Supreme Court decision on misrepresentation during pre-contract negotiations

10th March 2014

In a significant decision by the Supreme Court a representor has been held liable for its negligent misrepresentation to another party other than the party which was later induced to conclude the contract.

Cramaso LLP v Viscount Reidhaven’s Trustees [2014] UKSC 9

Background

A negligent misrepresentation is an untrue statement of fact or law made by Party A which induces Party B to enter into a contract that causes him loss. The negligent misrepresentation can be express or implied and must have continuing effect until the time the contract is concluded. This means that there is a continuing duty on the representor if he realises the inaccuracy of his innocent misrepresentation to disclose it or be liable for damages.

A principal can be liable for the fraudulent misrepresentation of his agent should the agent induce the representee into concluding a contract with the agent on behalf of the principal; even if the agency commenced after the misrepresentation was made (as long as the misrepresentation is continuing after the agent’s appointment and until conclusion of the contract).

In the case before the Supreme Court, the Lords had to decide whether the existing principles of misrepresentation and agency could be extended:

• to include a situation where the misrepresentation was made to and not by the contracting party’s agent
• to a principal’s liability for negligent misrepresentation rather than limiting it to cases of the agent’s fraudulent misrepresentation.

Facts

The respondents, owners of a Scottish grouse moor engaged a chartered surveyor to find a tenant for the moor in order to raise funds to invest in and increase the number of grouse. Mr Erskine, a prospective tenant, raised by email to the surveyor his significant concern about over-shooting and the depletion of grouse. The surveyor forwarded this to the respondents expressing his own concern that the estate had been overshot rendering the moor difficult if not impossible to let.

The respondents replied suggesting the surveyor forward an existing email to Mr Erskine which dealt with grouse counts and estimated grouse population extrapolated from those counts. In fact, the areas in which the counts were carried out were not representative of the moor as a whole and, as a result, the estimated population was well in excess of the actual population. Having seen the email, Mr Erskine decided to proceed with the tenancy and set up a limited liability partnership (LLP), Cramaso, as a vehicle for the lease.

After the lease was concluded, Mr Erskine discovered the grouse population was much smaller that he was led to believe. Cramaso issued proceedings alleging that, by their email, the respondents had deliberately misled them into signing the lease.

Journey through the courts

At first instance the Scottish Court of Session agreed that the respondents’ email had contained an implicit representation about the moor’s grouse population, which was material in that it induced Mr Erskine to conclude the lease under the LLP vehicle. It did not consider the respondents to have acted fraudulently, but negligently. Nevertheless, it dismissed Cramaso’s claim because the claimant LLP did not exist at the time the email was sent and the representation made.

On appeal, the court held that although the judge had been wrong to preclude the existence of a duty of care because the agency arrangement did not yet exist, on the facts the respondents did not owe Cramaso a duty of care because there lacked a sufficient proximity between the two. At the time the email was sent, the respondents could not have reasonably foreseen that anyone other than Mr Erskine would have relied on it.

The Supreme Court invited the parties to make written submissions on whether a party to a contract could be induced to conclude it by the representation of the other contracting party to a non-contracting party.

The Supreme Court decision

The Supreme Court considered the decision of Briess v Woolley [1954] AC 333 in which a shareholder fraudulently misrepresented information about the company during pre-contract negotiations. He was then authorised to act as the agent of other shareholders and in reliance on his earlier misrepresentation, the other party entered into a contract with those shareholders.

In his leading judgment Lord Reed held that the principle established in Breiss could be extended to cover negligent (as well as fraudulent) misrepresentations to (as well as by) the agent.

On that basis, the respondents’ misrepresentation continued until the lease was concluded as did their duty to ensure its accuracy. The email was sent during contractual negotiations for the lease of the moor. When Mr Erskine made it known he would establish an LLP to conclude the lease, negotiations did not stop and recommence with disclaimers about what was said before; they simply continued as before. The legal change of identity of the contracting party made no difference and the representation did not cease in its effect due to the technicality. It continued and remained material, influencing Mr Erskine’s decisions when acting as agent for and the directing mind of Cramaso. The respondents had a continuing duty of care to Cramaso for the representation’s accuracy, which they breached causing Cramaso loss.

WM Comment

This case is clear authority that the maker of a negligent misrepresentation has a continuing duty as to its accuracy until the time the contract is concluded. In addition and unreported in any previous case, the misrepresentation can be made to a third party who later becomes agent to the party which is induced into the contract.

To have avoided Mr Erskine/Cramaso’s claim, the respondents should have ensured that the lease contained an entire agreement clause, which, as long as it is deemed fair and reasonable in accordance with the Unfair Contract Terms Act 1977 can prevent the parties from later claiming that statements not included in the final agreement constitute additional terns or side agreements. Most entire agreement clauses also contain a non-reliance clause which confirms that the parties have not relied on any representation that is not set out in the agreement. This should exclude any claims of negligent misrepresentation, but it cannot exclude a claim of fraudulent misrepresentation. Had the respondents intended to deliberately mislead Mr Erskine, without any belief in the truth of the email, such a clause in the contract would have been to no avail.

For more advice on misrepresentation and contractual negotiations, contact Head of Walker Morris Commercial Litigation Group, Gwendoline Davies.