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Petitioner: CRAMASO LLP VS Respondent: G1LV IE-GRANT, EARL OF SEAFIELD and others
Court Name: Supreme Court of United Kingdom Judge(s): Lord Reed, Lord Mance, Lord Toulson, Lord Carnwath, Lord Clarke Title: CRAMASO LLP vs G1LV IE-GRANT, EARL OF SEAFIELD and others Case No.: (On appeal from [2011] CSIH 81) Date of Judgment:2014-02-12 Reported As: 2014 SCMR 1238 Result: Appeal accepted
JUDGMENT
JUDGMENT ' LORD REED (with whom Lord Mance, Lord Clarke, Lord Carnwath and Lord Toulson agree) 1. The appellant is a limited partnership formed by Mr Alistair Erskine and his wife as a vehicle for entering into a commercial contract with the respondents. These proceedings were brought by the appellant on the basis that it was induced to enter into the contract by a misrepresentation which was fraudulent or in any event negligent. The appellant sought the reduction of the contract and damages. After proof the Lord Ordinary, Lord Hodge, found that Mr Erskine was the directing mind of the appellant, and that he had decided to enter 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: [2010] CSOH 62. The latter point has not been pursued further. Nor has the present appeal concerned the question, whether the remedy of reduction may be available. The issue with which we are concerned is whether the appellant was induced to enter into the contract by a negligent misrepresentation and, if so, is in principle entitled to recover damages. 2. The Lord Ordinary focused upon the legal situation as at the time when the email in question was sent. He approached the case as one where A (the appellant, through Mr Erskine acting as its agent) had relied upon a representation made by B (the respondents) to C (Mr Erskine acting as an individual), and where the question was whether B had owed a duty of care to A at the time when the representation was made to C. Applying the principles set out in Caparo Industries plc v Dickman [1990] 2 AC 605, the Lord Ordinary held that the appellant could not recover damages because it had not been in existence at the time when the email was sent. Although the respondents had owed a duty of care to Mr Erskine, no such duty could in his view have been owed
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at that time to the appellant, since a non-existent entity could not hold any right or be owed any duty. 3. Both parties appealed against the Lord Ordinary's decision. Before the Inner House, it was conceded on behalf of the respondents that the Lord Ordinary had erred in considering that the non-existence of the appellant at the time when the email was sent was necessarily an insuperable obstacle to the existence of a duty of care: it was accepted that in appropriate circumstances a duty of care could be owed to a class of persons, some of whom might not then be in existence. In the present case however, it was submitted, 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. In those circumstances, there had therefore been no proximity between the appellant and the respondents. It followed, applying Caparo, that no duty of care had been owed by the respondents to the appellant. Those submissions were accepted by the Second Division: [2011] CSIH 81; 2012 SC 240. Their discussion of the case again proceeded on the assumption that the relevant question was whether, at the time when the email was sent to Mr Erskine, the respondents had owed a duty of care to the appellant. Their Lordships did not address the respondents' cross- appeal, which challenged the Lord Ordinary's finding that a duty of care had been owed to Mr Erskine. 4. In the present appeal, the issues were identified by the parties as being, first, whether, on the assumption that the respondents owed a duty of care in negligence to Mr Erskine., such a duty of care was owed to the appellant; and secondly, whether the assumption upon which the first issue proceeded was correct. The case was again approached as one where A had relied upon a representation made by B to C, and where the relevant question was whether B had owed a duty of care to A. It was again assumed that that question had to be answered as at the time when the mail was sent to Mr Erskine. The authorities relied upon were again Caparo and more recent English and Commonwealth authorities in which the Caparo principles were applied. The question focused in the printed cases, put shortly, was whether the Caparo principles could be regarded as satisfied as at the time when the email was sent, on the basis that the appellant was the alter ego of Mr Erskine, and the contract between the appellant and the respondents was the same as the contract which the respondents had had in contemplation when they made the statement to Mr Erskine. 5. There is however a question as to whether the basis upon which the case has been approached by the courts below, and by the parties in their printed cases, is correct. Is this truly a case in which A relied upon a representation made by B to C? Was the representation made only at the time when the email was sent? Or is this a case where, as was argued before the Lord Ordinary, there was a continuing representation, which was capable of remaining in effect until a contract was concluded? If so, in the circumstances of this case, was the contract concluded between the parties on the basis of a continuing representation made by the respondents to the appellant? If so, did the respondents assume a responsibility towards the appellant for the accuracy of the representation? 6. If these questions are, answered affirmatively, then the case is not concerned with the circumstances in which a third party may sue in damages for economic loss suffered as a result of relying upon a representation of which it was not the addressee, but with the recovery of damages where a party to a contract was induced to enter into it by a negligent misrepresentation made to it by the other party to the contract. In Scots law, that involves a consideration of section 10 of the Law Reform. (Miscellaneous Provisions) (Scotland) Act 1985 ("the 1985 Act") and of the authorities in which that provision has been discussed. 7. The questions which I have posed in para 5, and the area of the law which I have mentioned in para 6, were not discussed by the courts below or by the parties in their printed cases, but were
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raised during the hearing of the present appeal. Counsel for the respondents accepted that there woula be no unfairness in the court's considering these matters: and. In the circumstances, the parties were permitted to make additional submissions in writing. 8. Before addressing these matters, it is necessary first to consider ate relevant facts as found by the Lord Ordinary. The relevant facts The respondents are the owners of a grouse moor at Castle Grant, near Grantown-on-Spey, over which commercial shooting takes place. Recognising that there required to be substantial investment in the moor in order to increase the number of grouse, and being unwilling to undertake that investment themselves, they sought to attract a tenant. The matter was taken forward by their employee and chief executive, Mr Sandy Lewis, and by a chartered surveyor, Mr Jonathan Kennedy, who was engaged to advise them. In May 2006 Mr Erskine learned that a lease of the moor might be available, and entered into discussions with Mr Kennedy. He was sent the proposed terms of a lease. He did not however pursue his interest. 10. The respondents then entered into discussions with another prospective tenant, Mr Paddy McNally. In the course of those discussions, Mr McNally expressed concern about possible over- shooting of the moor during the 2006 season. In order to reassure Mr McNally that the respondents had considered the capacity of the moor to bear the shooting planned for that season, Mr Lewis sent his .Adviser an email dated 4 August 2006, in which he gave information about the grouse counts carried out on the moor earlier that year and the estimated grouse population of the moor, extrapolated from the counts. The areas of the moor in which the counts were carried out were not however representative of the moor as a whole, but were the parts of the moor which were considered to be the most heavily populated by grouse. As a result, the estimated grouse population, as stated in the email, was well in excess of the actual population. In the event, Mr McNally decided not to proceed with the transaction. 11. On Mr McNally's withdrawal, Mr Kennedy contacted Mr Erskine in early September 2006 in order to pursue the possibility of his taking a lease of the moor. After taking part in a shoot and making a further visit to the moor, Mr Erskine became concerned that the shooting planned for that season would leave an inadequate breeding population on the moor. He expressed his concern in an email to Mr Kennedy, in which he said that he was not qualified to quantify the damage which the shooting was doing to the grouse stocks but thought that it was not insignificant. Mr Kennedy forwarded the email to Mr Lewis, stating in his covering message that there was no doubt in his mind that the estate had been overshot, and that this had undoubtedly had an effect on the letting of the moor and might have made it impossible. 12. Mr Lewis replied by email on 29 September, stating: "I have sent a separate email re the grouse programme which you may wish to pass on to Alastair Erskine." The separate email sent by Mr Lewis to Mr Kennedy, which I will refer to as the critical email, did not form part of the chain of messages initiated by Mr Erskine's email, and did not have the appearance of responding to any concern expressed about over-shooting. Its subject was "Grouse Bags", and it began by stating: "Now that we are well through with the grouse season, I thought it may be appropriate to recap on how we set this year's programme for Castle Grant and where we are to date. The following information was provided to you at the ,beginning of August." ' Mr Lewis then repeated the information which had originally been sent in the email of 4 August 2006. The email concluded: "I am very happy for you to pass this on to Alastair Erskine if you feel this would be helpful to him." 13. On 2 October 2006 Mr Kennedy forwarded the critical email to ,Mr Erskine, as Mr Lewis had suggested. Mr Erskine decided to proceed with the transaction, and instructed his solicitors,
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Anderson Strathern, to conclude the lease in the name of a limited liability partnership. On 10 October Anderson Strathern informed the respondents that Mr Erskine intended to use a new limited liability partnership to take the tenancy. Discussions continued between Mr Erskine and Mr Lewis, who was aware of Mr Erskine's intention to incorporate the appellant as a vehicle for the lease. The appellant was incorporated on 16 November 2006. The lease was signed on various dates between 8 December 2006 and 18 January 2007. 14. Mr Erskine subsequently discovered that the counting areas were not representative of the moor as a whole, that the grouse population was smaller than he had believed, and that it would, in consequence take longer for the population to recover to the point where shooting could take place at the level which he had intended. He considered that Mr Lewis had deliberately misled him in the critical email in order to induce him to take on the lease, and brought the present proceedings on that basis. 15. The Lord Ordinary accepted that the critical email contained a material misrepresentation, namely an implicit representation that the counts were representative of the population of grouse on the moor. He found that Mr Lewis had acted honestly but negligently. He had had no basis for making the representation and did not check his facts before doing so. He had been aware of Mr Erskine's concern that there had been overshooting, and of the importance to an incoming tenant of an adequate population on which to build. The Lord Ordinary stated (paras 104-105): "The purpose of the representation was to give reassurance to Mr Kennedy and Mr Erskine that the 2006 shooting programme was justified and that it would leave a substantial surplus of birds on the moor, in order to maintain Mr Erskine's interest in entering into the lease .. The managers of the estate had, or would be perceived to have, access to a much more detailed knowledge of the quality of theit moor than any other party. In response to expressed concerns about the 2006 shooting programme and the availability of a sufficient end of season surplus, Mr Lewis chose to provide reassurance in his representations." ' The Lord Ordinary also accepted that the representation had induced Mr Erskine to choose to enter into the lease. 'Was the representation of a continuing nature? 16. The law relating to the effect of representations upon a contract proceeds on the basis that a representation made in the course of pre-contractual discussions may produce a misapprehension in the mind of the other party which continues so as to have a causative effect at the time when the contract is concluded. It is on that basis that a misrepresentation may lead to the setting aside of the contract as being vitiated by error or fraud. 17. The capacity of a representation to have a continuing effect was noted by. Lord Cranworth, when rejecting what he described as "a very desperate argument" that a representation could not justify the setting aside of a bond because it was made some time before the bond was executed, in Smith v Kay (1859) 7 HL Cas 750, 769: "It is a continuing representation. The representation does not end for ever when the representation is once made; it continues on. The pleader who drew the bill, or the young man himself, in stating his case, would say, Before I executed the bond I had been led to believe, and I therefore continued to believe ..." 18. A similar explanation can be found in the judgment of Lord Wright MR in With v O'Flanagan [1936] Ch 575, which was another action for the rescission of a contract. Under reference both to English authorities concerned with the law of contract, and to a Scottish authority concerned with the law of reparation (the case of Brownlie v Miller (1880) 7 R (HL) 66; Brownlie v Campbell (1880) 5 App Cas 925, which I shall discuss shortly), his Lordship observed at p 584 that "a representation made as a matter of inducement to enter into a contract is to be treated as a continuing representation", and added at pp 584-585:
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"This question only occurs when there is an interval of time between the time when the representation is made and when it is acted upon by the party to whom it was made, who either concludes the contract or does some similar decisive act; but the representation remains in effect and it is because that is so, and because the court is satisfied in a proper case on the facts that ' remained operative in the mind of the representee, that the court holds that under such circumstances the representee should not be bound." 19. The law relating to reparation for harm suffered as a result of the conclusion of a contract in reliance upon a misrepresentation made in the course of pre-contractual discussions proceeds in this respect upon the same basis. As Smith J observed in the Australian case of Janes v Dumbrell [1981] VR 199, 203: "When a man makes a representation with the object of inducing another to enter into a contract with him, that other will ordinarily understand the representor, by his conduct in continuing the negotiations and concluding the contract, to be asserting, throughout, that the facts remain as they were initially represented to be. And the representor will ordinarily be well aware that his representation is still operating in this way, or at least will continue to desire that it shall do so. Commonly, therefore, an inducing representation is a `continuing' representation, in reality and not merely by construction of law." 20. As Smith J indicated by his use of the words "ordinarily" and "commonly", whether a representation should be treated as continuing depends upon the facts of the individual case (see also Macquarie Generation v Peabody Resources Ltd [2000] NSWCA 361, paras 3-22, per Mason P). Where a misrepresentation does not have a continuing effect, for example because it is withdrawn or lapses, or because the other party discovers the true state of affairs before the contract is concluded, it cannot induce the other party to enter into the contract and therefore cannot affect its validity or give rise to a remedy in damages for any loss resulting from its conclusion. As Lord Brougham observed in Irvine v Kirkpatrick (1850) 7 Bell App (HL) 186, 237-238, in order that the misrepresentation may be of any avail whatever, it must inure to the date of the contract. If the other party discovers the truth before he signs the contract, "the misrepresentation and the ,concealment go for just absolutely nothing". 21. Whether the remedy sought is reduction of the contract or damages for the loss suffered as a result of entering into it, in either case a representation may therefore be treated by the law as having,- continuing effect, rather than as being an event whose legal consequences are necessarily fixed at the time when the statement in question was made. 22. The continuing effect of a pre-contractual representation is reflected in a continuing responsibility of the representor for its accuracy. Thus a person who subsequently discovers the falsity of facts which he has innocently misrepresented may be liable in damages if he fails to disclose the inaccuracy of his earlier representation: Brownlie v Miller (1880) 7 R (HL) 66, 79; Brownlie v Campbell (1880) 5 App Cas 925, 950 per Lord Blackburn. The same continuing responsibility can be seen in the treatment of representations which are true when made, but which become false by the time the contract is entered into: see, for example, Shankland & Co v Robinson & Co 1920 SC (HL) 103, 111 per Lord Dunedin. 23. The law is thus capable, in appropriate circumstances, of imposing a continuing responsibility upon the maker of a pre-contractual representation in situations where there is an interval of time between the making of the representation and the conclusion of a contract in reliance upon it, on the basis that, where the representation has a continuing effect, the representor has a continuing responsibility in respect of its accuracy. 24. In the present case, the representation contained in the critical email was undoubtedly of a continuing nature so long as Mr Erskine remained the prospective contracting party. The question then arises whether, in the circumstances of this case, the representation continued after the
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identity of the prospective contracting party changed, and, if so, whether the respondents assumed a responsibility towards the appellant for the accuracy of the representation. ' Did the representation, and responsibility for its accuracy, continue after the identity of the contracting party changed? 25. In principle, the possibility that a representation may continue to be asserted, and may have a causative effect so as to induce the conclusion of the contract, is not necessarily excluded where, as in the present case, the contracting parties are not the original representor and representee. In such a case, it is possible that the inference can be drawn from the parties' conduct that they proceeded with the negotiation and conclusion of the contract on the basis that the accuracy of the representation continued to be asserted by the representor, implicitly if not expressly, after the identity of the prospective contracting party had changed. In such circumstances the representation may have continued to have a causative effect, so as to induce the conclusion of the contract. 26. Where the inference to be drawn is that a representation continued to be made until the contract was concluded, it may also be inferred that the risk of harm being suffered as a result of reliance upon it, in the event that it was inaccurate, continued to be foreseeable. In such circumstances, the represent or may be taken to have assumed responsibility for the accuracy of the representation towards the contracting party who relied upon it, even though that person was not the original represented. 27. No authority has been cited in which the court has considered the liability of a contracting party for a representation inducing the conclusion of the contract by someone other than the original represented. The decision of the House of Lords in Briess v Woolley [1954] AC 333 is however relevant. The case concerned a fraudulent misrepresentation made in the course of pre- contractual discussions by a shareholder in a company. He was subsequently authorized 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. Lord Reid stated at p 349: "The misrepresentations were continuing representations intended to induce the other party to make the contract, and when that party made the contract to his detriment, a cause of action arose, and in my opinion it arose against both the agent and the principal. The agent continued to be fraudulent after he was appointed. It was his duty, having made false representations, to correct them before the other party acted on them to his detriment, but he continued to conceal the true facts." ' Lord Tucker added at p 354: "the duty of the agent, who has made the misrepresentation, to correct it cannot be regarded as only a personal obligation. If he has in the meantime been appointed agent with authority to make representations for the purpose of inducing a contract he, in his capacity as agent, is by his conduct repeating the representations previously made by him." 28. 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 represent or 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. 29. The case of Briess v Woolley concerned a misrepresentation which was fraudulent rather than negligent; and it preceded the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. Once it is accepted that a negligent misrepresentation can give rise to a remedy in damages, however, there is no reason why the approach adopted in Briess should not apply to negligent as
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well as to fraudulent misrepresentations which are made in order to induce the represented to enter into a contract. A negligent misrepresentation is equally capable of having a continuing effect up until the time when the contract is concluded, where the person by whom the representation is made, or to whom it is addressed, becomes the agent of the person by whom the contract is concluded. 30. In the present case, the change in the identity of the prospective contracting party did not affect the continuing nature of the representation, or the respondents' continuing responsibility for its accuracy. It appears from the Lord Ordinary's findings that the negotiations which had been under way between Mr Erskine and the respondents, in the course of which the critical email was sent, simply continued after it had become apparent that a limited liability partnership was to be used as a vehicle for Mr Erskine's investment. Neither party drew a line under the previous discussions, after the appellant was formed, in order to begin afresh. Neither party disclaimed what had previously been said in the course of their discussions, or sought assurances that it could be relied upon as between the appellant and the respondents. The seeking of such an assurance would no doubt have appeared to those involved to be an unnecessary formality. As the Lord Ordinary found, the representation made in the critical email remained operative in the mind of Mr Erskine 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. 31. In continuing and concluding the contractual negotiations with the appellant, through its agent Mr Erskine, without having withdrawn the representation earlier made to Mr Erskine as an individual,…
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