In Cramaso LLP v Ogilvie-Grant [2014] UKSC 9, the UK Supreme Court held that a negligent misrepresentation is capable of having a continuing effect up until the time when the contract is concluded, where the person to whom the representation is addressed becomes the agent of the person by whom the contract is concluded.

In principle, this means that a contracting entity would be entitled to sue for rescission and damages, even though the negligent misrepresentation was not actually made to it.

Facts

The appellant, a limited liability partnership, was formed by Alistair Erskine and his wife (AE) as a vehicle for entering into a lease with the respondents, owners of a grouse moor. The appellant claimed it had been induced to enter into the lease by a misrepresentation which was fraudulent or negligent. At first instance, the Court found that AE was the directing mind of the appellant, and that he had entered into the contract in reliance upon a negligent misrepresentation contained in an email sent to him some weeks before the appellant was formed. The allegation of fraud was found not to have been established. It held that the appellant could not recover damages because it had not been in existence at the time the email was sent. Although the respondents had owed a duty of care to AE, no such duty was owed to the appellant, since a non-existent entity could not hold any right or be owed any duty.

Both parties appealed against the decision. The appeal concerned whether the appellant was induced to enter into the contract by a negligent misrepresentation and, if so, was entitled to recover damages. On appeal, the Court accepted the submissions of the respondent that at the time the email was sent there was no-one other than AE whose reliance could reasonably have been foreseen. In those circumstances there had been no proximity between the appellant and the respondents. It followed, applying the principles set out in Caparo Industries plc v Dickman [1990] 2 AC 605, that no duty of care had been owed by the respondents to the appellant. The Court did not address the respondents' cross-appeal which challenged the finding that a duty of care had been owed to AE.

The appellant appealed to the Supreme Court.

Decision

The Supreme Court allowed the appeal. The Court held that a duty of care was owed by the respondents to AE in respect of the representation contained in the critical email. A duty of care was also owed by the respondents to the appellant, when they negotiated and concluded the contract on the basis of the discussions previously held with AE. The respondents had acted in breach of that duty of care, and were therefore liable in damages for any loss suffered by the appellant as a result. 

  1. Was the representation of a continuing nature?

As a matter of general principle, a representation made during contractual negotiations for the purpose of inducing a contract will ordinarily be regarded as continuing until the contract is actually concluded because it will generally be reasonable for the representee to continue to rely on it. The Court held that the representation contained in the critical email was of a continuing nature so long as AE remained the prospective contracting party. 

  1. Did the representation, and responsibility for its accuracy, continue after the identity of the contracting party changed?

The Court noted that no authority had been cited in which the court had considered the liability of a contracting party for a representation inducing the conclusion of the contract by someone other than the original representee. However the court held that the decision in Briess v Woolley [1954] AC 333 was relevant. That case concerned a fraudulent misrepresentation made in the course of pre-contractual discussions by a shareholder in a company. He was subsequently authorised by the other shareholders to continue the negotiations as their agent, and in due course a contract was concluded. The shareholders were held liable in damages to the other contracting party, notwithstanding that the representation had been made by the shareholder before he began to negotiate on their behalf. The Court concluded that the same principle should also apply in the converse situation, where the representation is made to (rather than by) the agent prior to the commencement of his agency. In such a situation, the representor can be taken, by his conduct, to be implicitly repeating the representation previously made, and can therefore owe a duty in respect of the accuracy of the representation towards the agent's principal. 

Although Briess v Woolley involved a fraudulent misrepresentation, the Court held that there was no reason why this approach should not also apply to negligent misrepresentations made in order to induce the representee to enter a contract. In the present circumstances, the change of identity of the prospective contracting party did not affect the continuing nature of the representation, or the respondents' continuing responsibility for its accuracy. The negotiations which had been underway between AE and the respondents, in the course of which the critical email was sent, simply continued after it became apparent that a limited liability partnership was to be used as a vehicle for AE's investment.

Neither party had disclaimed what had previously been said in the course of their discussions. Accordingly, the representation made in the critical email remained operative in the mind of AE after he began to act in the capacity of an agent of the appellant, up until the time when the lease was executed on behalf of the appellant. The appellant was thus induced to enter into the contract by that representation.

  1. Did the respondents assume a responsibility towards the appellant for the accuracy of the representation?

The Court held that by continuing and concluding the negotiations with the appellant, through its agent AE, without having withdrawn the representation earlier made to AE as an individual, the respondents by their conduct implicitly asserted to the appellant the accuracy of that representation, and they did so in a situation where it continued to be foreseeable that the representation would induce the other party to the negotiations to enter into a contract. They therefore assumed a responsibility towards the appellant for the accuracy of the representation, and owed the appellant a duty of care, which they had failed to fulfil.

Comment

This is a novel decision, which is likely to be of persuasive authority before the Irish Courts. Whilst there is nothing new in the concept of a continuing misrepresentation, what is new is the ruling that the misrepresentation can be acted upon by a legal person to whom no such representation was made and which was not even in existence at the time the representation was made.

Liability for pre-contractual or other misrepresentation may be excluded or limited in the agreement ultimately signed, but in circumstances where it is not, this decision will undoubtedly be of significance.

This is an important ruling for property transactions, where it is common for the ultimate contracting party in such transactions to be a vehicle established for the purpose by the purchaser or lessee. However the case is also relevant to other forms of corporate transactions, where negotiations are often entered into, and representations made, between the principals, but one or indeed both of the principals may later establish a body corporate to be the ultimate contracting party.