“The Assumption of a Duty of Care”

Jane Steel (“Ms Steel”) acted on behalf of Headway Caledonian Limited (“HCL”) in relation to the purchase of four commercial units in 1997. NRAM granted loan facilities to HCL in connection with the purchase of the units. HCL granted an “all sums due and to become due” standard security over all four units. HCL sold Unit 3 in May 2005 and thereafter entered into heads of terms for the sale of Unit 1 in May 2006 which would leave the standard security over Units 2 and 4.

Background

Following an email on 22 March 2007, it was alleged NRAM were misled into discharging the entire security when it ought to have been left in place in relation to Units 2 and 4. NRAM say that that was due to the negligent misstatements contained in the email of 22 March 2007 for which Ms Steel should be held responsible. HCL subsequently went into liquidation and the matter proceeded to Proof (trial).

At Proof, the Lord Ordinary held that Ms Steel did not owe a duty of care to NRAM on the basis that it was not reasonable for NRAM to rely on Ms Steel’s email without checking its file and therefore Ms Steel would not foresee them doing so. The Lord Ordinary therefore dismissed NRAM’s case. NRAM thereafter reclaimed (appealed) the Lord Ordinary’s Opinion to the Inner House.

Discussion – Decision of the Inner House

The Inner House considered that there were two issues in the reclaiming motion which required discussion:

  1. Did the Lord Ordinary err in law in holding that Ms Steel owed no duty of care to NRAM when she made the erroneous statements that led to the discharge of the entire security?
  2. Did the Lord Ordinary err in law in assessing damages on the basis of assuming NRAM would recover £70,351.50 from the liquidator of HCL?

Both Lady Smith and Lady Clark of Calton allowed the reclaiming motion with Lord Brodie dissenting.

Lady Smith noted that as a generality, the law imposes a duty not to cause unintentional but foreseeable harm. It was recognised that a legal duty exists not to cause economic loss by means of a careless or negligent communication. Lady Smith also noted the importance of the fact that Ms Steel had no actual or ostensible authority for making the series of critical statements in the email of 22 March 2007 or call for the discharges to be executed by NRAM. Lady Smith therefore recognised the greater likelihood of it being concluded that a solicitor who makes representations to another party to a transaction – and/or calls on them to execute important documents – without having any authority to do so owes a duty of care.

It was of critical importance to have regard to the precise circumstances in which the communication was made. It was therefore relevant that Ms Steel was acting within the area of her professional skill and there had been previous similar dealings in the past. Although the heading of the relevant email conflicted with the misleading text, it had not been regarded as doing so at the time and the message itself was clear and unequivocal.

Lady Smith also considered whether or not the Lord Ordinary gave careful consideration to the question of whether or not Ms Steel fell to be treated by the law as having assumed responsibility for the misstatements and their consequences. Lady Smith made reference to the following signposts which she considered critical in assessing the merits of the reclaiming motion:

  • Whether there has been an assumption responsibility
  • Whether the loss was reasonably foreseeable
  • Whether the imposition of a duty of care would be fair, just and reasonable

Having taken the above into account, it was held that Ms Steel had assumed responsibility given that there was reasonable foresight of significant economic loss suffered by NRAM in a sufficiently proximate relationship with Ms Steel who had previously shown herself to be a trustworthy source.

Lord Brodie, dissenting, held that the Lord Ordinary had taken into account the various factors relied on by the Pursuers, and his conclusion that it was not reasonable for NRAM in such a position to rely on the misstatement without checking its accuracy was “one that as the reasonable man on the bench he was equipped to make”. The UK Supreme Court had emphasised the limited power of an appellate Court to reverse the judge who had heard the evidence, and the Lord Ordinary had not made any error in his approach to the evaluation of the unchallenged findings in fact. It was therefore Lord Brodie’s opinion that the Inner House was not better placed to substitute its own decision.

All three judges agreed that the Lord Ordinary’s assessment of damages at just under £370,000 was affirmed.