Pre-contract statements can be relied on later even if identity of parties has changed, says Supreme Court

Out-Law News | 27 Feb 2014 | 2:36 pm | 3 min. read

A recent Supreme Court decision that statements made as part of pre-contract negotiations can be relied on at a later date, even where the legal identity of the contracting parties has changed, could have implications for all companies involved in negotiating contracts, an expert has said.

Craig Connal of Pinsent Masons, the law firm behind Out-Law.com, said that the court's rare decision on the point was particularly notable for the fact that the 'continuing representation' argument on which the case was won did not play any part in the previous  proceedings , before the matter reached the Supreme Court but instead only emerged during the judges' discussions there.

"The concepts in this case were not new but their application was: it has long been recognised that a representation does not just need to be accurate at the time of its making and that instead it can have continuing effect," he said. "What is more surprising is that the point does not seem to have been litigated on before."

"In the real world the use of corporate or special purpose vehicles is commonplace and in the flurry of activity around conclusion of a deal attention may not focus on earlier communications. Have the parties covered off this possibility? Would they ever think to do so? The lesson from this case shows how critical pre-contract statements can be," he said.

The case involved a contract for lease of a grouse moor near Grantown-on-Spey owned by Ogilvie Grant.  Mr Alastair Erskine, decided to enter into the contract on the basis of data relating to grouse counts on the moor and overall estimated grouse population forwarded by the landowner's agent, after he had expressed concerns about overshooting on the moor. The lease was actually concluded in the name of Cramaso LLP, a special purpose vehicle formed by Erskine for that purpose.

It later emerged that the areas of the moor on which the counts were carried out were not representative of the moor as a whole, and that the actual grouse population was lower than the estimate Erskine had been given. On discovering the discrepancy Cramaso sued, but the Court of Session ruled in favour of the landowner as Cramaso did not even exist at the time that the misrepresentation was made and so was not owed a duty of care by the landowner or its agent.

In his leading judgment, Lord Reed said that the lower court had considered the wrong question. He said that the real issue in the case was whether the representation relied on by Erskine was a continuing one, and whether that representation and responsibility for its accuracy continued after the identity of the contracting party changed. In his opinion, both of these questions were to be answered in the affirmative in this case.  He held that it is established law that representations can have a continuing effect, which, unless the misrepresentation is withdrawn or lapses or the other party discovers the truth pre contract, can have the effect of inducing a contract despite there being a time lapse between the making of the statement and conclusion of the contract.  Moreover Lord Reed held that: this could be so despite a change in the identity of the contracting party - in such a case, the inference may be drawn from the parties’ conduct that they proceeded with the negotiation and conclusion of the contract on the basis that the accuracy of the representation continued to be asserted by the representor, implicitly if not expressly, even after the change. -"The law is ... capable, in appropriate circumstances, of imposing a continuing responsibility upon the maker of a pre-contractual representation in situations where there is an interval of time between the making of the representation and the conclusion of a contract in reliance upon it, on the basis that, where the representation has a continuing effect, the representor has a continuing responsibility in respect of its accuracy," he said.

"In the present case, the representation contained in the critical email was undoubtedly of a continuing nature so long as Mr Erskine remained the prospective contracting party ... the change in the identity of the prospective contracting party did not affect the continuing nature of the representation, or the [landowner's agent's] continuing responsibility for its accuracy ... the negotiations which had been under way between Mr Erskine and the [landowner], in the course of which the critical email was sent, simply continued after it had become apparent that a limited liability partnership was to be used as a vehicle for Mr Erskine's investment. Neither party drew a line under the previous discussions," he said.

The case will now return to the Court of Session for consideration of appropriate damages.