Fri 21 Feb 2014

The continuing effects of misrepresentation

On 12 February 2014 the Supreme Court reached it decision in the long-running litigation in the case Cramaso LLP v Ogilvie-Grant, Earl of Seafield & Others [2014] UKSC 9.

The facts of the case were simple. Alistair Erskine (a well-known Scots businessman) was interested in purchasing the grouse moor at Castle Grant but he was concerned about the number of grouse on the moor and the effects of over-shooting. To assuage any doubts that Mr Erskine had, the chief executive of the defenders asked their surveyor to send Mr Erskine an email he had previously drafted which, for all intents and purposes, said that the level of grouse on the moor was not a concern.On the basis of that email Mr Erskine set up the pursuing entity Cramaso LLP and concluded the purchase. To his chagrin it then transpired that the level of grouse on the moor was not as described by the defenders but was quite poor. Accordingly, the pursuers sought to reduce the contract on the basis of the defenders' alleged misrepresentation and claim damages.Before the Lord Ordinary and the Extra Division (on appeal), the pursuers were unsuccessful. These courts both concluded that there had been a misrepresentation. The problem, however, was that the representation had not been made to the pursuers but rather to Mr Erskine. At the time the representation was made the pursuers did not even exist. Therefore the defenders could not possibly have known that the pursuers would rely upon it. For that reason the pursuers case failed. The case then came to the Supreme Court. Lord Reed (with whom the rest of the justices agreed) started by asking whether the lower courts had asked themselves the right question. Was this a case, he asked, where A relied on a representation made by B to C? Or was it, in fact, a case where there was a continuing representation capable of remaining in effect until the contract concluded? If it was then did the defenders actually assume a responsibility to the pursuers for the accuracy of what was said in their email?

Lord Reed started his analysis by making it clear that a representation can have a continuing effect. That effect disappears if, before signing the contract, the other party discovers the truth and signs the contract anyway. However, if the other party does not find out and relies on the representation then it can be taken to continue until the contract is concluded. In this case, the representation in the email sent to Mr Erskine was undoubtedly of a continuing nature as long as Mr Erskine remained the contracting party. The question was whether the representation continued to have effect once the identity of the contracting party had changed. If it did, did the defenders then assume a responsibility to the pursuers as well for what was said in the email?

Lord Reed explained that it was possible that they did because the representation was not withdrawn after the contracting party changed. It was foreseeable that the pursuers would rely on it to their detriment. Lord Reed referred to an English authority Briess v Woolley [1954] AC 333 in support of that view. In that case a misrepresentation had been made by a shareholder who was subsequently appointed to negotiate on behalf of the company. His change of status (i.e. from principal to agent) made no difference to the result and Lord Reed did not see why the principle should not also apply in the converse situation in this case (i.e. where Mr Erskine's position had changed from principal to agent). The change of identity of the contracting party did not, therefore, affect the continuing nature of the representation and did not relieve the defenders of responsibility for its accuracy. The pursuers were induced into entering into the contract as a result of it because it remained operative in the mind of Mr Erskine even after he began to act as the pursuer's agent.

The pursuers were, therefore, entitled to have the contract set aside. The case will now be remitted back to the Court of Session to discuss the matter of damages. The decision of the Supreme Court is an interesting one which will, no doubt, be the subject of some discussion. Although the defenders' argument was a technical one it had obvious attraction because the pursuers did not exist at the time the representation was made, which differentiates it from the Briess case in which the company did exist. It was also interesting that the Supreme Court made no distinction between the effect of a fraudulent or negligent misrepresentation. As Lord Toulson pointed out in his concurring opinion the maker of a fraudulent misrepresentation knows it to be false whereas the defenders in the present case did not. The court did not, however, consider that decisive. What mattered was the continued reliance on a misrepresentation, not the honesty of the maker and it is perhaps difficult to argue with that sentiment.

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