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OUTER HOUSE, COURT OF SESSION
[2007] CSOH 91
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A733/06
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OPINION OF LORD BRODIE
in the cause
ZURICH GSG LIMITED
Pursuer;
against
GRAY & KELLAS,
and JOHN PETER SHAW GRAY, CAROLINE JANE DAVIS, GRAHAM MORRISON, FIONA
MARGARET BARKER and JOHN ROBERT SIMPSON HARDIE
Defenders:
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Pursuer: Eric Robertson; Brodies LLP, Solicitors
Defenders: David Johnston QC; Lesley A
Gray, Solicitors
30 May 2007
Introduction
[1] An
executor-dative, other than a spouse who has right to the whole estate by
virtue of prior rights, must find caution as a condition of confirmation: Confirmation of Executors Act 1823 section 2,
as amended by the Law Reform (Miscellaneous Provisions) (Scotland) Act 1980
section 5. This requirement does not
apply to an executor-nominate.
[2] The
pursuer in this action, remitted from Aberdeen Sheriff
Court, is an insurance company. On 22 November 2002 the pursuer granted a
bond of caution ("the Bond") in terms of which it bound itself that the estate
as contained in the confirmation-dative of the deceased John George Watson Murdoch,
wherein David Murdoch had been decerned and was to be confirmed executor-dative
qua son to the deceased, should be made free and forthcoming to all parties
having interest therein.
[3] The
pursuer sues the defenders, a firm of solicitors, for damages for reparation on
the basis that the pursuer was induced into granting the Bond "as a result of
the defenders' fraudulent et separatim
negligent misrepresentations".
[4] The action
came before me for debate on Procedure Roll for discussion of the first and
second pleas-in-law for the defenders and the first plea-in-law for the
pursuer. Mr Robertson, Advocate, appeared
for the pursuer. Mr Johnston QC
appeared for the defenders. Both parties
had lodged Notes of Argument to which they referred. When he opened his submissions, Mr Robertson's
primary motion was for decree de plano but his position came to be that I
should allow a proof, having excluded certain of the defenders' averments from
probation. Mr Johnston's primary
motion was for dismissal.
[5] Mr Johnston
began. He developed his submissions in
what he described as six chapters. In
his first chapter Mr Johnston set out the factual background as disclosed
in the averments. In each of his five subsequent
chapters he put forward a separate argument. In so doing he both advanced criticisms of the
pursuer's pleadings and, in the light of the pursuer's Note of Argument,
responded to anticipated criticisms of the defenders' pleadings. Mr Robertson followed this structure
when he came to respond but added a further chapter in which he indicated how the
pursuer's pleas should be dealt with, having regard to his previously developed
arguments. When recording and discussing
counsels' respective submissions I too shall broadly follow this structure.
The factual
background as averred in the pleadings
[6] As
I have already indicated, the pursuer is cautioner in terms of a bond of
caution granted on 22 November 2002 by which it bound itself that the estate of
the deceased John Murdoch, to the extent of г82,000 as contained in the
relative confirmation-dative, be made free and forthcoming to all parties
having an interest. The executor-dative
of John Murdoch was his son, David Murdoch. David Murdoch died on 15 March 2003. The executor of David Murdoch was Carol
Murdoch. The defenders are a partnership
of solicitors and the individual partners thereof.
[7] David
Murdoch initially instructed Messrs Matheson Ritchie, solicitors in Glasgow,
in relation to the administration of John Murdoch's estate and on 7 June 2002 David Murdoch was decerned
as executor-dative of his late father on a petition drafted by Matheson
Ritchie. However, on or about 20
September 2002 David Murdoch instructed the present defenders to deal with any
matters relating to the estate of the deceased John Murdoch. The defenders were provided with a copy of
the petition and correspondence from Matheson Ritchie.
[8] Ms Alison
Merson, an unqualified legal assistant employed by the defenders', was given the
responsibility of carrying out the work involved in winding up John Murdoch's
estate.
[9] On 18 November 2002 Ms Merson completed
a copy of the pursuer's bond of caution application form. In that form there
was entered information about the executor-dative, the estate and the
beneficiaries, which information Ms Merson had verified with David Murdoch. The form was signed by David Murdoch as
applicant in the presence of one of the partners of the defenders, Mr Graham
Morrison. The form included a
"Solicitor's Certificate" which confirmed, inter
alia, that:
"We are not aware of any fact
or circumstance that would render the information set out in this form untrue
or inaccurate. We have been instructed
to advise and act in all matters concerning the administration of the Estate. We will advise you promptly of any claim or
dispute affecting the Estate ..."
Mr Morrison signed the Certificate, appending the
defenders' partnership name.
[10] The application
form included the question: "Are the
proposed Executors or their solicitors aware of any claims or disputes
affecting the Estate". The answer given
was "No". That answer had been provided
to Ms Merson by David Murdoch. To David
Murdoch's knowledge that answer was false in that he was aware that the British
Nursing Association, otherwise Nestor Healthcare Limited ("Nestor"), had
intimated a claim in respect of an alleged debt owed by the estate in the sum
of г43,255.50. Neither Ms Merson nor Mr Morrison
was aware of this fact at the time of completing the application form and
signing the Certificate. However,
another partner of the defenders, Mr John Hardie, may be taken to have been
aware of it. In July 2002, prior to the
defenders being instructed by David Murdoch to act in relation to the estate,
Lorraine Murdoch, the sister of David Murdoch, had instructed the defenders in
relation to a potential claim to the Criminal Injuries Compensation Authority
relating to injury sustained by John Murdoch. Mr Hardie acted for Lorraine Murdoch in
relation to that matter. By letter dated
16 July 2002 Mr Hardie
wrote to Messrs Ness Gallagher, the solicitors of the late John Murdoch, requesting
details of John Murdoch's claim to the Criminal Injuries Compensation
Authority. On 29 July 2002 Messrs Ness Gallagher wrote to Mr Hardie
in terms that included the following: "With
reference to the late Mr Murdoch's case ... We would advise that an outstanding
liability to the BNA in excess of г40,000 exists."
[11] Also aware
of this claim was at least one person who was an employee or partner of the
firm of Messrs Matheson Ritchie. The
British Nursing Association Legal Department had written to Messrs Matheson
Ritchie noting their interest in John Murdoch's estate by letter dated 16 August 2002. As I have already notedmentioned, the
pursuer avers that the defenders were provided with a copy of the petition and
correspondence from Messrs Matheson Ritchie but, so the averments continue, the
defenders did not "request any papers from Messrs Matheson Ritchie in this
regard". The pursuer further avers that although David Murdoch was the executor-dative,
Lorraine Murdoch was the defenders' principal contact in relation to the
administration of the estate and that the defenders accepted instructions from
both Lorraine Murdoch and David Murdoch in connection with the estate.
[12] The
defenders, acting for the executor, distributed the estate to the beneficiaries
by payments made on 25 February and 2
June 2003. By letter dated 10 July 2003 solicitors acting
for Nestor intimated a claim against the estate to the defenders for payment of
г43, 255 in respect of services provided to the late John Murdoch. On 21
December 2004 Nestor raised an action for payment of г43, 255
against, first, Carol Murdoch as executor dative of the late John Murdoch and,
second, the pursuer as cautioner for the executive-dative. The pursuer settled the action against them by
making a payment of г20,000. It incurred
legal fees and outlays of г14,895.02. It
is these two sums that the pursuer seeks to recover by way of damages in the
present action.
Section 16 of the
Partnership Act 1890
[13] Section 16 of the
Partnership Act 1890 provides:
"Notice to any partner who
habitually acts in the partnership business of any matter relating to partnership
affairs operates as notice to the firm except in the case of fraud on the firm
committed by or with the consent of that partner."
[14] In developing
the first chapter of his argument, Mr Johnston explained that, as appeared
from its Note of Argument, the pursuer relied on section 16 of the 1890 Act to
impute the knowledge of Mr Hardie to the firm and therefore to Mr Morrison,
as a partner of the firm, with a view to characterising Mr Morrison's
signing of the Certificate on behalf of the firm as a fraudulent
misrepresentation. Mr Johnston
submitted that this approach was to adopt too broad an interpretation of
section 16. He accepted that notice to a
partner was the equivalent of notice to the firm and he did not seek to
distinguish the expression "notice ...of any matter" from the giving of
information or imparting knowledge of a fact (cf Lindley & Banks On Partnership (18th edit)
para 12-26) but, so he submitted, it was not the case that the giving of any
information to any partner, irrespective of the nature of that information, necessarily
had the result that the information was to be imputed to the firm as a
whole. This was a case where information
was scattered over the defenders' organisation. Subject to the effect of section 16, it could
not be imputed to the defenders unless it had been received by a person able to
appreciate its significance: Malhi v Abbey Life [1996] Lloyds Reinsurance Law Rep 237 at 242. Turning to the effect of section 16, a
limitation had to be read into its ex
facie broad terms in order to accommodate the overriding obligation of a
solicitor to keep confidential, even from his partners, information relating to
the affairs of a client or advice given to that client: Begg on
Law Agents (1883) p312, Law Society of Scotland Code of Conduct, Three Rivers District Council v Bank of England (No 6) [2005] 1 AC 610, Prince
Jefri Bolkiah v KPMG [1999] 2AC 222 at 226H and 233H, and Rakusen v Ellis Munday & Clarke [1912] 1 Ch 831. Here it was averred that Lorraine
Murdoch was involved both in the matter for which Mr Hardie was
responsible and that for which Mr Morrison was responsible, but one could
not merge these two separate items of business into one. It would be unworkable, indeed absurd, if a
partner in a professional firm was to be held to have implied knowledge of
something that he was not permitted to know. Mr Johnston gave the example of two
partners of a firm of solicitors, each instructed by a different client to
offer for the purchase of the same property. It would be wholly unworkable if each was to
be taken as having imputed knowledge of the price that the client of his
partner was proposing to offer. The purpose
of section 16 was to state an equitable doctrine preventing a partnership from
taking points against people who reasonably thought that they were dealing with
the firm. However, clients of a firm
might have conflicts of interest. They
had a right to have their affairs kept confidential. Any certificate granted by the firm therefore
had to be read subject to the limitation which flowed from the firm's
corresponding obligation of confidentiality. Accordingly, the certificate in the present
case could not be read as saying "We have investigated the affairs of all our
clients and on that basis state that we are not aware of any claims or disputes
affecting the estate" but rather
"We have carried out proper
steps in relation to this client's affairs and on that basis state that we are
not aware of any claims or disputes affecting the estate, but in carrying out
these proper steps we have not breached any obligation of confidence to any
other client."
Mr Johnston referred to the factors that were narrated
in his Note of Argument: the information
received from Messrs Ness Gallagher related to a different client of the firm,
Lorraine Murdoch, who had been referred to the defenders on the grounds of
conflict of interest; it was
communicated to the defenders as agents for Lorraine Murdoch and in no
other capacity; it related to a prospective application by Lorraine Murdoch to
the Criminal Injuries Compensation Authority; it was confidential to her; and it was
communicated at a time when the defenders did not act for David Murdoch. In these circumstances, Mr Johnston
submitted that the representation made by Mr Morrison by signing the
certificate was not false. It was not a
misrepresentation, far less a fraudulent one.
[15] In reply, Mr Robertson began by reminding
me of the terms of section 16 and of Mr Johnston's acceptance that "notice
...of any matter" comprehended knowledge of a fact. The section identified the circumstances in
which knowledge could be imputed to a partnership. There was no equivalent provision in the
companies' legislation and, accordingly, nothing said in Malhi v Abbey Life could detract from the impact of section 16 when what
was in issue was what was to be taken to be within the knowledge of a
partnership. The section excluded the situation
of fraud on the firm committed
by or with the consent of the partner to whom notice was given, but no other
exception was identified. The terms of
the section were clear. They make no
distinction as between confidential information and non-confidential
information. However if, despite that,
section 16 was to be read as qualified by an exception relating to
confidentiality, that was not the position here. On the facts of the case there was no reason
why Mr Hardie should not have drawn the relevant piece of information to
the attention of Mr Morrison. Just as the terms of section 16 were clear,
so were the terms of the Certificate. It
was granted on behalf of the firm. It
used the formulation "We are not aware".
No rider was added. What the pursuer
was looking for in the answer to the question in the application form
was an independent mind being brought to bear on the material in the form which
had been provided by the executor-dative, rather than a mere rubber stamp. The language of the Certificate was of recommendation
or confirmation. The Certificate was of
considerable practical importance by reason of it being granted by the
solicitors employed to ingather and distribute the estate. It would be unworkable if the cautioner had to
accept the Certificate, despite its express terms, as having only been granted
by one of the partners in the firm and only in relation to his personal state
of knowledge. Mr Johnston's
approach, Mr Robertson argued, was to rob the Certificate of all practical
effect.
[16] It was Mr Johnston's submission that,
on a proper construction of section 16 of the Partnership 1890, the
pursuer had failed to aver a basis upon which the representation made by the
Solicitor's Certificate could be regarded as false. I disagree.
[17] It may well be, as counsel were agreed,
that there is a dearth of authority as to the effect of section 16 (the
decision of Lord Stott in Campbell v M'Creath 1975 SC 81 was noticed but
neither Mr Johnston nor Mr Robertson commended it as an authority
from which I might draw assistance). However,
I did not understand the following statement, in Lindley & Banks supra at para 12-26, to be challenged:
"The section has the following two consequences:
(1) If a firm claims the benefit of a transaction entered
into by a partner or is otherwise bound by his acts, it cannot use its own
ignorance of what that partner knew to place itself in a more favourable
position than could have been achieved by that partner if he had been acting on
his own account.
(2) When it is necessary to prove that a firm has
notice of some fact, all that is required is to show that notice was given to
one of the partners who habitually acts in the partnership business.
It should be emphasised that the firm does not have
notice of everything done by each of its members, but only of those matters
which relate to the partnership. Any other result would be absurd."
[18] Obviously it is the second of the two
consequences identified by the author that has immediate application here,
although I shall return later in this opinion to the distinction in the first
consequence between, on the one hand, the ignorance of the firm and the
knowledge of a partner. It may be
thought that the second consequence is no more than a close paraphrase of the
terms of the section but it underlines that if it is necessary to show that a
partnership was aware of a particular fact then it is enough to establish that
one of the partners who habitually acted in the business was aware of the fact.
Mr Morrison, by signing the
Solicitor's Certificate in the name of the firm, chose to certify that "We"
were not aware of any fact or circumstance that would render the information
set out in the form to be untrue or inaccurate. "We" can only mean the defenders. Mr Hardie, a partner who habitually acted
in the partnership business, was aware of facts and circumstances which would
appear to render the executor's negative answer to the question: "Are the proposed Executors or their
solicitors aware of any claims or disputes affecting the Estate?" untrue. The effect of section 16 is to impute Mr Hardie's
knowledge to the firm. That would seem
to be the plain meaning of the section. That
is what Lindley & Banks say is the effect of section 16. If a firm has imputed knowledge of facts and
circumstances that would render information untrue, a statement on its behalf
that it was unaware of facts and circumstances that would render the
information untrue is false, whether or not it is made in good faith. Now, I did not understand Mr Johnston to
take issue with any of this, at least as a matter of generality. However, he argued for exceptional treatment
of confidential information, pointing to the apparent paradox where a partner (Mr Morrison,
for example) is taken as having imputed knowledge of what he is not permitted
to know.
[19] I see no basis for treating information
that can be regarded as confidential differently from other sorts of
information. Apart from anything else,
to borrow a consideration put forward by both counsel for their different
purposes, I would see an exception for confidential information to be
unworkable. It is not always easy to
identify what is truly confidential information. Much depends on the attitude of the giver of
the information. Often information is
confidential in the sense that its distribution is restricted to a particular
group or for a particular purpose, rather than absolutely prohibited. The group or purpose may expand or contract
depending how things fall out over time. In the case of professional firms the
exception might well swallow up the rule. Importantly, and on this I agree with Mr Robertson,
there is no basis for such an exception in the plain terms of the statute. I would add this. The section is concerned with imputing
knowledge ("operates as notice") to the entity that is the firm. In Scotland, but not in England, a firm is a legal person
distinct from the partners of whom it is composed: Partnership Act 1890 section 4 (2). It is therefore possible to distinguish between
what an individual partner, who is a natural person, knows and what a firm,
which is no more than a legal person without any cognitive capacity, is taken
to "know". However, even if that were
not so, it seems to me both possible and necessary to distinguish between what
is within the actual knowledge of an individual partner and what the firm and
therefore the partners are deemed to know (cf Miller Partnership (2nd edition) p221). I see recognition of that in the first
consequence referred to by the author of Lindley & Banks in the passage
quoted above with its contrast as between the "ignorance" of the firm and "what
that partner knew". In my opinion the
effect of section 16 is to do with imputed or deemed knowledge. It has nothing to do with actual knowledge. At least one partner, acting in the
partnership business must, at least at one moment in time, have actual
knowledge of the relevant fact. Once
that is the case knowledge of the fact is imputed to the firm by virtue of
section 16 but that is as far as it goes. There is nothing in the language of section 16
to suggest that the other partners are taken actually to know what in fact they
do not know. I do see not any difficulty
with confidential information. I accept
that a partner of a professional firm and indeed, although perhaps less
commonly, a partner of a commercial firm, may receive information which is of a
confidential nature which he could not share with his partners without
breaching an obligation of confidence owed to a client or customer. In such circumstances he will presumably not
pass on the information and therefore his partners will not have actual
knowledge of it. In such circumstances
the information will therefore be within the actual knowledge of only one of
the partners (as, in practice, will be true of much of the information held
within the partnership). I simply do not
see that as a reason why the firm, and therefore all the partners, should not nevertheless
be deemed to have notice of that information. I would therefore regard the representation
made by Mr Morrison as having been false and therefore properly
characterised as a misrepresentation. However,
as I shall discuss further below, it does not necessarily follow that it was
made either negligently or fraudulently.
Fraud
[20] The pursuer's case depends upon the
proposition that the misrepresentation by Mr Morrison on behalf of the
defenders was fraudulent or at least negligent. That is how it is pled and Mr Robertson
confirmed as much during his submissions. In this, the second chapter of his argument, Mr Johnston
submitted that the pursuer's averments of fraud did not meet the test of
relevancy. He referred me to the
decision of the House of Lords in Derry v Peek (1889) 14 App Cas 337 and, in particular to the speech of Lord Herschell where, at 374,
there is set out the requirements of what is there described as an action of
deceit. The action of deceit required
there to have been fraud and what was said by Lord Herschell has become
generally accepted as the definition of fraud:
"First, in order to sustain an action of deceit, there
must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shewn
that a false representation has been made (1) knowingly, or (2) without belief
in its truth, or recklessly, careless whether it be true or false. Although I have treated the second and third
as distinct cases, I think the third is but an instance of the second, for one
who makes a statement under such circumstances can have no real belief in the
truth of what he states. To prevent a
false statement being fraudulent, there must, I think, always be an honest
belief it its truth. And this probably
covers the whole ground, for one who knowingly alleges what is false, has obviously
no such honest belief. Thirdly, if fraud
be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to
cheat or injure the person to whom the statement was made."
[21] Here, said Mr Johnston, there was no
suggestion that there had not been an honest belief on the part of Mr Morrison
in the truth of his statement. Among the
matters that were not known and not admitted by the pursuer were the defenders'
averments that Ms Merson was unaware of the debt claimed by Nestor, that the
Solicitor's Certificate had been signed in good faith by Mr Morrison and
that neither Ms Merson nor Mr Morrison was aware of the information
received from Messrs Ness Gallagher. Mr Johnston
compared the situation revealed by the pursuer's response to the defenders'
averments with what appears in Lord Herschell's speech at 375:
"...making a false statement through want of care falls
far short of, and is a very different thing from, fraud, and the same may be
said of a false representation honestly believed though on insufficient
grounds."
The
pursuer did not aver absence of honest belief on the part of Mr Morrison. It had not relevantly averred fraud.
[22] Reflecting
what appeared in the pursuer's Note of Argument, Mr Robertson stressed
that this was not a case of intentional fraud but, as appeared from the passage
from the speech of Lord Herschell which had been cited by Mr Johnston, it
was sufficient to instruct fraud that a statement had been made recklessly,
without caring whether it was true or false. Here it was averred that there had been a
failure to request papers from Messrs Matheson Ritchie. There was an issue as to whether Mr Morrison
had an honest belief in the truth of the representation. The defenders asserted that he did. This was denied.
[23] In considering the relevancy of the pursuer's averments of fraud I
take as my starting point Mr Robertson's acceptance that the pursuer does
not aver intentional fraud. In other
words, Mr Morrison may have made a misrepresentation but he did not do so
knowingly. Accordingly, correctly in my
opinion, Mr Robertson did not suggest that the effect of section 16 of the
1890 Act was that Mr Morrison should be treated as actually knowing
something that he did not know. That position,
correct as I take it to be, does not entirely reflect what appears in the
pursuer's pleadings. In article 5 of
Condescendence it is stated that "the defenders knew" that the representations
in the Solicitor's Certificate were false, that "the defenders were aware" of a
claim of at least г40,000 on the estate, and that "the defenders were aware"
that what appeared in the application form was untrue or inaccurate. Mr Robertson did not rely on any of these
averments. Had he done so it would have
been difficult to understand why he disavowed a case of intentional fraud. It appears to me that the author of the
pursuer's pleadings had taken a different view of the effect of section 16 than
I would take and, if I understood him correctly, Mr Robertson took. The pleader seems to have proceeded on the
basis that once knowledge of an accurate piece of information is imputed to a
firm by virtue of section 16 of the Act then any statement by any partner of
the firm to contrary effect is not only false but fraudulent. That is to treat the partnership as an
aggregate or, in Scotland,
a person, knowing everything that each of its partners knows. Up to a point that is correct but much depends
upon what is meant by "know". As I have
already mentioned, once notice has been given to a partner who acts in the
partnership business, notice has been given to the partnership. However, as I have attempted to explain, it
appears to me that the imputed knowledge of the firm and the actual knowledge
of the individual partners are different one from the other. An intentionally false and therefore dishonest
statement requires actual knowledge on the part of the person making the
statement that the statement he is making is false. A firm, which is not a natural person, is
incapable of dishonesty, although it might be vicariously liable for the
dishonest actions of its individual partners (or employees), whether acting
alone or together. Only individuals can lack
an honest belief. Only individuals
therefore can make fraudulent misrepresentations.
[24] At least as presented by Mr Robertson, the pursuer's case
includes an acceptance that Mr Morrison did not know that by signing the
Solicitor's Certificate he was making a false statement. He did not intend to defraud the pursuer. Why then is it said that he was acting
fraudulently? One does not get an answer
to that question by reading the pursuer's averments. Mr Robertson, echoing what appears in the
pursuer's Note of Argument, presented the misrepresentation by Mr Morrison
as one which, on the pursuer's pleadings, was said to have been made without
belief in its truth and therefore recklessly. I disagree. The proposition that the pursuer avers that Mr Morrison
made the misrepresentation without an honest belief in its truth sits uneasily
with a not known and not admitted response to the defenders' averment that the Solicitor's Certificate had
been signed by Mr Morrison in good faith. However, I would regard the
pursuer's averments as deficient even had that averment by the defenders been
denied (something that it would appear that the pursuer cannot, with proper
candour, do). Fraud is not something to
be lightly inferred. Nor should it be
lightly averred. It is for a party
alleging fraud to prove it and, in order to do so, to set out in specific terms
the basis upon which the court will be invited to infer that the party against
whom fraud is alleged did not honestly believe that the representation in
question was true. A denial of the
defenders' averment that Mr Morrison honestly believed the representation
to be true takes the pursuer nowhere. The
onus of proof is not on the defenders. The
only averment relied on by Mr Robertson as a basis for inferring that Mr Morrison
did not honestly believe in the truth of what was represented by virtue of the
Solicitor's Certificate was in these terms:
"The defenders were provided with a copy of the
Petition and correspondence from Messrs Matheson Ritchie, but did not request
any papers from Messrs Matheson Ritchie in this regard."
That
Mr Morrison signed the Certificate without having requested unidentified
"papers" additional to the correspondence from the solicitors who had
previously acted for the executor-dative which had been provided, at its very highest
might just suggest a want of care (something to which I shall have to return),
but, as appears from the speech of Lord Herschell, "making a false statement
through want of care falls far short of, and is a very different thing from,
fraud". In my opinion there is simply no
basis in the averments here for leading evidence from which the inference could
be drawn that Mr Morrison had no honest belief that the representation he
was making was true. I am accordingly
not prepared to admit the case to probation, insofar as it is based on fraud.
Negligence
[25] Mr Johnston began by outlining what
averments were required to make a relevant case of negligent misrepresentation
against the defenders: that the
defenders made a representation, which they knew or ought to known would be
relied on, which induced the pursuer to enter into a contract, and which the
defenders knew or ought to have known was false. Mr Johnston did not dispute that in the
circumstances averred by the pursuer Mr Morrison owed it a duty of care
when signing the Solicitor's Certificate. This was a case of the sort of liability
recognised in Hedley Byrne & Co v Heller & Partners [1964] AC 465. Mr Johnston had no quarrel with the
sufficiency of the averments of foreseeability of reliance on the representation
or the consequence of that reliance: the
pursuer granting the Bond. However, he
submitted that there was not sufficient by way of averment to explain why it
was said that the defenders had been negligent. The pursuer avers that "[the] defenders representations
were made negligently" but does not give adequate specification of that bald
assertion. The only discernible duty
that was founded upon (if it was a duty) was that "In particular, the defenders
ought to have requested papers from Messrs Matheson Ritchie prior to making the
representations". But why? Mr Johnston asked rhetorically. What "papers" were being referred to? What was to be achieved by requesting them? In short, there was nothing to explain why it
was said that that particular duty was incumbent in the circumstances. There were no averments, for example, to the
effect that this is something any solicitor of ordinary competence would have
done if exercising reasonable care: cf Hunter v Hanley 1955 SC 200. There
was no express averment of breach of duty. Mr Johnston submitted that the pursuer's
case insofar as based on negligence was irrelevant.
[26] As he had accepted that it was for the
pursuer to demonstrate in its averments not only that the representation was
false but that it was fraudulent, Mr Robertson accepted that the pursuer
had to aver why it was maintained that it had been made negligently. He conceded that inaccuracy, of itself, was
not enough. However, in order to make a case of negligence against a firm of
solicitors it was not, in his submission, necessary to adopt the formulation
which is appropriate to a case of professional negligence. It was simply a question of demonstrating that
the misrepresentation had been made negligently. The duties which it was said that the
defenders had breached were set out in article 5 of Condescendence. In particular it was averred that the
defenders ought to have requested papers from Messrs Matheson Ritchie prior to
making the representations. In the
circumstances disclosed in the pleadings that was no more than what had been required
by common sense.
[27] It is trite that the purpose of pleadings is to give notice,
in sufficient detail as to be comprehensible, of the case that is being made. In Jamieson
v Allan McNeil & Co WS 1974
SLT (Notes) 9 Lord Maxwell said this:
"...it is my understanding that our system of pleading
still requires in actions for damages for negligence first, that the essential
facts relied on should be set out with reasonable clarity; second, that the
duties alleged to have been breached should be plainly stated and should be
duties which the court can be satisfied at least might have been incumbent upon
the defenders in law in the circumstances averred ...third, that it should be
reasonably apparent how any alleged loss is claimed to be attributable to any
one or more alleged breaches of duty; and, fourth, that in so far as the nature
of any head of patrimonial loss permits, at least some notice should be given
of the amount claimed ..."
[28] I very respectfully agree with the way the
matter is put by Lord Maxwell. I draw
particular attention to what he says about duties being plainly stated and being
such that the court can be satisfied at least might have been incumbent upon
the defenders in the circumstances averred. It is not simply a question of form or undue
reverence for the conventions of pleading. The different audiences towards whom the
pleadings are directed, the other parties and the court, require to know what a
pursuer's case is about; the other parties in order to know what it is they
have to answer and the court, given our system of debate on preliminary pleas,
in order to determine whether the leading of evidence need be and should be
allowed. Candid and careful pleading
promotes efficient litigation. One of
the efficiencies is that it permits the identification of cases that cannot
succeed on what the pursuer is in a position to prove or at the very least
willing to attempt to prove and that therefore should be dismissed without
involving the expenditure of time, effort and money which is involved in the
leading of evidence: Jamieson v Jamieson 1952 SC (HL) 44 at 50 and 63. Of course before it dismisses a case the court
must have careful regard to familiar propositions derived from familiar cases. An action will not be dismissed as irrelevant
unless it must necessarily fail even if all the pursuer's averments are proved.
There is no onus on a pursuer to show
that if it proves its averments it is bound to succeed: Jamieson
v Jamieson supra at 50 and 63. An action of damages for negligence will only
be dismissed on grounds of relevancy in a very clear case: Miller v South of Scotland Electricity Board
1958 SC (HL) 20 at
32 and 33 and 33.
[29] Here Mr Johnston makes no complaint
about the clarity with which the pursuer has pled the facts which it seeks to
prove and upon which it must be taken to rely. Remarkably, the pursuer does not, as one might
have expected in conventionally set out pleadings, open article 5 with, or at
least include in that article, the proposition that, in the circumstances, the
defenders owed a duty of care to the pursuer. However, Mr Johnston made nothing of
that. He accepted that the factual
averments are sufficient to identify a degree of proximity from which a duty of
care might arise. Indeed, he went
further and accepted that in the circumstances a duty of care did arise. Moreover, albeit in response to a question
from me as to how the Solicitor's Certificate should be construed, he accepted
that the terms of the Certificate implied that the defenders had taken what he
described as "proper steps in relation to this client's affairs". Given Mr Johnston's approach, although
the pursuer has not chosen to do so in its pleadings, it appears to me to be
appropriate to test their relevancy on the assumption that there is enough from
which to imply an averment of a general duty of care and, moreover, a
particularisation of that duty to the extent of there being a duty to take some
sort of steps in order to ascertain that the information set out in the form
was not untrue or inaccurate. I put it
that way deliberately. The Certificate
is couched as "We are not aware of any fact or circumstance ..." but I understood
Mr Johnston to accept that for a partner of the defenders to act in a way
that was consistent with fulfilling his duty of reasonable care he had to do
something in order to attempt to acquaint himself with the true state of
affairs. However, Mr Johnston's
generosity in relation to the pursuer's pleadings gave out at this point and he
took issue with the unexplained insertion of a duty in these terms: "the defenders ought to have requested papers
from Messrs Matheson Ritchie prior to making the representations". Why that particular duty? asked Mr Johnston.
Common sense, responded Mr Robertson.
That response was eloquent in that it
was about all that Mr Robertson could say, given the absence of averment. There is simply no explanation in the
pleadings why unidentified "papers" should have been requested from the solicitors
who had obtained decerniture in favour of David Murdoch as executor-dative. Nor is there any averment indicating what, if
any, the response by these solicitors to such a request might have been. For whatever reason, that is left to
speculation. There is therefore no basis
in averment explaining (and therefore no offer to prove) how the loss is
claimed to be attributable to the only alleged breach of duty.
[30] For the purposes of relevancy, as Lord
Maxwell explained, the court must be satisfied, on the basis of the
circumstances averred, that the duty in question at least might have been
incumbent upon the defender. It is not
enough simply to pluck a supposed duty from the air without setting it in a
context of averment which allows the court to understand why the pursuer
maintains there to have been this particular duty and how a court, having found
the pursuer's factual averments proved, might come to conclusion that the duty
was indeed incumbent upon the defender in the circumstances. Lord Stewart explained how this should be done
in his opinion in J Dykes Ltd v Littlewoods Mail Order Stores Ltd 1982
SLT 50 at 52:
"The fundamental duty to be observed, whether the case
involves professional negligence or any other fault at common law, is the duty
to take reasonable care in the circumstances. A pursuer, however, cannot plead a relevant
case by merely stating this generality and then plucking out of the air a
number of alleged particular duties which are not set in the context of some
recognised framework. By a recognised
framework I mean either a framework set by accepted precedent of which an
example is the duty of an employer to take reasonable care to maintain his
plant and machinery in safe condition, or else a framework set in a professional
negligence case by reference to the professional standard of the time. Taking an analogy from the old form of
indictment in criminal pleadings, there must be a standard set by the major
premise before the minor premise can be seen to have any validity. If that standard is already assimilated into
the law there may strictly be no need for the pleader to refer to it, just as
there is now no need in indictments to state a major premise. Nevertheless, it is still good pleading
practice in civil causes to state the general proposition from which the
particular duty is deduced."
[31] Here there is no such general proposition.
It is not said that there was a practice
among solicitors in the circumstances of the case to act in a particular way. It is not said that no competent solicitor
would have requested papers beyond those that he had already received. It cannot be said that this particular duty
has been established by accepted precedent, as in the case of the maintenance
of plant and machinery instanced by Lord Stewart. I see in the pursuer's pleadings a failure of
analysis, the origin of which may lie in a view taken as to the effect of
section 16 and which is pointed up by the pursuer's references to "the
defenders" as being aware of certain things and the representations founded on
being those of "the defenders". Now, to
an extent, these references may be acceptable shorthand but they may have
misled the pursuer as to the nature of its case, if it indeed has one. On the pursuer's averments the person who made
the representations upon which the pursuer founds was Mr Morrison, signing
on behalf of the defenders. As I have previously
discussed, it is not said that Mr Morrison personally knew that the
representations were false; the only basis of the pursuer's assertion that "the
defenders" knew that they were false being the fact that another partner of the
defenders (Mr Hardie) had received information which would render the
representations untrue. In terms of
section 10 of the 1890 Act the firm is liable for "any wrongful act or omission
of any partner acting in the course of the business of the firm or with the
authority of his co-partners". That
provision makes clear that a partnership may be directly liable for negligence
or it may be vicariously liable for the negligence of a partner. It may also be liable vicariously for the
negligence of an employee. Where the act
or omission arises from or is ratified by a collective decision of all the
partners or arises from a failure to make a collective decision then the
liability will be direct. Where, as has
to be the position here, the act or omission is that of an individual partner
acting in the course of the business of the firm then the liability is
vicarious. There is no doubt but that there may be vicarious
liability but only if the individual partner is negligent. Here, I am simply unable to understand how it
can be said, assuming that the pursuer proves all its averments, that in the
circumstances a reasonably careful person or a reasonably careful solicitor in
the position of Mr Morrison was obliged to request "papers", or
information of any sort, from the solicitors who had previously acted in the
capacity attributed to Messrs Matheson Ritchie. I certainly could not come to that conclusion uninstructed
and no instruction whatsoever is offered by the pursuer's averments. Moreover, as I have already mentioned, there
is nothing in the averments to indicate whether such papers would or could have
been provided and what they would have contained had they been provided. In my opinion the pursuer's case of negligence
is irrelevant and should not be admitted to probation.
Failure to aver reasonable
conduct of the previous litigation
[32] Mr Johnston explained that this
chapter of his argument went to causation because misrepresentation only gives
rise to an action for damages in respect of loss where there has been no
intervening act which breaks the chain of causation. Here the pursuer sues for its losses in
defending and then settling the action at the instance of Nestor. For there to be no break in the chain of
causation, so submitted Mr Johnston, under reference to what had been said
in Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452
at 506 and The Oropesa [1943] P 32 at
39, it was for the pursuer to aver that it had acted reasonably and, moreover,
to aver how exactly it had acted. Mr Johnston
submitted that the pursuer had failed to satisfy that test. It had given neither fair notice nor
reasonable specification as to why it had settled the action at the instance of
Nestor and, in particular, why it had rejected the various lines of argument
that had been suggested to its agents by the defenders in their letter of
6 June 2005 and which had been referred to and adopted into the pleadings.
Thus the pursuer had failed relevantly
to aver that the misrepresentation of which it complained had caused its loss.
[33] In
response, Mr Robertson did not dispute that in order to recover damages in
respect of the costs of settling a claim, a party such as the pursuer had to
show that it had acted reasonably. However,
that was all it had to do: Banco de Portugal v Waterlow & Sons Ltd supra
at 506. Mr Robertson submitted that
it was not necessary for the purposes of relevancy in the present action to put
forward a reasoned rebuttal of every conceivable defence that might have been
advanced in answer to the Nestor action. Here the pursuer had provided specification of
the nature of the claim by lodging and referring to the record in the Nestor
action. Vouching of the sum sued for by
Nestor was available in the productions. Enough was averred to allow the leading of
evidence on the basis of which the court could come to a conclusion as to
whether the pursuer had acted reasonably.
[34] This
chapter of argument rather runs into the chapter which follows. Parties were agreed as to the applicable
principles of law. It was not said that
there was anything incompetent about suing to recover a sum paid in voluntary
settlement of a claim made in another action. However, if a party suffers loss through the
wrongful act of another and wishes to recover that loss by way of an action of
damages it will only be able to do so to the extent that it has acted
reasonably to minimise or remedy what it claims to be the consequences of the
wrongful act. Thus, if the party acts
unreasonably the chain of causation will be taken to have been broken and
damages will not be recoverable. However,
measures taken by an injured party will not be judged too exactly: "The law is satisfied if the party placed in a
difficult situation by reason of the breach of a duty owed to him has acted
reasonably in the adoption of remedial measures, and he will not be held
disentitled to recover the cost of such measures merely because the party in
breach can suggest that other measures less burdensome to him might have been
taken": Banco de Portugal v Waterlow
& Sons Ltd supra at 506. In the next chapter of argument I shall have to
look at Mr Johnston's contentions that there were defences available that
should have been insisted upon by the pursuer rather than settling with Nestor,
but in relation to this chapter I am in agreement with Mr Robertson. In my
opinion, there is enough in the pursuer's averments of settling a vouched
claim, the making of which upon the pursuer had been intimated the defenders,
at a reduced sum (albeit with considerable expenditure in legal fees) to
entitle the pursuer to proof in relation to causation. I reject Mr Johnston's argument on this
point.
Unreasonable rejection of
lines of defence to the previous action
[35] Under this chapter of his submissions Mr Johnston
turned to consider two of the lines of defence that had been suggested to the
pursuer's agents in a letter from the defenders dated 6 June 2005 but rejected by them: voidability of the bond, and failure by Nestor
to constitute the debt or have it admitted. Other lines defence had also been put forward
in the letter but Mr Johnston did not seek to support them. However, it was his submission that either of
the two identified lines would have
provided a complete answer to Nestor's claim and therefore should have been
insisted upon. Because the pursuer had
not insisted on what would have been good lines of defence it could not now
maintain that any act or omission by the defenders or for which they were
liable had caused their loss. As
appeared from the pursuer's Note of Argument, it was its position (and this is
what Mr Robertson came to argue) that each of the suggested lines of
defence was without foundation and that therefore the reference to them in
Answer 4 in the present action was irrelevant and should not be admitted to
probation. Mr Johnston, for his
part, was concerned to emphasise that at this stage it was only a question of
determining whether the lines of defence were arguable. In that case the averments relating to them
should go to proof. It would be for the
judge at proof, on a consideration of the whole evidence, to determine whether
it would have been reasonable for the pursuer to maintain the suggested lines
of defence as answers to the Nestor claim and whether, had it done so, the
lines or one or other of them would have succeeded.
[36] As far as the first line of defence was
concerned, it was Mr Johnston's submission that because the Bond
had been granted in consequence of a fraudulent misrepresentation by David
Murdoch, notwithstanding that Nestor knew nothing of that misrepresentation,
the Bond was voidable and could be set aside. Mr Johnston referred me to the following
authorities: Wardlaw v McKenzie (1859)
21D 940, Sutherland v W M Low & Co (1901) 3F 972, Clydesdale Bank Co v Paul (1877) 626, Gloag The
Law of Contract (2nd edition) at p333 and the Stair Memorial Encyclopaedia,
vol 3. at para 896.
[37] The way the matter is put in Gloag is that
it is probably the law that if a debtor fraudulently induces a third party to
guarantee his debt, the creditor, though innocent of the fraud, cannot enforce
the guarantee unless he has given some consideration for it, either by abstaining
from suing the debtor or by making fresh advances to him. However, having taken me through the cases,
Mr Johnston put less stress on what appeared in Gloag than on what is
found in the article in the Stair
Memorial Encyclopaedia
on Cautionary Obligations and
Representations as to Credit by Sandra Eden. At para 895 of vol 3 of the Encyclopaedia there
is a statement of a general rule that misrepresentations by the debtor, whether
fraudulent or innocent, have no effect on the contract of caution. The following next paragraph is
headed "Limitations to the general rule" and includes the following:
"...in accordance with the general law of contract, if
the misrepresentation by the debtor is such as to generate error as to the
substantials of the contract, this excludes consent and the contract is void ab initio. ...A further qualification to
the general rule that misrepresentations by the debtor do not affect contracts
of caution lies in the equitable principle expressed in Clydesdale Bank Co v Paul, namely that 'a
person cannot avail himself of what has been obtained by the fraud of another,
unless he is not only innocent of the fraud but has given some valuable
consideration'. In other words, in the
context of a cautionary obligation, the creditor must be unaware of any fraud
of the debtor, and must have acted to his own prejudice on the faith of the
obligation before the cautioner remains bound. This principle found its clearest expression
in Sutherland v W M Low & Co ...the cautioner must have been induced by the
fraud of the debtor; merely negligent
misrepresentation is not sufficient. ...the requirement that the person taking
advantage of the fraud of the other must have given valuable consideration
means that the creditor must have acted in reliance on the guarantee to his
prejudice. So if the further advances
are made, or the creditor has prejudiced his chances of recovery from the
debtor by abstaining from suing, he will be able to rely on the guarantee. Where the caution was interposed for an
existing debt, the creditor's position has not been prejudiced and the
guarantor will not be bound."
[38] Thus,
submitted Mr Johnston, the applicable general principle was to allow
reduction of a deed induced by fraud notwithstanding that the party benefiting
from the deed was innocent, where that party had given no consideration. The first line of defence was clearly arguable
and the defenders' averments on this point should be remitted to proof.
[39] Mr Robertson
argued that the first line of defence was not a relevant answer to the Nestor
claim. The statement of the law founded
on by Mr Johnston was dependent on what were (with the exception of what
appears in Wardlaw v Mackenzie) obiter dicta. The cases referred to had dealt with the
relationship of creditor/debtor/cautioner.
It was difficult to extrapolate what had been said to the more complex
situation of an executory, where not only there were beneficiaries with an
interest but also creditors, many of whose debts will have pre-existed the
executor's appointment. It will be
unusual for any of them to have given consideration. Such commentary as there was did not address
the particular features of a bond of caution in the circumstances of an
executory. The decision in Wardlaw v Mackenzie suggested that a critical feature in such a case was
whether or not the bond had been necessary in order for the party whose
intromissions were the subject of the cautionary obligation to enter into the
administration of an estate. Accordingly,
to focus simply on the absence of consideration is an inadequate approach. To set aside a bond in the absence of
consideration having been given will not always be equitable. An insurance company, such as the pursuer
here, must proceed responsibly in response to claims directed to it. Mr Robertson therefore submitted that in
all the circumstances of the present case the first line of defence was not
relevant but even if the court was to conclude that the matter was not clear,
that would indicate that it had been eminently reasonable for the pursuer to
compromise the Nestor claim on the best available terms.
[40] In the
event of it being necessary to do so, I would admit the defenders' averments
relating to the first line of defence to probation. The parties were agreed that David Murdoch
acted fraudulently in completing the application form when he stated that there
were no debts or liabilities on the estate of the late John Murdoch and that he
was unaware of any claims or disputes affecting the estate. It is the pursuer's case that it was induced
to grant the Bond by reason of the terms in which the application form was
completed. Now, I have held that the
pursuer has not relevantly averred that it was induced to grant the Bond by
reason of the fraud of the defenders but it is clear on the pleadings that the
pursuer is maintaining that it was induced to grant the Bond by reason of the
fraud of David Murdoch. I did not
understand it to be disputed that, as a matter of generality, a deed induced by
fraud may be reduced (or otherwise not given effect) where it is equitable so
to do. Equally, I did not understand it
to be disputed that there will be circumstances where it will not be equitable
to reduce a deed induced by fraud and that accordingly the obligation
constituted by the deed will stand. Turning
more particularly to the contract of caution, while it may be correct to state
as a general rule that even fraudulent misrepresentations by the debtor to the
cautioner will have no effect in a question as between the cautioner and the
debtor's creditor, as is demonstrated by the opinions in Wardlaw v Mackenzie and Sutherland v W M Low & Co, there may be circumstances in which the court
will consider it equitable to reduce a bond of caution, notwithstanding the
inevitable prejudice to a creditor. A
variety of circumstances may be relevant to the question as to where the
equities lie, but the matter is succinctly put by the dictum of Lord Shand in Clydesdale Bank v Paul (which he took from the judgement of Lord Chancellor Campbell
in Scholefield v Templer (1859) 28 LJ Ch 452) which is quoted in the article on
cautionary obligations in the Stair Encyclopaedia: "a person cannot avail himself of what has
been obtained by the fraud of another, unless he is not only innocent of the
fraud but has given some valuable consideration". In the case of a cautionary obligation giving
valuable consideration would obviously comprehend extending credit or
abstaining from diligence, as is instanced by Gloag, but it appears to me that
it might also include any material change of position or other reliance on the
existence of the bond. It would might include, as
Mr Robertson stressed, the grant of a title of intromission: Wardlaw v Mackenzie supra at 946 and 948 to 949. Here, on such information as is available from
the averments it is difficult to see that any consideration was given directly
by Nestor, but I agree with Mr Robertson that a legal requirement that a
bond be obtained guaranteeing the intromissions of an executor as a
prerequisite for the administration of the executory estate, introduces a
degree of complexity. As I would see it,
there is something to be said on either side of the question as to whether the
Bond could have been reduced at the instance of the pursuer on the grounds of
David Murdoch's fraud. It is a question
that would be better considered after full inquiry into the facts. It is sufficient for Mr Johnston's
purposes that this line of defence is arguable. In my opinion it is and for that reason I
would be prepared to admit the relevant averments to probation. It is not
appropriate that I express a view beyond that.
[41] In relation to the further line of defence
that should have been adopted, I took Mr Johnston to argue the failure by
Nestor to constitute the debt point only rather faintly. As I understood the point it was that the bond
of caution was to be construed narrowly, so as to limit the extent of the
pursuer's obligation. Accordingly,
before the pursuer could be called on to make payment of a sum that the executor
should have made free and forthcoming to a party having interest, that party
must establish its entitlement by constituting a debt as against the executor
or at least having the debt admitted by the executor. The pursuer was not obliged by the terms of
the bond to pay an illiquid claim. Therefore,
if it nevertheless chose to do so, it could not then contend in an action
against the present defenders that its loss was due to it being induced to grant
the Bond.
[42] I do not propose to examine the soundness
of the propositions advanced by Mr Johnston in support of this part of his
argument because in my opinion it was simply and conclusively answered by
Mr Robertson pointing to the admission by the defenders that Nestor had
taken decree in absence against Carol Murdoch, as executor dative of the late
David Murdoch, prior to the conclusion of the settlement by the pursuer of
Nestor's claim. If constitution of the
debt was a necessary prerequisite of liability, that prerequisite was met. I accordingly reject this part of
Mr Johnston's argument. It follows
that were I to allow the pursuer proof I would not admit the defenders'
averments as to the availability of this line of defence to probation.
Disposal of pleas and
conclusion
[43] The pursuer's case is based on fraudulent
and negligent misrepresentations. For
the reasons given above I consider that neither the fraud case nor the
negligence case is relevant. I shall
therefore uphold the defenders' first plea-in-law and dismiss the action. It follows that had I taken a different view
on the pursuer's negligence case and admitted it to probation I would have
nevertheless upheld the defenders' second plea-in-law. Had I been prepared to allow proof of the
pursuer's case of fraud, contrary to Mr Robertson's submissions I would
have allowed probation of the defenders' averments as to good faith. Had I been prepared to allow proof of the
pursuer's case of fraud or its case of negligence, I would not have allowed
probation of the defenders' averments relating to lines of defence that might
have been adopted by the pursuer in answer to the action at the instance of
Nestor other than that relating to reduction or setting aside of the Bond and
would therefore have upheld the pursuer's first plea-in-law to that extent.
[44] I shall reserve all matters relating to
expenses.
