Misrepresentation — Negligence — Representation relating to grant of lease — Whether lessee entitled to damages under the Misrepresentation Act 1967 — Whether lessor and its solicitors owed a duty of care to the lessee when answering preliminary enquiries
contract dated May 30 1984 the first defendant, Richcliff (Group) Ltd, granted
the plaintiff an underlease dated June 26 1984 of the basement and ground floor
of nos 7 and 9 Montpelier Street, London SW7 — The first defendant held the
premises under two headleases both of which contained redevelopment break
clauses, exercisable by 12 months’ notice expiring on or after June 1989 —
Prior to the contract, the first defendant’s solicitors, the second defendants,
Gershon Young Finer & Green, supplied answers to ‘Enquiries before Lease’
on May 10 1984 — In answer to an enquiry as to whether there were any
covenants, restrictions or rights affecting the superior leasehold titles which
would impose a greater obligation on the tenants than contained in the draft
lease or in any way inhibit the enjoyment of the property by the tenant, the
second defendants stated ‘not to the Lessor’s knowledge’ — Pursuant to break
clause options in the headleases, the superior landlord gave 12 months’ notice
in November 1988 — The plaintiff asserted that the reply to the enquiry
constituted a representation that there was no provision for early
determination, the representation was intended to induce the plaintiff to take
the underlease and in reliance on that representation it did so — The plaintiff
asserted that the representation was false and made negligently and claimed
damages under the Misrepresentation Act 1967 against the first defendant — The
plaintiff also asserted negligence against both defendants contending, inter
alia, that the second defendants owed a duty to a buyer when answering
preliminary enquiries
against second defendants dismissed — Given the existence of the break clauses
in the headleases, the answer to the inquiry was a misrepresentation — On the
evidence the plaintiff was induced to make the contract by that representation
and had a good cause of action for damages against the first defendant under
section 2(1) of the Misrepresentation Act 1967
did not owe a duty of care to the plaintiffs — Although there was no problem
about foreseeability or a close and direct relationship as explained by the
House of Lords in Caparo Industries Ltd v Dickman and
that the second defendants must have foreseen that the plaintiff might suffer
financial loss if the answers to the enquiries were incorrect, in normal
conveyancing transactions solicitors who are acting for a seller do not in
general owe to the would-be buyer a duty of care when answering enquiries
before contract or the like — In the context of a contract for the sale of an
interest in land, the buyer seeks information from the seller and answers are
given by the solicitors on behalf of the seller; the law provides the buyer
with a remedy against the seller — The seller himself owes a duty of care to
the buyer — There was no good reason to impose a duty of care when the agent
already owes to his principal a duty which covers the same ground and the
principal is responsible to the third party for his agent’s shortcomings
a defence of contributory negligence, section 1 of the Law Reform (Contributory
Negligence) Act 1945 applies to a claim by a plaintiff for damage under the
Misrepresentation Act 1967 — On the evidence it would not be just or equitable
to make any reduction in the plaintiff’s damages — Carelessness in not making
other enquiries provides no answer to a claim when the plaintiff has done that
which the representor intended he should do — The measure of damages for the
misrepresentation and for the breach of the duty of care were in the present
case the same — By reason of the period of occupation of the plaintiff it was
entitled to recover by way of damages only one-half of the premium of £30,000
paid for the underlease, one-half of the legal costs of acquisition and other
abortive legal costs in all totalling £25,304
The following
cases are referred to in this report.
Al-Kandari
v J R Brown & Co [1988] QB 665; [1988] 2
WLR 671; [1988] 1 All ER 833, CA
Allied
Finance & Investment Ltd v Haddow [1983]
1 NZLR 22
Caparo
Industries plc v Dickman [1990] 2 AC 605;
[1990] 2 WLR 358; [1990] 1 All ER 568, HL
Cemp
Properties (UK) Ltd v Dentsply Research &
Development Corporation [1989] 2 EGLR 205; [1989] 37 EG 133
Esso
Petroleum Co Ltd v Mardon [1976] QB 801;
[1976] 2 WLR 583; [1976] 2 All ER 5; [1976] 2 Lloyd’s Rep 305, CA
Forsikringsaktieselskapet
Vesta v Butcher [1989] 1 AC 852, CA & HL
Hedley
Byrne & Co Ltd v Heller & Partners Ltd [1964]
AC 465; [1963] 3 WLR 101; [1963] 2 All ER 575; [1963] 1 Lloyd’s Rep 485, HL
Nocton v Lord Ashburton [1914] AC 932
Redgrave v Hurd (1881) 20 Ch D 1; [1881-5] All ER Rep 77; 57 LJ Ch
113; 45 LT 185; 30 WR 251, CA
Resolute
Maritime Inc v Nippon Kaiji Kyokai [1983] 1
WLR 857; [1983] 2 All ER 1; [1983] 1 Lloyd’s Rep 431
Reynell v Sprye (1852) 1 De GM&G 660
Rowe v Turner Hopkins & Partners [1980] 2 NZLR 550
Smith v Eric S Bush (a firm) [1990] 1 AC 831; [1989] 2 WLR 790;
[1989] 2 All ER 514; [1989] 1 EGLR 169; [1989] 17 EG 68 & 18 EG 99, HL
This was a
claim for damages alleging breach of a duty of care against the first
defendant, Richcliff (Group) Ltd, and against the second defendants, Gershon
Young Finer & Green, the first defendant’s solicitors, and a claim for
damages under the Misrepresentation Act 1967 against the first defendant alone
in relation to enquiries before contract concerning an underlease dated June 26
1984 of premises at 7 and 9 Montpelier Street, London SW7. The first defendant
held two headleases of the premises from the third defendant, Eagle Star plc.
Christopher
Pymont (instructed by Mackenzie Mills) appeared for the plaintiff; Ralph
Wynne-Griffiths (instructed by Freeman Pollard) represented the first
defendant; Dirik Jackson (instructed by Ince & Co) represented the second
defendants; the third defendant did not appear and was not represented.
Giving
judgment, SIR DONALD NICHOLLS V-C said: This case arises out of the
circumstances in which the plaintiff, Gran Gelato Ltd (which I shall refer to
as ‘Gran Gelato’), acquired from the first defendants, Richcliff (Group) Ltd
(‘Richcliff’), an underlease dated June 26 1984 of the basement and ground
floor of 7 and 9 Montpelier Street, London SW7. The underlease was expressed to
be for a term of almost 10 years, that is, until March 24 1994. The underlease
was carved out of two headleases. The headlease relating to no 7 was due to
expire on June 24 1995 and the headlease relating to no 9 was for a term
expiring on September 29 1997. Unknown to Gran Gelato and its solicitors, both
headleases contained redevelopment break clauses, exercisable by 12 months’
notice expiring on or after June 1989. Thus, if the headlessor, Eagle Star
Insurance Co Ltd, exercised the break clauses at the first opportunity, the
term granted to Gran Gelato by the underlease would be reduced by about
one-half to five years. In the event, Eagle Star did exercise the break clause
options, by giving 12 months’ notice in November 1988.
In the course
of the negotiations and steps leading up to the grant of the underlease, Gran
Gelato’s solicitors, Mackenzie Mills, sent ‘Enquiries before Lease’ in the
usual way to Richcliff’s then solicitors, Gershon Young Finer & Green. They
are the second defendants in the action. Those enquiries, together with the
answers supplied by Gershon Young on May 10 1984, included the following:
Q.1(C) If the
landlord does not own the freehold, please supply a copy of the Superior Lease
or leases and deduce title thereto and confirm that an unqualified receipt for
the latest rent due under the superior lease will be produced on completion?
A. 1(C) The Superior Title is not to be deduced.
. . .
Q.3(A) Are there any covenants, restrictions or
rights affecting the freehold or superior leasehold titles which would impose a
greater obligation on the Tenant than contained in the present draft lease or
in any way inhibit the enjoyment of the property by the Tenant in accordance
with the terms of the present draft lease?
A. 3(A) Not to the Lessor’s knowledge.
In this action
Gran Gelato claims that the answer to enquiry 3(A) constituted a representation
that there was no provision for early termination in the two headleases; that
the representation was intended to induce Gran Gelato to take the underlease;
and that in reliance on that representation Gran Gelato did so. Gran Gelato
asserts that the representation was false and made negligently. Gran Gelato
claims damages in negligence against both defendants and also against Richcliff
damages under the Misrepresentation Act 1967. Thus, this action raises, among
other matters, the question whether a solicitor acting for a seller owes a duty
of care to a buyer when answering preliminary enquiries.
The
history
Shortly
stated, the background and history of the transactions were this. In 1983 Mr
David Landau conceived the idea of selling top-quality Italian ice cream in
London. The idea was that the ice cream would be made by an Italian chef with
particular expertise in this field. The laboratorio in which the
manufacture took place would be visible to the public, who could see that the
ingredients used, such as fresh milk and fresh eggs, were all far removed from
any image of back-street manufacture of ice cream sold in mobile vans. The
product would be displayed and sold in the shop in the familiar style of an
Italian gelateria. The fittings would be to a high, indeed spectacular,
standard of design. It was hoped that the brand, for which the name Gran Gelato
was adopted, would become well known and that the ice cream would be sold at
other outlets in London.
Mr Landau,
with three Italian colleagues, Mr Max Rabino, since deceased, Mrs Ilaria
Borletti and Mr Marco Rocca, decided to proceed with this as a joint venture.
They were directly or indirectly the shareholders of Gran Gelato, which was a
shelf company acquired for the purpose in 1984. They were to provide the
necessary finance, in varying proportions. Mr Landau, who lived in England,
looked at premises in Brompton Road and in Covent Garden. In February 1984 he
heard that the ground floor and basement of 7 and 9 Montpelier Street were
available. This property was then being used as a delicatessen shop. The
situation, in Knightsbridge, was ideal, as was the layout, with two adjacent
shop fronts. Mr Landau initially met Mr Trapani, and subsequently Mr Tesai,
from whom he understood that a 10-year lease of the two shops was available. Mr
Tesai seems to have been the moving spirit behind Richcliff. On April 9 1984 Mr
Landau and Mr Tesai orally agreed terms in principle: a rental of £26,000 pa
and premium of £30,000. Mr Tesai told Mr Landau that his company’s lease of no
7 was until June 1995 and its
Mr Tesai insisted on payment of a premium of £30,000, ostensibly for fixtures
and fittings and goodwill, although none of these had any value to Gran Gelato.
Mr Landau
informed Gran Gelato’s solicitor, Mr David Mills, who was also the secretary of
Gran Gelato, of the gist of the arrangements he had negotiated. The usual
conveyancing steps proceeded, in the course of which the enquiries before
contract already mentioned were asked and answered. Gran Gelato was very
anxious to proceed quickly, so as to get the necessary shop-fitting work done
in time to open before the summer season was too far advanced. Contracts were
exchanged on May 30, and Gran Gelato went into possession at once. The contract
provided that Richcliff was not required to deduce any title to the grant of
the underlease. Gran Gelato agreed to pay Richcliff’s solicitors’ costs.
Completion took place on June 26 by which date Eagle Star had given its consent
in principle. It was not until much later, on November 29 1985, that Eagle
Star’s formal licence to sublet and carry out alterations was granted. Mr
Landau entered into both the underlease and the licence as a guarantor of Gran
Gelato’s obligations. The underlease was excluded from the protection afforded
to business tenancies by Part II of the Landlord and Tenant Act 1954 pursuant
to an order made by West London County Court.
The
shop-fitting works were carried out to an arresting, award-winning design by
Miss Dinah Casson. The cost was of the order of £100,000. The ice cream
manufacturing equipment, costing about another £100,000, was imported from
Italy. The business opened in early August 1984. Unfortunately, the summer of
1984 was cold and wet. So was summer 1985. The business did not prosper. In
September 1985 Gran Gelato decided to cut back. The services of the Italian
chef were dispensed with. The company decided to make the ice cream elsewhere
in cheaper property and to dispose of no 9. Difficulties arose in obtaining the
necessary consents for the assignment of part only of the property comprised in
the underlease and for the relaxation of the existing user restriction. The
underlease confined the use of nos 7 and 9 to the retail sale of high-quality
ice cream and the ancillary making of such ice cream. Mr Tesai insisted on
being paid £4,000 for this licence. It was not until February 27 1987 that a
formal deed was entered into by Richcliff. By then a proposed sale of no 9 had
fallen through.
1986 was
another poor summer and the business made heavy financial losses. In March 1987
or thereabouts the four principals behind Gran Gelato decided that the
underlease should be sold. Hillier Parker, estate agents, were instructed
accordingly. In September Gran Gelato quit the property and ceased trading with
accumulated losses of over £600,000. On August 11 Hillier Parker wrote to Mr
Landau and told him that a problem had arisen with a potential purchaser. His
solicitors had discovered that the headleases contained a rebuilding break
clause. Thus, although the underlease did not contain such a clause, if the
headlessor operated this clause, the underlease would necessarily end. That
sale then fell through and further marketing efforts were unsuccessful.
Gran Gelato
ceased paying rent. As already mentioned, break clause notices were served by
Eagle Star in November 1988. Eagle Star recovered possession in or about
October 1989. In this action Richcliff counterclaims for unpaid rent from June
1987 up to Michaelmas 1989, totalling £50,420, plus contractual interest.
Misrepresentation
Richcliff
denies that the answer to enquiry 3(A) contained any misrepresentation. I
cannot accept this. The enquiry asked, among other things, whether there were
any ‘rights affecting the . . . superior leasehold titles which would . . . in
any way inhibit the enjoyment of the property by the Tenant in accordance with
the terms of the present draft lease’. Whatever be the precise limits to the
scope of this question, I am in no doubt that a break clause in the headlease
is within those limits. If the headlessor exercised its rights under such a
clause, the tenant would have to quit the property before the expiration of the
term expressed to be granted by the underlease. The tenant would cease to be
able to enjoy the property in accordance with the terms of its lease.
Mr
Wynne-Griffiths, counsel for the first defendant, contended that the existence
of the break clause did not inhibit the enjoyment of the property in accordance
with the terms of the underlease. The tenant’s enjoyment of the property would
be inhibited only if the headlessor exercised its rights. Hence, he argued,
until the break option was exercised the legal position was that there was no
right affecting the headleases which inhibited Gran Gelato’s enjoyment of nos 7
and 9 in accordance with the terms of its underlease. In my view, this is not a
tenable interpretation of enquiry 3(A). The existence of a right in the
headlease, whether a user restriction or whatever, will affect what the
undertenant actually does in the property only if and to the extent that the
headlessor chooses to exercise its right. But the enquiry cannot sensibly be
regarded as directly only at instances where the headlessor has already taken
steps to enforce, or is presently in a position to enforce, its rights. The
potential undertenant is concerned with what the headlessor is or may become
entitled to do during the currency of the proposed underlease. The word
‘rights’ in question 3(A) is apt to embrace such an entitlement.
In my view,
therefore, given the existence of the break clauses in the headleases, the
answer to enquiry 3(A) was a misrepresentation. Let me hasten to add that
nobody has suggested that there is any question of fraud. A mistake was made in
Gershon Young’s offices. It is to Mr Young’s credit that he has never sought to
suggest otherwise.
Reliance
Clearly, the
answers given by Gershon Young on behalf of Richcliff were intended to be
relied on and acted on by Gran Gelato and its solicitors. That is the whole
purpose for which the enquiries were made.
The next issue
is whether Gran Gelato did in fact rely on the answer to enquiry 3(A). In
particular, would Gran Gelato have proceeded with the transaction even if
Gershon Young’s answer had disclosed the existence of the break clauses in the
headleases? The evidence of Mr Landau
and Mr Rocca was that Gran Gelato would not have gone ahead. Mrs Borletti did
not give evidence.
This is a
difficult question. It is not a question which arose for consideration at the
time. Had it done so, there were several features which might have prompted
Gran Gelato to proceed even though there was a risk that the underlease would be
determined after five years; Mr Landau was very enthusiastic about the project;
he was convinced that the property was ideal; and he hoped that the capital
outlay would be recovered over a period of five years. Further, by May 10
preliminary arrangements for the new business had already got under way and
Gran Gelato had entered into certain commitments: the chef had been engaged;
Miss Casson had prepared her splendid design; the availability of the ice cream
equipment in Italy had been checked; a shop-fitting contractor had been
approached; some professional fees, although only in modest sums, had been
incurred; it was too late to look elsewhere if trading was to begin in time to
catch any worthwhile part of the 1984 summer season; and there was a serious risk
that, if the project did not proceed in 1984, it would not proceed at all.
Still further, Mr Landau was not temperamentally averse to taking risks. He
went ahead and installed a new shopfront without having obtained planning
permission, confident in his own judgment (later vindicated by a successful
appeal to the minister) that permission would not be withheld for a design of
such quality. Finally, there was no certainty that redevelopment would take
place: no planning application had been made by 1984.
I consider
that the other principals would have accepted Mr Landau’s advice on the point
had it arisen in May 1984. But had the point arisen then, I do not believe the
answer would have been as cut-and-dried as Mr Landau’s evidence suggested. I
believe he would have been very reluctant indeed to abandon the project.
Nevertheless, in my view, even Mr Landau would have felt that a certainty of
five years was insufficient to justify a capital outlay of some £250,000. I
accept his view that, had he known the true position about the headleases on or
about May 10 1984, he would not have proceeded to acquire the underlease of 7
and 9 Montpelier Street.
Accordingly,
subject to proof of loss, Gran Gelato has established a good cause of action
for damages against Richcliff under section 2(1) of the Misrepresentation Act
1967.
Duty of
care
Gran Gelato’s
claim against Gershon Young depends upon the solicitors themselves owing
directly to Gran Gelato a duty to take reasonable care when answering the
preliminary enquiries on behalf of their client Richcliff. That Richcliff
itself owed such a duty of care is common ground. Indeed, in the light of
authorities such as Esso Petroleum Co Ltd v Mardon [1976] QB 801
the contrary could not be seriously argued. I was told that the existence of a
claim directly
questionable whether Richcliff is in a position to satisfy any substantial
judgment debt.
The approach
now to be adopted by the court when considering issues relating to the
existence of a duty of care in the context of negligent misrepresentation is
set out in the decision of the House of Lords in Caparo Industries plc v
Dickman [1990] 2 AC 605. For there to be a duty of care there must be a
foreseeability of damage and a close and direct relationship which has come to
bear the label of ‘proximity’. In addition, to adopt the phraseology of Lord
Bridge of Harwich (at p 618), the situation must be one in which the court
considers it ‘fair, just and reasonable’ that the law should impose a duty of a
given scope upon the one party for the benefit of the other.
Here there is
no problem about foreseeability or a close and direct relationship. Gershon
Young intended, or must be taken to have intended, that Gran Gelato and its
solicitors should rely on the accuracy of the answers to the enquiries and that
they should do so in connection with this particular transaction. Gershon Young
foresaw, or are to be taken to have foreseen, that Gran Gelato might suffer
financial loss if the answers were incorrect. Certainly, in so far as the
enquiries related to matters of title, as did enquiry 3(A), Gran Gelato and its
solicitors would be relying on Gershon Young to apply their legal expertise as
solicitors when answering the enquiries. Thus far, all the indications point
towards it being just and reasonable to impose on Gershon Young a duty of care
in favour of Gran Gelato. Indeed, all the factors which lead to the conclusion
that a duty of care was owed by Richcliff exist also in the case of Gershon
Young. The only material difference is that in making the representations
Gershon Young were acting not as principals but as agents on behalf of
Richcliff. They gave their answers as Richcliff’s solicitors, for and on behalf
of Richcliff. Does this make any difference?
By itself, it
does not. It is now established that the fact that the person making the
representation was acting for a known principal does not necessarily negative
the existence of a duty of care owed by him to the representee. The mortgagee’s
valuer may owe a duty of care to the mortgagor: Smith v Eric S Bush [1990]
1 AC 831*. Further, in Resolute Maritime Inc v Nippon Kaiji Kyokai [1983]
1 WLR 857 at p 861, Mustill J held that no cause of action in damages lies
under the Act of 1967 against a negligent agent acting within the scope of his
authority. One of the strands in his reasoning was that the Act does not need
to be interpreted as having this effect, because there was no gap here which
required to be filled. In such a case the representee can sue the agent at
common law, in accordance with Hedley Byrne principles.
*Editor’s
note: Also reported at [1989] 1 EGLR 169.
That was in
the context of agents generally. In the particular context of enquiries before
contract in a normal conveyancing transaction, Morritt J expressed a different
view in Cemp Properties (UK) Ltd v Dentsply Research &
Development Corporation [1989] 2 EGLR 205†
at p 207. He observed that it would be absurd if the solicitor for one
party to the transaction owed a duty of care to another party as well as to his
own client.
† Editor’s
note: Also reported at [1989] 37 EG 133, [1989] 2 EGLR 205.
In my view, in
normal conveyancing transactions solicitors who are acting for a seller do not
in general owe to the would-be buyer a duty of care when answering enquiries
before contract or the like. In reaching the conclusion that the law should not
generally import a duty of care in such circumstances, three factors have weighed
with me. The first lies in the context in which such representations are made.
The context is a contract for the sale of an interest in land. The buyer is
formally seeking information from the seller about the land and his title to
it. The answers given by the solicitor are given on behalf of the seller. The
buyer relies upon those answers given on behalf of the seller; although the
confidence of the buyer and his solicitors in the reliability of the answers
may be increased when they see the answers have been given by a solicitor in
the ordinary way. They will expect the seller’s solicitor, as a professional
acting on behalf of his client, to have got the answers right. I venture to
think that in these circumstances one would expect to find that the law provides
the buyer with a remedy against the seller if the answers were given without
due care. I am far from persuaded that the fair and reasonable reaction to
these facts is that there ought also to be a remedy against the other party’s
solicitor personally.
Second, what
one finds is that the buyer indeed does have a remedy against the seller in
respect of any misrepresentation in the answers given on his behalf. As already
noted, the seller himself owes a duty of care to the buyer. When, as is usual,
the answers are given by the seller’s solicitor, the seller will be as much
liable for any carelessness of his solicitor as he would be for his own
personal carelessness. He will be so liable, because in the ordinary way the
solicitor has implied authority from the seller to answer on his behalf the
traditional enquiries before contract made on behalf of the buyer. In providing
the answers the solicitor is acting within the scope of his authority. Some of
the enquiries will raise questions of fact. Others will raise legal
conveyancing points which the client cannot answer himself. The client leaves
all these matters to the solicitor to handle for him, after seeking
instructions where appropriate from the client on any particular points on
which the client may be expected to have relevant information. Thus, the
purchaser to whom incorrect answers are given is not without a remedy even if
the fault was that of the seller’s solicitor and not the seller himself.
Whoever was at fault, the buyer has a remedy for damages at common law against
the seller. (This, I interpose, is to be contrasted with a case such as Smith
v Bush. There the mortgagor would have been without remedy if he did
not have one against the valuer personally or his employer.)
Third, at the
forefront of his submissions, Mr Jackson, for the second defendants, presented
an argument that to impose a duty of care on solicitors would be to expose them
to conflicting duties, with one duty owed to their clients and another
different duty owed to the buyer. I am not persuaded that this would be so. The
duty to the buyer would be to take reasonable care to see that the answers
provided were accurate. That duty would march hand-in-hand with a duty to the
same effect owed by the solicitor to his own client. There would be no
conflict. Nevertheless, and although I am not impressed by this argument based
on conflict, it does seem to me that in the field of negligent
misrepresentation caution should be exercised before the law takes the step of
concluding, in any particular context, that an agent acting within the scope of
his authority on behalf of a known principal, himself owes to third parties a
duty of care independent of the duty of care he owes to his principal. There
will be cases where it is fair, just and reasonable that there should be such a
duty. But, in general, in a case where the principal himself owes a duty of
care to the third party, the existence of a further duty of care, owed by the
agent to the third party, is not necessary for the reasonable protection of the
latter. Good reason, therefore, should exist before the law imposes a duty when
the agent already owes to his principal a duty which covers the same ground and
the principal is responsible to the third party for his agent’s shortcomings. I
do not think there is good reason for such a duty in normal conveyancing
transactions.
I add this. I
appreciate that one consequence of this conclusion is that the buyer may be
left without an effective remedy if the seller becomes insolvent. I do not
think that is sufficient reason for adding on to the solicitor-client
relationship a duty owed directly by the solicitor to the non-client in normal
conveyancing transactions. That those with whom one deals may become insolvent
is an ordinary risk of everyday life.
Caveats
I must
emphasise two points. First, there will be special cases where the general rule
does not apply and a duty of care will be owed by solicitors to a buyer. A good
illustration is the New Zealand decision of Allied Finance & Investment
Ltd v Haddow [1983] 1 NZLR 22. There solicitors acting for a
borrower certified to an intending mortgagee that specified documents had been
duly executed and were fully binding on their client and that there were no
other charges on the boat which was the intended security. The solicitors were
held to owe a duty of care to the lender in connection with the giving of that
certificate. On any reasonable appraisal of that arrangement, the solicitors
must be taken to have assumed personal responsibility to the mortgagee for the
accuracy of their certificate. That is a case in which, to adapt the language
used by Lord Donaldson MR in Al-Kandari v J R Brown & Co [1988]
QB 665 at p 672, in the context of a solicitor acting in adversarial
litigation, the solicitors had stepped outside their role as solicitors for
their client and had accepted a direct responsibility to the lender.
Second, I must
emphasise that nothing I have said detracts in any way from the duties owed by
a solicitor to his own client when answering enquiries before contract. Nor
does it relieve him from full financial responsibility for any carelessness on
his part. If by his carelessness he exposes his principal to a claim by a buyer
for negligent misrepresentation, he will be liable to indemnify his client on
well-established principles.
Not a
special case
Mr Pymont, for
the plaintiff, submitted that this was a special case: enquiry 3(A) related to
legal rights, the answer was provided by Gershon Young without any disclaimer
of liability, there was an express refusal to deduce title, there were
practical difficulties in Gran Gelato’s going direct to Eagle Star to obtain
information about the headleases, in correspondence the underlease was said to
follow the headleases closely, Gershon Young knew or should have known that
Gran Gelato was likely to rely on what Gershon Young said and Gran Gelato paid
Gershon Young’s bill.
Suffice it to
say, I cannot see in these features, taken separately or altogether, anything
which would make this a special case to which the general rule should not
apply. In particular, I cannot think that payment by the buyer of the
solicitor’s bill as such, as distinct from the bill being met out of the
purchase price paid by the buyer to the seller, can determine whether or not the
seller’s solicitors owe a duty of care to the buyer. My conclusion, therefore,
is that Gran Gelato’s claim against Gershon Young fails.
Contributory
negligence
Richcliff has
advanced a defence of contributory negligence. Clearly, this is available as a
defence to the claim against Richcliff for damages for breach of the common law
duty of care; but is it available to the claim against Richcliff under section
2(1) of the Misrepresentation Act 1967?
In other words, does section 1 of the Law Reform (Contributory
Negligence) Act 1945 apply to a claim by a plaintiff for damages under the
Misrepresentation Act 1967? So far as is
material, section 1 (1) of the 1945 Act provides:
Where any
person suffers damage as the result partly of his own fault and partly of the
fault of any other person or persons, a claim in respect of that damage shall
not be defeated by reason of the fault of the person suffering the damage, but
the damages recoverable in respect thereof shall be reduced to such extent as
the court thinks just and equitable having regard to the claimant’s share in
the responsibility for the damage.
Fault is
defined in section 4 as ‘negligence, breach of statutory duty or other act or
omission which gives rise to a liability in tort or would, apart from this Act,
give rise to the defence of contributory negligence’. Section 2(1) of the 1967
Act provides:
Where a
person has entered into a contract after a misrepresentation has been made to
him by another party thereto and as a result thereof he has suffered loss,
then, if the person making the misrepresentation would be liable to damages in
respect thereof had the misrepresentation been made fraudulently, that person
shall be so liable notwithstanding that the misrepresentation was not made
fraudulently, unless he proves that he had reasonable ground to believe and did
believe up to the time the contract was made that the facts represented were
true.
Thus, in
short, liability under the Misrepresentation Act 1967 is essentially founded on
negligence, in the sense that the defendant, the representor, did not have
reasonable grounds to believe that the facts represented were true. (Of course,
if he did not believe the facts represented were true he will be liable for
fraud.) This being so, it would be very
odd if the defence of contributory negligence were not available to a claim
under the Act. It would be very odd if contributory negligence were available
as a defence to a claim for damages based on a breach of a duty to take care in
and about the making of a particular representation but not available to a
claim for damages under the Act in respect of the same representation.
In my view,
the answer to this point is provided by the decision of the Court of Appeal in Forsikringsaktieselskapet
Vesta v Butcher [1989] 1 AC 852. There the court held that the 1945
Act applies to a case where there is a claim for damages for negligence at
common law even if, in addition, there is a claim in contract to the same
effect. O’Connor LJ (at p 866) adopted the view expressed by Prichard J in Rowe
v Turner Hopkins & Partners [1980] 2 NZLR 550 at p 556, regarding
the equivalent section of the New Zealand legislation:
I therefore
conclude, in the absence of any clear authority to the contrary, that the first
limb of the definition of s2 determines the meaning of the word ‘fault’ as it
relates to the plaintiff’s cause of action: that accordingly, the Contributory
Negligence Act cannot apply unless the cause of action is founded on some act
or omission on the part of the defendant which gives rise to liability in tort:
that if the defendant’s conduct meets that criterion, the Act can apply —
whether or not the same conduct is also actionable in contract.
Neil LJ (at p
875) agreed with this approach and I do not read Sir Roger Ormrod’s judgment as
differing on this point.
In the present
case the conduct of which Gran Gelato complains founds a cause of action both
in negligence at common law and under the 1967 Act. As already noted, under the
1967 Act liability is essentially founded on negligence. By parity of reasoning
with the conclusion in Forsikringsaktieselskapet Vesta v Butcher regarding
concurrent claims in negligence in tort and contract, the 1945 Act applies in
the present case where there are concurrent claims against Richcliff in negligence
in tort and under the 1967 Act.
Having decided
that the 1945 Act applies, I turn to consider whether there should be any
apportionment in this case. Mr Wynne-Griffiths submitted that Gran Gelato and
its solicitors were at fault in proceeding without first seeing the headleases,
especially since Gran Gelato and Mr Landau were required to enter into
covenants with Eagle Star to observe and perform the covenants (save as to
rent) contained in the headleases so far as they affected the ground floor and
basement of nos 7 and 9.
In my view, it
would not be just or equitable to make any reduction in Gran Gelato’s damages.
The essential feature of the present case is that Gran Gelato’s claim, both at
common law and under the 1967 Act, is based on misrepresentation. Richcliff
intended, or is to be taken to have intended, that Gran Gelato should act in
reliance on the accuracy of the answers provided by Gershon Young. Gran Gelato
did so act. In those circumstances it would need to be a very special case before
carelessness by Gran Gelato, the representee, would make it just and equitable
to reduce the damages payable to compensate Gran Gelato for loss suffered by it
in consequence of doing the very thing which, in making the representation,
Richcliff intended should happen, viz that Gran Gelato should rely on
the representation. In principle, carelessness in not making other enquiries
provides no answer to a claim when the plaintiff has done that which the
representor intended he should do. This is a well-established principle when
misrepresentation, whether innocent or fraudulent, is being relied on as a
ground for seeking recision of the ensuing contract. In Reynell v Sprye
(1852) 1 De GM & G 660 at p 710, Lord Cranworth LJ said:
No man can
complain that another has too implicitly relied on what he himself has stated.
In Redgrave
v Hurd (1881) 20 ChD 1 at p 14, one of the leading authorities on
this subject, Sir George Jessel MR, said:
Another
instance with which we are familiar is where a vendor makes a false statement
as to the contents of a lease, as, for instance, that it contains no covenant
preventing the carrying on of the trade which the purchaser is known by the
vendor to be desirous of carrying on upon the property. Although the lease
itself ought to be produced at the sale, or might have been open to the
inspection of the purchaser long previously to the sale, it has been repeatedly
held that the vendor cannot be allowed to say, ‘You are not entitled to give
credit to my statement.’ It is not
sufficient, therefore, to say that the purchaser had the opportunity of
investigating the real state of the case, but did not avail himself of that
opportunity.
Likewise, in Nocton
v Lord Ashburton [1914] AC 932 at p 962, Lord Dunedin said:
No one is
entitled to make a statement which on the face of it conveys a false impression
and then excuse himself on the ground that the person to whom he made it had
available the means of correction.
In my view,
the like approach is applicable when considering what is Gran Gelato’s share in
the responsibility for the damage flowing from the misrepresentation. It may be
surprising that Mackenzie Mills did not advise their clients against proceeding
without seeing the headleases containing the covenants their clients were undertaking
to perform. But that has no relevance to the loss suffered by Gran Gelato in
consequence of its reliance on the representation in answer 3(A).
Damages
Stated
broadly, the measure of damages payable under the Misrepresentation Act 1967 is
that sum of money which will place the plaintiff in the position he would have
been in if the representation had not been made. Had the representation not
been made in the present case, Gran Gelato would not have gone ahead with the
Montpelier Street transaction. Copies of the headleases were not being produced
for inspection. It is inconceivable that Gran Gelato’s solicitors would have
proceeded without receiving a clear answer to enquiry 3(A). An accurate answer
would have disclosed the existence of the break clauses.
As to the
claim for damages for breach of the duty of care in answering the preliminary
enquiries, the measure of damages is that sum of money which will place the
plaintiff in the position it would have been in if reasonable care had been
exercised. Had due care been exercised by Gershon Young when giving the
answers, Gran Gelato
In the present case, therefore, the two measures are the same.
Gran Gelato
did proceed. It paid a premium of £30,000 to acquire the underlease, it
incurred rental obligations, it incurred expenses and it laid out considerable
sums of money in fitting out the property. Prima facie the fair measure
of its loss is the total of all these outgoings, less the value of what Gran
Gelato acquired for all this expenditure.
Gran Gelato’s
claims can be classified under four headings.
(1) Premium of £30,000 and rental payment.
The parties’ contentions, and also their valuation evidence, were remarkably
disparate. Gershon Young’s valuation evidence was to the effect that even
without a break clause Gran Gelato substantially overpaid. The market rent of
the property in 1984 was £18,000 a year and without a break clause up to £2,000
more; and no premium, let alone one of £30,000, was justified. Richcliff
adduced no evidence, but its case was that the market rental in 1984 was
£26,000 even with a break clause and that the rental might have increased above
this figure in September 1987 when the rent fell to be reviewed. As to the
£30,000, this sum was paid for fixtures, fittings and goodwill, which Gran
Gelato duly received. Gran Gelato’s valuation evidence was that with a break
clause the agreed rental should be discounted by 15 to 20% and that in August
1987 the property had no market value because by then redevelopment proposals
were afoot and were a matter of public knowledge.
As I see it,
the position is this. The premium was effectively a lump sum which Gran Gelato
had to agree to pay in order to get the underlease. In agreeing to pay £30,000
and an annual rental of £26,000, Gran Gelato, acting without professional
advice, was paying a very full price, but these figures were not so high that
they should not be taken fully into account in assessing damages. They were not
absurd figures. With a break clause, the appropriate figures would have been
smaller. The underlease acquired was less valuable. But it does not follow from
this that, in assessing damages, Gran Gelato should have to give credit and
accept responsibility for a rental, albeit reduced, for the whole period of the
underlease. It would not be right to apply the prima facie rule in this
case, because what happened was that when the misrepresentation came to light
in August 1987 it was too late for Gran Gelato to dispose of the property. Gran
Gelato found that, because of the break clauses, it now had an unsaleable
asset. Indeed, if anything, the underlease was a liability, with a negative
value. Thus, when the misrepresentation was discovered Gran Gelato found itself
saddled with a rental obligation for a property from which henceforth (viz after
September 1987) it received no benefit and which it could not turn to financial
advantage. In my view, Gran Gelato is entitled to be reimbursed in respect of
this rental obligation. It was a liability which flowed directly from the
misrepresentation.
But, on that
footing, the matter stands quite differently for the period up to September
1987. In respect of that period it is fair that Gran Gelato should give credit
for a rental and, moreover, that should be at the agreed rate. The
misrepresentation did not affect the quality of Gran Gelato’s enjoyment of the
property while in occupation.
As to the
premium, Gran Gelato is not entitled to repayment of the whole £30,000. Gran
Gelato paid this sum in order to obtain a 10-year underlease. In fact, Gran
Gelato acquired an underlease subject to Eagle Star’s rights under the
headlease break clauses. When the misrepresentation came to light, the
underlease was not saleable because of the existence of the break clauses. By
then Gran Gelato had enjoyed the property for three years. In my view, the fair
course is to require Gran Gelato to give credit for an apportioned part of the
premium; Gran Gelato received some benefit in return for the premium and this
it should bring into account. There was no evidence before me directed as to
apportionment, so I must do the best I can by the light of nature. A
straight-line apportionment, whereby Gran Gelato would have to credit for only
three-tenths of the premium, would be unduly favourable to Gran Gelato, since a
higher proportion of the premium ought to be attributed to the earlier years of
the term. I consider a fair apportionment is that Gran Gelato should give
credit for one-half of the premium.
(2) Legal costs of acquisition. Gran
Gelato paid legal fees and disbursements totalling £6,308 in connection with
the acquisition of the underlease. The figure is made up of stamp duty (£520),
Gershon Young’s fees and disbursements which Gran Gelato had agreed to pay
(£2,388), and Mackenzie Mills’ fees and disbursements (£3,400). In arriving at
the latter figure I have deducted those parts of the bills which Mr Mills
agreed were attributable to other matters. These expenses would not have been
incurred if Gran Gelato had not acquired the Montpelier Street underleases. On
the other hand, Gran Gelato derived some benefit from this expenditure because
it traded for three years from the property. Painting with a broad brush, I
consider Gran Gelato should recover one-half of this expenditure, but not more.
(3) Shopfitting costs. Gran Gelato spent
£99,030 in respect of the design and installation of shopfittings at the
property and subsequent works of alteration. Mr Pymont submitted that all these
costs are recoverable. None of this expenditure would have been incurred if the
misrepresentations had not been made. In my view, that would be to spread the
net of the damages claim far too wide. This argument proves too much. If sound,
it would mean that Gran Gelato could equally well recover all its trading
losses, because they would not have been incurred if the Montpelier Street
premises had not been acquired and, hence, the business had not started. That
cannot be right. In my view, none of the shopfitting costs are recoverable.
These works were carried out to enable Gran Gelato to trade and they were used
by Gran Gelato while it traded. They ceased to be of any value to Gran Gelato
when it stopped trading. But Gran Gelato stopped trading for reasons wholly unconnected
with the misrepresentation. Gran Gelato’s loss here flowed solely from the
commercial failure of its business. There was no causal connection between the
misrepresentation and this loss.
(4) The deed of variation and other legal
costs. Gran Gelato paid £4,000 for Richcliff’s licence for change of use of
no 9 and paid legal expenses totalling £3,150 in connection with that deed and
with abortive attempts to sublet: Gershon Young’s fees (£1,350), Eagle Star’s
solicitors’ fees (£50), and Mackenzie Mills’ fees (£1,750). These expenses were
all incurred before the misrepresentation came to light. Gran Gelato derived no
benefit from this expenditure. Any possibility of deriving benefit from the
deed of variation ceased when the misrepresentation came to light. Nor is it
likely that Gran Gelato would ever have derived any benefit from the other
legal expenditure: the existence of the break clauses presumably would have
stymied the proposed assignments or sublettings ultimately, even though this
was not appreciated in the course of the abortive negotiations.
(5) Conclusion on damages. Gran Gelato is
therefore entitled to recover the following sums by way of damages:
|
£ |
|
|
One-half of the premium |
15,000 |
|
One-half of the legal costs of acquisition |
3,154 |
|
The deed of variation licence fee and other legal costs |
7,150 |
|
£25,304 |
In addition, Gran Gelato is entitled to recover and set-off against
and thereby almost wholly extinguish Richcliff’s counterclaim for rent sums
totalling £48,420 in respect of unpaid rent after September 1987. Richcliff is
entitled to recover £2,000, being the unpaid balance of rent for the quarter
ending September 1987.
Footnotes
I mention two
final points. First, in its defence Richcliff raised a point to the effect that
by consenting to the grant of the underlease which contained no break clause
Eagle Star was estopped as against Gran Gelato from relying on the break
clauses in the headleases. Eagle Star was then joined as a defendant in the
action and this issue was decided, as preliminary issue, in favour of Eagle
Star in June 1989. Eagle Star did not participate in the trial of the action.
Second, there
are on foot claims by Richcliff against Gershon Young for an indemnity and
contribution. The parties agreed, as indeed seemed sensible, that the
determination of these claims should await judgment in the action. So, these
claims remain to be resolved.
Judgment for
the plaintiff against the first defendant for £25,304. Judgment for the first
defendant on its counterclaim for £2,000. Plaintiff’s claim against the second
defendant dismissed.
