Solicitor wins Supreme Court appeal against lender duty ruling

A solicitor has won an appeal to the UK Supreme Court against an Inner House ruling that she was liable to commercial lenders when, acting for the borrowers, by a negligent misstatement she procured and caused to be registered an executed discharge covering the whole of the security subjects, when only part of the subjects should have been released.

Five Justices unanimously held that it was an essential element of the concept of assumption of responsibility for a representee to show that it was reasonable of it to have relied on the relevant representation. Further, a commercial lender about to implement an agreement relating to its security did not act reasonably if it proceeded on no more than a description of the terms put forward by the borrower.

The appeal was brought by Jane Steel and her former firm, Bell & Scott, against a majority ruling by the Inner House (click here for report), allowing a reclaiming motion by NRAM plc in its action for damages.

Ms Steel had acted for a company, HCL, which borrowed from the pursuers in 2002, granting a security over property comprising four units on a business park. In 2005 one unit was sold and the proceeds applied to reduce the loan. There were discussions in 2006 about selling a further unit, but nothing happened until March 2007 when Ms Steel emailed asking for discharges to be signed and returned as soon as possible "as the whole loan is being paid off for the estate and I have a settlement figure for that".

The lenders complied and received a further sum to reduce the loan; HCL continued to make regular payments until it became insolvent in 2010, at which point the lenders discovered that the loan was unsecured and the remaining units had been disposed of with no further repayments having been made.

At proof it was found that NRAM did not have solicitors acting for them, as Ms Steel knew. The Lord Ordinary however held that it was not reasonable for a bank in the position of the pursuers to rely on the misstatement information without checking its accuracy against its file; and that a solicitor in Ms Steel's position would not foresee that such a bank would reasonably rely on that information without carrying out such a check. The Inner House held that there were certain circumstances which led to the conclusion that Ms Steel had assumed responsibility for the representations, such that the court did not need to consider whether NRAM should have checked its file.

Allowing the defenders' further appeal, Lord Wilson, with whom Lady Hale, Lord Reed, Lord Hodge and Lady Black agreed, said the starting point was the case of Hedley Byrne & Co v Heller & Partners (1964), at the heart of which was the need, in order for the representor to be liable, for the representee reasonably to have relied on the representation, and for the representor reasonably to have foreseen that they would do so. That had been developed in Smith v Eric S Bush (1990) and Caparo v Dickman (1990), the latter of which however was notable for its reassertion of "the need for a representee to establish that it was reasonable for him to have relied on the representation and that the representor should reasonably have foreseen that he would do so".

It was now clear, he continued, that this concept of assumption of responsibility remained the foundation of liability for a careless misrepresentation, although the concept might sometimes require "cautious incremental development" in order to fit cases to which it did not readily apply. Such development was unnecessary here, as the concept fitted the case perfectly.

The approach of the Inner House was incorrect as nothing in the relevant case law supported a conclusion that it was not always necessary for a representee to show that it was reasonable of it to have relied on the relevant representation. This was an essential element of the concept of assumption of responsibility. Moreover, the Lord Ordinary was correct to find that a commercial lender about to implement an agreement relating to its security did not act reasonably if it proceeded on no more than a description of the agreement’s terms put forward by the borrower.

Click here to access the judgment.