A commercial lender released security after the borrower’s solicitor wrongly told it that the whole loan was being repaid. The lender’s own records showed that only part of the security was to be released. The Supreme Court considered whether it was reasonable for the lender to rely on the solicitor without checking those records.
The transaction and the email
Ms Steel, a partner in Bell & Scott LLP, acted for Headway Caledonian Ltd. Headway owned Cadzow Business Park, registered under two titles and subject to an all-sums standard security in favour of Northern Rock, together with a floating charge. Northern Rock did not instruct solicitors for partial releases of security.
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After earlier partial releases, Northern Rock agreed in 2006 to release Unit 1 on repayment of £495,000, while its security over Units 2 and 4 was to remain. Headway accepted those terms and instructed Ms Steel to remit £495,000 to Northern Rock on settlement and the balance to Headway.
On 22 March 2007, the eve of settlement, Ms Steel emailed Northern Rock asking for a letter of non-crystallisation and attaching draft deeds of discharge of the security over all three remaining units. She said that the whole loan was being paid off and that she had a settlement figure for it. Both statements were wrong. Nothing had suggested repayment of the whole loan, she had no such figure, and the attached deeds were inappropriate. She later accepted that she must have sent the email but could not explain it. The Lord Ordinary found her guilty of gross carelessness.
Northern Rock staff read the email but did not check it against the file. They treated it as authority to execute the discharges and to provide the letter of non-crystallisation. The sale of Unit 1 settled, £495,000 was remitted, and the discharges were registered. The security over Units 2 and 4 was thereby discharged. Headway continued to pay interest until its liquidation in 2010, when Northern Rock said it discovered the discharge. Units 2 and 4 had already been sold in 2007. The court proceeded, as invited, on the basis that the email caused both the discharge and a net loss of almost £370,000, while noting that the dispute might instead have been framed as one of causation.
The courts below
The Lord Ordinary held that no duty of care was owed and dismissed the claim. Ms Steel knew that Northern Rock was unrepresented but generally expected it to check her requests. She had not foreseen reliance without a check, and it was reasonable for her not to do so. It was not reasonable for Northern Rock to rely on the email without checking its file or seeking clarification. Any prudent bank taking basic precautions would have seen at once that the discharges should not be executed.
By a majority, the Inner House reversed that decision and awarded the contingently assessed damages of almost £370,000. Lady Smith, with whom Lady Clark of Calton agreed, held that an assumption of responsibility could be attributed without asking whether Northern Rock should have checked its file. She relied on Ms Steel’s status as a solicitor, the subject matter of the statements, Northern Rock’s lack of solicitors, an asserted lack of authority, the demand for urgency, and a view that the parties were not at arm’s length. She also held that reliance without checking was foreseeable, saying there was no evidence of a lender’s basic precautions and no room for judicial knowledge of them. Lord Brodie dissented, holding that the Lord Ordinary had been entitled to reach his conclusion.
Assumption of responsibility
Lord Wilson, with whom Lady Hale, Lord Reed, Lord Hodge and Lady Black agreed, held that the claim was governed by whether Ms Steel assumed responsibility for the statement. That concept, drawn from Hedley Byrne, fitted the case and required no incremental development. A representee must show that reliance was reasonable and that the representor should reasonably have foreseen it. Those inquiries are distinct, although an unreasonable reliance will often mean that reliance was not reasonably foreseeable.
A solicitor owes a duty to the client but generally owes none to the opposite party. Liability to the opposite party arises only in a special case, commonly where the solicitor steps outside the ordinary role. The authorities showed that the solicitor does not assume responsibility unless the opposite party’s reliance was reasonable and reasonably foreseeable. Reliance by an opposite party is presumptively inappropriate.
The Supreme Court held that the Lord Ordinary was right. A commercial lender implementing an agreement about its own security does not act reasonably if it proceeds on no more than a description of the terms advanced by or for the borrower. The lender knows those terms and is likely to have proposed them; here, the correct terms were immediately available on Northern Rock’s file. No cited or discovered authority supported an assumption of responsibility for a careless misrepresentation about a fact wholly within the representee’s knowledge. In that situation it is not reasonable to rely without checking, and it is reasonable for the representor not to foresee such reliance.
Lady Smith’s circumstances did not remove the need to examine reasonable reliance. Ostensible authority had not been fully explored, and rightly so, because no claim was made against Headway and an agent may owe a duty even when acting within authority. Although the parties were not in hostile litigation, they were at arm’s length over removal of the security. Reasonable reliance remains central to assumption of responsibility.
Verdict: The Court unanimously allowed the solicitor and her firm’s appeal and restored the order dismissing the lender’s claim. The solicitor owed the lender no duty of care on these facts.
