Caveat Lender


In Steel v NRAM the Supreme Court had to determine whether a solicitor acting for a borrower was liable to the lender bank for negligent misrepresentation.

The claim was brought in Scotland and the Lord Ordinary (equivalent to the English judge at first instance) dismissed the claim, holding that the lender’s reliance on the solicitor’s email, without any independent checks, was neither reasonable nor foreseeable. The Inner House of the Scottish Court of Session (Scotland’s highest civil court and broadly equivalent to the English Court of Appeal), however, allowed the lender’s reclaiming motion (appeal) on the basis that the solicitor had nevertheless assumed responsibility to the lender. The solicitor appealed to the Supreme Court and the decision is therefore applicable and of interest below the border.

The lender had security over three units of a property, only one of which the borrower wished to sell. The borrower’s solicitor wrote to the lender incorrectly stating that the borrower would be repaying the loan in respect of all three units and attached draft deeds of discharge for all the properties, which the lender signed. The lender alleged that the solicitor’s misrepresentation as to the nature of the transaction had caused it to suffer loss as the borrower subsequently defaulted and the lender had no security.

The starting point, when considering whether someone is liable for a negligent misrepresentation which causes economic loss, is the 1964 decision of the House of Lords in Hedley Bryne v Heller. At the heart of that decision was the need, in order for the representor to be liable, (a) for the representee reasonably to have relied on the representation and (b) for the representor reasonably to have foreseen that it would do so. Those requirements of reasonable reliance and foreseeability were reaffirmed by the House of Lords in Caparo Industries Plc v Dickman. Together these principles allow for an assumption of responsibility on the part of the representor which makes a claim against them possible.

In Steel, the Supreme Court reviewed six authorities considering situations in which a solicitor had, or had not, been held to owe a duty of care to an opposing party. Those cases demonstrated there could only be an assumption of responsibility if it was reasonable for the latter to have relied on what the solicitor said, and if the solicitor should reasonably have foreseen that the opposing party would actually rely on the statement. The Court noted that these ingredients (reasonable reliance and foreseeability) are particularly relevant to a claim against a solicitor by the opposing party because there is a presumption that it is inappropriate for a solicitor to assume responsibility towards the other side.

The Supreme Court unanimously allowed the appeal and restored the original decision. The lender ought to have carried out its own checks about the loan discharge. It was fatal to the lender’s case that it made no attempt to check the accuracy of the solicitor’s representations against the material in its file. The Court was clear that any prudent bank taking the most basic precautions would have checked the accuracy of the deeds before signing them. Its failure to do so was not reasonable and would not have been reasonably foreseen by the solicitor. The solicitor assumed no responsibility.

Of course, had the lender instructed its own legal advisers, the problem may have been avoided…

Ben Ogden