michael twomey (1)

2
www.newlawjournal.co.uk | 30 May 2014 17 LEGAL UPDATE COMMERCIAL I give you his word Penny Bygrave & Michael Twomey examine instances of potential liability I n Cramaso LLP v Ogilvie- Grant, Earl of Seafield (Scotland) [2014] UKSC 9, [2014] 2 All ER 270 Sandy Lewis, an employee and chief executive of the defendant trust, caused an e-mail to be delivered to Alistair Erskine referring to a moor’s estimated grouse population. The e-mail contained implied false statements of fact that amounted to misrepresentations; the figures were extrapolated from counts relating to certain parts of the moor and were not representative of the moor as a whole. The Scottish lower court did not find fraudulent misrepresentation. Erskine subsequently decided to use a new limited liability partnership to enter into a lease of the moor. Discussions continued between Lewis and Erskine, who was then acting as agent of the LLP. Some weeks after the e-mail, the lease was eventually signed on behalf of the trust and the LLP. In the Scottish Court of Session, the Lord Ordinary, Lord Hodge, found that Erskine was the directing mind and will of the LLP and that he had decided to enter into the contract in reliance upon the negligent misrepresentation contained in an e-mail that was sent some weeks before the LLP was formed. The lower courts focused on the legal situation at the time when the e-mail was sent and this was regarded as decisive. The Supreme Court held that the lower courts had approached the case on an incorrect basis. This was not a case in which a representation was made by the trust to Erskine which was later relied on by a third party, the LLP. It was a case where there was a continuing representation made by the trust up to the point of contract, and the representation, at that time, was being made to the LLP and was continuing to have a causative effect. Lord Reed reviewed a number of decisions including that of Mr Justice Smith in the Australian case of Jones v Dumbrell [1981] VR 199, 203: “When a man makes a representation with the object of inducing another to enter into a contract with him, that other will ordinarily understand the representor, by his conduct in continuing the negotiations and concluding the contract, to be asserting, throughout, that the facts remain as they were initially represented to be.” In Cramaso, the Supreme Court inferred that the parties proceeded with the negotiation and conclusion of the contract on the basis that the accuracy of the representation made to Erskine continued to be asserted by the trust, implicitly if not expressly. It continued to have a causative effect so as to induce the conclusion of the contract. Though no authority was cited to the court that discussed the liability of a party where a representation was made to a person other than the other contracting party, Lord Reed considered the decision of the House of Lords in Briess v Woolley [1954] AC 333, [1954] 1 All ER 909 to be relevant. Representations by a person who later becomes an agent Briess concerned a fraudulent misrepresentation made by a shareholder who was subsequently authorised by the other shareholders to continue negotiations as their agent. The other shareholders were held liable for the fraudulent statements made by the agent, notwithstanding that the representation had been made before he began to negotiate on their behalf. The misrepresentations were continuing and gave rise to a cause of action against the principal. When a person is appointed as agent, with authority to make representations, he is by his conduct taken to be repeating representations previously made by him, and the principal assumes responsibility for the acts of its agent. Practical points Correct what is incorrect A party should seek to identify and clearly correct any incorrect statements. As we can see from Cramaso, this is so even if the representation has been made to a person who is not the other contracting party if the representation is communicated to and relied upon by that party. In Briess, a principal was liable for representations made by a person who was not, at the time of the statement, the agent of the principal. If a party does not correct a representation that he knows to be, or is reckless as to whether it is, false, whether made by him or on his behalf, he is likely to be liable for fraudulent misrepresentation. In BSkyb v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC), [2010] All ER (D) 192 (Jan) BSkyb claimed in excess of £700m, eventually settling for £319m, having been induced to enter the contract by a fraudulent misrepresentation. The liability cap of £30m was of no effect in the light of the finding of fraud. IN BRIEF f A maker of a misrepresentation may be liable even if the statement was made to a person other than the other party to the contract. f A principal may be liable for misrepresentations made by his agent, and this is so even if the statements were made prior to the commencement of the agency. f It is not possible for a party to exclude or limit liability for its own fraudulent misrepresentation. f The question as to whether a principal is able to exclude liability for the fraud of its agent is undecided. f If it is possible to exclude liability for an agent’s fraud, the wording should do so with sufficient clarity which is likely to require an express reference to fraud.

Upload: dylanmarlais

Post on 21-Jul-2015

36 views

Category:

Documents


2 download

TRANSCRIPT

Page 1: Michael Twomey (1)

www.newlawjournal.co.uk | 30 May 2014 17LEGAL UPDATECOMMERCIAL

I give you his wordPenny Bygrave & Michael Twomey examine instances of potential liability

In Cramaso LLP v Ogilvie- Grant, Earl of Seafield (Scotland) [2014] UKSC 9, [2014] 2 All ER 270 Sandy Lewis, an employee and chief executive of the defendant trust,

caused an e-mail to be delivered to Alistair Erskine referring to a moor’s estimated grouse population. The e-mail contained implied false statements of fact that amounted to misrepresentations; the figures were extrapolated from counts relating to certain parts of the moor and were not representative of the moor as a whole. The Scottish lower court did not find fraudulent misrepresentation. Erskine subsequently decided to use a new limited liability

partnership to enter into a lease of the moor. Discussions continued between Lewis and Erskine, who was then acting as agent of the LLP. Some weeks after the e-mail, the lease was eventually signed on behalf of the trust and the LLP.

In the Scottish Court of Session, the Lord Ordinary, Lord Hodge, found that Erskine was the directing mind and will of the LLP and that he had decided to enter into the contract in reliance upon the negligent misrepresentation contained in an e-mail that was sent some weeks before the LLP was formed. The lower courts focused on the legal situation at the time when the e-mail was sent and this was regarded as decisive. The Supreme Court held that the lower courts had approached the case on an incorrect basis. This was not a case in which a representation was made by the trust to Erskine which was later relied on by a third party, the LLP. It was a case where there was a continuing representation made by the trust up to the point of contract, and the representation, at that time, was being made to the LLP and was continuing to have a causative effect.

Lord Reed reviewed a number of decisions including that of Mr Justice Smith in the Australian case of Jones v Dumbrell [1981] VR 199, 203: “When a man makes a representation with the object of inducing another to enter into a contract with him, that other will ordinarily understand the representor, by his conduct in continuing the negotiations and concluding the contract, to be asserting, throughout, that

the facts remain as they were initially represented to be.”

In Cramaso, the Supreme Court inferred that the parties proceeded with the negotiation and conclusion of the contract on the basis that the accuracy of the representation made to Erskine continued to be asserted by the trust, implicitly if not expressly. It continued to have a causative effect so as to induce the conclusion of the contract.

Though no authority was cited to the court that discussed the liability of a party where a representation was made to a person other than the other contracting party, Lord Reed considered the decision of the House of Lords in Briess v Woolley [1954] AC 333, [1954] 1 All ER 909 to be relevant.

Representations by a person who later becomes an agentBriess concerned a fraudulent misrepresentation made by a shareholder who was subsequently authorised by the other shareholders to continue negotiations as their agent. The other shareholders were held liable for the fraudulent statements made by the agent, notwithstanding that the representation had been made before he began to negotiate on their behalf. The misrepresentations were continuing and gave rise to a cause of action against the principal.

When a person is appointed as agent, with authority to make representations, he is by his conduct taken to be repeating representations previously made by him, and the principal assumes responsibility for the acts of its agent.

Practical points

Correct what is incorrectA party should seek to identify and clearly correct any incorrect statements. As we can see from Cramaso, this is so even if the representation has been made to a person who is not the other contracting party if the representation is communicated to and relied upon by that party. In Briess, a principal was liable for representations made by a person who was not, at the time of the statement, the agent of the principal.

If a party does not correct a representation that he knows to be, or is reckless as to whether it is, false, whether made by him or on his behalf, he is likely to be liable for fraudulent misrepresentation. In BSkyb v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC), [2010] All ER (D) 192 (Jan) BSkyb claimed in excess of £700m, eventually settling for £319m, having been induced to enter the contract by a fraudulent misrepresentation. The liability cap of £30m was of no effect in the light of the finding of fraud.

IN BRIEF f A maker of a misrepresentation may be

liable even if the statement was made to a person other than the other party to the contract.

f A principal may be liable for misrepresentations made by his agent, and this is so even if the statements were made prior to the commencement of the agency.

f It is not possible for a party to exclude or limit liability for its own fraudulent misrepresentation.

f The question as to whether a principal is able to exclude liability for the fraud of its agent is undecided.

f If it is possible to exclude liability for an agent’s fraud, the wording should do so with sufficient clarity which is likely to require an express reference to fraud.

Page 2: Michael Twomey (1)

30 May 2014 | www.newlawjournal.co.uk18 LEGAL UPDATE COMMERCIAL

Indemnity from the agent A principal could seek an indemnity from the agent that is wide enough to cover pre-appointment statements. But the agent may have insufficient resources to satisfy any claim and this is more so in the case of fraud.

Disowning the agent’s statementsThe principal may seek to disclaim any responsibility for the agent’s statements. With clear wording, he may succeed in excluding or limiting liability for innocent or negligent representations. But it may not be possible to exclude liability for the agent’s fraud.

Non-reliance clauseA typical non-reliance clause states that the parties are not relying on any representations other than those expressly set out in the contract. And an express reference could be made to statements of agents. But this might not give the desired protection as an attempt to exclude or restrict liability for misrepresentation must satisfy the reasonableness test (Misrepresentation Act 1967, s 3)—and it is for the person claiming that the term is reasonable to show that it does. And such a clause will have no effect in relation to the fraud of a party to the contract.

Excluding the agent’s fraudFor public policy reasons, it is clear that the law does not permit a contracting party to exclude liability for his own fraud in inducing the making of the contract. But dicta from the House of Lords in the 1907 case of S Pearson & Son Ltd v Dublin Corporation [1907] AC 351, [1904-07] All ER Rep 255 appear to support the argument that it may be possible to exclude the fraud of an agent. Pearson was considered in HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, [2003] 1 All ER (Comm) 349.

If it is ever possible to do so, both Pearson and HIH are authorities for the rule that if a

party to a written contract seeks to exclude the ordinary consequences of fraudulent or dishonest misrepresentation by his agent, acting as such, such intention must be expressed in clear and unmistakable terms on the face of the contract.

HIH concerned a high-risk premium insurance product used in financing film production. The lender made it a condition of the loan that it would have the benefit of an insurance policy. The broker, a company responsible for setting up the scheme, acted as the agent of the lender when dealing with the insurer. As the lender was not in a position to assess the accuracy of statements being made about the scheme, a clause in the policy stated: “[The lender] shall have no liability of any nature to the insurers for any information provided by any other parties.”

The insurers argued that the language did not cover fraud or negligence. The House of Lords rejected the submission that, in the absence of express reference to negligence, the clause in question should not be construed as sufficient to cover negligence. The court found that a reference to “liability of any nature” did apply to negligence. As with all cases on contractual interpretation, the decision is fact-specific with the court seeking to ascertain what the specific parties meant by the specific clause. A draftsperson who wishes to avoid having to argue the point before a court might prefer to refer expressly to “negligence”.

But the court found that the wording was not sufficiently clear to cover fraud. A commercial party would not have expected it to do so. Lord Hoffmann stated at [68]: “I think that in the absence of words which expressly refer to dishonesty, it goes without saying that underlying the contractual arrangements of the parties there will be a common assumption that the persons involved will behave honestly.”

A rule of law?Is there a rule of law preventing a party from excluding the fraud of his agent? In Pearson, Lord Halsbury appeared to have thought that such a rule existed in saying, at p 356: “The action is based on the allegation of fraud, and no subtlety of language, no craft or machinery in the form of contract, can estop a person who complains that he has been defrauded from having that question of fact submitted to a jury.”

The opinions of the other Law Lords who sat in Pearson (there were eight altogether) are less clear. Lord Hoffmann in HIH found that the question remains undecided while saying that it was open to the lordships to decide the law in the sense favoured by Lord Halsbury. Lord Scott, on the other hand, stated that he could see no reason of public policy why a party should not exclude his liability for fraudulent misrepresentation by his agent. As the court in HIH held that the clause did not cover fraud, these comments are obiter—so the question remains undecided.

Lord Hoffmann thought it significant that no court has found it necessary to decide the question either way in the period of nearly a century that has elapsed since Pearson. This suggests that it is “extraordinarily unlikely that parties to a contract will agree a term which excludes liability for fraud with sufficient clarity”.

This does not mean that it cannot be done if the wording is clear enough. And the facts of Briess, where a party wishes to exclude liability for such statements of a person before that person became an agent, may be a case in point. NLJ

Penny Bygrave is an associate with Bircham Dyson Bell LLP & Michael Twomey is the founder of LAW2020 LLP ([email protected]; www.bdb-law.co.uk; [email protected]; www.law2020.co.uk)