In the case of Cramaso LLP v Viscount Reidhaven's Trustees [2010] CSOH 62, the Court of Session decided that where representations are made to an individual, inducing a limited liability partnership (of which he was a member) to enter into a lease, if those representations transpire to be false, neither the individual - nor his LLP - have a right of recourse.
Facts
The estate of Castle Grant was owned by the Defenders. The productivity of the moor at the Estate had been in decline and required substantial investment. As such, the Defenders decided to offer a 15 year lease.
Mr Erskine was interested in taking on such a lease. To do so, he intended to set up a limited liability partnership, Cramaso LLP ("Cramaso"), to be the tenant. He did not make that intention clear to the Defenders. Upon entering the lease, Cramaso invested significant sums in the Estate, however, grouse numbers remained lower than expected. Cramaso claimed that they only entered into the Lease as a result of representations made by the Defenders in respect of grouse numbers. Those representations were, it transpired, false - Cramaso alleging that they constituted fraudulent, or at least negligent, misrepresentations.
Remedy Sought
Cramaso sought reduction of the lease and damages for the loss suffered as a result. In particular, the Pursuers relied on an email sent by the Defenders to Mr Erskine on 29 September 2006, (prior to Cramaso entering the lease, and indeed being incorporated), setting out certain information and various calculations in relation to the potential numbers of grouse which could be anticipated.
Decision
Lord Hodge determined that the email, indeed, contained a material misrepresentation. Whilst the representations could not be considered fraudulent, they were negligent as there was a duty of care owed by the Defenders to Mr Erskine. Due to carelessness in presentation, the Defenders failed in that duty. Lord Hodge ruled that the misrepresentation made by the Defenders influenced Mr Erskine as regards the lease - an essential to establish misrepresentation in Scots law.
However, even though Lord Hodge ruled that there had been a negligent misrepresentation, the claim failed. The crux of the matter was that the Defenders owed a duty of care to Mr Erskine - not to Cramaso (the Pursuers). On 29 September 2006, when the critical email was sent, Cramaso did not even exist and the Defenders were not aware of Mr Erskine's intention to create Cramaso to enter into the lease. Lord Hodge determined that the creation of Cramaso "deprives [Mr Erskine] of a remedy in law".
Comment
What lessons can be learnt? When entering agreements, consider the information on which you are relying. If the misrepresentation was made to someone other than a contracting party, the person making that misrepresentation may escape liability for it. If you do intend to incorporate, for example, an SPV, it is always worthwhile having the information on which you rely incorporated into the agreement e.g. by way of warranty. Otherwise, like Mr Erskine and his LLP, you may be left high and dry.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
