How Far Can Parties Rely on Pre-contractual Statements?

Parties should always remain wary of making misrepresentations in pre-contractual statements to avoid inviting damages claims after a contract is entered into.

It is important that this is borne in mind even if the negotiating parties will not be the actual legal parties to the eventual contract. For example, where individuals or businesses negotiate a deal but set up new corporate entities or special purpose vehicles in order to go ahead with the particular project after pre-contract negotiations have taken place.

A long running legal battle that concluded in the Supreme Court at the beginning of 2014 has shed new light on the degree to which the actual contracting parties can rely on earlier misrepresentations.

Cramaso LLP v Ogilvie-Grant [2014]

Businessman Alistair Erskine wanted to enter into a lease of a grouse moor at a castle owned by Ogilvie-Grant. Prior to entering into a contract Mr Erskine sought reassurance about the strength of the stock of grouse on the moor after having concerns that it had been harmed by over-shooting. This reassurance was given by email to Mr Erskine.

Mr Erskine then set up a limited liability partnership, Cramaso LLP, in order to enter into the contract with Ogilvie-Grant. Following the conclusion of the contract he discovered that the level of grouse was below expectations and not in line with the reassurance he had received.

Mr Erskine sued Ogilvie-Grant for misrepresentation and damages.

Continuing Misrepresentation

In earlier hearings the courts concluded that there had been a misrepresentation. However, Mr Erskine lost his claim in the lower courts on the basis that Cramaso LLP had not existed at the time the email containing the misrepresentation was sent. The courts concluded that although the defendants had owed a duty of care to Mr Erskine, they had not owed a duty of care to Cramaso LLP because they could not have foreseen its reliance upon the misrepresentation.

The Supreme Court took a different view. It suggested that the lower courts had erred by asking the wrong question and should have considered whether there was a continuing misrepresentation. It started its analysis by confirming that a misrepresentation could have a continuing effect even if the contracting party was different to the recipient of the misrepresentation. That effect would only fall away if the misrepresentation was withdrawn or if the other party discovered the truth before entering into the contract and entered it anyway.

The Supreme Court concluded that there was a continuing misrepresentation and that the respondents owed a duty of care to the LLP set up by Mr Erskine. It allowed his appeal and the claim for damages succeeded.

Comment

Businesses should take this judgement as a helpful reminder of the continuing effect of pre-contract representations. For specialist advice contact Peter Gourri today by email PGourri@rollingsons.co.uk or telephone 0207 611 4848.