Out-Law News | 02 Mar 2018 | 11:31 am | 3 min. read
In a unanimous judgment, the Supreme Court found that Jane Steel owed no duty of care to the lender, the former Northern Rock (Asset Management) Plc (Northern Rock). The court overturned an earlier judgment by the Inner House and restored the earlier judgment of the Lord Ordinary, finding it was not reasonable for Northern Rock to have relied on Steel's emails without carrying out its own checks.
The Supreme Court's judgement "reaffirmed the long-held view that liability should generally only attach in such cases where there has been an assumption of responsibility", according to commercial litigation expert Jacqueline Harris of Pinsent Masons, the law firm behind Out-Law.com.
"This is good news for solicitors and their insurers, and a reminder of the benefits of obtaining independent specialist advice before undertaking what may prove to be a costly course of action," she said.
In order to find somebody liable for a 'careless misrepresentation' which causes economic loss, the courts must first consider whether it was reasonable for the one who suffered the loss to rely on the statement, and whether the person who made that statement could reasonably have foreseen that that person would do so. This test was further refined in the 1990 Caparo Industries case, which considered the extent to which a party, in that case an accountant, could be said to have 'assumed responsibility' towards a third party.
In 2007, Steel was a solicitor at Glasgow firm Bell & Scott, where she acted for Hamish Munro and his company, Headway Caledonian Ltd. The company was the registered owner of Cadzow Business Park in Hamilton, which consisted of four units. When the business park was purchased, Headway had granted Northern Rock an 'all sums' standard security over the property as well as, separately, a floating charge.
In 2006, Headway entered into a contract to sell off one of the units. Northern Rock agreed to release this particular unit from its security, but it was understood that the security would remain over the two units that, following the sale, were still owned by Headway. The day before the sale was due to complete, Steel emailed two draft deeds of discharge to Northern Rock which, she stated, were to do with the "whole loan" being paid off. Northern Rock did not query this request and executed the deeds in accordance with the email. The error was not discovered until 2010, when Headway went into liquidation.
Steel accepted that the statement in her email was inaccurate, but was unable to explain the error at trial. Regardless, the Lord Ordinary dismissed Northern Rock's claim. The Inner House, by a majority, allowed Northern Rock's appeal, and awarded damages of just under £370,000 in favour of the lender.
The Supreme Court reviewed various cases in the course of its judgment which, it found, established that a solicitor "will not assume responsibility towards the opposite party unless it was reasonable for the latter to have relied on what the solicitor said and unless the solicitor should reasonably have foreseen that he would do so". Reliance by an 'opposite party' on the other's solicitor, in particular, was "presumptively inappropriate", the court said.
"We should accept that 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," said Lord Wilson, giving the judgment of the court."
"The lender knows the terms of the agreement and indeed, as in this case, is likely to have evolved and proposed them ... The explanation is, no doubt, that in such circumstances it is not reasonable for the representee to rely on the representation without checking its accuracy and that it is, by contrast, reasonable for the representor not to foresee that he would do so," he said.
Professional negligence expert Suzie Davies of Pinsent Masons said that the main factor considered by the judges in this case appeared to be "the nature of the relationship between the appellant and the third party, who was on the opposite side of the transaction".
"Whilst it may be reasonably foreseeable for a set of audited accounts, for example, to be relied upon by a third party, as in the Caparo case, the courts have been reluctant to confirm that a solicitor owes a duty to its opposing party, the imposition of such a duty being the exception rather than the norm," she said.
"A solicitor will not assume responsibility towards the opposite party unless it is reasonable for the latter to have relied on what the solicitor said and unless the solicitor should reasonably have foreseen that the opposite party would actually rely on the statement. The Supreme Court, confirming the first instance decision, stated the very fact that the solicitor expected the opposing party to check her requests before complying with them meant she had not foreseen that they would be relied upon without such accuracy being checked," she said.
As the case involved a solicitor, "accountants should not assume that the potential scope of their duty under Caparo has been diminished", she said.