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Borrower's solicitor not liable to lending bank for misstatement

8 December 2014

A solicitor acting for a commercial borrower, whose negligent misstatement led to the lending bank granting a full rather than partial discharge of a security, was not liable in damages to the lender following the borrower's insolvency, a Court of Session judge has held.

Lord Doherty in the Outer House decided after hearing evidence that it was not reasonable for the bank to have relied on the misstatement information without checking its accuracy, and that a solicitor in the position of the solicitor who acted (Jane Steel, then of Bell & Scott) would not have foreseen that the bank would reasonably rely on that information without checking it. No duty of care therefore arose on the part of Ms Steel.

The borrowing company, Headway Caledonian Ltd (“HCL”), had bought an industrial estate in Hamilton comprising four units, with a loan from the pursuers, Northern Rock (Asset Management) plc. In 2005 HCL sold Unit 3, and obtained a restriction of the security to the other units on making part repayment of the principal sum. In 2006 HCL agreed the sale of Unit 1 and obtained from Northern Rock a statement of the further amount that would require to be repaid to achieve a release from the security.

Settlement took place, after a delay, in March 2007. Just before settlement, Ms Steel emailed Northern Rock, under the heading Unit 1 of the industrial estate, asking for the usual letter of non-crystallisation of a floating charge and for attached discharges also to be executed and returned, “as the whole loan is being paid off for the estate”. The discharges were executed but only the sum stated as the part repayment figure was paid. The remaining two units were later sold but HCL continued to pay interest on the loan outstanding until it went into liquidation.

The pursuers' practice was not to instruct solicitors when requests for discharges or deeds of restriction were received from customers' solicitors. Their manager responsible, Mr Clarke, had immediately forwarded the email to the administrative team without considering its terms. He said he had acted in good faith on the request. Ms Steel was not sure how the confusion between restriction and discharge had arisen on her part, and could not recall why she had sent the email in the terms she did. However at no time had she been acting for or advising Northern Rock.

The pursuers argued, among other points, that there had been a degree of urgency in the request and it had been reasonable for them to rely on the statements by Ms Steel, with whom they had dealt before.

Giving judgment, Lord Doherty rejected Mr Clarke’s evidence that under Scottish conveyancing procedure the pursuers had no choice but to issue discharges before receipt of redemption funds, noting that transactions often completed on the basis of personal undertakings by the solicitors.

He said that factors in favour of the view that there was the requisite foreseeability and reasonable reliance were that the email (i) contained no disclaimer; (ii) had a degree of urgency in its tone; (iii) was communicated directly to the pursuers, rather than to professional advisers; and (iv) came from a solicitor – a trustworthy source. On the other hand, the pursuers were a commercial bank, able to obtain legal advice if they required it. “But in truth the critical information was factual and concerned matters that could have been checked very easily and very quickly by the pursuers”, he commented – and in some respects the email was ambiguous, with a tension between the subject heading and the body.

Lord Doherty ruled that in the whole circumstances the relevant tests were not met. “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”, he commented. “It follows that whether the test applied is the threefold one in [Caparo Industries v Dickman], or the assumption of responsibility test, the pursuers’ primary case fails.”

He further observed that had Ms Steel been acting within the scope of her authority when she made the misstatements, the pursuers would have had a remedy against HCL for its agent's negligent misstatement, and if at any stage HCL would have been worth pursuing, that would be “a factor tending against imposing a duty of care” on Ms Steel. But “Such evidence as was led did not support a finding that the first defender had apparent authority to do what she did.” However he also queried an acceptance by both counsel that this was not a situation of breach of implied warranty of authority, and “Had it been open to me to reach a view on the matter I would have inclined to the conclusion that she was in breach of the implied warranty of authority which she gave.”

Click here to view the opinion.

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