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A cautionary tale: Lender’s unreasonable reliance on solicitors’ statement

Leeds Town Hall Building, England, United Kingdom Print publication

01/03/2018

In a case that will be of interest for lenders and lawyers alike, the Supreme Court has provided some useful commentary on the principles regarding liability for negligent misstatement and, in particular, the concept of the assumption of responsibility in opposing party claims against solicitors. Walker Morris’ Banking Litigation partner Louise Power explains.

The UK Supreme Court has today [28 February 2018] published its judgment in Steel v NRAM Ltd [1]. The crucial question was whether the appellants, a solicitor and her firm (the solicitors) owed a duty of care to the respondent (the lender), and whether it was reasonable for the lender to rely upon the solicitors’ advice without carrying out its own investigations. Unanimously allowing the appeal and overturning the prior decision in the Scottish Court of Session, the Supreme Court concluded that the lender should have carried out its own investigations before relying on the advice of the opposing party solicitors.

The facts

The solicitors had acted for Headway Caledonian Ltd (Headway) who were the registered owner of a property consisting of four different units registered across two titles (the Property).  At the time of purchasing the Property, Headway had granted ‘all sums’ standard securities (the Securities) over the Property in favour of the lender. The Securities were registered against both titles to the Properties in 1998. Headway later granted the lender a floating charge over all its assets in 2002.

In 2006 Headway entered into a contract to sell one of the units (Unit 1) within the Property. The lender agreed to release Unit 1 from the Securities in exchange for the due repayment of £495,000 and it was understood by both parties that, following the sale of Unit 1, the lender’s Securities would remain in place over the remainder of the units within the Property. The lender did not appoint solicitors to represent it in the release transaction.

The sale of Unit 1 was due to complete on 23 March 2007. At 5 pm on 22 March 2007, the solicitors sent an email to the lender asking for a letter of non-crystallisation of the floating charge. Two draft deeds of discharge (the Deeds) were also forwarded to the lender. In those Deeds, the solicitors had failed to specify that the Securities were only being discharged in relation to Unit 1 of the Property. Instead, the deeds of discharge referred to the entirety of the Properties within Headway’s current ownership.

The lender signed and returned the Deeds without query. No attempts were made to reference or otherwise check the terms of the Deeds against the lender’s internal records.

Headway went into liquidation in 2010, at which point the Respondent realised that the Securities had been discharged in full, rather than in part only as intended. As Headway were in liquidation, the lender alleged that the solicitors had owed a duty of care to it and issued a claim for damages suffered as a consequence of its reliance upon the negligent misstatement contained in the email of 22 March 2007.

The Lord Ordinary in the Outer House of the Scottish Court of Session dismissed the claim. That decision was then overturned on appeal at the Inner House of the Court of Session and the solicitors appealed the decision to the UK Supreme Court.

Supreme Court decision

The Supreme Court unanimously allowed the appeal, thereby reinstating the initial judgment of the Lord Ordinary. In doing so, the Supreme Court has provided some useful commentary on the principles regarding liability for negligent misstatement and, in particular, the concept of the assumption of responsibility in opposing party claims against solicitors.  The case will therefore be of interest for lenders and lawyers alike – both above and below the borders.

The 1964 case of Hedley Byrne & Co Ltd v Heller & Partners Ltd, which decisively established liability for negligent misstatement, requires the party to whom the statement was made to have acted reasonably in relying on that statement. Furthermore, the party making the negligent misstatement must have reasonably foreseen that his statement would be relied upon. The requirements of reasonable reliance and foreseeability were reaffirmed in Caparo Industries Plc v Dickman [1990].  Together, these principles give rise to an assumption of responsibility on the part of the maker of the statement, which in turn can form the basis of a claim.

Applying these principles, and a raft of other relevant authorities, in the current case, the Supreme Court found that the solicitors had generally expected the lender to check her requests before complying with them, and that she would have assumed that to be the case in relation to the email of 22 March 2007 which contained the Deeds. In addition, the court noted that solicitors generally do not assume legal responsibilities towards an opposing party – and indeed it is presumed to be inappropriate for a solicitor to assume such a responsibility towards the other side – such that the ‘ingredients’ of reasonable reliance and foreseeability are perhaps even more crucial in a claim brought against a solicitor by an opposing party.

The Supreme Court therefore decided that the lender ought to have carried out its own checks upon receipt of the email. The lender’s failure to do so was not reasonable, and would not have been reasonably foreseen by the solicitors. The Supreme Court affirmed that any prudent bank taking basic precautions would have checked the accuracy of the Deeds before signing them.

WM Comment

In negligent misstatement claims it is always necessary for a claimant to show that statements have been relied upon reasonably, having regard to all the circumstances. The lender’s failure in this case ultimately cost it the value of its remaining Securities against the Property.

As well as being a cautionary tale which highlights the practical risks that can arise when crucial documents are circulated late in the day and in a last-minute rush prior to completion of a transaction, this case confirms that reliance upon the representations of solicitors who act for an opposing party in a transaction will not constitute reasonable conduct. Financial institutions would be best advised to ensure that robust systems and safeguards are in place to guard against the eventuality which materialised in this case.

In addition or alternatively, had the lender instructed its own firm of solicitors to act in this matter, perhaps the error in the Deeds would have been spotted, and the problem avoided, from the outset; or, if it had not, the lender would have been able to pursue a more straightforward claim against its own solicitors in negligence and/or in breach of contract.

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[1] Steel & anor (Appellants) v NRAM Limited (formerly NRAM Plc) (Respondent) (Scotland) [2018] UKSC 13

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