Scope of duty of care in pre-contractual representations (Cramaso LLP v Ogilvie-Grant)

Scope of duty of care in pre-contractual representations (Cramaso LLP v Ogilvie-Grant)

The UKSC has considered the question of to whom are duties of care owed when making pre-contractual representations.

In Cramaso LLP v Ogilvie-Grant and others [2014] UKSC 9 , the pre-contractual statement had been made to an individual, Mr Erskine, who was interested in purchasing a lease of moorland for grouse shooting.

Representations were made as to grouse stocks and negotiations continued before Mr Erskine established an LLP to acquire the lease. When the representation turned out to be untrue the LLP sued the vendor who claimed that, as the representation had been made to Mr Erskine and not the LLP, any duty of care owed as to the accuracy of the representation was owed to Mr Erskine only and not to the LLP.

The UKSC rejected that argument. In so doing, it took the view that the representation so made was a continuing representation which was not withdrawn when it became apparent that the purchaser was to be the LLP and not Mr Erskine personally and thus by its conduct the vendor had implicitly asserted to the LLP the accuracy of the representation. The LLP could recover for negligent misrepresentation.

Background

Mr Erskine was interested in acquiring a lease of moorland for grouse shooting. He expressed concern to the vendor's agent as to the sufficiency in the levels of grouse stock. The vendor's agent forwarded Mr Erskine's email to the vendor's chief executive, in so doing, expressing to the chief executive his own concerns as to the stock levels.

The chief executive responded to the agent that he had sent him a separate email regarding planned grouse shooting programmes, which he might wish to pass on to Mr Erskine. This separate email was the representation that later turned out to be inaccurate.

Negotiations continued between the vendor and Mr Erskine. Mr Erskine then set up a company, Cramaso LLP as a special purpose vehicle (SPV) to acquire the lease. Cramaso did so and, on then discovering the grouse stock levels to be less than represented, issued proceedings against the vendor.

Before UKSC the vendor argued that the representation had been to Mr Erskine, therefore any duty of care as regards its accuracy was owed only to Mr Erskine and not to Cramaso.

The earlier approach and arguments

In the lower Scottish courts, the issue had centred on whether or not a party A (Cramaso) could rely on a representation made by party B (the vendor/its agent) to party C (Mr Erskine). The assumption being that this question had to be answered as at the time that the email containing the representation was sent to Mr Erskine.

On that basis, and citing Carparo, the issue was whether or not when making the email representation it was reasonably foreseeable that a party other than Mr Erskine would rely on that representation, such that the vendor owed a duty of care to Cramaso as to the accuracy of that representation.

The Scottish Inner House had concluded that, at the time when the email was sent, there was no one other than Mr Erskine whose reliance upon it could reasonably have been foreseen, thus there was a lack of proximity between Cramaso and the vendor and thus no duty established.

This approach was incorrect. Lords Reed and Toulson (who both gave judgments) concluded that this was not a case concerned with when a third party can sue in damages for economic loss suffered as a result of relying upon a representation of which it was not the representee; rather this was a case concerning the continuing nature of a pre-contractual representation, which survived a change in identity of the representee.

Continuing representation

Lord Reed was clear that the representation made to Mr Erskine was a continuing representation.

That there might be delay between the making of the representation and the concluding of the contract does not mean that the representation did not induce the party to enter into the contract. The representation was of a continuing nature so long as Mr Erskine remained the prospective purchaser.

Similarly so from Lord Toulson, who at paragraph 62 cited Lord Tucker in Briess, in turn citing Halsburys Laws, to the effect that where there is an appreciable delay between when a misrepresentation is made and when the contract it induces is entered into, the representor is taken to be repeating the representation throughout the intervening period, unless he withdraws or modifies it to the representee.

Continuing representation—new party

In concluding that the representation, and responsibility for its accuracy, continued after the identity of the contracting party changed from Mr Erskine to Cramaso, Lord Reed focused on the parties' conduct.

The vendor was fully aware that Mr Erskine had decided to set up Cramaso as an SPV to acquire the lease and it was Mr Erskine who continued to negotiate with the vendor, now as agent for Cramaso rather than on his own behalf.

The inference to be drawn from this was that the parties had proceeded with negotiating and concluding a contract on the basis that the accuracy of the representation continued to be asserted by the vendor, implicitly if not expressly, after the identity of the prospective purchaser changed from Mr Erskine to Cramaso.

Reliance was placed on Briess where a shareholder had made pre-contractual fraudulent representations. He was subsequently authorised by the other shareholders to continue the negotiations as their agent. Following conclusion of the contract the other party brought proceedings for fraudulent misrepresentation and the shareholders were held liable in damages notwithstanding that it had been their agent who had made the representations and that he had done so prior to his appointment as their agent.

Lord Reed considered that the same principle should apply in the present case:

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, depending of course on the facts, the representor can equally be taken to be, by his conduct, 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. (para 28, Cramaso)

What does this mean for future practitioners?

Although the concept of implied representations is not new*, query whether this decision adds a new set of circumstances as to when it may be possible to assert reliance on a misrepresentation by implication (see in particular paras 25–26 of the judgment).

As Lord Toulson noted in paragraph 46, this case had some novel aspects to it, but ones which relied on established principles for their resolution. It is perhaps somewhat surprising that the point has not been litigated previously—no doubt corporate and commercial lawyers are instead astute to ensure that the making of pre-contractual representations is carefully provided for in concluding their contracts, perhaps by ensuring, for example, that a business sale agreement provides that a representation made to/by one individual binds all/no-one or by the use of entire agreement clauses**.

* LexisNexis subscribers can see Practice Note: Elements of a misrepresentation claim—statements — Implied representations

**LexisNexis subscribers can see Practice Note: Interpreting entire agreement clauses.

This article was first published on Lexis®PSL Dispute Resolution on 14 February 2014. Click here for a free 24 trial of Lexis®PSL.

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About the author:
Ruth specialises in general corporate and commercial dispute resolution with particular experience in shareholder disputes, fraud and warranty claims. Ruth trained and qualified at Berwin Leighton Paisner LLP (now Bryan Cave Leighton Paisner LLP) where she remained in practice for ten years. Her work has involved project managing large-scale cases to trial in the chancery and commercial courts. Ruth was actively involved in in-house training with a particular focus on all aspects of evidence gathering and production, including authoring a user-manual on E-disclosure. She is also a contributor to the New Law Journal.