Can one party rely on the solicitor of another?

In the recent professional negligence case of Steel & Another v NRAM Limited (formerly NRAM plc) the Supreme Court had to determine whether a solicitor instructed exclusively by a borrower, owed an actionable duty of care not to cause loss to its lender.

Background

In 1997 Headway Caledonian Ltd (Headway) purchased Cadzow Business Park, in Hamilton, Scotland (the Park). The Park comprised four units, registered under two separate titles. To fund the purchase, Headway obtained a loan from Northern Rock, in return for granting an ‘all sums’ standard security over each unit.

In 2005 Headway agreed to sell Unit 3 of the Park. It did so having first obtained the consent of Northern Rock, which itself was conditional upon Headway remitting £470,000 from the proceeds of sale in partial redemption of its loan.

In 2006 Headway entered into heads of terms for the sale of Unit 1 of the Park. As before, it approached Northern Rock, who again consented to the sale. However, this too was conditional, upon (i) Headway remitting £495,000 in partial redemption of its loan; and (ii) the balance of the loan remaining secured on Units 2 and 4.

On the eve of the proposed sale of Unit 1 Headway’s solicitor, Ms Steel, sent an email to Northern Rock. In her email, and mistakenly, she advised that Headway’s entire loan was to be paid off and that she had a settlement figure for that.

The next day, and relying on Ms Steel’s email, Northern Rock provided the documents required to discharge its security over not only Unit 1, but also Units 2 and 4. The sale of Unit 1 then followed and the sum of £495,000 was remitted to Northern Rock in partial redemption of the loan.

Subsequently, in 2007, Headway sold Units 2 and 4. While it seems that Northern Rock was made aware of the sales of these units, no questions appear to have been raised by it regarding its security over them.

In 2010 Headway went into liquidation and stopped making the interest payments required on its loan. This, it seems, prompted the discovery by Northern Rock that the security it had previously been granted over Units 2 and 4 had been lost.

Allegations

Northern Rock alleged that although Ms Steel had not been retained by it in connection with the sale of Unit 1, she had nevertheless assumed a duty of care to it in respect of the financial losses that it incurred as a consequence of losing its security over Units 2 and 4.

Decisions of the courts below

In 2014, Lord Doherty sitting in the Outer House of the Court of Session (Scotland) dismissed Northern Rock’s claim. However, his decision was subsequently overturned on appeal by Northern Rock to the Inner House, where Northern Rock was awarded £370,000 by way of damages.

In turn, it was Ms Steel who further appealed to the Supreme Court.

Decision of the Supreme Court

The leading judgment was given by Lord Wilson, with whom the other Lord Justices agreed.

Having considered a number of case authorities as to the appropriate test by which to determine liability in claims for the recovery of economic loss by third parties, the court considered that the circumstances of this case fell squarely within the concept of assumption of responsibility.

In considering the constituent elements of that test and assessing whether they have been satisfied, the court specifically observed that:

  • While the parties were not engaged in hostile litigation, it was impossible to subscribe to the suggestion that this was not an arm’s length transaction; and
  • The reasonableness of the reliance on the statements of Ms Steel by Northern Rock was central to the concept of an assumption of responsibility.

After doing so, the court concluded that a commercial lender about to implement an agreement with its borrower, referable to its security, does not act reasonably if it proceeds upon no more than a description of its terms put forward by or on behalf of the borrower.

Accordingly, it held that there had been no assumption of responsibility by Ms Steel to Northern Rock and, in turn, that no duty of care arose. The appeal would therefore be allowed and the original decision of the Outer House restored.

Comments

From a claimant perspective, this decision is a reminder that the courts will be cautious about allowing one party to rely on the solicitor of another to shield them from, or not to directly cause them, financial loss. However, this decision should not be regarded as the last word on this issue and there are numerous instances where the senior courts have concluded that a duty of care was owed by a professional not only to a client but also to a third party. Some of these are addressed in our article Third party claims for professional negligence.

In assessing whether a duty of care does arise, careful consideration will need to be given to the facts of each individual case. Here, for example, it is noteworthy that the claimant was an institutional lender, who had itself devised the terms upon which it had funded the borrower and who could have checked those terms, in an instant and without difficulty, as they were already in its possession. Had the claimant been a less sophisticated or vulnerable individual, without ready access to the material terms of the transaction, the decision of the court may well have been different. Similarly, if the parties had been operating on the same side of the transaction, rather than opposing sides, the outcome may also have been different.

From a legal perspective, the decision serves as a clear endorsement of the test of assumption of responsibility, famously enunciated by Lord Devlin in Hedley Byrne v Heller & Partners. That the present decision was unanimous and from the highest court in the land, makes it all the more significant. However, it is doubtful that this decision will entirely displace either the three-fold test enunciated in Caparo Industries v Dickman or the incremental approach advocated by Brennan J in Sutherland Shire Council v Heyman.

As Lord Mance previously observed in Commissioners of Customs and Excise v Barclays Bank Plc:

‘…it has been said on a number of occasions that it is artificial or unhelpful to insist on fitting all claims for breach of a duty of care to avoid economic loss within the conception of assumption of responsibility, and there are several cases involving economic loss where the three-fold test and incrementalism have been preferred.’

Moreover, other judicial pronouncements suggest that the different tests may be used inter-changeably, as well as concurrently. Most notably, in BCCI v Price Waterhouse (No.2), Sir Brian Neill (with whom Nourse and Brooke LJ agreed) stated that:

‘…it may be useful to look at any new set of facts by using each of the three approaches in turn’ and that ‘…if the facts are properly analysed and the policy considerations are correctly evaluated the several approaches will yield the same result.’

It seems more likely, therefore, that despite this decision, the courts will continue to employ different tests for determining whether a duty of care in respect of economic loss is owed to a third party and that, in selecting the appropriate test, much will depend on the circumstances of the case, as well as the individual preferences of the judiciary.

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