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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Northern Rock (Asset Management) Plc v Steel & Anor [2014] ScotCS CSOH_40 (27 February 2014)
URL: http://www.bailii.org/scot/cases/ScotCS/2014/2014CSOH40.html
Cite as: [2014] ScotCS CSOH_40

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OUTER HOUSE, COURT OF SESSION


[2014] CSOH 40

CA7/13

OPINION OF LORD WOOLMAN

in the cause

NORTHERN ROCK (ASSET MANAGEMENT) PLC

Pursuers;

against

(1) JANE STEEL AND (2) BELL & SCOTT LLP

Defenders:

________________

Pursuers: Clancy QC, Hawkes; TLT Scotland Ltd

Defenders: Duncan QC, C Paterson; Dundas & Wilson CS LLP

27 February 2014

Introduction


[1] A company borrows sums to finance the purchase of heritable property. In return it grants a standard security in favour of the lender. Some years later, the company's solicitor sends a draft discharge of the standard security to the lender. She asks it to sign and return the document. In the accompanying email, she states that the company intends to sell the subjects and redeem the loan. That information is incorrect. The company intends to sell only part of the subjects and to redeem only part of the loan.


[2] In reliance upon the email, the lender grants the discharge of the standard security. The solicitor registers it in the Land Register. In consequence, the loan becomes unsecured. Subsequently the company becomes insolvent and the lender suffers loss. It raises an action for damages against
the solicitor and her firm. They contend that the lender is a third party to whom she does not owe a duty of care. That is the issue for decision in the present case.

The Relevancy Threshold


[3] The court can only dismiss an action if it is clear from the pursuer's averments that it cannot succeed: Jamieson v Jamieson 1952 SC (HL) 50.
Questions about the existence and scope of a duty of care are primarily questions of law. Accordingly, they can often be resolved at debate. Sometimes, however, it is unsafe to determine such questions without hearing evidence: Mitchell v Glasgow City Council 2009 SC (HL) 21, at paras 11 and 12 per Lord Hope. Each case turns on its own circumstances. Proof may be appropriate where there are mixed questions of fact and law: United Central Bakeries Ltd v Spooner Industries Ltd [2012] CSOH 111.

The facts


[4] In 2002 Headway Caledonian Ltd ("HCL") purchased Cadzow Business Park in Hamilton. It comprised four separate units, together with the surrounding property. They were held on the basis of two titles in the Land Register. In order to fund the transaction, HCL obtained a loan from Northern Rock
(Asset Management) plc ("Northern Rock"). In return, HCL granted a standard security and a floating charge in favour of Northern Rock. The standard security was registered in respect of both titles. The directors of HCL also provided personal guarantees up to a maximum of £50,000. The loan terms were set out in a letter dated 20 June 2002 signed by both parties.


[5] Ms Steel
acted as HCL's solicitor in relation to the purchase of the business park and the security arrangements with Northern Rock. She was formerly a partner in Clairmonts, which was taken over by Bell and Scott LLP. She also acted for HCL when it obtained a loan from Northern Rock to purchase other subjects in Lossiemouth. Northern Rock did not instruct solicitors to act on its behalf in these transactions. Instead, its in-house case management team based at its head office in Sunderland dealt with matters.


[6] On 26 May 2005, Ms Steel wrote to inform Northern Rock that HCL intended to sell unit 3 at the subjects. She enclosed (i) two draft deeds of restriction of the standard security, and (ii) a letter of non-crystallisation of the floating charge. At her request, Northern Rock executed and returned these documents. After the conclusion of the sale on 30 June 2005, she transferred the net free proceeds of sale to the lender. That left an outstanding balance of £1,441,978 on HCL's loan account.


[7] In November 2005, Ms Steel wrote to ask Northern Rock to execute a discharge of the standard security over the Lossiemouth property. It returned the signed document in advance of funds being received for redemption of the loan.


[8] In 2006, HCL informed Northern Rock that it had decided to sell unit 1 at the subjects. Northern Rock was concerned about the possible effect on its security arrangements. It instructed DM Hall, surveyors to carry out a valuation of units 2 and 4. In a report dated 11 September 2006, they valued them at £1,425,000. As a result, Northern Rock believed that it would still have sufficient security to cover the loan after the proposed sale of unit 1.


[9] On 17 September 2006, John Lindsay of Northern Rock sent an email to HCL's principal director, Hamish Munro, in the following terms:

"Hamish, further to last week's discussions, I confirm we shall be satisfied to receive £495,000 coming in permanent Loan reduction from the sale of unit one Cadzow Business Park, Hamilton. When Clairmonts require a formal figure, can you please ask them to write to Edinburgh office at the same timing (sic) advising the likely completion date ..."


[10] Mr Munro forwarded a copy of the email to Ms Steel. Nothing further occurred until 22 March 2007. At 5pm she sent the key email to Northern Rock. It was addressed to the case management team. The email stated:

"Helen/Neil

I need your usual letter of non crystallisation for the sale of the above subjects to be faxed through here first thing tomorrow a.m. if possible to 0141 221 0123 marked for my attention - I have had a few letters on this one previously for various other units that have been sold. I also attach discharges for signing and return as well as the whole loan is being paid off for the estate and I have a settlement figure for that. Can you please arrange to get these signed and returned again asap.

Many thanks"


[11] Ms Steel attached two draft discharges, one for each registered standard security. The following day Northern Rock returned both documents by fax without alteration. It signed and sent the principal documents to Ms Steel by letter dated 27 March. She then registered the discharges in the Land Register. From the proceeds of sale, Ms Steel transferred £495,000 to Northern Rock to reduce the loan.


[12] Subsequently, HCL continued to make regular loan repayments to Northern Rock until it became insolvent in 2010
. At that stage, it owed about £640,000 in terms of the loan. Northern Rock made enquiries and discovered (a) that its loan was unsecured; (b) that HCL had conveyed units 2 and 4 to a third party purchaser without remitting any part of the proceeds to Northern Rock; and (c) that a new standard security had been registered in favour of another lender. It enforced the personal guarantees against each of the three directors of HCL. That reduced the amount of the outstanding loan to £508,723, which is the sum sought in the present action.


[13] During the course of the litigation, Northern Rock has unsuccessfully attempted to find out the origin of the errors in Ms Steel's email. It recovered her conveyancing file, but it does not contain any communication from HCL bearing upon the issue. In answer to calls placed in the pleadings, Ms Steel states that she has no recollection of sending the email. Accordingly, she cannot explain how the errors
arose.

The pleadings


[14] Northern Rock avers that Ms Steel:

"had no basis to make the statements in the email that the whole loan was being paid off, or that she had a settlement figure for that, or for presenting the pursuers with discharges for execution in the form in which she did. She has never offered an explanation as to why she made those statements or why she believed them to be true when she made them. She had a redemption figure for unit 1 alone. She was aware that only unit 1 was to be sold and that the pursuers' security ought to be restricted to reflect that transaction but no further"


[15]
The delictual case is as follows:

"... in requesting the execution and delivery of the discharges in the circumstances in which she did, Ms Steel specifically undertook a responsibility to NR, independent from her status as Solicitor for the borrower, not to release the discharges except in exchange for a sum sufficient to redeem those securities in full. Ms Steel was exercising professional skill as a solicitor when she sent the email and the draft discharges. NR relied on the information contained therein as a matter for which Ms Steel had assumed personal responsibility. Ms Steel was aware, or at least ought to have been aware, that such reliance by NR was likely. Said assumption of responsibility gave rise to a duty of care on her part, owed to NR, which she thereafter breached by releasing the discharges without receiving in exchange a sum sufficient to redeem the outstanding loan."


[16] Northern Rock also plead fraud, which has been met with a plea of prescription. At the debate, Mr Clancy indicated that he no longer insisted on the fraud case.

Liability for economic loss


[17] The law relating to economic loss stems from the decision in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. It suggested two tests to determine liability. The first is the voluntary assumption of responsibility (Lord Reid at page 486, Lord Devlin at page 529). The second involves asking whether a person has accepted "a relationship with the inquirer which requires him to exercise such care as the circumstances require": per Lord Reid page 486. There is plainly a large measure of overlap between the two tests.


[18] Since Hedley Byrne, the courts have generally adopted the first test. In applying it to specific circumstances, attention has focussed on the meaning of 'voluntary'.
Lord Jauncey has indicated that it means that a person has assumed responsibility in circumstances when he had no legal obligation to do so: Smith v Bush
[1990] 1 AC 831,
870C-D. It involves a conscious, considered, or deliberate decision to assume responsibility: Customs and Excise Commissioners v Barclays Bank plc [2007] 1 AC 181 at 210C per Lord Walker.


[19] Lord Oliver provided further guidance in Caparo plc v Dickman [1990] 2 AC
605, at 638C-E. He stated that in advice cases, the adviser should typically know that the advice "is likely to be acted upon ... without independent inquiry". The question of liability was canvassed fully in Customs and Excise Commissioners. It recognised that while there had been a search to identify a single formula for liability in these cases, the quarry had proved elusive: at para 51 per Lord Rodger. Turning to the position of solicitors, Lord Jauncey considered their liability for economic loss in Midland Bank plc v Cameron, Thom, Peterkin & Duncans 1988 SLT 611, 616D-F. He identified four conditions that should normally be present:

(1)     the solicitor must assume responsibility for the advice or information furnished to the third party;

(2)     the solicitor must let it be known to the third party expressly or impliedly that he claims, by reason of his calling, to have the requisite skill or knowledge to give the advice or furnish the information;

(3)     the third party must have relied upon that advice or information as a matter for which the solicitor has assumed personal responsibility; and

(4)     the solicitor must have been aware that the third party was likely so to rely.


[20]
Liability is easier to establish in an "advice", rather than an "information" case. The question is whether the solicitor has:

"been converted from someone merely transmitting that information on the client's instructions to someone who has assumed responsibility for, and thus the role of principal in relation to, that information so far as the third party is concerned." (ibid at 617 H-K)


[21] Lord Drummond Young followed that approach in Frank Houlgate Investment Co Ltd v Biggart Bailie LLP 2010 SLT 527. He stated (at para 20) that it is not generally fair or reasonable that a solicitor should be under any duty of care to a third party. But if he:

"appears to undertake the task on his own initiative, it may be easier to draw the inference that responsibility has been undertaken. If, by contrast, the solicitor does no more than pass on information provided by his client, and presents the information as so provided, the inference will be much more difficult."


[22] T
he question is an objective one: Frank Houlgate Investment Co Ltd v Biggart Bailie LLP 2012 SLT 256, para 24 per Lord Glennie.

The Delict Case


[23] Mr Duncan submits that a proof is unnecessary. He candidly accepts that Ms Steel intended Northern Rock to return the executed discharges. But he does not concede that she intended them to rely on the information contained in the email. He rests his argument on the following propositions.


[24] First, Northern Rock did not rely upon Ms Steel's skill and expertise as a solicitor. This is therefore not an advice case. Second, her email followed discussions "principal to principal", so she was merely relaying information from her client. Third, she sent the information to the very department responsible for knowing the key facts. She expected Northern Rock to carry out an independent enquiry. She did not expect it to rely on a single sentence in one email. If she had done, she would either not have sent the email, or couched it in different terms. Fourth, there was no basis for imposing an obligation on Ms Steel to hold the discharges as undelivered. Northern Rock
never issued an instruction to that effect.


[25] In my view, liability in this case cannot be decided in the abstract without leading evidence. It
is of vital importance to concentrate attention:

"on the detailed circumstances of the particular case and the particular relationship between the parties in the context of their legal and factual situation as a whole." Customs and Excise Commissioners per Lord Bingham at 190E-192F


[26]
The starting point is the position prior to Ms Steel's email being sent. The parties are in dispute as to whether HCL and Northern Rock reached an agreement about the redemption of the loan. In my view, the resolution of that point may be material. Next there is the prior history. Northern Rock offers to prove (a) that Ms Steel had been involved in prior transactions on behalf of HCL; (b) that Northern Rock had acted on her requests to provide discharges in the past; and (c) as she was aware, it had done so without instructing its own solicitor.


[27] Whether Northern Rock relied on
Ms Steel's skill and expertise as a solicitor does not admit of a clear-cut answer. The question is one of reasonable reliance: Williams v Natural Life Ltd [1998] 1 WLR 830, 837B per Lord Steyn. In my view reasonableness here can only be assessed as a matter of fact. As well as the prior dealings, Northern Rock avers that drafting a discharge of a standard security requires the deployment of legal skills. It is a task commonly undertaken by solicitors. In the course of his submissions, Mr Clancy stated that Ms Steel did not wish Northern Rock to instruct solicitors, because that would have caused delay and increased the costs to HCL, as it would have become responsible for their fees.


[28]
Ms Steel'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. In addition, Ms Steel did not suggest that Northern Rock should check the accuracy of the information contained in the email. Her proposed time-frame is also significant. Requesting such a rapid response militated against any check being made.


[29]
Mr Duncan argued that even if Ms Steel did owe a duty of care, it was either (a) to alert Northern Rock to the problem before matters proceeded, or (b) to take reasonable steps to ensure that the standard security was restricted, not discharged. Again in my view, the scope of the proposed duty is an issue best left until after proof, when the court will have the benefit of expert opinion. Northern Rock offers to prove that in terms of normal conveyancing practice, a solicitor will not register a discharge without the loan being redeemed in whole or in part (whatever has been agreed with the lender).

The Contract Case


[30] Northern Rock pleads its contract case as follows:

"the statements made in the email were an implied offer to act as Solicitor for NR, which offer was accepted by the subsequent delivery of the signed discharges. A Solicitor - client relationship was thereby established. It was an implied term of that contractual relationship that Ms Steel would not register or permit registration of the discharges without securing the whole amount needed to redeem."


[31] In my opinion, there are formidable objections to this analysis. They can be illustrated by asking a series of questions. When was the contract concluded? What is its scope? In particular, what are the precise duties of care undertaken by Ms Steel? Did Northern Rock become her client? If so, did she fail to adhere to the money laundering requirements for new clients? When did the contract come to an end? All these questions admit of no easy answer.


[32]
To my mind the decisive consideration is that seeking a discharge from a third party on behalf of a client is an arm's length transaction. It would only be in the most exceptional circumstances that an implied contract would arise between the solicitor and the third party. I am not satisfied that those circumstances exist here. Accordingly, I shall dismiss the contract case.

Conclusion


[33] I shall appoint the delictual case (other than
the averments of fraud) to a proof before answer. Meantime I reserve all questions of expenses.


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