ROYAL BANK OF SCOTLAND PLC V JAMES O'DONNELL AND IAN MCDONALD
EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
[2014] CSIH 84
CA149/11
Lord Bracadale
Lord Drummond Young
Lord Wheatley
OPINION OF THE COURT
delivered by LORD DRUMMOND YOUNG
in the cause
ROYAL BANK OF SCOTLAND PLC
Pursuers and reclaimers;
against
JAMES O’DONNELL and IAN McDONALD
Defenders and respondents:
Act: Clark QC, McBrearty QC; HBJ Gateley
Alt: Barne; MBM Commercial LLP
16 October 2014
[1] The reclaimers have brought proceedings against the respondents to enforce a guarantee that the respondents had purportedly granted in support of the borrowings of a company controlled by them, Whinhill Developments Ltd. The respondents have counterclaimed for reduction of the guarantee on the ground that it was induced by misrepresentations made by the reclaimers. In summary, the first respondent, who is a property developer, had identified a site at Strone Farm, on the outskirts of Greenock, that he considered suitable for residential development. Whinhill was incorporated on 10 September 2007 in order to acquire the land and carry out the development. The first and second respondents were the only shareholders in the company. Whinhill had no significant assets. Finance was arranged from the reclaimers and a loan agreement for £1.65 million was concluded. The reclaimers obtained successive valuations of the land based on its development potential from surveyors, Ryden LLP, the first such valuation being obtained in September 2007.
[2] No steps towards development had been taken prior to September 2008. In that month, the United Kingdom was engulfed by a financial crisis. This caused great difficulties both for the banks and for the business of property development. Planning permission was obtained in October 2008. Further valuations by Ryden were obtained by the reclaimers, the most significant being one dated 19 December 2008. Thereafter further communications passed between the reclaimers and the first respondent. Eventually, on 20 March 2009, a new (second) loan agreement for £1,695,000 was concluded between the reclaimers and Whinhill. On the same date the respondents granted a personal guarantee for £300,000 in respect of Whinhill’s obligations to the reclaimers. In February 2010 the respondents raised concerns about the valuation obtained in December 2008 and the reclaimers’ conduct in connection with the second loan agreement. The reclaimers put Whinhill into administration and sold the site at Strone Farm for £65,000 to a company in which the first respondent’s wife has an interest.
[3] The reclaimers subsequently raised the present action against the respondents to enforce the guarantee granted by them on 20 March 2009, including payment of the expenses of its enforcement. The respondents resisted payment on the ground that their guarantee had been induced by misrepresentation by the reclaimers. They further counterclaimed for reduction of the guarantee and damages in respect of the payments of interest that they had made personally on behalf of Whinhill. The action proceeded to proof in the Commercial Court. The Lord Ordinary held that the guarantee had been induced by negligent misrepresentation. Consequently he assoilzied the respondents from the conclusions of the summons in the principal action and granted decree in the counterclaim for reduction of the guarantee and payment of the sums that the respondents had paid by way of interest. The reclaimers have now reclaimed against the Lord Ordinary’s decision.
Background
[4] Whinhill was incorporated on 10 September 2007, and four days later it entered into an agreement with the reclaimers for a loan of £1,650,000. The loan was due for repayment no later than 12 months after it was drawn. The agreement specified that the loan was to be utilized to assist with the purchase of the site at Strone Farm, Greenock and to make certain ancillary payments. Certain defined fees were payable to the reclaimers. On 17 September the reclaimers obtained a valuation of the site from Ryden. This valued the site at £3 million. It was based on outline development plans that had been supplied by the respondents which envisaged the construction of 87 residential houses. The figure of £3 million was the result of a residual valuation, based on a gross development value of £16,920,000 (the anticipated proceeds of the sale of the houses in the development) from which the costs of construction and various other ancillary costs were deducted. The valuation assumed that planning permission for residential use for a scheme similar to that outlined by the respondents could be obtained. The valuation was instructed by the reclaimers, and was expressly stated as being for security purposes. Two days after the valuation was available, on 19 September, the reclaimers made funds available to Whinhill and the site was purchased.
[5] The next significant event occurred on 4 September 2008, when the reclaimers’ relationship director with responsibility for the Whinhill loan facility, Mr Leonard Marsh, spoke to Ryden about a possible residual valuation of £4.5 million, based on the construction of approximately 120 units. Mr Raymond Burns, a senior surveyor employed by Ryden, commented that without doing a proper valuation exercise and carrying out a much more detailed investigation into possible sales, it was very difficult to say what the value of the site was. Consequently the figure of £4.5 million could not be relied upon but was “merely indicative” of what increased density would do to the site value. The loan facility was extended to 31 October 2008, and on 2 October 2008 outline planning permission was granted. Meanwhile, in the course of September 2008, the financial crisis struck the banking sector in the United Kingdom. The Lord Ordinary notes that this had caused major problems for the whole of the reclaimers’ group, and had seriously affected the property market; Mr Marsh stated in evidence that all buyers had “gone to ground”. While a market recovery was hoped for, there was a concern that the fall in market values might create a shortfall in security.
[6] Consequently the question was raised as to whether a new valuation should be obtained. Following the onset of the financial crisis, both Mr Marsh and the first respondent adopted the strategy of holding on to the site until the market recovered. On 23 October Mr Burns had a telephone conversation with the first respondent with a view to obtaining a further valuation of the site from Ryden. The fee originally quoted, £2,500, was considered too high by the first respondent, who indicated that he wanted “a fag packet valuation for £3 million value with increased density”. On the same day Mr Burns wrote to Mr Marsh to indicate that, in the current harsh market conditions, house prices had undeniably dropped. In his email Mr Burns stated that, having now done initial research into the current new build residential market in Greenock, he believed that a site price of somewhere between £1.75 million and £2 million was realistic. He noted that this was not what Mr Marsh wanted to hear, but he could not in all honesty come up with a value of more than £2 million at that time. Nevertheless building costs could be provided by the first respondent. Mr Marsh replied the following day, stating that on the figures provided by Mr Burns he was “under water” and would need to think of something else. In his evidence Mr Marsh stated that in subsequent communications he had not referred to the figure of £1.75 million because that had not been formalized, the figures at this stage being “indicative only”.
[7] The result of the valuation figures suggested by Ryden was that the loan facility granted to Whinhill contravened the bank’s loan to value policy. At the time this policy required that a loan secured over heritable property should not exceed 70% of the value of the security subjects taken together with the amount of any personal security granted in support of the loan. After September 2008 that policy was enforced more strictly than previously. Consequently Mr Marsh came under pressure to resolve the situation. The Lord Ordinary finds that Mr Marsh and his colleagues in the commercial banking division preferred to avoid a formal revaluation of the site, as that would merely confirm a difficult situation. Owing to the absence of a market for such sites in late 2008 Mr Marsh was reluctant to enforce the reclaimers’ security, but preferred to refinance the facility on the basis of the 2007 valuation. That would mean that the amount of the loan was less than 70% of the apparent value, which meant that the criteria in the loan to value policy were met.
[8] On 27 October 2008 Mr Marsh emailed Mr Joseph Wallace, a director of the reclaimers’ commercial banking division, to suggest that the loan facility should be renewed for a further two years on the basis that the reclaimers’ credit division had agreed that a revaluation at that time was not required and consequently the reclaimers could continue to rely on the valuation of £3 million provided in September 2007. In fact the credit division had not agreed that a revaluation was not required; Mr Marsh accepted that in his evidence. On 31 October 2008 the original loan agreement expired, and an exit fee of £160,000 was charged to the Whinhill account. On 18 November Mr Robert Johnston, of the reclaimers’ credit division, informed Mr Marsh that repayment of Whinhill’s debt was dependent on the development or sale of the site, and that in the current market neither was likely to be an attractive option. It had been proposed to park the site for two years, but Mr Johnston stated that the reclaimers would have to be satisfied that there was sufficient comfort to justify a two-year commitment. On 20 and 21 November concern was expressed by other officials that a request for an updated valuation had not been acceded to by Mr Marsh, and it was indicated that without a development scheme a fresh valuation was unlikely to produce a figure that would be within policy in view of the lack of buyers for a site of the size of Strone Farm. On 26 November Mr Wallace wrote to Mr Graham Galloway, the managing director of the reclaimers’ commercial banking division, to request that the property should not be revalued at that juncture. Mr Galloway replied that “this is not an automatic deal and the case so far has been weak”; Mr Wallace would need to get the matter sorted as soon as possible. It is clear from this internal correspondence that Mr Wallace and Mr Marsh, in particular, were coming under considerable pressure to do something about Whinhill’s loan facility.
[9] On 5 December Mr Marsh wrote to Mr Ian Gladstone, another official of the reclaimers, that insistence on a revaluation would make the reclaimers’ ongoing relationship with Whinhill very difficult; he continued “We know we are under water but I think we need a steer from Credit where we are locked in as to whether we are seeking to revalue”. On 11 December Mr Johnston told Mr Wallace that a revaluation should be carried out. The following day Mr Wallace emailed Mr Gladstone, stating that on receipt of the valuation they would know where they were in terms of security cover. Mr Wallace continued
“I did [moot to Mr Johnston] that we could perhaps convince customer to provide [personal guarantees] totalling around £300 K but he couldn’t commit to whether or not this would be acceptable”.
That appears to be the first suggestion that personal guarantees might be provided by the directors of Whinhill. Mr Marsh then contacted Ryden to state that he might need a revaluation. Mr Ronnie, the responsible partner in Ryden, checked the file and advised Mr Marsh that they “could get to” £2 million. Mr Ronnie then advised Mr Burns of that figure. In an internal email to Mr Burns dated 12 December he narrated that Mr Marsh had called about the Whinhill facility and that he might need a revaluation. Mr Ronnie told Mr Burns that he had checked the file and “advised that we could get to £2m”. We observe that this appears to have been a very cursory exercise. It is apparent that nothing approaching a proper residual valuation was carried out. Nevertheless, as the Lord Ordinary notes, when he subsequently carried out a valuation exercise Mr Burns was aware of the assurance given to Mr Marsh. To that extent it may be suspected that his hands were tied, which may explain the important qualifications that appeared in his valuation, as discussed below.
The first alleged misrepresentation
[10] On 16 December Mr Marsh and Mr Wallace met the first respondent. By this stage it was clear that the reclaimers’ loan criteria (70% of property value) could not be met unless a personal guarantee was granted; consequently, as the Lord Ordinary notes, Mr Marsh and Mr Wallace could only hope that the prospect of still making money from the site would persuade the respondents to grant a guarantee for £300,000. The first respondent was told by Mr Marsh and Mr Wallace that Ryden would value the site at £2 million. The first respondent indicated in evidence that he was disappointed to hear of that figure, as he wanted £3 million. Nevertheless it was agreed that Ryden would be instructed to provide a valuation. The Lord Ordinary observes that the first respondent was concerned at the implications of any Whinhill default for other loans advanced to his development company, Zoom Developments Limited; Mr Wallace had stated that the reclaimers would not ignore any default so far as those loans were concerned. In the event of default the whole of the first respondent’s interests would have gone to the reclaimers’ global restructuring group, which was designed to deal with distressed facilities. Mr Wallace and Mr Marsh suggested to the first respondent that a new loan agreement could be granted if the respondents were willing to grant a joint and several personal guarantee in the sum of £300,000. The result of this would be that the reclaimers’ 70% loan to value policy would be satisfied.
The second valuation
[11] The following day, 17 December, the first and second respondents met and discussed matters. They agreed that they should grant personal guarantees, and this was communicated to the reclaimers. The Lord Ordinary notes that they were remarkably uninterested in the detail of how Ryden reached a revaluation of £2 million; nevertheless, they agreed to the guarantee on the strength of Mr Marsh’s assurance that Ryden would revalue the site at that amount. On the same day Mr Ronnie emailed Mr Marsh to state that, to cut costs, Ryden could provide an updated valuation letter for £500 plus VAT, based on 120 units on the site. Mr Marsh immediately contacted the first respondent, who agreed to such a valuation based on 120 units, and Mr Marsh then instructed Mr Ronnie to go ahead. On 19 December Ryden provided a “desktop update” valuation of the site. The Lord Ordinary notes that, while this contained Mr Ronnie’s reference, it was in fact prepared by Mr Burns. This valuation referred to the earlier valuation and then stated that it had been assumed that 128 units, including one existing building, would be permitted. The opinion might vary according to the terms of the detailed planning permission that was obtained. Reference was then made to research into the housing market in Greenock and Inverclyde. A gross development value in the order of £21 million was then calculated; it should be noted that this was based on the sale price of detached houses rather than flats. It seems clear, however, that a density of 128 units would not be possible without considerable use of flats. Moreover, the gross development value of £21 million was a substantial increase on the previous report, which was based on a gross development value of £16,920,000.
[12] The valuation letter noted that the economic climate meant that there was a degree of uncertainty as to the time required to effect disposals, and that a revaluation might be desirable if values were to fluctuate further. The operative section stated that the market value of the site at Strone Farm was a sum in the order of £2 million. The valuation continued:
“The above opinion of value is prepared solely for the use of The Royal Bank of Scotland and no responsibility is accepted to any other party. We would highlight that the above opinion of value has been carried out on a desktop basis without a re-inspection of the premises and should be used for indicative purposes only”.
Mr Ronnie and Mr Burns commented on this qualification in their evidence. They explained that the qualification meant that the updated valuation was not suitable for lending purposes, nor was it to be relied on by the reclaimers for such purposes. The figure of £2 million did not represent Ryden’s opinion as to the value of the subjects at the time. The letter was explained as being a valuation based upon a “what-if” scenario, the “what-if” being the assumption that the site was capable of a development of maximum density. Thus the valuation in the letter represented a maximum possible value. If Ryden had been paid £2,500 for the exercise, as against £500, they could have provided a full valuation as prudent surveyors, but they had not been allowed to do that. Mr Burns stated that he understood that the instructions were to provide a valuation at the highest possible level. He stated
“Our reported figure was an indicative value based on increased density. The 2007 and 2008 valuations were very different types of reports”.
[13] The Lord Ordinary finds that, when Mr Marsh received the valuation letter of 19 December, he read it and did not identify any problems or errors. He did not understand that the report was unsuitable for lending purposes. He stated that he should perhaps have questioned the “indicative” nature of the valuation, but he “must have overlooked it”. He realized that assumptions were being made, and stated that everyone knew that it was a theoretical exercise. If the site had been put on the market, Mr Marsh would not have expected it to sell, and no valuer could say what the value was “because there were no buyers”. He did not regard the use of 128 units rather than 120 as material, and he did not regard a combination of flats and houses as essential. Mr Marsh stated that he recalled photocopying the valuation letter, putting it in an envelope addressed to the first respondent, and placing it in an office mailing basket marked “first class post”. It was possible, however, that he misremembered posting out the report.
[14] The respondents in their evidence stated that the first respondent had not received a copy of the Ryden revaluation from Mr Marsh. They did not see the letter of 19 December until February 2010, after the relationship with the reclaimers had broken down. More or less immediately after that they contacted their solicitor with complaints as to the terms of the report and the reclaimers’ conduct. They claimed that the site could not accommodate 128 detached and semi‑detached houses; such a number could only be achieved by a mix of flats and low rise development. In addition, they assumed that Ryden was providing a professional opinion on market value which could be relied upon as an update to the earlier valuation.
[15] The Lord Ordinary found that the respondents had not received a copy of the valuation. This finding is not challenged by the reclaimers. Consequently we proceed on the basis that the respondents were not made aware of the detailed terms of Ryden’s valuation, nor of the important qualifications made in the valuation letter. The Lord Ordinary comments that the granting of the guarantee without seeing the letter was not as surprising as it might at first seem; in the respondents’ minds Ryden had already carried out a detailed formal valuation in September 2007, and the December 2008 exercise was to be an update on that report in the light of current market conditions.
[16] As to the detail of Ryden’s December 2008 valuation, a computer programme (Kell Delta) was used to produce figures for gross development value and residual land valuation based on assumptions as to such matters as the number and type of units, the sales period, professional fees and the like. By altering the assumptions differing valuations could be produced. The Lord Ordinary found that Mr Burns, working under time pressure and on a small budget, achieved the £2 million valuation that Mr Ronnie had promised only by stretching the density of the house types used by him to the limit and by altering some of the Kell Delta calculations to maximize value. The Lord Ordinary further held that it was “beyond coincidence” that so many details had been altered from the previous scheme, all designed to ensure that the end result was the figure previously promised by Mr Ronnie. The most obvious example of that was the use of 128 as opposed to the instructed 120 units; the latter figure would have brought out a value of £1.8 million, but 128 brought it to just over £2 million. A density of 12 houses per acre was used, but this was the absolute maximum conceivable. The Lord Ordinary states that he was persuaded that both of the defenders considered that an impossibility and that, if they had been aware of it at an earlier stage, they would have objected and raised questions which would have cast a very substantial doubt on the exercise carried out by Ryden.
[17] The Lord Ordinary further held that, if either of the respondents had raised questions about the report, it is probable that it would have emerged that Ryden were not purporting to offer a market valuation that could be relied upon for lending purposes. Mr Graham Galloway, the head of the reclaimers’ commercial division, stated that the purpose of the valuation was to check that the bank was properly covered. The Lord Ordinary considered that the respondents could reasonably take the same view in respect of the guarantee; there was a limit to the extent to which they would provide personal guarantees. He further held that it had been proved that that limit would have been reached if the respondents had been aware of the terms of the Ryden letter of 19 December and of the limitations involved in its “indicative” nature. Neither respondent would have signed the guarantee if he had known that the revaluation could not be relied upon as a professional opinion from a large and respected firm of surveyors. In that event, he considered it probable that the facility would have been referred to the reclaimers’ global restructuring group, and that the events that occurred in February 2010 (see paragraph [20] below) would have been accelerated by approximately one year.
The second and third alleged misrepresentations
[18] On 9 January 2009 Mr Marsh sent a further email to the first respondent to intimate that he had obtained approval for a renewal of the facility for two years on specified terms. He continued
“As you know Ryden have revalued the site at £2m giving us [a loan to value] of 85%. Proposal is for you and [the second respondent] to provide unsupported Joint & Several [Personal Guarantee] for £300k.… In the current climate this is a good result”.
The respondents contend that this letter amounted to a representation that the site had been properly revalued by Ryden at £2 million; no reference was made to the qualifications in the valuation letter.
[19] On 20 March 2009 a second loan agreement was executed between the reclaimers and Whinhill. This provided for facility of £1,695,000. In a clause headed “Property Covenants”, it was stated that a guarantee was to be granted by the respondents for £300,000 in respect of the obligations of Whinhill. The clause continued:
“Value: the market value of the Property evidenced by the most recent valuation addressed to the Bank, from a valuer acceptable to the Bank”.
The respondents state that that was a third misrepresentation made to them by the reclaimers, as it incorporated the Ryden revaluation without any reference to the crucial qualifications made in the valuation letter. The clause in question went on to state that “the Loan minus the Guarantee expressed as a percentage of Value must not exceed 70%”. The latter statement indicates the importance of the guarantee; the 70% requirement could only be satisfied if the loan less the guarantee came to less than £1.4 million (70% of £2 million), and the granting of the guarantee brought the balance down to £1.395 million. On the same date, 20 March 2009, the respondents signed the joint and several guarantee.
[20] The respondents received a copy of the December 2008 valuation in February 2010, and raised concerns about it. A different firm of surveyors had indicated a value of £156,000. The reclaimers subsequently put Whinhill into administration, and the land at Strone Farm was sold for £65,000.
The Lord Ordinary’s decision
[21] Following proof the Lord Ordinary granted absolvitor in the principal action. In the counterclaim he granted reduction of the guarantee provided by the respondents dated 20 March 2009. He further ordered payment to each of the respondents of the sum of £39,600. He held that on three occasions, at the meeting on 16 December 2008, in the email of 9 January 2009 from Mr Marsh to the first respondent, and in the body of the terms of the second loan agreement, the reclaimers had told the respondents that Ryden would or had valued the subjects at £2 million. The statements were made in the context of an updating of the original valuation report. Mr Marsh and both respondents understood the revaluation to be a professional opinion of market value which could be relied upon for lending and personal guarantee purposes. The reclaimers’ statements were positive assertions of fact, not statements of opinion or future intention; a reasonable person would so understand their purpose and effect. Each of the statements was false. The Lord Ordinary considered that that was clearly demonstrated by the evidence of Mr Ronnie and Mr Burns. The three statements were material factors in the respondents’ decision to grant the guarantee in March 2009. Consequently, he held it proved that, if the defenders had been aware of the true position, the guarantee would not have been granted. It was thus provided under an operative error of fact resulting from information given to the defenders by Mr Marsh. Mr Marsh knew that the defenders were relying on what he said to them; the initial decision to agree to the guarantee was intimated to him the day after the meeting on 16 December and prior to Mr Burns’ writing his letter of 19 December. Nothing happened subsequently to alter that state of affairs. In those circumstances the Lord Ordinary held that the respondents were fully entitled to place reliance on the representations. Consequently, as the representations were false, the respondents were entitled to reduction of the guarantee.
[22] Whether the respondents could also claim damages depended upon whether the misrepresentations amounted to a breach of a duty of care owed to the respondents. The Lord Ordinary held that as at 16 December 2008 Mr Marsh had no reason to question that Ryden could provide a proper valuation of the subjects at £2 million. He accordingly held that the statement made on that occasion was an innocent misrepresentation; no suggestion been made that Mr Marsh had been guilty of a dishonest misrepresentation or of fraudulent concealment. The respondents had submitted, however, that once Mr Marsh had read Ryden’s letter of 19 December he had sufficient information to raise questions of the valuers, which would have revealed the true status of the valuation. Mr Marsh read the references to “indicative” and “desktop” nature of the valuation, but merely repeated the earlier assurance to the first respondent in the email of 9 January 2009.
[23] The Lord Ordinary held that a duty of care was owed in the circumstances. As to breach of the duty following Mr Marsh’s receipt of Ryden’s letter of 19 December, he held that at the very least the terms of that letter put Mr Marsh on inquiry as to the status of the revaluation report and as to the accuracy of the information previously given to the respondents and the impression conveyed to them. The reclaimers were relying upon the valuation as an important part of the justification for the guarantee sought from the respondents. When he was informed that the valuation was “for indicative purposes only”, Mr Marsh came under a duty to inform the defenders specifically of that fact and of its potential implications; alternatively he should have sought further information and clarification from Ryden, and then alerted the respondents to what had occurred. Mr Marsh had used the assurance given by Mr Ronnie before the 16 December meeting to help persuade the respondents to agree to the guarantee; consequently he must be taken as having assumed responsibility for its accuracy. In those circumstances he came under an obligation of inquiry or disclosure if he subsequently received material that cast doubt on the information that had been given to the respondents. After that he came under a duty not to repeat the misrepresentation. Even if Mr Marsh had placed the report in the mailing tray addressed to the first respondent, that would be insufficient to fulfil his duties to the respondents. In any event, the misrepresentations had been repeated in early 2009. Those were negligent misrepresentations, made in breach of the duty of care owed by Mr Marsh to the respondents.
[24] The Lord Ordinary rejected a submission that Mr Marsh was under a duty to identify issues related to the details of the development, notably the number of units and the mix of flats and houses. Nevertheless, the details of the development used by Mr Burns were not irrelevant, as if the respondents had been alerted to the merely indicative nature of Ryden’s opinion these points would have emerged before the guarantee was signed. The Lord Ordinary further expressed an obiter opinion that, if a representation made before a contract is concluded remains operative at the time of the contract; if reduction is allowed on account of a representation that is false when made, the same remedy should be available for a representation that is true when made but becomes untrue before the execution of the contract.
The law of misrepresentation
Innocent misrepresentation
[25] When parties undertake negotiations with a view to concluding a contract, there is generally no obligation to disclose anything to the other party; each party is taken to rely on his own knowledge of the facts that are material to the proposed contract, and has no complaint if the other party has better information but does not convey it. The point can be put another way: if a party enters into a contract in consequence of an error that is not induced by the other party, there will generally be no remedy for the error. If, however, one party makes a representation of fact that induces the other party to enter into the contract, and the representation is false, the other party may have the contract reduced: Gloag, Contract (2nd edition), 471; McBryde, The Law of Contract in Scotland (3rd edition), 15-66 - 15-87. For this purpose it is immaterial that the representation is made innocently, in the belief that it is true, and without any lack of care on the part of the person who makes it; the remedy of reduction is still available. Thus in considering whether the remedy of reduction is available, the state of mind of the party who makes the representation is irrelevant; in that respect all that matters is whether the representation was true or not.
[26] Certain other factors are relevant. The representation must be material, in the sense that it was a factor that induced the other party to enter into the contract. It is not, however, necessary that it should be the sole reason for his decision to enter into the contract; it is enough that the representation should have given rise to an error on the part of the recipient and that that error should be one of the motives that induced him to enter into the contract, or to agree to the particular terms of the contract: Gloag, ibid, 468. The representation must be made in the course of the negotiations for the contract. Furthermore, it must amount to a misstatement of fact, rather than an expression of opinion or intention. If, however, a party represents that he holds an opinion that he does not hold, or represents that he intends to do something that he does not in reality intend, that may be an operative misrepresentation, as a party’s state of mind is properly regarded as a fact.
[27] In some circumstances the concealment of facts may amount to a misrepresentation. That is particularly true of half‑truths. To represent a fact but omit a material qualification on that fact or to state one fact but omit other related facts may create a misleading impression. In such a case the failure to disclose the qualification or to present an accurate overall picture will amount to a misrepresentation: Gloag, ibid, 460; Royal Bank v Greenshields, 1914 SC 259; Crossan v Caledonian Shipbuilding Co, 1906, 14 SLT 33. This is an important qualification on the general rule that there is no obligation on parties to say anything during contractual negotiations. The most dangerous misrepresentations are frequently those that are closest to the true facts. If a statement is made that bears little or no relationship to reality, it may be relatively easy to expose it as false because there are so many discrepancies with the truth. If, on the other hand, a statement is largely true but false in one critical respect, discovering its falsity is much more difficult. For this reason half‑truths are dangerous, and in our opinion the law must be astute to ensure that any statement that is, objectively speaking, misleading is treated as a misrepresentation, with the attendant legal consequences. For this purpose it is the totality of the statement that matters; the fact that individual components are true is immaterial. We return to this point in the context of cautionary obligations at paragraph [41] et seq below.
[28] When a representation is made in the course of contractual negotiations, its purpose, objectively considered, is to induce agreement to a particular contract containing particular contractual terms. For that reason a representation must normally be taken to have continuing effect until the time when a contract is concluded. This very basic principle appears from the decision in Blakiston v London and Scottish Banking and Discount Corporation Ltd, 1894, 21 R 417. In that case the petitioner had applied for shares in a company on the basis of a statement in the prospectus that a particular individual, whom he knew to have a high reputation for business ability and integrity, was one of the directors. That individual withdrew his consent to be a director before shares were issued, but the petitioner was not told of this. It was held that the petitioner was entitled to have his name removed from the register of shareholders, with a return of his contribution. Lord Kinnear (at 420-421) stated the ground for the remedy as follows:
“that a certain representation was made to [the petitioner] which was material to induce him to enter into the contract with the company; that he relied upon this representation when he applied for shares, and that if it were true when it was first made, it had ceased to be true when the company came to conclude the contract by allotting shares to him on his own application”.
The remedy sought, removal from the register, was equivalent to reduction in the case of an ordinary contract. That case was referred to with approval in Shankland & Co v Robinson & Co, 1920 SC (HL) 103, at 109 per Viscount Cave. In that case Lord Dunedin stated (at 111):
“I do not doubt that, once the representation had been made, if anything had happened to alter the pursuers’ view of the truth of that representation, he would have been bound to disclose what had happened, for the representation was a continuing representation”.
[29] In our opinion the continuing nature of a representation is the norm, and the result is that a representation made in the course of contractual negotiations will generally continue in force unless it is qualified or withdrawn prior to the conclusion of the contract. Exceptions can exist, but they would typically occur in cases where either the terms of the representation or its surrounding circumstances indicate that the representation was limited in duration or was not intended to influence the decision to contract. An example of the former might be a representation that was expressly related to the facts at its date; in such a case the representation would have no continuing effect in relation to subsequent changes in those facts, although if it were subsequently discovered that the facts represented were inaccurate at the time when the representation was made there would in all probability be a duty to correct it. It is also possible that in some cases the time that elapses between the making of the representation and the decision to contract is such that a reasonable person in the position of the parties would not expect the representation to have continuing force; the same might be true if negotiations took place for a time, were suspended, and then resumed. In general, however, where negotiations for a contract proceed more or less continuously, representations will normally be taken to have continuing effect, for the simple reason that they are intended, objectively, to influence the decision to contract.
[30] Two other cases support this conclusion. First, in With v O’Flanagan, [1936] Ch 575, in the course of negotiations for the sale of a medical practice, a statement was made about its turnover. A contract was eventually concluded, but by then the turnover had declined substantially because of the seller’s illness. It was held that the purchaser was entitled to withdraw from the contract. The representation was treated as a continuing representation that operated down to the date of the contract: see Romer LJ at 586, and also Lord Wright MR at 584. Lord Wright gave a further reason for his decision, namely that the seller had a duty to communicate changed circumstances. So far as innocent misrepresentation is concerned, we consider that the continuing nature of a representation provides a complete explanation for the availability of a remedy, whether reduction or withdrawal from the contract, in such a case. Secondly, in the recent case of Cramaso LLP v Earl of Seafield, [2014] UKSC 9, the United Kingdom Supreme Court reviewed a number of authorities, in Scotland, England and Australia, including Shankland and With, and concluded that the law “is thus capable, in appropriate circumstances, of imposing a continuing responsibility upon the maker of a pre‑contractual representation in situations where there is an interval of time between the making of the representation and the conclusion of a contract in reliance upon it, on the basis that, where the representation has a continuing effect, the representor has a continuing responsibility in respect of its accuracy”: paragraph 23, per Lord Reed. It was held that the critical representation under consideration by the court, as to the grouse population of a moor, remained in force until a contract was concluded some months later, with a party which was different from the person to whom the representation had been made. Although the law is stated in slightly qualified terms in the passage just quoted, we are of opinion that the continuing nature of the representation will be the norm.
[31] In this connection we are in agreement with a passage in an English textbook, Cartwright, Misrepresentation, Mistake and Non-Disclosure (3rd edition), at paragraph 4-27, which is founded on by the Lord Ordinary. This states, after a detailed analysis of With v O’Flanagan:
“It is not yet clear on the authorities whether a representation constitutes a misrepresentation for the purposes of the remedy of rescission [or reduction in Scotland] if it was true when made, but without the representor’s knowledge has become false before it is relied upon by the representee. The better view is surely that the principle should not be limited to cases where the representor can be shown to have known of the changed circumstances. The question is whether there was a false statement relied on by the representee in entering into the contract. If a statement was made which was capable of being relied on even after a period of time during which the negotiations have lasted, and it is in fact by then false, it is a misrepresentation which can found a claim to rescission”.
We agree entirely with that analysis. The author goes on to suggest that this result might seem harsh to a representor, but as the remedy of rescission is available for innocent misrepresentation it was not inconsistent with the underlying rationale of the remedy, namely to allow a party to avoid a contract where he was induced into error through the representation of the other party. We were referred to an academic article in which a contrary view was expressed, Bigwood, Pre-contractual misrepresentation and the limits of the principle in With v O’Flanagan, [2005] CLJ 64 and 94-125. The latter article contains a number of interesting and subtle observations on the law, but it appears to us that it is based fundamentally on the proposition that “misrepresentation” is an agency-responsible act on the part of the misrepresentor. It is on that basis that the author argues that, if a representation is subsequently falsified without the representor’s knowledge, there can be no liability. Whatever the position may be in systems based on English law (the author is a New Zealander), in Scots law the underlying rationale of rescission for innocent misrepresentation is that the representation induces an error in the representee, on the basis of which he enters into the contract. For this purpose, as we have already indicated, it is immaterial whether or not the representor knew of the falsity of what he said; all that matters is that it is false. On this basis we prefer the approach of Professor Cartwright. Thus, so far as rescission is concerned, when a representation true when made is subsequently falsified, it is immaterial whether the representor knows of that fact. The subsequent falsification is enough by itself.
[32] If a party receives information or an opinion from a third party and merely passes it on to the other contracting party, on the basis that the opinion is that of the third party or the information is what the third party has said, there will usually be no misrepresentation by the contracting party. (There might of course in some circumstances be a right of action against the third party on the ground that he has made a negligent or even fraudulent misstatement). In such a case the contracting party makes it clear that he is merely acting as a conduit, and is not adopting the information or opinion as his own. Nevertheless, there is a duty to set out the information fairly. Thus passing on parts of a report but omitting qualifications might well amount to a misrepresentation, on the basis that a half‑truth can amount to a misrepresentation. Moreover, even in passing on information a party to contractual negotiations may well make implicit representations. In FoodCo UK LLP (t/a Muffin Break) v Henry Boot Developments Ltd, [2010] EWHC 358 (Ch), Lewison J (at paragraph 218) set out the basic approach to passing on information and then noted that where, for example, audited accounts of a company are passed to potential buyers of the company there is an implied representation that the accounts have been prepared honestly, and that the representor is not aware of anything that prevents them from giving a true and fair view of the company’s financial position. Lewison J concluded by stating that it all depends on context: there is no absolute rule of law. We agree with that statement. Nevertheless, when information is passed on, what is said must give a fair and accurate account of the original, and the representor must generally disclose anything that he knows that might detract from the accuracy of the information.
[33] A broadly similar approach was taken in IFE Fund SA v Goldman Sachs International, [2007] 1 Lloyd’s LR 264; [2007] 2 Lloyd’s LR 449. In that case the defendant company acted as advisers to a French company that was attempting to acquire the whole shareholding of an English company. The plaintiffs expressed an interest in participating in the syndication of the mezzanine debt facility, and ultimately decided to do so. In the course of discussions the defendants produced a report from accountants. Subsequently, before the transaction was completed, the accountants had qualified their report on the ground that they had received inadequate access to information. The defendants did not inform the plaintiffs of the accountants’ changed opinion. It was held that the defendants were not liable for such failure. Toulson J held (at [2007] 1 Lloyd’s LR 273) that the defendants had impliedly represented in supplying the report and other information that they were acting in good faith, in the sense of not knowingly putting forward information likely to mislead. This was a continuing representation, so that if they became aware that the information supplied in good faith was misleading that would give rise to a duty to disclose that fact. Nevertheless, the defendants had merely acquired subsequent information that gave rise to a possibility that the information previously supplied was misleading. In the Court of Appeal it was held that there had been no misrepresentation by the defendants, in view of the wording of the notice that accompanied the information supplied (Waller LJ at [2007] 2 Lloyd’s LR 458), and in any event Toulson J had been correct in holding that the defendants did not have any actual knowledge that the reports were misleading. Although this case was founded on to some extent by the reclaimers, we are of opinion that the decision turns on its particular facts, which were quite different from those of the present case. In particular, the case involved a mere possibility that information might be inaccurate. In the present case, by contrast, for reasons to be discussed subsequently it became apparent that an important valuation was qualified in a critical respect.
Negligent misrepresentation
[34] Innocent representation will not, however, found a claim for damages. For such a claim it must be established that the representation was either fraudulent or negligent. Fraud is not in issue in the present case, but the respondents’ counterclaim for damages is based on negligent misrepresentation. In this respect, the mere fact that a misrepresentation normally continues in force until a contract is concluded is not sufficient. Negligence must be established at some point during the negotiating process. In our opinion such negligence may arise, at either of two points during that process. First, a representor may be negligent at the time when the misrepresentation is made, as where he affirms that a certain state of facts exists when it does not, and when a reasonable person exercising ordinary care would have realized the inaccuracy.
[35] Secondly, a party negotiating contractual terms may make a representation that was either correct at the time when it was made or, although wrong at that time, was not made negligently. In that event there can be no liability for negligent misrepresentation at the outset. Subsequently, however, it may be discovered that the representation was wrong, or it may be that a reasonable person exercising ordinary care should have realized that the representation was wrong. In that event negligence will occur at a time after the representation, at the time when the representor discovers or ought to have discovered the error. It is still ordinary negligence, however, and will be actionable in the same way as if an original misrepresentation was made negligently. For example, a party attempting to sell a painting may represent that it is by a named painter. Before a contract is concluded, the seller is either told that the attribution is wrong or discovers facts from which a reasonable person in his position exercising ordinary care and skill would infer that the attribution was wrong. If nothing is said thereafter, that would be a clear case of negligent (if not fraudulent) misrepresentation. In such a case it is the failure to correct that can be held negligent, but that in our opinion amounts to actionable negligence; if a person who has represented a fact subsequently discovers that it is wrong, or if a reasonable person in his position exercising ordinary care would have discovered that it was wrong, there is a duty to correct the misrepresentation.
[36] The continuing nature of a representation is relevant to negligent misrepresentation, although not in precisely the same way as to innocent misrepresentation. In general, a representation made in the course of contractual negotiations will be presumed to remain valid throughout those negotiations, unless it is limited in time or effect when it is made. That follows from the straightforward point that a representation made during contractual negotiations is made, objectively, with a view to inducing a contract on particular terms. Thus a representation that is made negligently will normally be taken to influence the decision to contract, and hence will give rise to liability in negligence. If the negligence is a failure to correct, that again will normally be taken to have continuing effect until the contract is concluded, and in that way will give rise to liability in negligence.
[37] The legal basis for negligent misrepresentation is the ordinary common law duty of care for negligent misstatements, as explained in cases such as Hedley Byrne & Co Ltd v Heller & Partners Ltd, [1964] AC 465 and Caparo Industries PLC v Dickman, [1990] 2 AC 605. Section 10 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 is relevant in excluding the former common-law rule that, when a contract was induced by representation, only a fraudulent misrepresentation would give rise to an entitlement to damages: see Cramaso LLP v Earl of Seafield, supra, at paragraphs 36‑39, per Lord Reed.
[38] Liability for negligent misstatement normally requires the existence of a relationship giving rise to a duty of care: Caparo Industries PLC, supra, at [1990] 2 AC 620-621, per Lord Bridge. When parties undertake contractual negotiations there will usually be no difficulty in concluding that such a relationship exists, in view of the overall commercial context; the parties are communicating with each other with a view to entering into a binding legal relationship: see Cramaso LLP v Earl of Seafield, supra, at paragraphs 40-42, per Lord Reed, following the views of Lord Glennie in PSA International SA v Irvine, [2010] CSIH 78, at paragraph 15, and Professor JM Thomson in an article, “Misrepresentation”, at 2001 SLT 279. A similar view is expressed by Lord Toulson at paragraphs 51-53, following Esso Petroleum Co Ltd v Marden, [1976] QB 801. Lord Toulson further indicates that the context of contractual negotiations limits the possible liabilities that may result from the negligent misstatement, thus avoiding the celebrated problem pointed out in the New York Court of Appeals by Cardozo CJ in Ultramares Corporation v Touche, 174 NE 441 (1931), at 444, of “liability in an indeterminate amount for an indeterminate time to an indeterminate class”.
[39] The result is that the criteria for imposing a duty of care will almost invariably exist when a misstatement of fact is made during contractual negotiations and is such that it induced the contract and would have induced a reasonable person to enter into the contract. As Lord Reed indicates in the passage cited, parties are entitled to pursue their own interests, and consequently the law imposes no general duty of care in the conduct of contractual negotiations. That is reflected in the general proposition, mentioned above, that there is no obligation on a party to make any factual representation during contractual negotiations. If a party does say something, however, legal consequences may follow if it is inaccurate.
[40] Finally, we should note that a half‑truth is quite capable of amounting to a negligent misrepresentation as well as an innocent misrepresentation. The critical question in such a case is whether the omission of a qualification or further relevant information renders the representation that was made objectively misleading. If it does, there is a misrepresentation, and if the maker of the representation was at fault in the sense discussed above there is a negligent misrepresentation.
Cautionary obligations
[41] In the course of argument we were referred by counsel for the respondents to two cases dealing with disclosure and cautionary obligations. In the first, Royal Bank of Scotland v Ranken, 1844, 6 D 1418, Lord Jeffrey stated (at 1434):
“It is no doubt quite true, that a creditor who requires a cautioner along with his principal debtor; or to whom a security is offered, is no way bound to make any representation to such proposed cautioner, or to give him any warning or information as to the extent of the risk he is undertaking. But then, if he does make any such representation, he must take care that it is a fair and a full one; and if he either conceals any facts which obviously and materially affect the risk, and still more, if he in any way so misrepresents those facts, whether intentionally, or from mere blunder or carelessness, as necessarily to mislead the cautioner as to the hazards of his undertaking, then certainly the cautioner must be liberated, and can never be held to an obligation substantially different from that held out to him”.
[42] Further discussion of the position of a cautioner is found in Smith v Bank of Scotland, 1997 SC (HL) 111. Lord Clyde (at 117-118) referred to the general rule that a cautioner is expected to look to his own interest and to make such inquiries as he considers necessary or appropriate. This is merely an application of the general rule that there is normally no obligation on a party to contractual negotiations to make any representations. Reference was then made to exceptions to the general rule, including circumstances that suggest fraud, if there is a failure to investigate. Lord Clyde continued:
“Another exception is where the creditor does make some representation to the potential cautioner, either spontaneously or in response to a question. The representation then made by the creditor must be full and fair. The creditor must not mislead the cautioner by withholding part of the truth. Again, if there is some fact in the relationship between the creditor and the debtor which is material to the risk and that is a fact which would not be expected to exist and of which the cautioner is excusably ignorant, the creditor must disclose it. Again, if the guarantor makes a statement in the presence of the creditor which demonstrates that he entirely misunderstands the position of the debtor, that also will require the creditor to give a true and accurate explanation.…
Lying behind these examples of situations where the creditor is obliged to take steps in the interests of the cautioner is the basic element of good faith.… [T]here must be perfect fairness of representation on the part of the creditor in the constitution of the contract. Thus if the creditor misleads the cautioner either by his silence or by some positive representation he will be acting in bad faith and may thereby lose the right to enforce the contract”.
[43] In large measure the foregoing statements reiterate the general law of misrepresentation. While there is no obligation to represent a fact, if any representation is made it must be full and fair. Consequently a half‑truth may amount to a misrepresentation, and concealing a material fact will frequently amount to a half‑truth. The statements emphasize that in the field of cautionary obligations the rules relating to full and fair representations and half‑truths must be applied rigorously. No doubt this is because in many cases a cautioner is assuming responsibility for the obligation of another person about whose affairs he is likely to have fairly limited knowledge. (This consideration obviously does not apply in the very common case of guarantees granted by companies in the same group, and other analogous situations involving partnerships or limited liability partnerships). Lord Clyde suggests that this area is underlain by a basic element of good faith. The expression “good faith” in this context is clearly intended to apply to the manner in which representations are made to a potential cautioner. Perhaps the true meaning of the expression is found in the statement, derived from Gloag and Irvine, Rights in Security, at 706, that “there must be perfect fairness of representation on the part of the creditor in the constitution of the contract”. That consideration is in our opinion important, and is material to the present case.
Analysis of the present case
[44] The respondents rely on three alleged misrepresentations. The first occurred on 16 December 2008, at a meeting between the first respondent on one hand and Mr Marsh and Mr Wallace of the reclaimers on the other. Mr Marsh and Mr Wallace told the first respondent that Ryden would value the site at £2 million. The second occurred on 9 January 2009, when Mr Marsh in an email to the first respondent repeated the statement that Ryden had revalued the site at £2 million, and added that that gave rise to a loan to value ratio of 85%. On this occasion, it is said, the important qualifications contained in Ryden’s valuation letter of 19 December 2008 were not mentioned, even though they were of great materiality to a potential guarantor. The third occurred on 20 March 2009 when the second loan agreement was executed; on this occasion it is said that the reference to Ryden’s revaluation was repeated but once again without the critical qualifications. The Lord Ordinary held that the first of these was an innocent misrepresentation when it was made, but that the failure to inform the respondents of the qualifications after Ryden’s revaluation report was received was negligent. He further held that the second and third representations were negligent. The negligence gave rise to a claim for damages by the respondents. Any of the three representations was sufficient to permit rescission of the guarantee.
[45] The three representations must be read in context. Ryden had produced an earlier valuation report in September 2007. This was a very detailed document, containing a full residual valuation. It expressly stated that the valuation was for security purposes. It brought out a residual valuation of £3 million. In early September 2008 Mr Marsh raised the question of valuation again, with a view to having it increased to £4.5 million through increased density of housing. It is notable that at this stage Mr Burns of Ryden commented in his email of 4 September 2008 that, without doing the valuation exercise and carrying out a much more in-depth investigation into the market, it was very difficult to say what the value of the site was. Consequently any figure of £4.5 million “cannot be relied upon but is merely indicative of what increased density would do to the site value”. We think it obvious from this email that the word “indicative” denotes something that is less than reliable. Indeed, the general meaning of the word is to denote something that merely gives an indication rather than stating anything definitive. We are further of opinion that a reasonable person in Mr Marsh’s position would have understood the foregoing; it is material that Mr Marsh was a banker involved on a day‑to‑day basis in the granting of secured loans and, in consequence, the assessment of different forms of security.
[46] The financial crisis altered matters dramatically. It became clear that the reclaimers’ security for the loan that they had advanced to Whinhill to purchase the site might well be inadequate, and discussions ensued about a further valuation. The first respondent suggested that £3 million might be possible with increased density, but Mr Burns informed Mr Marsh that a realistic valuation would be somewhere between £1.75 million and £2 million. At this point Mr Marsh realized that he was in serious difficulty. The Lord Ordinary records that he gave evidence that he did not refer to that low valuation subsequently because it was “indicative only”. Thus, when it suited his purposes, he seems to have been aware of the importance of a qualification such as “indicative” when applied to a valuation.
[47] At about this time Mr Marsh and his colleagues realized that the loan to Whinhill contravened the reclaimers’ loan to value policy. Mr Marsh decided that the Whinhill facility should be continued on the basis of the 2007 valuation of £3 million. Nevertheless, other officials of the reclaimers considered that a further valuation was required, and Mr Marsh and Mr Wallace came under pressure to resolve the problem with Whinhill. The idea of personal guarantees from the respondents was then mooted, in early December 2008. It was at this point that Mr Marsh contacted Mr Ronnie of Ryden to obtain a revaluation. It appears that Mr Ronnie checked the file and then told Mr Marsh that Ryden “could get to” £2 million. As we have already noted, this appears to have been a very cursory valuation exercise, nowhere near a full residual valuation. Nevertheless it was on the basis of this assurance from Mr Ronnie that Mr Marsh approached the respondents with a view to obtaining personal guarantees. He did so in the knowledge that without such guarantees the reclaimers’ loan to value ratio could not be satisfied. That loan to value ratio represented the reclaimers’ general criterion for prudent lending. Implicitly, therefore, any lending that failed to meet the ratio was deemed to be to a greater or lesser extent imprudent. That emphasizes that meeting the ratio in a fair and reasonable manner was of critical importance, not merely to the reclaimers but to the granter of any guarantee in their favour.
The first representation
[48] When Mr Marsh and Mr Wallace met the first respondent on 16 December 2008, they told him that Ryden would revalue the site at £2 million; this was based on the statement that Mr Ronnie had made a few days previously. On that basis it was agreed that Ryden would be instructed to provide a valuation. The Lord Ordinary finds (paragraph [48]) that Mr Marsh and both respondents understood the Ryden revaluation to be a professional opinion on the market value of the subjects which could be relied upon for lending and personal guarantee purposes. That finding in fact is not challenged. We observe that the normal reason for obtaining a valuation is to obtain a figure that can be relied upon for the purposes of property transactions, whether sale and purchase, letting or security. The Lord Ordinary further finds that the reclaimers’ statements made at the meeting on 16 December were positive assertions of fact, not expressions of opinion or future intention; a reasonable person would so understand their purpose and effect (paragraph [48]). In fact, as the subsequent revaluation provided by Ryden on 19 December made clear, Ryden’s revaluation was not a proper professional opinion on market value; we return to this matter at paragraph [50] below.
[49] The following day the respondents met and agreed that they would provide a personal guarantee for £300,000; that amount had of course been chosen by Mr Marsh because it was just sufficient to satisfy the reclaimers’ loan to value policy. The decision to provide the guarantee was clearly based on the valuation that had been intimated by Mr Marsh and Mr Wallace on the previous day; the Lord Ordinary expressly held it proved that if the respondents had been aware of the true position, which we discuss in the following paragraph, the guarantee would not have been granted (paragraph [48]). On that basis he held that the guarantee was provided under an operative error of fact caused by information given to the respondents by Mr Marsh. He further held that Mr Marsh knew that the respondents were relying on what he said to them. In our opinion the foregoing propositions are fully justified by the evidence recorded by the Lord Ordinary. The guarantee granted by the respondents was a new element in the relationship with the reclaimers, and the updated valuation of the property was critical to the decision to grant the guarantee; any reasonable person in the position of the respondents would have no reason to commit himself to a further substantial obligation if the overall development transaction were unlikely to be successful. On that basis, as the Lord Ordinary held (paragraph [49]), the respondents were fully entitled to place reliance on the representation made as to the value of the property.
[50] The representation made by Mr Marsh and Mr Wallace was that Ryden would revalue the site at £2 million. That was based on Mr Ronnie’s statement made some days prior to the meeting on 16 December. That statement was followed by a more detailed written document, the so-called “desktop update” valuation provided by Ryden on 19 December, prepared by Mr Burns. It is plain that this document represented the detailed views of Ryden on the current valuation of the land. The Lord Ordinary found that both Mr Marsh and the respondents understood that the revaluation could be relied upon for lending and guarantee purposes. The revaluation document stated that the market value of the site was a sum in the order of £2 million, but it continued with the qualification quoted at paragraph [12] above. This qualification mentions three matters: first, that the valuation was prepared for the reclaimers only, and that Ryden were not undertaking responsibility to any other person; secondly, that the valuation had been carried out “on a desktop basis without a re-inspection of the premises”; and thirdly, that it should be used “for indicative purposes only”. The Lord Ordinary records that in their evidence Mr Ronnie and Mr Burns stated that this qualification meant that the revaluation was not suitable for lending purposes.
[51] In our opinion a reasonable person in the position of Mr Marsh would have understood that. Mr Marsh was a banker responsible for the granting of commercial loans and the taking of security. Any such person would be accustomed to reading property valuations and assessing the extent to which they could be relied on by the parties to a lending or security transaction. The words “for indicative purposes only” should have indicated to such a person that the valuation was not to be relied on, but was merely designed to give a general indication of value. That message would be strengthened by the statement that the revaluation been carried out in a fairly cursory manner, on a “desktop” basis without a reinspection. The fact that Ryden disclaimed responsibility to any person other than the reclaimers was in our view the clearest of indications that the revaluation could not be relied on by the respondents. All of those factors in our opinion were very clearly material to the respondents’ decision as to whether or not to grant security. We consider that that that should have been apparent to any banker in Mr Marsh’s position exercising reasonable care.
[52] On this basis the representation that Ryden would value the site at £2 million was subject to the material qualifications narrated above. In our opinion the effect of those qualifications was to render the statement of Ryden’s valuation inaccurate, and thus a misrepresentation. Without the qualifications it amounted to no more than a half‑truth. Furthermore, as the Lord Ordinary held, the respondents would not have granted the guarantee if they had been aware of the qualifications. We are accordingly in agreement with the Lord Ordinary that the result was to make Mr Marsh’s representation of the value at a meeting of 16 December 2008 an innocent misrepresentation, sufficient to entitle the respondents to rescission.
[53] At that point, of course, Mr Marsh was not aware of the qualifications in the report prepared by Mr Burns, which was only available on 19 December. Consequently the misrepresentation at the time could be no more than innocent. When the revaluation report was received, however, the vital qualifications discussed in paragraph [50] became known to Mr Marsh. Thereafter, for the reasons discussed in paragraph [51], he ought to have been aware that the representation of value conveyed to the respondents at the meeting of 16 December was at best a half‑truth, and was likely to mislead them as to the status of that statement of value. In these circumstances we are of opinion that it was Mr Marsh’s duty to inform the respondents of the qualifications; as explained above, a banker in Mr Marsh’s position ought, exercising reasonable care, to have appreciated the materiality of the qualification to any decision by the respondents to grant security. The failure to inform the respondents about the qualification was in our opinion negligent, and would accordingly give rise to liability in damages.
[54] The statement of value had of course been disclosed by Mr Marsh in the course of contractual negotiations. We are of opinion that, in accordance with the normal position, the representation was intended to influence the decision to contract, and thus would continue in effect until the contract was actually concluded by the granting of the guarantee. Counsel for the reclaimers submitted that all that Mr Marsh and Mr Wallace had done was to pass on information supplied by Ryden. We are of opinion that this argument must be rejected. It is true that the figure of £2 million and been supplied by Ryden, but the detailed report made clear that it was subject to vital qualifications. The failure to pass on those qualifications was a classic example of a half‑truth. That is clearly sufficient for it to amount to a misrepresentation.
[55] We further note that the Lord Ordinary expressly held that, if either respondent had raised questions about the Ryden revaluation report, the critical qualifications would have emerged, and it would have been clear that the report was not suitable for lending purposes; we have summarized his views on this matter at paragraph [17] above. In that event, on the basis of the evidence, the Lord Ordinary concluded that neither respondent would have signed the guarantee. That aspect of his conclusions was not challenged. It clearly establishes the materiality of the misrepresentation and its effect on the respondents’ decision to grant the guarantee.
[56] In the above analysis of the representation made on 16 December 2008 and the subsequent failure to qualify it following the receipt of Ryden’s revaluation, we have taken into account that the respondents were being invited to grant a cautionary obligation. The result of that is that the responsibility for full and scrupulously accurate disclosure – the avoidance of half‑truths – was enhanced; “perfect fairness of representation” was required. This made it all the more important for Mr Marsh to consider the import of the qualifications in the revaluation, and to let the respondents know about those qualifications in order that they could make a properly informed decision. The Lord Ordinary records that Mr Marsh in his evidence stated that he thought that he had and sent it for posting to the respondents, which perhaps indicates acceptance on his part that the respondent should have been shown Ryden’s report. The Lord Ordinary further finds that the respondents did not receive the report, and that finding is not now challenged.
The second and third representations
[57] The second representation founded on by the respondents was made in Mr Marsh’s email of 9 January 2009: see paragraph [18] above. This repeated the statement that Ryden had revalued the site at £2 million. It was added that that gave a loan to value ratio 85% and that the revaluation was “a good result”. Nothing was said about the qualifications contained in Ryden’s revaluation of 19 December 2008. By this stage Mr Marsh was aware of the terms of the revaluation and the qualifications. For reasons already discussed, the failure to mention the qualifications made the representation of 9 January misleading in the manner discussed at paragraphs [50]‑[52] above. The representation was thus a half‑truth, made in the course of contractual negotiations that were still continuing. The representation had continuing effect down to the date when the guarantee was granted. Once again, the argument for the reclaimers that all that Mr Marsh did was to pass on information derived from Ryden must be rejected, as the information passed on was misleading without the qualifications. It is also relevant that the contract under contemplation was a cautionary obligation, with the result that “perfect fairness of representation” is required. That element was in our opinion manifestly lacking.
[58] The third representation relied on by the respondents was that made in the loan agreement itself, on 20 March 2009. In that document, the clause headed “Property Covenants” referred to the market value of the property as evidenced by the most recent valuation, which was obviously Ryden’s revaluation carried out in December 2008. The clause went on to refer to the reclaimers’ loan to value ratio, 70%, which demonstrated the importance of the revaluation in the financial calculations underlying the granting and acceptance of the guarantee. Once again, nothing was said about the critical qualifications contained in the revaluation report of 19 December 2008. Consequently, for the reasons applicable to the first representation, we are of opinion that the representation in the contract was misleading, constituting a half‑truth. On this occasion the representation was made at the point when the contract was concluded, and the continuing effect of contractual negotiations is thus not relevant. As with the previous representations, it cannot in our opinion be said that the reclaimers did no more than pass on information; that information was seriously misleading without the qualification. Similarly, the fact that the respondents were to grant cautionary obligations is significant.
[59] In our opinion both the second and the third representations induced the contract; they reinforced the effect of the first representation. Consequently reduction for innocent misrepresentation is available on the basis of these statements. We are further of opinion that the second and third statements were negligent misrepresentations, made in breach of the duty of care owed by Mr Marsh to the respondents. Our reasoning is that set out at paragraph [51] above. As a banker, Mr Marsh ought to have been alert to the important qualifications in property valuation reports, and a statement that a report was “for indicative purposes only” should have made him realize that the report could not be relied on for lending or security purposes. In addition, the limited basis of which the valuation was carried out and the disclaimer of responsibility to any person other than the reclaimers should have alerted him to the important manner in which the revaluation was qualified. On this matter we are in entire agreement with the views of the Lord Ordinary (paragraph [54] of his opinion).
The cross‑appeal
[60] The foregoing is sufficient for us to uphold the decision of the Lord Ordinary, permitting reduction of the guarantee and awarding damages for negligent misrepresentation, in the form of the losses caused by the interest payments made under the new loan facility granted in March 2009. The respondents presented certain further arguments to the Lord Ordinary, one of which is the subject of a cross‑appeal. This is to the effect that Ryden’s revaluation was for a scheme different from that originally proposed by the respondents, but this change was not disclosed to the respondents when they were told of the revaluation. It is not strictly necessary for us to deal with this argument, but for the sake of completeness we will express our views briefly.
[61] In summary, the contention for the respondents is that the revaluation was based on important assumptions that differed from those originally supplied by the respondents; these are summarized in paragraph [16] above. The most important alteration was an increase in the number of units to be constructed on the site; the first respondent had agreed with Mr Marsh by email on 17 December 2008 that the revaluation should be based on 120 units, but Ryden’s revaluation was in fact based on 128 units. That was necessary to arrive at the figure of £2 million that Mr Ronnie had indicated. The respondents considered that the increase to 128 units would result in an impracticable density of housing on the site, both in general terms and because Ryden’s revaluation had been based on exclusively detached housing, whereas some flats would be necessary to accommodate the increased density. The Lord Ordinary held that it would be going too far to conclude that Mr Marsh was under a duty to identify those particular issues and alert the defenders. In this respect the increased density was quite different from the “indicative” nature of the report, which went to the heart of the assurance given at the meeting on 16 December 2008.
[62] We are in agreement with the Lord Ordinary’s conclusion on this argument. We consider it relevant that Mr Marsh was a banker, not a surveyor or developer; his expertise was essentially in the field of finance, not building. He was in our opinion entitled to assume that Ryden, as experts surveyors, had used proper assumptions in the revaluation. This was a technical task, carried out using the Kell Delta computer programme, and there was no indication that Mr Marsh had any expertise in that field. We are accordingly of opinion that his failure to pass on the different assumptions made in the revaluation did not amount to negligence.
Conclusion
[63] For the foregoing reasons, we are of opinion that the Lord Ordinary’s decision is correct. We will accordingly refuse the reclaiming motion and sustain his decision to assoilzie the respondents from the conclusions of the summons, to reduce the guarantee granted by the respondents in favour of the reclaimers, and to grant decree in favour of each of the respondents for the sum of £39,600 with interest at 4% per annum from 21 December 2009 and 23 December 2009 until payment in relation to the first and second respondents respectively.