Andrew Foyle reflects on how a recent Supreme Court judgment affects professional negligence in Scotland

“A makes a careless misrepresentation which causes economic loss to B. There was no contract between them. But did A owe a duty of care to B? No, said the trial judge. Yes, said the appellate court. So it is A who brings this further appeal.”

Thus begins the Supreme Court’s judgment in Steel & Another v NRAM Limited ( UKSC 13), an appeal from the Inner House of the Court of Session which had found a solicitor liable to a lender (for whom they did not act) for losses incurred when the solicitor wrongly represented in an email that they were instructed to redeem a loan in full, and procured a discharge of securities on the strength of that representation.

The facts

The lender in this case was not represented. They had seemingly agreed directly with their customer the terms upon which they would remove certain properties from the scope of their securities, but they had not agreed to discharge those securities in full. Their customer’s solicitor – in an act described by the Supreme Court as “gross carelessness” - emailed the lender indicating she understood the loan would be paid in full, that she held a redemption figure for the loan (which she did not), and that she required discharges (attached to the email) to be executed urgently in time for settlement of a sale transaction.

The lender took no steps to verify the contents of the solicitor’s email. They proceeded to execute the discharges and a related letter of non-crystallisation. Upon receipt by them of a sum less than half of the amount required to redeem the loan in full, they released the discharges to the solicitor and they were duly registered. At no time did they query the fact that the loan had not been paid in full, and they continued to accept payments of interest on the remaining loan from the customer.

Some years later the customer was placed into liquidation and the issue emerged. The lender suffered a substantial loss and sought to recover this from the solicitor.

The issue before the court, therefore, is as summarised so neatly in the opening line of the judgment – does the solicitor owe a duty of care to a lender when they have no contractual relationship with each other?

The court’s judgment

Lord Wilson (with whom the remainder of the court agreed) recognises that the email upon which the entire claim founds was “on any view… extraordinary”. It was almost entirely inaccurate. However, the court also recognises that the lender made no attempt to check the accuracy of the statements in the email against their own records, and simply proceeded to follow the requests in the email.

Against that background, the court reviewed the law in this area, beginning with the Hedley Byrne case of 1964 and taking us on a journey right up to the present day. Having done so, the court identified the legal principle as being that a solicitor may only be found liable for a misrepresentation to a third party if they have assumed responsibility for the representation towards the party who suffered the loss. Ordinarily a solicitor has no duty to the opposite party to a transaction and so the question in this case was whether the circumstances were such as to take this case out of the ordinary.

The court reviewed a number of authorities and concluded that a solicitor will not assume responsibility towards the opposite party unless it was reasonable for the latter to have relied upon what the solicitor said and unless the solicitor should reasonably have foreseen that he would do so. In a case where, for example, the solicitor had given the other side an undertaking of some description and then acted contrary to that undertaking, it would be reasonable to assume that responsibility was being taken. In this case however, that was not the position.

The decision

The court overruled the Inner House and held in favour of the solicitor. In this case, the lender must have known the true terms of the agreement as they would have been instrumental in proposing them. It would have been straightforward for the lender to have checked the terms of the email against their own records. In those circumstances it was not reasonable for them to rely upon the representation. Nor was it reasonably foreseeable to the solicitor that the lender would rely upon the statements to the extent that they did – these were facts within the lender’s knowledge which could and should have been readily verified and seen to be wrong.

Conclusions

It is not uncommon for unrepresented lenders to deal with the other side’s solicitors in a transaction such as this. In doing so, it can be very easy to overlook the fact that the solicitor has very little by way of duties towards the lender.

This case is a salutary lesson to lenders to ensure that they have procedures in place for checking communications from solicitors against their own records and satisfying themselves that they should proceed as they are being asked to. It is rare for a solicitor to make an error such as was made here, but it is important to note that when it does happen there may be no recourse for the lender.