"A makes a careless misrepresentation which causes economic loss to B. There was no contract between them. But did A owe a duty of care to B? No, said the trial judge. Yes, said the appellate court. So it is A who brings this further appeal".
And so the Supreme Court set the scene for their judgment in Steel and another (Appellants) v NRAM Limited (formerly NRAM Plc) (Respondent) [2018] UKSC 13 where they considered when a solicitor might assume responsibility for representations made to third parties or opponents when representing their client.
Background
Ms Steel is a solicitor who, from 2005 onwards, had acted for Headway Caledonian Ltd (HCL). They had borrowed money from NRAM, formerly Northern Rock, to purchase Cadzow Business Park in 1997 which comprised 4 commercial units. HCL granted an "all sums" standard security over the Business Park to NRAM in exchange for the loan.
HCL had previously sold Unit 3 repaying part of the loan in exchange for NRAM restricting its security to Units 1, 2 and 4. Ms Steel had represented HCL while NRAM did not appoint solicitors.
In 2006, HCL instructed Ms Steel to act in the proposed sale of Unit 1 and, again NRAM did not instruct solicitors and dealt directly. NRAM obtained a valuation of Units 2 and 4 of the Business Park and advised that they would require a part payment before they would be willing to release Unit 1. They made it clear that they expected their security to remain in place over Units 2 and 4 so that the balance of the loan would be secured.
On the night before completion, Ms Steel emailed NRAM attaching "discharges for signing and return... as the whole loan is being paid off for the estate and I have a settlement figure for that". The email was inaccurate as there had never been any suggestion that the whole loan was to be repaid and the security discharged in full. Ms Steel had no recollection of having sent the email and could not explain why she had misrepresented the situation. NRAM did not query that email nor check the accuracy of Ms Steel's statements.
The transaction completed leaving NRAM's loan unsecured on units 2 and 4.
HCL went into liquidation in 2010 and NRAM discovered their loan was unsecured. NRAM then sought to recover their losses from Ms Steel. Did Ms Steel and her law firm assume responsibility to NRAM, who was not her client, for the representations made in the email?
Judgement
The Inner House of the Court of Session (the Scottish appeal court) had concluded (contrary to the judge at first instance) that circumstances were present such that Ms Steel had assumed responsibility to NRAM as a solicitor having made a representation falling within her area of expertise, given she knew NRAM were without solicitors.
The Supreme Court overruled the Inner House and first confirmed Caparo Industries Plc v Dickman [1990] 2 AC 605 had been wrongly interpreted for many years. It was thought that case had endorsed a threefold test for establishing assumption of responsibility which required that:
- it was foreseeable that, were the information given negligently, the claimants would be likely to suffer damage;
- there was a sufficiently proximate relationship between the parties; and
- it was just and reasonable to impose liability.
The Supreme Court in NRAM noted that in Caparo it was in fact the reasonableness of a representee's reliance that was central to the assumption of responsibility.
The Court went on to reformulate the test by saying that, for the doctrine of assumption of responsibility to come into play, the representee must establish in addition to the forseeability leg of the test that:
- it was reasonable for him to have relied on the representation; and
- the representor should reasonably have foreseen that he would do so.
Applying this the court concluded NRAM had not reasonably relied on what Ms Steel had said because 'a commercial lender about to implement an agreement with its borrower referable to its security does not act reasonably if it proceeds upon no more than a description of its terms put forward by or on behalf of the borrower'.
NRAM had immediate access to the correct terms but had not bothered to check. Therefore, it had not been reasonable for them to rely on Ms Steel's representation without checking its accuracy, and it had also been reasonable for her not to foresee that it would rely on her representation.
Commentary
Clearly, the Supreme Court's observations on the Caparo decision will have a potentially significant impact on difficult cases where the bounds of duties are being pushed. It will also have a significant effect on how claims for breach of duty under delict or tort are pled although it is unlikely to radically alter the number of circumstances which satisfy the test.
It will be difficult to make such a claim against a solicitor in particular as the Court went on to add that it would be "presumptively inappropriate" for the opposite party in a transaction to place such reliance on a solicitor.
At a practical level the case highlights that there may be a role for the use of disclaimers of reliance in correspondence, especially when the other party is unrepresented. It would be difficult for a party to argue that it could rely on a representation in the face of a disclaimer saying they could not do so.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
