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Why Steel v NRAM is important

Recent Supreme Court confirmation that the primary test for a duty of care to protect another from pure economic loss is the assumption of responsibility test. This test is given substance through the concept of ‘reasonable reliance’.

Link to case: https://www.supremecourt.uk/cases/uksc-2016-0111.html

Facts

Ms Steel acted as the solicitor for ‘Headway Caledonian Ltd’ in the sale of one of three Units in a business park. Northern Rock (NRAM) had a security over all three Units (valued at about £1.2 million), so Headway required the release of the security over Unit 1 to complete the sale. The parties agreed that such a release would cost Headway £495,000.

Ms Steel then negligently informed NRAM that Headway was in fact discharging the entire loan, attaching documents which would discharge the full security. It was at all times accepted that this was a misrepresentation. NRAM’s employees did not check the accuracy of Ms Steel’s email, and proceeded to discharge NRAM’s entire security. Headway duly transferred £495,000 to NRAM and continued to make interest payments to Northern Rock under the terms of the loan.

Headway then entered into liquidation, at which point all parties realised that NRAM’s security had been discharged. Without this security, NRAM was unable to recover almost £370,000 of its loan from Headway.

Claim and issue

NRAM brought a claim against Ms Steel in the tort of negligence, arguing that her careless and negligent misstatement caused them a loss. In the Supreme Court the only remaining issue was whether Ms Steel owed NRAM a duty to take reasonable care.

Held

No duty was owed.

Reasoning

Lord Wilson gave the only judgement of the Court. He identified the ‘assumption of responsibility’ concept as the “foundation” of liability for a misstatement ([24]). Lord Wilson concluded that Smith v Bush and Caparo Industries did not reject the assumption of responsibility test, and instead invoked Lord Toulson’s analysis from Michael v CC South Wales Police (affirmed by Lord Reed in Robinson v CC West Yorkshire Police) that Lord Bridge in Caparo was not laying down a specific test, nor outright rejecting the assumption of responsibility test, but rather identified the importance of developing the law incrementally ([20]-[22]).

In line with an incremental development of the law, Lord Wilson gave substance to the assumption of responsibility test through ‘reasonable reliance’. He considered that this was evident in both Hedley Byrne v Heller and Caparo, identifying from the former “the need for the representee reasonably to have relied on the representation and for the representor reasonably to have foreseen that he would do so.” ([18]-[19])

Applying this (and only this) test, Lord Wilson concluded that Ms Steel had not assumed responsibility for Northern Rock. The relevant factors were whether it was reasonable for NRAM to rely on Steel, and whether Steel ‘should reasonably have foreseen that [NRAM] would do so.’ ([32]) An important factor was that ordinarily solicitors owe no duty of care to the opposite party, meaning that reliance on the opposite party’s solicitor is “presumptively inappropriate” ([32]). Lord Wilson concluded the trial Judge was justified in concluding that nothing in this case overrode that presumption. Crucially, the Court agreed with the trial Judge that any reasonable bank would have checked the documents, meaning Northern Rock’s reliance was unreasonable and Ms Steel could not reasonably have foreseen this reliance.

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