Solicitor for borrower owed duty of care to lender for ‘negligent misstatement’, appeal judges rule

A bank which granted a loan to company for the purchase of four commercial units but due to a solicitor’s “negligent misstatement” discharged the entire security when it ought to have been left in place in relation to two of the units is entitled to damages, appeal judges have ruled.

By a majority of two-to-one, the Inner House of the Court of Session allowed the bank’s appeal after ruling that the solicitor acting for the company owed the lender a “duty of care”.

Lady Smith and Lady Clark of Calton allowed the reclaiming motion by NRAM plc in its action against the solicitor Jane Steel, who was at the relevant time a partner in Bell & Scott, while Lord Brodie dissented.

The court heard that NRAM granted loan facilities to Headway Caledonian Limited (HCL), a client of Ms Steel’s, in relation to its purchase of four commercial units at Cadzow Business Park in Hamilton, in return for which HCL granted security over the whole property.

However, NRAM claimed that they were “misled” into discharging the entire security at a stage when it ought to have been left in place in relation to two of the units.

Ms Steel acted for HCL in 2002 when it borrowed money from NRAM, which granted an “all sums due and to become due” standard security over all four units when it was acquired.

In 2005 HCL sold unit 3 and following settlement NRAM received a capital repayment reducing the company’s overall indebtedness but leaving it secured over units 1, 2 and 4.

A year later HCL entered into heads of terms for the sale of unit 1, but the transaction did not settle until March 2007 when Ms Steel emailed NRAM and attached the discharges to be signed and retuned stating that the “whole loan is being paid off for the estate and I have a settlement figure for that”.

NRAM posted the executed discharges to Ms Steel and received from her firm the sum of £495,000.

A substantial part of HCL’s loan remained outstanding, but Ms Steel forwarded the discharges of the entire security to the purchaser’s solicitor and they were duly registered.

HCL later went into liquidation and the bank said that there was little or no prospect of their recovering the outstanding loan.

NRAM, which did not have solicitors acting for them in any of the transactions, argued that Ms Steel should be held responsible for the negligent misstatements.

It looked to the respondents to make good their losses which, it averred, amount to more than £450,000 plus relevant interest.

The Lord Ordinary found that Ms Steel either knew or ought to have known that NRAM would not instruct solicitors to act for them in relation to the sale, and that she had “no actual or ostensible authority from her client to make the statements or require wholesale discharge of the security”.

But the Lord Ordinary 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; and that a solicitor in the first defender’s position would not foresee that such a bank would reasonably rely on that information without carrying out such a check”.

The judge observed that “any prudent bank taking the most basic precautions would have checked the information provided by seeking clarification from the first defender and/or looking at their file”.

It followed that whether the test applied was the assumption of responsibility test or the threefold one in Caparo Industries v Dickson - namely whether loss to the claimant was a reasonably foreseeable consequence, whether there was sufficient proximity between the parties and whether it is fair, just and reasonable to impose liability - the pursuers’ primary case failed.

However, Lady Smith, with whom Lady Clark of Calton agreed, held that the Lord Ordinary erred in law in holding that Ms Steel owed no duty of care to NRAM when she made the erroneous statements that led to the discharge of their entire security.

She said that while a solicitor acting for one party in a property transaction does not normally owe a duty of care to another party, the authorities showed that “liability may arise where the agent chooses to provide information and does so in such a way that it can reasonably be inferred that he undertook a duty of care in respect of it”.

“Thus, the solicitor who has authority but volunteers to do that which he does not need to do – who chooses to convey information – may find himself being held to have owed a duty of care to a person other than his client. I draw attention to this because it seems to me that that it points to there being an even greater likelihood of it being concluded that a solicitor who makes representations to another party to a transaction – and/or calls on them to execute important documents - without having any authority to do so owes such a duty”, Lady Smith said.

She considered that it “ought to have been concluded that there was an assumption of responsibility”, as Ms Steel’s email “clearly indicated that, as HCL’s solicitor she was in a position to communicate as she did, NRAM relied on the information and, such reliance was “clearly within the ambit of reasonable foresight”.

In a written opinion, Lady Smith said: “As a consequence of the Lord Ordinary’s approach, he did not go on to consider whether the imposition of a duty of care would be fair, just and reasonable. The context was, for the reasons I have explained, a background of assumption of responsibility and reasonable foresight of significant economic loss suffered by a bank in a sufficiently proximate relationship with a solicitor who had previously shown herself to be a trustworthy source. The context was also, importantly, that that solicitor whilst acting outwith her mandate and instructions made a serious error and put in train a series of events which caused the bank to suffer significant loss.

“What then of the fact that the loss could have been avoided if, having received the email which ought never to have been written and the attachments which ought never to have been sent, the bank had checked its file? Does that mean that it would not be fair, just and reasonable to hold the solicitor liable? I cannot identify any policy reason for doing so. Nor can I conclude that that fact demonstrates that the solicitor should be relieved of liability.

“Indeed, it might be thought invidious to suggest that a solicitor can abrogate responsibility for a serious error because the recipients of her communication might have checked rather than relying on what she, as a hitherto trustworthy professional, communicating with them as a solicitor, told them, particularly when she herself took no action to correct the error when, on receipt of the signed discharges, it was within her power to do so.”

She added: “For the reasons I have sought to explain, I consider that the Lord Ordinary’s decision making failed to follow these signposts and if it had done, the result would inevitably have been a finding that Ms Steel owed NRAM a duty of care.

“I would, accordingly, allow the reclaiming motion to the extent of sustaining the second plea in law for the pursuers, finding them entitled to damages of £369,811.18 and reserving, meantime, all questions of interest and expenses.”

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