Contractual Negotiation and Negligent Misrepresentations

A recent Supreme Court judgement serves as a useful reminder of the importance of ensuring the accuracy of statements made during contractual negotiations.

6th March 2014

Misrepresentations and unfounded assertions of fact made to a party during pre-contractual negotiations can come back to bite you if they induce that party to enter into the contract. The Supreme Court case has emphasised that misrepresentations made to a non-contracting party can also result in liability for the party that made the misrepresentation.

The case of Cramaso LLP v Ogilvie-Grant concerned a negligent representation made to a third party during pre-contractual negotiations. During the course of negotiations between the owner of a grouse moor and a prospective tenant, Mr Erskine, the owner sent an email to Mr Erskine regarding grouse counts on the moor. It was on the basis of the information contained in this email that Mr Erskine decided to proceed with the lease. Mr Erskine then set up a limited liability partnership for the purposes of entering into the lease. The partnership was to be the tenant with Mr Erskine acting as the partnership's agent 

Continuing Responsibility

As there may be a period of time between representations made during pre-contractual negotiations and the conclusion of the contract the Supreme Court acknowledged that the party making the representations has a continuing responsibility to ensure that any representations made are accurate until the contract is concluded. If one party discovers that they have made a misrepresentation prior to the conclusion of the contract then they should immediately bring this to the attention of the other party.

Proximate Relationship & Duty of Care

This is because the nature of the relationship between the parties during pre-contractual negotiations may give rise to a duty of care in respect of representations which the party making the representation can reasonably forsee are likely to induce the other party to enter into the contract.  

In this case the fact that the identity of the contracting party had changed prior to the conclusion of the contract, ie from Mr Erskine to the partnership, did not affect the owner's responsibility to ensure that the information supplied previously was accurate.

The contents of the email were in the mind of Mr Erskine, acting as agent when the contract was concluded. The owner knew about the partnership vehicle and was aware of Mr Erskine's role as agent.  The court decided that it was foreseeable that the representation would induce the partnership to enter into the contact and as a result the owner owed a duty of care to the partnership.  A continuing responsibility had been assumed for the accuracy of the representation until the contract was concluded.

As a result, the court held that there was a claim for damages in respect of the negligent misrepresentation made.

Practical points to note

This is notable case because the court has concluded that a contracting party can be held liable for a negligent misrepresentation made to a party other than the party induced to enter into the contract.  It emphasises the importance of ensuring that all pre-contractual communications are accurate and not misleading, irrespective of the recipient of such communication. The contracting parties should ensure that they keep representations under review and if an inaccuracy is discovered prior to the completion of the contract this should be communicated to the other side.