| Obligations Law Blog

The duty of confidentiality incumbent on solicitors in respect of their clients’ affairs is well known, and is narrated in both the Code of Conduct published by the Solicitors’ Regulation Authority and in the Rules relating to the conduct of solicitors published by the Law Society of Scotland. The relevant rules embodied in each instrument neither require nor permit a solicitor who discovers that a client has been engaging in criminal conduct to communicate this to a third party (or their legal agent) who may be adversely affected by such criminal conduct: on the contrary, the English Code of Conduct provides for no exception to the duty of confidentiality in relation to knowledge of criminal conduct, and the Scottish rule makes an exception only in relation to circumstances where a client indicates that he or she will commit a crime in the future (thus apparently excluding cases of the communication of past criminal acts from the exception). However, despite there being no indication of this exception in these rules, the duty of confidentiality does not extend to circumstances where fraud or some other illegal act is alleged against a party whose law agent has been directly concerned in the carrying out of the very transaction which is the subject-matter of inquiry. That exception, established in prior case law (see Micosta SA v Shetland Islands Council 1983 SLT 483), has been reaffirmed in a recent decision of the Inner House of the Court of Session, a decision which has in addition explored the nature of the potential liability which may fall on a law agent for losses caused to a third party as a result of complicity in his or her client’s fraud.

The decision in question is Frank Houlgate Investment Co Ltd v Biggart Baillie LLP ([2014] CSIH 79, 2014 SLT 1001, [2015] PNLR 3). The relevant facts were that the defenders, a firm of solicitors, had a client who had fraudulently represented to the pursuer (an investment company) that he owned an estate in Fife worth £2.6 million. Discussions followed between the fraudster and the pursuer relating to the possibility of a joint venture to create a luxury golf development on the estate. In reality, an entirely unconnected party (whom the fraudster was impersonating) lived at and owned the estate, this individual knowing nothing of the fraudster or his deception. The defenders, to whom the fraudster had also fraudulently purported to be the owner of the estate, acting through one of their directors (a Mr Mair), prepared a standard security over the estate in favour of the pursuer, incorporating a personal bond for £300,000 in the name of the actual owner of the estate. On the strength of this security (which the fraudster executed), the pursuer advanced various sums of money to the fraudster in furtherance of the purported development of the site. The security was registered in September 2006. In January 2007, Mr Mair received information suggesting that the true owner of the estate was not his client. When Mr Mair confronted the fraudster with this information, he admitted the truth but said that he would clear matters up directly with the pursuer. On the basis of that undertaking, Mr Mair undertook not to approach the pursuer’s solicitors, at least until his client had had a chance to speak to the pursuer. Later that month, the pursuer, still knowing nothing of the fraud, advanced the fraudster the further sum of £100,000. Thereafter, the fraudster fraudulently discharged the standard security.

The pursuer sought this sum of £100,000 by way of damages from the defenders. The pursuer claimed that Mr Mair, once he knew the true position, and while not intending to deceive, had acted in furtherance of his client’s fraud, thereby exposing the defenders to liability to damages in delict. The defenders argued that Mr Mair had not been actively engaged in any fraud, neither was he liable for fraudulent concealment (there having been no duty of disclosure on Mr Mair’s part) nor for a reckless omission. At first instance, the judge (Lord Hodge, later apppointed to the Supreme Court) found the defenders liable in damages in delict to the pursuer. They, through Mr Mair, had been an accessory to fraud, because Mr Mair had failed to dissociate himself from his client’s continuing fraud by withdrawing from acting and had failed to warn the pursuer or its solicitors that they could not rely on the invalid security. Mr Mair had thereby acted in furtherance of his client’s fraud, causing the pursuer to lose £100,000.

The description of what Lord Hodge thought had been the duty of Mr Mair on discovering his client’s fraud is noteworthy: the first of the two mandated requirements – that Mr Mair cease immediately to act for the client – is notorious and unexceptional; the second – that he communicate either to the other party or to its legal agents that the other party “could not rely on the security” – is an injunction that might have caused surprise to some members of the legal profession. While such a statement would not expressly communicate any confidential information relating to the client to the other party, it might at least be strongly suggestive of some impropriety on the client’s part. However, Lord Hodge (and, as discussed below, the Inner House) issued a useful reminder that the duty of confidentiality is inapplicable where a fraud, disclosed by a law agent’s client, is one which the solicitor has wittingly or unwittingly facilitated through his conduct. Mr Mair was thus unable to rely on any alleged duty of confidentiality in relation to the admission by his client of a fraud with which he had been associated (through preparing the security documentation). This useful reminder is one of which members of the legal profession would be well advised to take note.

The defenders appealed, arguing that Mr Mair was not an accessory to the fraud as (i) he did not meet the criteria for liability as a joint wrongdoer, and (ii) there was no common design between him and the client to defraud the pursuers. The appeal court upheld the finding of the judge at first instance that the defenders were liable for the pursuer’s loss, and dismissed the defenders’ appeal. There was however some disagreement on the bench regarding the proper basis of liability for such loss.

Two of the three judges (Lords Menzies and McEwan) agreed with the approach of Lord Hodge that Mr Mair had been an accessory to the fraud of his client, this founding liability for the pursuer’s loss. In addition, one of them (Lord Menzies) was of the view that the principal ground of liability was that Mr Mair, being under a duty of honesty towards those with whom he interacted, had made an implied, continuing representation that he did not know the information provided by his client to be untrue; when he discovered that that representation was no longer true, and failed promptly to correct it, he became liable for any losses flowing from it. This flowed from the duty of a solicitor to act honestly.

While agreeing with Lord Menzies that Mr Mair was under a duty of honesty, the third judge (Lord Malcolm) disagreed with Lord Hodge’s view that the liability of the defenders could be based on Mr Mair being an accessory to the fraud of his client: a person could not make himself liable as an accessory to a crime without having, to some degree, the mental element necessary for commission of the wrong itself, and Lord Hodge had found, as a matter of fact, that Mr Mair had not been subjectively dishonest. Nonetheless, Lord Malcolm took the view that Mr Mair was liable in delict for the pursuer’s loss, arguing that he was bound by the equivalent of a Hedley Byrne type assumption of responsibility on his part for the accuracy of the information provided by him.

The statements on the exception to the duty of confidentiality were, at the appeal stage, not as helpfully expressed as those of Lord Hodge at first instance. Lord Malcolm talks simply of a “fraud exception”, and Lord McEwan of the “the fraud of his client relieving [Mr Mair] of any duty of confidentiality”. Caution needs to be shown here: it is not a mere confession of a client’s criminal activity which negates a solicitor’s duty of confidentiality towards the client; were that so, no one could confidently seek legal advice in relation to past criminal activity without fear of its being disclosed. Lord Hodge’s formulation – that what is exempted from the duty of confidentiality is knowledge of a fraud committed by a client which the solicitor has facilitated (as well as any disclosure by the client of an intention to commit criminal activity in the future) – is the more accurate formulation.
The disagreement between the judges of the Inner House of the Court of Session as to the basis of the defenders’ liability is noteworthy. Lords Menzies and Malcolm agree that a solicitor comes under a duty of honesty not just to his or her client, but also to other members of the legal profession and to the general public. This duty is described by Lord Menzies as deriving, not from the law of delict, but from an individual’s position as a solicitor. It gave rise, on the facts of this case, to a “continuing implied representation” on Mr Mair’s part that he was not aware of any fundamental dishonesty or fraud which might make the security transaction worthless. Lord Menzies seems to suggest that liability resting on such a basis would not be constrained by the usual limitations that would affect liability for misrepresentation arising on the basis of Hedley Byrne, that is, by the considerations of foreseeability, proximity, and justice, fairness and reasonableness (the Caparo limitations ). If so, the untrammelled consequences of such a breach of honesty have the potential to be very far-reaching and onerous (one wonders whether Lord Menzies turned his mind to that issue this when reaching his decision).

Lord Malcolm’s analysis of the consequences of Mr Mair’s dishonesty is couched in more overtly delictual language, and is more akin to descriptions of the usual consequences of misrepresentation in delict: he says that “the case for liability is at least as strong as in Hedley Byrne … the obligations flowing from Mr Mair’s position as a solicitor can be seen as the equivalent of a voluntary assumption of responsibility.” But Lord Malcolm does not say whether, in his view, Caparo type limitations on liability would apply in the case of breach of this duty, which again leaves liability in a potentially unlimited state.

The disagreement between the majority and minority on the issue of the defenders’ accessory liability for fraud may be an even more significant point. Lord Menzies, for the majority, re-emphasises that there is no Scottish authority for the proposition that it is necessary for an accessory to have the same intent as the fraudulent principal. The lack of a subjective dishonest intent on Mr Mair’s part was thus irrelevant: honesty had to be measured by an objective standard. An analogy with the criminal law was appropriate, and it did not matter that English criminal law differed in the approach taken to this question. By contrast, Lord Malcolm, as noted earlier, was of the view that the mental element, in some degree, necessary for commission of the fraud was required by an accessory. No clear answer to this issue is given in the older authorities: the passage from Stair’s Institutions of the Law of Scotland concerning accessory liability gives examples of conduct which are of a more active sort than mere failure to alert another of fraud, and makes no mention of the mental state required of the accessory. Lord Malcolm raised his concerns by posing some examples concerning what is required to establish accessory liability for fraud based on an omission to do something:

“Suppose someone overheard [the fraudster] plotting his scheme? Would that person’s inaction create a liability in damages to the victim? To think more generally, imagine that a user of a bank cash machine notices a suspicious device designed to steal the users’ details. Does he become liable as an accessory if he fails to warn the others in the queue? In my opinion, more is needed before legal responsibility is imposed.” (para 64)

These examples give rise to somewhat phantom concerns however, because the facts of the case before the court did not involve the potential for imposing accessory liability on a complete stranger to a fraudulent transaction who merely happened to learn of it; in the case before the court, Mr Mair had prepared the very legal instrument which was used to defraud the pursuer, and he had done this on the basis of information presented to the pursuer by the fraudster which Mr Mair subsequently discovered was false. One might suggest that if ‘more is needed’, this intimate involvement in the mechanism of the fraud should have been sufficient (as indeed it was thought to be so by the majority judges). Nonetheless, the potential consequences of this judgment for an expansion of accessory liability in delict in Scots law, especially when compared to the lack of such liability in English law, give cause for concern: the courts will require to give fuller consideration to what sorts of omission might trigger such accessory liability.

An intended appeal by the defenders against the decision of the Inner House to the Supreme Court was abandoned. While therefore this decision serves as an important reminder that a solicitor’s duty of confidentiality does not extend to information regarding fraud by a client which the solicitor has wittingly or unwittingly facilitated, the two other important matters raised in the case – a duty of honesty/duty of care as the potential basis of liability of a solicitor towards a third party, and the mental element required to be an accessory to fraud – will not now be subject to what might have been useful further consideration by the Supreme Court, at least in the context of the Houlgate litigation.

[A shortened version of this blog post will appear in a forthcoming edition of the Journal of Professional Negligence]

Undertakings given within a social context are often held not to give rise to any legally enforceable contracts (or unilateral promises). A story, on the BBC’s website (here) therefore makes for interesting reading. A boy (or perhaps his parents, it is unclear from the story exactly who) has been invoiced for costs resulting from his failure to attend a friend’s birthday party. The precise item billed by the birthday boy’s disgruntled parents is listed in the invoice as being “Birthday Party No Show Fee”, though what this actually relates to seems to be be an amount charged by the ski slope at which the party took place in respect of the absent boy.

The issuing of such an invoice may be a bizarrely cold and formal way to complain about the absence of a party guest, but it raises the interesting question of whether the sum can be claimed at law. The birthday boy’s parents seem to think it can: they are suing the absent boy (or his parents) in the small claims court for the amount of £15.95. But is there legal liability here? For any claim to be contractual in nature there would require to be a determination that the absentee boy’s parents, in accepting the invitation, had intended to enter into a contract obliging the child to attend. That seems an unlikely inference, albeit that there would be (as it seems there was in this case) wasted expenditure incurred by the birthday boy’s parents if the invited child did not in fact attend (a pecuniary interest can sometimes clothe an otherwise unenforceable agreement with contractual force). If there was no contract (or, had the events taken place in Scotland, no unilateral promise either), then it is hard to see what else might provide the basis for the claim. Did the absent boy’s parents make an actionable misrepresentation in stating he would attend, or in not intimating his non-attendance when it became clear that he could no longer attend? It seems unlikely that any such misrepresentation, if such there was, would be held to give rise to a duty of care in tort/delict in respect of the economic loss suffered by the birthday boy’s parents.

All in all, this looks like a small claim which is destined to be thrown out by the court if the matter does indeed get that far. A finding otherwise would certainly make this blogger think twice before accepting any future birthday party invitations.

A remarkable story appears here in today’s Daily Telegraph newspaper about a US hotel which charges guests a $500 “fine” for every negative review posted online by them, or anyone in their party, about the hotel. The hotel’s website warns prospective guests as follows:

“If you have booked the Inn for a wedding or other type of event anywhere in the region and given us a deposit of any kind for guests to stay at USGH there will be a $500 fine that will be deducted from your deposit for every negative review of USGH placed on any Internet site by anyone in your party and/or attending your wedding or event.”

This isn’t a classic penalty clause, as it’s not a sum stipulated to be paid upon breach of contract, but it’s certainly something that would put most contractors “in terrorem”, to use the Dunlop Tyres case language, this blogger should have thought.

Whatever the legality of this purported fine in US contract law, assuming that the posted warning became a term of the contract it would be the sort of clause which would, if this were a Scottish or English case, be very likely to be struck down by the Unfair Terms in Consumer Contracts Regulations 1999 – Regulations which strike non-negotiated, unfair terms out of contracts. A term is “regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.” A clause designed to prevent the customer from publicly recounting a poor level of service would, in this blogger’s view, qualify as one causing a significant imbalance in the parties’ relationship.

Safe to say, this blogger won’t be staying at the hotel in question any time soon on a visit to the US!

It cannot be very often that a judge’s discussion of a pertinent issue in litigation is summed up as being “whether the pursuer has established on the balance of probabilities that the seagull which attacked her” came from a building owned by the defenders in the case. Visions arise of seagull identity parades. Strange though an issue such as this might be, it was expressed to be the principal question at issue in the recent Outer House decision of Kelly v Riverside Inverclyde (Property Holdings) Ltd. The pursuer had been exiting her workplace in Greenock when she was ‘divebombed’ by a seagull which had been nesting, she alleged, in the building (which was owned by the defenders). In an attempt to avoid being struck by the seagull, the pursuer had fallen and injured herself. She sued the defenders for damages, alleging that they were in breach of a duty care owed under section 2 of the Occupiers’ Liability (Scotland) Act 1960 (and in breach of concurrent common law duties of reasonable care), and in breach of regulations 5 and 17 of the Workplace (Health, Safety and Welfare) Regulations 1992.

The pursuer’s case was dismissed for the simple factual reason that the court considered there to be no evidence that the gull responsible had indeed been nesting in the defender’s building, rather than in another building nearby on which there were other nesting gulls. So, the pursuer’s case failed primarily for evidential problems. However, the court’s consideration of whether, apart from this evidential problem, the pursuer would have had a good case is worthy of a few comments.

In relation to the case based on breach of the occupier’s duty of care under the 1960 Act, the judge held that the case would have failed on the basis that there was no breach of the duty of care owed under section 2 of the Act. Why not? Because the injuries suffered by the pursuer were not reasonably foreseeable, there being no evidence that the defenders were aware of any previous incidents involving swooping gulls and thus of any danger of this nature which might be posed by the gulls. One might question, however, whether the absence of any prior reports of swooping gulls would really have been enough to exculpate the defenders from possible breach of their duty. If, for instance, there had been evidence that gulls were in fact nesting in the building (which there was not), and the defenders were aware of this, then arguably the defenders should have taken steps to have removed the gull’s nests or to have taken some other protective measures, whether or not any incidents of swooping had been drawn to their attention. My point is that the problem of swooping gulls during nesting season is well known, so arguably the presence of such nesting gulls on specific premises would of itself be sufficient to make injuries sustained as a result of swooping gulls reasonably foreseeable.

In relation to the case based on the Workplace (Health, Safety and Welfare) Regulations 1992, the judge thought that neither regulation was applicable to the case at hand. Regulation 5 was thought inapplicable because it relates to maintaining (including cleaning as appropriate) the workplace in an efficient state, in efficient working order and in good repair. None of what the pursuer said ought to have been done in this case – the use of spiking, meshing and netting to prevent the gulls nesting – was thought to be relevant. One thought occurs, however, and that is that that cleaning of the building’s guttering to remove any nests could surely be classed as maintenance (indeed cleaning is specifically mentioned in the Regulation), so perhaps an opportunity was missed to phrase the employer’s failure to act in a fashion that might have brought it within the terms of Regulation 5. As for Regulation 17, that was thought inappropriate because it requires that “every workplace shall be organised in such a way that pedestrians and vehicles can circulate in a safe manner”, and ‘organisation’ of the workplace was not relevant to the control of wild animals such as gulls (which seems a reasonable conclusion).

The decision seems right on the facts – given the failure to identify the source of the nesting gull – but it is suggested that occupiers of buildings nonetheless need to be vigilant in ensuring that they undertake reasonable steps to combat the problems caused by swooping gulls during nesting season. Regular inspection of buildings seems prudent, and the use of netting or spiking to avoid nesting would indeed seem sensible precautions in areas where gulls are known to be problematic. And, as argued above, this blogger takes the view that the very presence of nesting gulls on a building would of itself create a reasonable foreseeability of injury to persons entering or leaving the building, and thus impose on occupiers a duty to take proactive steps to combat the likelihood of such injuries occurring. Of course, the problem for any potential litigant remains: how do you identify the gull that attacked you, and where it was nesting? Rounding up the usual suspects for a gull identity parade is likely to be beyond the ability of even the most diligent firm of solicitors.

This blogger is currently researching and writing a new book (to be published by Cambridge University Press under the title “Obligations: Law and Language”) on fundamental structural language in the law of obligations. Many fields of law, including obligations, rely on such language to provide basic building blocks for the law and when analysing the nature of obligations and the consequences flowing from them (including remedies). In the law of obligations, such language includes terms such as ‘obligations’ itself, ‘liability’, ‘conditional’, ‘contingent’, ‘unilateral’, ‘bilateral’, ‘mutual, ‘independent’, ‘gratuitous’, ‘onerous’, ‘injury’, and ‘harm’, amongst others. Although such language is frequently used by the courts (and legislators), it is often unclear which of a number of senses is intended in a specific instance of usage of a term. The purpose of my intended book will be to explore the meanings of such terms, and to look at the way in which a number of jurisdictions (including the Common Law states of the USA, Canada, Australia, England & Wales, and the mixed legal systems of Scotland, and South Africa) and model law instruments (including the DCFR, UCC, and a number of Restatements) employ such language.

The importance of precision in the usage of such words is frequently demonstrated in case law in which the terms are employed. Only yesterday, the Court of Session handed down a new judgment (in the case of Edgar v Edgar) in which one basis for the court’s finding in favour of the pursuer rested upon whether a disposition granted by her in favour of the defender was or was not “gratuitous” in nature (if it was, then her unilateral error in granting it could found reduction of the deed). While the court found that the disposition was indeed gratuitous in nature, the matter appears to have been of some doubt (indeed, the pursuer’s counsel seems to have changed his position during the course of pleadings, from asserting that the deed was granted onerously to asserting that it was a gratuitous grant – see the discussion at paras 36-37), and the judge himself does no more than narrate his conclusion that the circumstances supported the conclusion of a gratuitous grant; there is no explanation as to the judicial understanding of what “gratuitous” means, or as to why the conclusion was reached. In this specific case, the failure to explore this issue was not as crucial as it might have been, as the judge held that, even if the grant had not been gratuitous, the defender’s bad faith (coupled with the pursuer’s unilateral error) would also have founded a reduction of the disposition, but in other cases the gratuitous nature of a transaction might be thrown more sharply in to focus.

This recent case is merely one example among many of the importance of defining fundamental structural language with care and precision. The book which I am currently writing will demonstrate that too often such language is used in a careless or imprecise way, something which can lead to inconsistent results and hinder the administration of justice.

The Scottish Law Commission published yesterday a Discussion Paper on third party rights in contract law (the DP may be downloaded here). This is an important area of contract law, and reform has been long overdue; ever since the English Law relating to third party rights underwent a sea change in the Contracts (Rights of Third Parties Act 1999), the Scots law in this field has looked distinctly outdated and, more importantly, uncertain. The Scottish Law Commission is considering encapsulating the law of third party rights in a modern, comprehensive Act (an alternative would be simply to tidy up uncertain areas of the law). This observer would strongly favour the comprehensive, statutory option, as part of a more general move towards codification of the law of obligations. Such a codification would set out the law in a clear, easily accessible fashion, thereby making the law of obligations easily accessible to the general public and resolving the problems caused by the many muddled and unclear parts of our law.

Comments are invited by the Scottish Law Commission on the DP by 20th June 2014.

The Inner House of the Court of Session has given its judgment in the case of Bavaird v Sir Robert McAlpine and others, and has held that liability for the exposure to asbestos of a council worker, resulting in his subsequent death from mesothelioma, by the now defunct East Kilbride Development Corporation (EKDC) passed to its successor, South Lanarkshire Council (SLC). In so holding they overturned the decision at first instance that liability did not transmit. The result is good news for employees of statutory bodies, like local authorities, who are negligently exposed to asbestos but who do not go on to develop symptoms, as is common, for many years afterwards: the Inner House’s decision means that their right to claim damages will be exercisable against any statutory successor of the body which exposed them to the danger.

I argued elsewhere (see ‘Liabilities and Obligations: Two Different Concepts?’ (2013) Journal of Professional Negligence 186) that the decision at first instance was an unfortunate one. It seemed perverse that someone’s right to claim damages for an asbestos-related injury should be dependent upon whether or not their employer was still in existence (in which case recovery would be undoubted), or whether its rights and liabilities had been taken over by a successor (in which case, according to the 1st instance judgment, there would be no transmission of liability). Holding that liabilities do not transmit to successor authorities thwarts the underlying purpose of the very legislation transferring rights and liabilities in such cases, and is therefore heartening to see a purposive approach to interpreting such legislation being approved of in both of the substantive judgments in the Inner House (those of Lady Paton and Lord Drummond Young).

The outcome at first instance was reached on a judicial assessment of the order transferring rights and obligations from EKDC to SLC as not extending to liabilities which had not matured at the time of the transfer into enforceable obligations to pay compensation to injured parties. This meant that those who had been exposed negligently to asbestos (this constituting the injuria element of a delict) but who did not begin to manifest any ill effects of the exposure (the damnum element of a delict) until after the transfer of liabilities to the successor body were unable to claim. The judge at first instance held that no ‘liability’ (the term used in the relevant legislative provision) to compensate such people had existed when EKDC ceased to exist, nor indeed could there even be said to be a ‘contingent liability’ in existence at the time, as for a liability or an obligation to be ‘contingent’ there had first to be some ‘obligation’ in existence, and a delictual obligation required the presence of both injuria and damnum before it could be said to exist. In the article in the 2013 JPN referred to above, I criticised this approach, both as misunderstanding the point that liabilities can be contingent in a sense other than that described by the judge at first instance, but also because such an interpretative approach thwarted the purpose of the legislative provisions.

On appeal, Lady Paton, in the leading judgment, made two important arguments justifying the decision to overturn the judgment at first instance:

(1) Construing the order as a whole, and adopting a purposive construction, it was clear that the word “liabilities” in article 2 of the transfer order included “contingent liabilities and potential liabilities”, such as liabilities which emerged after the date of transfer (such as liabilities to pay damages which arose only on the manifestation of physical symptoms); and
(2) Quite apart from article 2, there was a further provision of the order (article 3) stating that “anything done” before the date of transfer by EKDC “for the purposes of or in connection with the property, rights and liabilities transferred by article 2” was, after the date of transfer, to be treated as having been done by SLC.This meant that the exposure of the deceased employee to asbestos by EKDC was to be treated as something done by SLC, so that in effect both the injuria and the damnum in the case were to be treated as caused by EKDC.

The purposive approach adopted in this first argument is to be approved of, as is the result, but two aspects of Lady Paton’s approach are worth exploring further:

(a) what is the difference, if any, between ‘contingent liabilities’ and ‘potential liabilities’?; and
(b) was article 3 in fact supportive of the conclusion reached by the court?

These are considered in turn.

(a) what is the difference, if any, between ‘contingent liabilities’ and ‘potential liabilities’

The appearance of the idea of a ‘potential liability’, and the suggestion that is may be something different to a ‘contingent liability’, was a development in the Inner House. At first instance there was reference only to ‘contingent’ liabilities. The change in terminology may reflect usage of the phrase ‘potential liability’ in the recent Supreme Court case of In Re Nortel Group of Companies [2013] UKSC 52 (though this case is not mentioned in the judgments of the Inner House), but if that is so it seems odd to suggest that potential and contingent liability might mean something different, as the judgments in Nortel switch between the language of potential and contingent without seeming to suggest any difference in meaning. So do the two terms differ in meaning? The fact that Lady Paton mentions both might suggest so, and this suggestion is made stronger by a further reference by her (at para 36) to the fact that:

“The pursuers’ argument had changed and developed since the debate in the Outer House. In the Outer House, the pursuers periled their case on contingent liability, whereas in the Inner House they relied primarily upon the concept of potential liability, failing which contingent liability.”

Counsel clearly thought contingent and potential liabilities were different, and the suggestion is that Lady Paton does too. Frustratingly, what the difference might be between the two is not explained. One suspects that, because of the strong judicial view expressed at first instance that, for a contingent liability to exist, there must be a completed obligation (i.e. injuria plus damnum) to begin with, the reclaimer’s counsel in the case were wary of using the idea of contingent liability again on appeal. I think the view taken at first instance was a mistake, as I have argued elsewhere, and there is amply authority, both native and foreign, to suggest that obligations/liabilities may indeed be contingent in the sense of not yet having arisen. However, if the tactic was adopted for the reasons suggested, then it would seem that what perhaps was meant by ‘potential liability’ was something which is not yet a completed obligation, i.e. (in a delictual context) it is just the presence of injuria without damnum, thus a state of affairs which has the ‘potential’ to become a completed obligation but only on the occurrence of damnun. It seems to me however that there is no need to have drawn this distinction between potential and contingent liability; as I have argued before, a proper understanding of ‘contingency’ is that it is a term which can be used to mean EITHER an obligation which has been formed, but under which performance will only become due in the event of some uncertain future event (contracts may be contingent in this sense), OR an obligation which has not yet been formed but which might be, i.e. one whose very existence is contingent upon an uncertain future event (contract and delict can both be contingent in this sense). So, I don’t think there was any real need to employ the term ‘potential liability’ in distinction to ‘contingent liability’, one could simply have said that the mere presence of injuria gave rise to a contingent liability, and such was caught by the relevant article, but in any event this did not prevent the correct result being reached. It would however have been very helpful to have had explained what the judicial understanding of the difference in the two terms was.

(b) was article 3 in fact supportive of the conclusion reached?

As to this second part of Lady Paton’s justification for overturning the decision at first instance, I’m not entirely convinced that this in fact was relevant to the question at hand. Her Ladyship says (at para 30) that article 3 has the effect that the “negligent exposure to asbestos” of the deceased man, which occurred during the existence of EKDC, was “something done … by, or on behalf of, or in relation to, EKDC for the purposes of its property, rights and liabilities”, and hence transferred under article 3. My concern is that this is arguably stretching the semantics of the phrase ‘something done’ beyond the purpose the phrase needs to serve.

How were EKDC, in exposing an employee to asbestos, “doing something” for the purposes of, or in connection with, their property, rights or liabilities? Lady Paton, in describing the effect of article 3, gives the example of “general maintenance work on housing stock, including roof repairs” as being something done for such purposes, and one can see why this example makes sense: repairing the roofs of a council’s housing stock is something done to maintain its property and thus preserve the value of an existing right of ownership in the property. Similarly, an example of something done to preserve a claim in contract might be a notification to a debtor that EKDC considered a contractual debt as still outstanding – such a notification would reset the prescriptive clock, and thus preserve its right to enforce the contractual debt (the same might be said of a right to claim damages in delict from a party which had negligently damaged Council property). Such an act would quite properly be classed as something done “for the purposes of or in connection with” a contractual (delictual) right (claim), given that it preserves the very existence of the claim. Similarly, the act of EKDC in tendering payment under a debt owed by it, or of entering a defence in an action raised against it, would be something done “for the purposes of in connection with” a liability, and would properly fall, under article 3, to be considered as having been done by the successor authority.

But negligently exposing a person to asbestos is not done for “the purposes of” a right or liability, as it is neither done purposely nor, until the exposure occurs, is there any liability; on the contrary, it is something which creates the liability in the first place. Exposure to asbestos could only be done for the “purposes of or in connection with” the liability ensuing if (perversely) it was done with the intention that the Council, in exposing the employee to asbestos to create, would be creating such liability (a very unlikely event).

Now, perhaps it might be countered that my argument adopts too strict an interpretation of the phrase “for the purpose of or in connection with”, but I find the application of this provision in connection with negligent (i.e. non-purposeful) exposure to be stretching the meaning of the phrase too far, especially given the context of the article in which it appears, an article designed (it seems to me) to ensure that actions taken in relation to existing property and ‘obligations’ (in the widest sense) of the dissolved entity are to be deemed to be actions of the successor.

It is worth adding that this critical observation on the article 3 point does not undermine the decision of the Inner House: the conclusion reached is perfectly able to stand by reference simply to the interpretation adopted of the meaning of ‘liabilities’ as used in article 2.

Conclusion
Neither of the above two observations on aspects of the generally commendable judgment of Lady Paton in any way undermines the welcome good sense which the decision of the Inner House brings. Had the decision gone the other way, there would doubtless have been mounting pressure for a legislative change to ensure that the unjust deprivation of delictual entitlement in cases of this sort was rectified. I understand that the Inner House’s decision may be being appealed to the Supreme Court. If so, it is to be hoped that the outcome provided for by the Inner House is preserved.

Next week sees an event to launch a new comparative project in the field of obligations law, a study on Misconduct in European Tort Law. The project is being sponsored by the European Centre for Tort and Insurance Law (ECTIL), and the event is a conference at Bocconi University in Milan.

Over the next 2 years the project’s contributors will be studying how the legal systems of the EU countries address the issue of ‘misconduct’ in their tort/delict laws. The intended outcome of the project will be the third volume in a series entitled the ‘Digest of European Tort Law’ (the previous volumes were on the topics of (i) Causation and (ii) Damage).

A further report will follow on the proceedings of the Conference, and on what reflections Scottish lawyers might have on the way we address misconduct in our law (largely dealt with by reference to the idea of ‘culpa’, wrongful conduct, and its relationship to the infringement of various interests protected in the law) in the light of European approaches to the subject.

A poster of the Conference speakers may be accessed here: Poster

The Scottish Parliament is to debate on 29th October 2013 a motion concerning strict liability on Scottish roads. The motion reads:

“Strict Liability

That the Parliament believes that the number of fatalities and injuries to pedestrians and cyclists on Scotland’s roads, including in the Lothian region, is unacceptably high; recognises that the Scottish Government has funded a number of national cycle safety initiatives; notes that versions of a strict liability rule exist in the civil law of many European countries; notes that a number of walking and cycling organisations support the introduction of such a law in Scotland; understands that a petition by Cycle Law Scotland on this topic has secured nearly 5,000 signatures; considers that a stricter liability rule could have positive benefits for the safety of more vulnerable road users as part of a package of measures, and would welcome further debate on this proposal.”

The motion has cross-party support.

What is interesting to this observer is that it is not entirely clear to whom the proposed strict liability for injuries might be intended to apply. The website of the campaign backing the change in the law (www.cycling-accident-compensation.co.uk/strict-liability.aspx) talks about introducing strict liability as a means of protecting “cyclists and other vulnerable road users”, but does not clearly explain (so far as I can see) who these ‘other vulnerable road users’ are. Do they include pedestrians? The motion before the Scottish Parliament would suggest so. But would they also include, say, drivers of scooters and motorcycles? Such road users are often struck by drivers of cars, vans and lorries who fail to notice them, so there would seem to be a reasonable case for arguing that they are also ‘vulnerable road users’.

Ultimately, of course, vulnerability on the roads is a relative matter: a cyclist is vulnerable when compared to the driver of a car, but a pedestrian is also vulnerable when compared to a cyclist. It is not clear whether any Bill that might ultimately be proposed would reflect a hierarchical norm, making those higher up the hierarchy stand in a position of strict liability to those beneath them in the hierarchy, but also giving them the right to claim strict liability against those higher up the hierarchy. If strict liability is to be imposed, then such a hierarchical approach would seem fair, and indeed a hint that the organisers of the campaign agree with this is given in the statement on their website that any Bill would “reflect a hierarchy of road users”. That is a sensible concession, as it would seem lop-sided if, say, cyclists were to benefit from strict liability imposed on car drivers but not be subject to it they injured pedestrians.

In drafting any legislation, care would have to be taken to deal not just with strict liability in respect of injuries caused on the roads, but also on the pavements, given the propensity of some cyclists to cycle on the pavement or to switch between road and pavement and back to road at junctions where red lights are against them.

The details of any Bill may become clearer during the coming debate, which this observer will be watching with interest.

The Inner House of the Court of Session has recently delivered (12th September) its decision in the case of Royal Bank of Scotland plc v Carlyle [2013] CSIH 75. In its judgment, the Inner House held that an oral representation by an employee of the pursuers, made during the course of a telephone call with the defender, to the effect that the pursuers had approved funding for a development proposed by the defender did not give rise to any binding voluntary obligation on the pursuers’ part (the precise words used were “It’s all approved. Edinburgh are going for it for both houses” – see para 56 of the judgment). In particular, the employee’s statement did not constitute a ‘collateral warranty’ on the bank’s part. The decision reached by the Court – that the Royal Bank did not undertake any binding obligation by virtue of what its employee said, whether of a freestanding or collateral nature – seems the right one. In reaching its decision, the court made some interesting remarks on the nature of so-called “collateral warranties” in Scots law. It will be suggested below that some of what was said by the Court is too limiting as regards the nature of warranties in Scots law.

Collateral warranties – what are they?
The defender’s case was premised on the argument that, in speaking as she had done on the telephone, the pursuer’s employee had made a “collateral warranty” in respect of the funding assurance. This led the Inner House to ponder at some length what the nature of a “collateral warranty” might be in Scots law (and whether, for instance, it is contractual in nature, or has some other basis in law). The term is encountered less frequently in Scotland than it is in England.

In pondering what, if anything, might be indicated by something being referred to as a ‘collateral warranty’ in Scots law, the Court prefaced its consideration of this by noting that voluntary obligations can, in Scotland, be undertaken in one of two ways: consensually, in a contract, or unilaterally, through a promise (see para 51). Such obligations fall to be distinguished from mere representations not intended to have obligatory force. These points were well made, though it is suggested that this is only part of the background to ‘collateral warranties’. Warranties, in the broad sense in which they are often used in commercial contracts (and there are narrower senses, as discussed below), encompass both undertakings made by a party, but also statements/assurances held out as true but which do not, of themselves, expressly state any undertaking. So, in a construction contract, a collateral warranty document might include assurances made by a heritable proprietor of land, to a contractor, about the nature of the land, e.g. that it is not polluted, that the substructure of the land is clay and not limestone, and so forth. Such statements are frequently referred to as ‘collateral warranties’ though they do not of themselves state any obligation, even if obligations to be implemented if the statements are not true (e.g. the payment of damages) may appear alongside such statements. The answer to this point may be that it is only the statement held out as true coupled with the obligation to be undertaken if the statement is untrue which, together, fall to be considered as the ‘warranty’, but it is not clear that this would be an accurate reflection of the use of the term ‘warranty’ in practice.

Leaving that point to one side, the Court continued by analysing the term ‘collateral warranty’, saying that the legal meaning of both of its component words were ‘well known’ (para 52). A warranty was said by the Inner House to be “a term of a contract” (para 52). This is true as far as it goes: warranties may be contract terms, but a warranty may also be constituted by a unilateral promise, and the Court’s failure to acknowledge this is somewhat surprising at this point, given that the Court’s later consideration of whether the words spoken during the telephone conversation might amount to a promise seems to suggest that the Court did consider that a warranty might be constituted in promissory form. (One of the authorities cited for the nature of a warranty as a contract term is McBryde. Contract, 3rd edition, para 20-93, yet in this paragraph McBryde is merely making the point that what in English law are considered either ‘warranties’ or ‘conditions’ are both in Scots law simply contract terms – but this is a meaning of warranty in English law distinct from the more general usage of warranty to mean an assurance, so this passage of McBryde does not support the idea that warranties must be contract terms.) This being so, doubt must be expressed about the Court’s subsequent statement that a warranty is

“not something which exists as a free standing legal entity outwith a contract. It is not the same as an “assurance”, which may or may not be a term of a contract”

On the contrary, I would suggest that a warranty may indeed be a free-standing legal entity outwith a contract: were that not so, a warranty issued by manufacturer C in respect of its goods could not exist separately of a contract for the sale of the goods by supplier B to customer A without giving such a warranty the forced construction of an offer impliedly accepted by the owner of the goods, yet such warranties do exist apart from the contract of sale under which they are sold and in Scots law it is entirely possible to see such warranties as unilateral promises issued by the manufacturer to the owner of the goods. The fact that some collateral undertakings have been analysed as contractual in nature (as appears to have been so in British Workman’s and General Assurance Co v Wilkinson (1900) 8 SLT 67, a case cited by the Inner House) does not entail that all collateral undertakings must be contractual in nature. The Court’s suggestion that warranties must be contractual looks all the more odd given that, following its discussion of the nature of warranties as contractual, it proceeds to state (para 55) that “the obligation arising may be involve a unilateral obligation created by promise or a unilateral or mutual one created by contract”. It is hard to square this with its earlier assertion that warranties must be contractual in nature.

The Court continues (para 52) by analysing the word ‘collateral’, remarking that “if something is to be regarded as “collateral”, it must be linked to a principal item”, which seems an unobjectionable analysis.

The conclusion drawn by the Court of collateral warranty is thus that

“If something is described as a collateral warranty, it must be taken to relate to a term of an existing contract which is collateral to another, different, contract” (para 52).

If one accepts the assumption that all warranties must be contractual in nature (an assumption I have doubted), then this conclusion follows. Whether or not one accepts the point that warranties must be contractual in nature, it seems correct that, whatever the nature of a warranty, for it to be collateral it must be ancillary to a separate obligation, to which it must relate. There must therefore be a clear linkage between the alleged collateral warranty and another specified obligation. Any such link was missing from the facts of this case, so the conclusion of the Court that “[o]ne thing is clear, this is not a case of “collateral warranty”” seems the correct one to have reached.

If not collateral warranty, perhaps free-standing promise?
Even if the statement was not a ‘collateral’ warranty, might it have been a free-standing promise made by the pursuers? (It should be added at this point, that this was not the basis of the defender’s claim, so no such argument could have assisted the defender, but the idea is worth exploring here) Such a statement might possibly have been a promise, though to be such the words would have had objectively to disclose an identifiable unilateral undertaking to which the promisor was unequivocally binding itself. That was highly unlikely here. Insufficient content about the nature of what was promised can be gleaned from the few words spoken on the telephone. What was the amount to be lent? On what terms? As the Inner House noted, “An agreement or a promise to enter into a contract, where the essentials are not ascertainable, cannot be regarded as legally binding” (para 54). Moreover, a promise is not usually considered to be undertaken simply through the recitation of an internal decision made by a party, as the previous case of Cawdor v Cawdor [2007] CSIH 3 indicates. At best, such statements are likely to be considered as non-binding statements of intention (see both Cawdor v Cawdor as well as the recent Inner House judgment in Regus (Maxim) Ltd v Bank of Scotland plc [2013] CSIH 12). Unsurprisingly, given the words used in the telephone conversation in this case, and the context within which they were spoken, the Court concluded that:

“at most all that the pursuers’ employee was doing was advising the defender of an internal decision of the pursuers, which amounted to approval in principle of the proposal to lend the defender (and his company) funding for the development(s). She was not, in so communicating to the defender, creating a legal obligation on the pursuers to lend to the defender (and his company) several million pounds.” (para 57)

This seems an entirely reasonable interpretation of the nature of the words spoken, and the Court’s conclusion on whether such words were intended to give rise to a unilateral promise (they were not) is to be approved.

Conclusion
The suggestion that the oral statement made by the pursuers’ employee was a collateral warranty seems to have been a rather feeble attempt (albeit approved by the Commercial judge at first instance) to give such statement obligatory form. It is hard to see what convincingly any undertaking could be argued to have been collateral too, given that no express linkage was made when the statement was made nor was an implied linkage to a specific later contract evident from the circumstances (there were subsequent agreements between the parties, but these defined different levels of funding and different purposes for that funding, so could not be the principal undertakings to which the statement might be collateral). It is a pity that the defender did not try to make an argument that the statement made during the telephone conversation was a freestanding promise (this was not the pled basis of the case), as that would have avoided the difficulty of having to tie the obligation to some other undertaking in order to make it ‘collateral’. However, as has been argued above, the words used by the pursuers’ employee do not seem to disclose any promissory intent at all, so that such a promissory argument would also properly have failed.

The decision on the case aside, however, it is a pity that what the Inner House says about the nature of collateral warranties appears to suggest that warranties can only be contractual: there is no obvious reason why a warranty, collateral or not, may not be a promise, and there is good reason to believe that promise may well be the most appropriate way to view some warranties (e.g. manufacturers’ warranties) in Scots law, whatever their characterisation in other systems.