We revisit the case of Hunt and Others v Optima (Cambridge) Ltd and Others after its trip to the Court of Appeal.
We highlighted there the dangers of consultants not fully understanding the scope of their role as an independent certifier.
Briefly the facts were as follows.
Optima (O) built a block of flats and engaged Strutt & Parker (S&P) to carry out inspections of the building and to produce certificates attesting to the satisfactory construction of the flats for the benefit of purchasers and lenders.
It turned out that the works were unsatisfactory and the inspections had been negligently carried out. The purchasers had each purchased a flat and were told that it would come with a certificate. All but two of the purchasers received their certificate after the exchange of contracts and the execution of their leases.
The certificates were sent by S&P to O's solicitors who forwarded them to the purchasers' solicitors.
The purchasers subsequently brought a claim in the Technology and Construction Court (TCC) against O, to which O joined S&P and S&P's architect.
The purchasers won at first instance. The judge found that it was immaterial that the certificates were received after exchange of contracts; the certificates amounted to enforceable warranties (allowing the success of the claim for breach of contract), they constituted negligent misstatements and S&P owed two separate duties - namely to take care in carrying out the inspection and to take care in compiling the certificates - both of which it had breached.
The Court of Appeal's decision
O appealed and the Court of Appeal resoundingly reversed the TCC's first instance judgment. Here, we focus on the Court of Appeal's analysis of three key questions.
Question 1 - Were the certificates enforceable warranties?
The Court of Appeal decided no. This was so for several reasons:
- The certificate was not described as being a warranty rather than merely a representation - none of the unusual terms used to describe the former, such as "promise", "warranty" or "guarantee" were used.
- There was no reference to an assignment of obligations.
- While Clause 5 of the certificate used language ("I am aware that this Certificate is being relied upon…") which is typical of a document intended to be relied on to give rise to a potential liability in negligent misstatement, these words became superfluous where there was a contractual liability anyway. Similar reasoning was applied to clause 7 which confirmed the certifier's appropriate experience.
- As the document was to be given to and relied upon by ordinary lay people it should not be construed as "an agreement between commercial parties that was the product of legal craftsmanship on both sides". However, it should be read from the perspective of a reasonable person with the knowledge that a person could be expected to have: in the context of purchasers of land this meant (and was the case for all the purchasers) having legal assistance. Although lay people may not be aware of the distinction between warranties and representations, their lawyers should be.
- It was noted that the Council of Mortgage Lender's handbook (which provides rules for solicitors acting for borrowers and lenders) states: "If we require a collateral warranty from any professional adviser this will be stated specifically in the mortgage instruction."
Question 2 - Did the certificates constitute negligent misstatements?
The Court of Appeal again decided no. While sympathetic to the TCC judge's reluctance to "accept the unattractive point that the claim in negligent misstatement failed because the Certificates post-dated exchange and completion" they considered his analysis took "inadequate account of certain key principles".
Fundamentally, a claimant must show that he relied on a statement and that that reliance caused a loss. In the present case, the negligent misstatements for most of the purchasers were provided after exchange and completion. The most these purchasers could have relied on was an understanding that there was a certificate in place or that they would receive a certificate on or after completion.
Although the judge was entitled to make his finding of fact that S&P knew that O would send a draft certificate to the purchasers' solicitors before the contract, a draft certificate which was as yet unsigned and unissued, and therefore capable of being amended or, possibly, not issued at all, would not incur liability for negligent misstatement. This is because an "indication of the form that a statement will take when issued is a far cry from a representation that it can be relied on before it is".
This reasoning seems sensible; subsequent to an inspection or inspections it could have become apparent to S&P that the inspections had not been properly conducted, as a result of which they might (and should) have decided either
- not to issue a certificate or
- to issue one in a qualified fashion.
It would be a very unusual result that despite such a decision S&P would attract liability to third parties in respect of the failure to properly conduct the inspections.
As the Court of Appeal noted, this would "render the issue of the certificate a superfluous step in the process whereby they attracted liability".
Question 3 - Did S&P owe a duty of care, and if so what was it?
The judge at first instance was found to be incorrect to categorise the duty owed by S&P as two separate duties: namely to take care in carrying out the inspection and to take care in compiling the certificates.
In reality the duty was a single one - "the duty owed by S&P was a duty to the recipient of a certificate, who thereafter relies on it, to take care in making the statements contained in the certificate, of which duty S&P will be in breach if the certificate is not the product of both competent groundwork and drafting".
Although S&P had a contractual duty to carry out the work of inspection competently, they did not at that stage assume a responsibility to those to whom certificates might one day be issued. The stage at which S&P are to be held as assuming a responsibility to third parties is the stage at which it decides whether to issue a certificate and if so in what form.
Although it will often be necessary for a 'representor' seeking to escape liability for negligent misstatement to show that the work which underlies the representation was properly and carefully done, a free-standing independent duty of care should not be imposed upon a representor at a stage before he has made a representation.
In coming to this conclusion the Court of Appeal affirmed the view of Lord Devlin in Hedley Byrne & Co Ltd v Heller and Partners Ltd ,that "responsibility can attach only to the single act, that is, the giving of the reference, and only if the doing of that act implied a voluntary undertaking to assume responsibility".
This case is really about the significance of a certificate - a document which is often the source of dispute in the construction industry. Practitioners are reminded of three points:
- Firstly this case confirms that save for instances of clear wording, certificates of the form considered in this case do not attract contractual liability.
- Secondly, we should pay attention to the Court of Appeal's analysis of the significant cases in the area and its conclusion that tortious liability arising from negligently issued certificates has its genesis in the representations made in the certificate itself.
- Thirdly, a certificate's power to attract tortious liability is dependent on it being signed and issued and not on any prior inspection undertaken by the party who issues it.