Commercial law update

The Supreme Court's wise decision in Cramaso reinforces to draftsmen the importance of considering the prelude to a contract, says Mark Lucas

The Supreme Court has continued the good work shown in its supremely sensible judgment in Marley v Rawlings and again allowed straight logic to prevail in the first commercial contract case of the year: Cramaso LLP (Appellant) v Ogilvie-Grant, Earl of Seafield and Others (Respondents) [2014] UKSC 9.

This case addresses the extent to which a misrepresentation at a very preliminary stage of negotiation can be relevant to the contract that is eventually concluded.

The case is also a reminder that the Supreme Court is the supreme court of the United Kingdom. The underlying action and appeal were brought in the Scottish Courts but the Supreme Court has jurisdiction as the highest appellate court in cases relating to Scottish civil law.

Grouse count

A surveyor, acting for the respondents who were the trustees of an estate on the Spey, was in discussions about the lease of a grouse moor. At the time in question (September 2006), he was of the view that the estate may have been overshot. The proposed tenant, Mr Erskine, had also formed a similar suspicion. He raised the issue.

The surveyor raised the matter with the chief executive of the estate who gave Mr Erskine, through the surveyor, a copy of an email which the chief executive had previously sent to an earlier prospective tenant setting out the grouse counts which had been carried out during August 2006 and the substantial population estimated from those counts.

Satisfied with the response that he had received, Mr Erskine proceeded to arrange to enter into a lease and did so through Cramaso LLP in December 2006 or January 2007. The LLP's members were Mr Erskine and his wife.

How does the law deal with the representation set out in the email? What if, as it subsequently proved, the grouse counts had not been representative and the estimate flawed? In fact, the counts had been carried out only in a few, heavily populated areas. The moor yielded scores not hundreds of birds.

Does it matter that the misrepresentation was made to the individual who was at the time the proposed tenant and not to the subsequently formed LLP which actually entered into the arrangement?

The Scottish appeal court (the Inner House) reached a similar judgment to the court of first instance that it was the principal, Mr Erskine, who had relied upon the email and not the LLP. Both courts thought that the LLP could not have rights in respect of the misrepresentation as it was (in the view of the court of first instance) not existent at the time or (in the view of the Inner House) insufficiently proximate.

The Inner House relied upon the fact that the law is very settled in relation to the imposition of a duty of care. The tri-partite test in Caparo Industries v Dickman [1990] UKHL2 is well-known and requires the court to ask:

(1) was the damage was foreseeable?

(2) is the relationship between the parties sufficiently approximate for a duty of care to arise?

(3) is it, in all the circumstances, fair, just and reasonable to impose a duty of care?

Duty of care

The Supreme Court took a different view. It questioned whether it was right at all that Caparo was relevant.

There is no doubt that the over-estimate was a misrepresentation. In other words, it was an "untrue statement of fact made by one party to the other which induces someone to enter into a contract and causes loss". But for how long does a representation continue to have effect?

It has been established that a representation made in contemplation of a contract can continue to affect the recipients of that representation and cause loss at the time the contract was entered into (With v O'Flannagan [1936] CH575). In that case, the test was whether the court is satisfied that the representation "remained operative in the mind of the representee".

A misrepresentation can cease to have effect or be nullified by the improved knowledge of the recipient, by a change in circumstances or by withdrawal or by contract.

In addition, there can be no duty of care if the representation can be shown not to have induced the contract. None of these interventions applied in this case.

Furthermore, the fact that the representation was not deliberate or fraudulent but honest and merely negligent was not relevant. Most importantly, in the words of Lord Reed, relying on With v O'Flannagan: "The law is… capable, in appropriate circumstances, of imposing a continuing responsibility upon the maker of a pre-contractual representation in situations where there is an interval of time between the making of the representation and the conclusion of a contract in reliance upon it, on the basis that, where the representation has a continuing effect, the representor has a continuing responsibility in respect of its accuracy."

The chief executive chose to give assurances knowing that they would affect Mr Erskine. His act rendered the estate, for whom he was acting as agent, responsible for the accuracy of the statements and its failure to disclose the inaccuracy of the earlier representation was a failure to halt that continuing effect.

But did the difference in the identities of the negotiator (Mr Erskine) and the tenant (Cramaso) put a stop to that effect?

Fraudulent misrepresentation

The most significant case touching upon the difference between the identity of the recipient of a misrepresentation and the contracting party was Briess & Woolley [1954] AC 233. In that case, an individual shareholder made a fraudulent misrepresentation in the course of pre-contractual negotiations.

He was then subsequently appointed to negotiate a contract on behalf of all the shareholders. Those shareholders were held liable to the other party even though the misrepresentation had preceded their instruction to the individual to negotiate on their behalf at their agent.

Lord Reed in Cramaso saw the shareholder's failure to disclose his earlier misrepresentation as similar the failure of the estate's agent to disclose the earlier misrepresentation. It did not matter that the representation was made to another agent, Mr Erskine, prior to the creation of his agency with Cramaso.

While the Supreme Court recognised that there is no general duty of care in the conduct of contractual negotiations (it might have added that there is no duty of good faith), that each party is entitled to pursue its own interests and the prospect of causing loss is implicit in negotiation, it found that Mr Erskine had a remedy arising from a misrepresentation, without any need to look to Caparo.

Overall, this case is a reminder that the draftsmen of commercial contracts need to step back from the final terms as negotiated or as the clients have stated them. What has happened in the lead up to the creation of the contract? Is there a risk that the apparent accord may subsequently be destroyed by misrepresentations, misunderstandings or mistakes?

Unless one can absolutely rule that out, one must mitigate that risk.