it did not provide any services? The service provider may not even know the third party exists.

In Tennessee, however, a service provider’s duty to a third party often turns on whether the service provider knows or should have known that the third party would rely on the services received by the customer. The following examples of when courts found the service provider did and did not owe a duty to a third party will be helpful.

The court in Grogan v. UGGLA, No. M2014-01961-COA-R3-CV (Tenn. Ct. App., Sept. 22, 2015), held that a home inspector did not owe a duty of care to the home owner’s guest when he inspected the house. In that case, the home inspector prepared an inspection report which identified defective deck flooring, but did not identify any defects in the deck railing. Several weeks later, after the homeowner purchased the home, a guest fell from the second floor deck due to the faulty railing.

The guest sued the home inspector for performing the home inspection in a negligent manner by failing to discover and report the faulty deck railing. The court, however, dismissed the guest’s claim against the inspector because the inspector did not owe a duty of care to the guest.

The court found that the inspector did not perform the inspection for the guest’s protection, but as part of the homeowner’s purchase of the home. In fact, the inspector’s contract specifically stated that the report was not meant for third parties, but only for the homeowner. There was no reason for the inspector to believe that the homeowner’s guest would review and rely on its inspection report. Therefore, the inspector owed no legal duty to the guest, and he was not liable for the guest’s accident and resulting injuries.

Contrast that case with Bethlehem Steel Corporation v. Ernst & Whinney, 822 S.W.2d 592 (Tenn. 1991), an audit malpractice case. In Bethlehem Steel, the court held the auditor was liable to its client’s creditor for damages suffered by the creditor arising out of a negligent audit.

In that case, the court found that it was reasonably foreseeable that the client’s creditor would rely on the audit when it extended credit to the auditor’s client. In fact, one of the purposes for performing an audit is to give assurances to the client’s creditors. Other classes of non-clients who might reasonably rely on audited financial statements include investors, shareholders, management, directors, and regulatory agencies. The court reasoned that because it was foreseeable that a third party creditor would rely on the audited financial statements, the auditor owed the creditor a duty of care.

The difference between these two cases may seem subtle, but the results are not. Both cases turn on the extent to which the service provider knew or should have known a third party would rely on its work. In the home inspection case, the inspection was performed solely for the benefit of the homeowner when he purchased the property. The inspection was not performed for the benefit of the homeowner’s guest, and there was no reason to believe that guests would rely on the home inspection report. Therefore, the inspector owed no duty of care to the third party guest.

The purpose of an audit, however, is not just to confirm the client’s accounting to the client, but to provide assurance to third-party creditors, investors, and shareholders that the client has complied with generally accepted accounting principles in preparing its financial statements. According to Bethlehem Steel, auditors know a certain class of third parties will rely on the audited financial statements. Auditors, therefore, owe a duty of care to third parties it knows will rely on the auditor’s report.

The lesson from these cases is that a service provider must be aware of who is using or relying on the information it provides to its own clients or customers. The duty to act as a “reasonable person” may extend beyond the customer relationship to other third parties. In some situations, a disclaimer that the service is provided solely for the benefit of the customer may provide some protection, but not always.

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