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Court refuses to dismiss third party claim for economic loss against solicitor

Northern Rock (Asset Management) plc v Jane Steel and Bell & Scot LLP
Outer House, Court of Session
27 February 2014

Catriona Hunter comments on this case in which the Court of Session considered a claim for damages against a solicitor who had acted for a company that had borrowed funds from the Claimant. The Claimant maintained that, relying on the terms of an email received from the solicitor, it had discharged a standard security when this should only have been restricted. As a result, the Claimant had only received partial repayment of the loan and argued that the solicitor was responsible for its loss.

Facts

The Claimant lent funds to a company to finance the purchase of a business park comprising of various units. In return, the company granted a standard security over the property in the Claimant’s favour. Subsequently, the company decided to sell one of the units and the company’s solicitor emailed a draft discharge of the standard security to the Claimant to be signed and returned as a matter of urgency. The solicitor stated in her email that the company intended to sell the property and repay the whole loan. This was incorrect as the company only intended to sell a single unit, which meant that the Claimant’s standard security required to be merely restricted, not fully discharged. Relying on the solicitor’s email, the Claimant executed the discharge and when the sale of the unit concluded, the discharge was registered in the Land Registers of Scotland. This meant that the Claimant’s loan was no longer secured.

The Claimant received the proceeds from the sale of the unit in part-settlement of the loan, but a significant sum remained outstanding. The company subsequently became insolvent and the Claimant was unable to secure payment of the remainder of the loan. The Claimant raised an action for damages against the solicitor and her firm (“the Defenders”) on the basis that it had suffered economic loss as a result of the solicitor’s actions. The negligence claim was based on the argument that, in the circumstances of this case and in light of the information in the solicitor’s email to the Claimant regarding the aim and outcome of the proposed transaction, she had assumed a responsibility to the Claimants, which gave rise to a duty of care.

The Defenders’ position was that the Claimant was a third party to whom no duty of care was owed. The solicitor had acted solely for the company and on that basis, although she had intended that the Claimant return the executed discharge to her, she had not intended the Claimant to rely on the information contained in her email and, as a result, no duty of care existed.

The Defenders argued that the case should be dismissed without the need for a proof (trial) on several grounds including:-

  • This was an “information” not an “advice” case - the Claimant had not relied on the solicitor’s skill and expertise;

  • The solicitor was merely relaying information from her client to the Claimant and her email followed "principal to principal" discussions directly between the parties;

  • The solicitor sent the information to the very department within the Claimant’s organisation that was responsible for knowing the key details of the proposed transaction. The solicitor expected the Claimant to confirm the position independently. She did not expect the Claimant to rely on a single sentence within one email and if that had been her expectation, she would not have sent that email or would not have sent an email in those terms.

Findings

The judge considered the authorities on liability for economic loss and the correct test to be applied in some detail. He referred to the well-known decision in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 and a number of other English and Scottish authorities, including the decision in Customs and Excise Commissioners v Barclays Bank plc [2007] 1 AC 181 in which the court recognised that a single formula for liability in these cases “had proved elusive”.

Having done so, the judge indicated that he was not prepared to dismiss the claim on the basis that no duty of care was owed to the Claimant by the solicitor in the circumstances of the present case and instead he ordered a proof before answer (evidential hearing). The judge was of the view that, before reaching a decision, the court would need to hear evidence on the circumstances surrounding the transaction and the relationship between the parties. The issue, which was by no means clear cut, was whether the Claimant had relied on the solicitor’s skill and expertise and whether it had been reasonable for the Claimant to do so. He highlighted several points which needed to be explored, such as:-

  • whether the parties had reached an agreement about the redemption of the loan;

  • the parties’ prior history, including details of earlier transactions involving the Claimant that the solicitor had handled on behalf of the company and whether the Claimant had dealt with those transactions without consulting its own solicitor;

  • whether the solicitor had wished to avoid the Claimant instructing separate solicitors as this would have delayed matters and increased costs.

Comment

This decision provides a helpful review of the authorities which discuss the test(s) required to establish the existence of a duty of care in claims by third parties for economic loss. Although this area of law has developed since Hedley Byrne was decided in 1964, the authorities do not provide a simple formula or test which can be applied in these cases. Much will depend on the circumstances in each case and, in particular, whether the professional provided the third party with advice or simply information.

From a risk management perspective, professionals ought to be mindful that a duty of care can be owed to a third party in certain circumstances, particularly where the third party is unrepresented (as was the case here). Care must be taken when drafting correspondence to a third party, with thought being given to whether advice, information or both are being provided and whether the third party is likely to take steps in reliance on that advice and/or information. The language used in such correspondence should also be considered - in this case the judge noted that “[the solicitor]'s email looks like a communication that a solicitor would write to her own client. It suggests to me that she expected it to be read and acted upon without further inquiry. It was unequivocal in content and urgent in tone. She gave no hint that she was merely acting as a conduit on behalf of her client.”

Particular risks arise in situations involving lenders as the borrower’s solicitor will often correspond directly with the lender, draft legal documents (such as deeds of restriction or discharges), and may provide a significant volume of information to the lender during the transaction. In this case, the Claimant relied on the fact that the solicitor had drafted the discharge – a task which the judge noted requires the use of legal skills and is commonly undertaken by solicitors.

Claims by third parties which allege liability for economic loss should, of course, be distinguished from situations where the solicitor accepts a dual instruction to act for a borrower and a lender (for example where a residential mortgage or development facility is being put in place). In that situation the solicitor will owe duties in contract and in delict (tort) to both the borrower and the lender and should act accordingly. 

Read the judgment.

Contact

For further information please contact Catriona Hunter, Senior Solicitor, Professional Indemnity and Commercial Insurance on 0141 228 8000 or at catriona.hunter@dwf.co.uk

By Catriona Hunter

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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