Supreme Court considers liability for pre-contractual misrepresentations where the contracting party is not the original representee.

Précis

In Cramaso LLP v Ogilvie-Grant, Earl of Seafield and others1 the Supreme Court considered whether a  party could be liable for a negligent pre-contractual misrepresentation in circumstances where the  party to which the representation was originally made was not the ultimate contracting party.

Facts

The respondents were the owners of a grouse moor on the edge of the Cairngorms National Park in  Scotland, which was used for commercial shooting. The respondents were seeking a new tenant to  invest in the moor and increase the number of grouse. In mid-2006, the respondents entered into discussions with an interested party, Mr Erskine.

Following a visit to the moor, Mr Erskine expressed concern that the shooting planned for the  current season would leave an inadequate breeding population. In response, the respondents sent Mr  Erskine an email containing information about the grouse counts carried out on the moor earlier  that year and the estimated grouse population of the moor, extrapolated from those counts (the key  email). In fact, these grouse counts were taken from the parts of the moor considered most heavily populated by grouse and were not representative of the whole, so the estimated total population based on extrapolation from the counts was well in excess of the actual population.

Shortly after receipt of the key email, Mr Erskine decided to proceed with the transaction, and  instructed his solicitors to conclude the lease in the name of a new LLP. Mr Erskine’s solicitors informed the respondents that Mr Erskine intended to  take the tenancy in the name of a new LLP, and negotiations continued uninterrupted. The appellant,  Cramaso LLP, was established in November 2006 and the lease was signed shortly afterwards.

Mr Erskine subsequently discovered that the counting areas were not representative of the moor,  that the grouse population was smaller than he had believed and that it would take longer than  anticipated to restore the grouse population to the levels he intended. The appellant commenced  proceedings in Scotland for negligent and fraudulent misrepresentation at common law (there being no statutory remedy in Scotland for  negligent misrepresentation, as there is in England and Wales under section 2(1) of the Misrepresentation Act 1967). 

The decisions below

The judge at first instance found that:

  • the key email contained an implicit representation that the counts were representative of the  rest of the moor
  • the representation had been made by the respondents honestly but negligently
  • the representation had induced Mr Erskine to choose to enter into the lease

However, the judge at first instance held that the respondents could only be liable to the  appellant for a negligent misrepresentation if the respondents owed the appellant a duty of care at  the time the representation was made in the key email. Because the appellant did not exist at that  time there could be no such duty, and the claim failed.

On appeal, the parties agreed that the first instance judge had been wrong to find that the  appellant’s non-existence at the date of the key email precluded a successful claim. However, on the basis that the respondents could not, when the key email was  sent, have reasonably foreseen reliance on the representation by anyone other than Mr Erskine, the  court held that there was no proximity between the parties and so it followed, applying the test  from Caparo Industries Plc v Dickman2, that no duty of care was owed to the appellant.

The approach of the Supreme Court

The Supreme Court noted that the lower courts had approached the  case on the  basis that:

  • the appellant had relied on a misrepresentation made by the respondents to Mr Erskine
  • the relevant question was whether, in that context, the respondents owed a duty of care to the appellant
  • that question had to answered as at the time of the key email

The Supreme Court considered that that was not the correct approach. Instead, the starting point was to consider whether the lease was in fact concluded on the basis of a continuing representation by the respondents to the appellant. If it was, and if the respondents assumed a responsibility towards the appellant for  the accuracy of the representation such that they owed it a duty of care, then the respondents  could be liable to the appellant for the negligent misrepresentation.

The Supreme Court noted that, although a question of fact, a representation made as inducement to  enter into contract should generally be treated as a continuing representation. A representation  may not have continuing effect in some cases, for example where it is withdrawn, lapses or the  representee discovers the true position before the contract is concluded.

Decision

The Supreme Court considered that there was no reason in principle why a representation could not  continue in circumstances where the original representee was not the contracting party. Although there was no authority on  this point, in Breiss v Wooley3 the House of Lords had considered the reverse situation. In that  case, a shareholder in a company made a fraudulent misrepresentation in the course of pre-contractual negotiations. The shareholder was then only subsequently authorised by the other shareholders to conduct negotiations as their agent. The shareholders were  nevertheless held collectively liable for the fraudulent misrepresentation. The Supreme Court considered that the same principle should apply in the present case, and that a  negligent misrepresentation could have continuing effect in circumstances where the original  representee (as opposed to the representor) became the agent of the contracting party.

On the facts, the negotiations in the context of which the key email was sent continued in exactly the same vein after it became clear that the  appellant would be the contracting party, there was no disclaimer of the representation and the representation remained  operative in the mind of Mr Erskine in his capacity as agent for the appellant. 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 counterparty (whether Mr Erskine or the appellant) to enter into a lease. They therefore assumed a responsibility to the appellant for the accuracy of the representation and owed the appellant a duty of care, which they failed to fulfil.

Conclusion

Although this is the first reported decision on this specific point, on the facts of the case, and  in particular given that the appellant was in substance a vehicle through which Mr Erskine took the lease, the result is not surprising. Moreover, the Supreme Court was careful to emphasise that it was not in any way extending the law of negligent misrepresentation at common law. Instead, the result followed from a proper appreciation of the continuing nature of representations and a careful analysis of the facts.

The Misrepresentation Act 1967

As a final point, it important to note that the Supreme Court’s  reasoning should also apply to claims under section 2(1) of the Misrepresentation Act 1967. That sub-section imposes liability for negligent  misrepresentation (provided that there would be liability at common law, had the misrepresentation been fraudulent) where “a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result  thereof he has suffered loss” (emphasis added). In the present case, the original representation  was not made to the appellant.  However, if, as the Supreme Court does in this case, the continuing  nature of the representation is taken seriously, then it can properly be said that the representation  was  nevertheless made to the appellant, which would have brought it within this sub-section.