UKSC—misrepresentation and third parties, Caparo explained

Alisdair Matheson, partner, and Cheryl Laird, solicitor, at Brodies LLP, examine the Supreme Court’s decision, Steel and another v NRAM Ltd [2018] UKSC 13, that a solicitor will not assume responsibility for making a careless misrepresentation to the other party in a transaction, unless it was reasonable for the latter to have relied on what the solicitor said and the solicitor should have reasonably foreseen that the other party would actually rely on the statement. 

Some of the links below require a subscription to LexisPSL. Click here for a free trial.

What are the practical implications of the decision?

The Supreme Court restated the test for liability to third parties as a result of a negligent misstatement, altering the commonly understood test from Caparo Industries Plc v Dickman [1990] 2 AC 605, [1990] 1 All ER 568.  As well as forseeability of the loss, a party will need to prove it was reasonable for it to have relied on the representation and that the representor should reasonably have foreseen that it would do so.

It will be difficult to make such a claim against a solicitor in particular, as the court went on to add that it would be ‘presumptively inappropriate’ for the opposite party in a transaction to place such reliance on a solicitor. At a practical level, the case highlights that there may be a role for the use of disclaimers of reliance in correspondence, especially when the other party is unrepresented. It would be difficult for a party to argue that it could rely on a representation in the face of a disclaimer saying they could not do so.

What was the background?

The respondent commercial lender had loaned money to a company to purchase a business park consisting of four units and, in return, had been granted an ‘all sums’ standard security over the property and a floating charge over all of the company’s assets. The company sold one unit and partly redeemed its loan. The respondent released that unit from its security.

When the company decided to sell a second unit, the first appellant solicitor acted for it alone. The respondent did not instruct a firm of solicitors on the transaction. The first appellant wrote to the respondent informing it, incorrectly, that the company would pay off the whole loan secured on the remaining three units. The respondent accordingly provided a letter of non-crystalisation of its floating charge over the unit to be sold and also executed deeds of discharge over the other two units, not noticing that it only received repayment of the loan for the unit which the company had intended to sell.

Unaware of the first appellant’s mistake, the company continued to pay the respondent interest on the loan for the two units which it had not sold. It was only when the company went into liquidation that the respondent discovered that its security for the loan had been fully discharged. The respondent sought to recover its losses from the first appellant and the second appellant, the firm for which she worked, arguing that they should be held responsible for the negligent mis-statement.

At first instance, the Lord Ordinary held that the first appellant did not owe the respondent a duty of care. However, the Inner House allowed the respondent’s reclaiming motion and awarded it damages on the basis that the first appellant had assumed responsibility towards it for her representations.

The appellant appealed to the Supreme Court.

What did the Supreme Court decide?

After considering the authorities, which included Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, [1963] 2 All ER 575, Ross v Caunters [1980] Ch 297, [1979] 3 All ER 580 and Caparo, the court held that a solicitor would not assume responsibility for a careless mis-statement to the opposite party unless it was reasonable for the latter to have relied on what the solicitor said, and unless the solicitor should reasonably have foreseen that the opposite party would do so.

The Supreme Court confirmed Caparo had been wrongly interpreted for many years. It was thought that case had endorsed a threefold test for establishing assumption of responsibility which required that:

  • it was foreseeable that, were the information given negligently, the claimants would be likely to suffer damage
  • there was a sufficiently proximate relationship between the parties
  • it was just and reasonable to impose liability

The Supreme Court in the instant case noted that in Caparo it was in fact the reasonableness of a representee’s reliance that was central to the assumption of responsibility.

The court went on to say that the representee must establish, in addition to the forseeability test, that:

  • it was reasonable for him to have relied on the representation
  • the representor should reasonably have foreseen that he would do so

The court concluded that the respondent had not reasonably relied on what the first appellant had said because ‘a commercial lender about to implement an agreement with its borrower referable to its security does not act reasonably if it proceeds upon no more than a description of its terms put forward by or on behalf of the borrower’.

The respondent had had immediate access to the correct terms, but had not bothered to check. Therefore, it had not been reasonable for the respondent to rely on the first appellant’s representation without checking its accuracy, and it had also been reasonable for her not to foresee that it would rely on her representation.

Some of the links below require a subscription to LexisPSL. Click here for a free trial.

Interviewed by Robert Matthews. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Relevant Articles
Area of Interest