UK: The Continuing Effect Of A Negligent Pre-Contractual Misrepresentation

Cramaso LLP (Appellant) v. Ogilvie-Grant, Earl of Seafield and Others (Respondents) (Scotland) [2014] UKSC 9

Pre-contractual representations: to whom is the duty owed? A recent Supreme Court Judgment dealing with an appeal from the Scottish Inner House decides that a party can be liable for a pre-contractual misrepresentation, even though the representation was first made to a party other than the ultimate contracting party. While this is a decision developing upon Scots law principles, it may well be persuasive (and is therefore significant) authority for English jurisprudence.

The background facts

The Respondents were the owners of a grouse moor at Castle Grant in Scotland, over which commercial shooting takes place. They sought to attract a tenant who would be willing to undertake the substantial investment in the moor in order to increase the number of grouse. In the autumn of 2006, the Respondents contacted an individual, E, to pursue the possibility of his taking a lease of the moor.

The Respondents made representations in an email to reassure E that the moor had the capacity to bear the planned shooting that season. The email included information about grouse counts and the estimated grouse population of the moor, extrapolated from the counts. The counts were based on the parts of the moor which were considered to be the most heavily populated by grouse, and were not representative of the moor as a whole. As a result, the estimated grouse population, as stated in the email, was well in excess of the actual population.

As negotiations progressed, E informed the Respondents that he intended to use a new LLP entity, Cramaso LLP, as a special purpose vehicle (SPV) to acquire the lease. The appellant LLP was incorporated on 16 November 2006 and the lease was signed on various dates between 8 December 2006 and 18 January 2007.

Proceedings were brought against the Respondents on the basis of misrepresentation.

The Lower Scottish Court decisions

At first instance, the Judge found that E had been induced to enter into the lease on behalf of Cramaso by a misrepresentation that had been made negligently. However, the Judge dismissed the proceedings on the ground that, at the time the misrepresentation was made, Cramaso had not come into existence. Cramaso appealed the decision. The Appeal Court held that the Respondents could only have foreseen that the representation would be relied upon by E, but not Cramaso. For that reason it was held that no duty of care was owed to Cramaso at the time when the misrepresentation was made, and Cramaso therefore had no cause of action.

The UK Supreme Court

The Supreme Court decided that this approach was incorrect. The starting point was that, in the right circumstances, a representation had the capacity to have a continuing effect.

The Supreme Court relied on the House of Lords decision in Briess v. Wooley [1954] to the effect that where there is a gap in time between the misrepresentation being made and when the contract is entered into, the law regards the representation as continuing during the whole interim period, unless the representation is withdrawn or modified. As a result, if the representation continues to have a causative effect from the time it was made through to the time when the contract is concluded, then the representor has a continuing responsibility in respect of the accuracy of the representation.

The Supreme Court decided that the representation was undoubtedly of a continuing nature so long as E remained the prospective contracting party. The key question to be decided was whether the representation continued after the identity of the prospective contracting party changed and, if so, whether the Respondents assumed a responsibility towards Cramaso for the accuracy of the representation.

Continuing representations

The Supreme Court held that the fact that the ultimate contracting parties were not the original representor and representee did not necessarily preclude the possibility that the representation may continue to be asserted and have a causative effect so as to induce the conclusion of the contract.

On the facts, the parties' conduct was such that the representation continued to have a causative effect, so as to induce the conclusion of the contract, even after Cramaso replaced E as the potential contracting party.

Lord Reed, giving the leading judgment, noted that the Respondents were fully aware that E had set up Cramaso as an SPV solely in order to acquire the lease. E's continuing negotiations with the Respondents were from then on in the capacity of an agent for Cramaso rather than on his own behalf. There had been no change in the status of the representation, which had not been withdrawn and remained operative in the mind of E after he began to act in the capacity of an agent for Cramaso, up until the time when the lease was executed. Cramaso was thus induced to enter into the contract by that representation. The Respondents therefore owed Cramaso a duty of care, which they failed to fulfil. Cramaso was accordingly allowed to recover for negligent misrepresentation.

Comment

The decision means that a contracting party can be liable in negligence for a representation made in pre-contractual negotiations, and which induced the conclusion of the contract by someone other than the original representee. It is submitted that the decision reached was the correct one. Although there are some novel features to this decision, the Supreme Court were very conscious of asserting that the problem did not require new principles to resolve, and the decision was reached on the grounds of long-established legal principles and on the specific facts.

That said, this is the first reported decision dealing with this point expressly. The decision will be of particular importance and interest to parties who are in the practice of incorporating SPVs for the purpose of entering into contractual arrangements. Given that a pre-contractual representation can have continuing effect and can even survive a change in identity of the representee, special thought should also be given to how parties wish to treat pre-contractual representations.

The case also serves as a helpful reminder of the use of entire agreement clauses in appropriate circumstances if parties wish to exclude reliance on representations not contained within the four corners of the agreement.

As an appeal under Scots law, the decision is merely persuasive, rather than binding, authority in English law. However, although the Supreme Court has not yet authoritatively decided this point as a matter of English law, it is suggested that for all practical purposes commercial parties can assume that the decision sets out the English law position.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.