The solicitor’s warranty of authority

A third party is protected against unauthorised activity of agents in different ways.  If the criteria are established, he may be able to raise an action against the principal for damages on the basis of apparent authority.  If the principal, notwithstanding the agent’s lack of authority, chooses to adopt the transaction, then it becomes binding through ratification.  A less familiar action is the action that the third party has against the unauthorised agent: breach of warranty of authority.  In an opinion issued on 23 September, Lord Glennie analysed this action as it applies to solicitors (Cheshire Mortgage Corporation Limited v Grandison and Blemain Finance Limited v Balfour Manson [2011] CSOH 157).  Outcomes in cases of this type are highly fact-dependent.  On the facts of this case, it was held that the solicitor warranted only that he was authorised, not the identity of his clients.   

The fraud which took place in these cases was similar to that which occurred in another case which was commented on in this blog last year: Frank Houlgate Investment Co Ltd v Biggart Baillie LLP 2010 SLT 527, see http://www.law.ed.ac.uk/ecclblog/blogentry.aspx?blogentryref=8030.  The scam is simple but effective, as is illustrated by the facts of the first case.  By impersonating an actual couple (the rather appropriately named Mr and Mrs Cheetham), the fraudsters secured a loan of £355,000 secured over the real Mr and Mrs Cheethams’s home.  The fraudsters were able to provide a number of documents including drivers’ licences and utility bills, all suggesting that they were the real Mr and Mrs Cheetham.  On the day the offer letter was issued, the fraudsters consulted Mr Longmuir, a solicitor, instructing him to act on their behalf.  Not surprisingly, the fraudsters did not have the title deeds to the property which the mortgage was to be taken out over.  Extracts were produced by them, under explanation that the original deeds had been lost.  Their dealings progressed in the normal way, the loan was made and a standard security was executed and submitted for registration over the property.  Shortly after the loan had been made, the fraudsters disappeared, leaving the mortgage company unable to recover the loan and unable to rely on the pretended standard securities.  The mortgage company raised actions against the two sets of solicitors who had acted on behalf of the fraudsters.  They argued that the solicitors in acting for their clients warranted not only that they were duly authorised, but also the identity of their clients.  In other words they argued that the solicitors warranted to the mortgage company that their clients were who they said they were.  As is invariably the case in unauthorised agency, “…the issue is fought in each case between two innocent parties” (para [5]). 

Lord Glennie began his analysis of the law with the English case, Collen v Wright [1857] 8 E&B 647, quoting from Willes J at 657:

“I am of the opinion that a person, who induces another to contract with him as the agent or a third party by an unqualified assertion of his being authorised to act as such agent, is answerable to the person who so contracts for any damages which he may sustain by reason of the assertion of authority being untrue….The obligation arising in such a case is well expressed by saying that a person, professing to contract as agent for another, impliedly, if not expressly, undertakes to and promises the person who enters into such a contract, upon the faith of the professed agent being duly authorised, that the authority which he professes to have does in point of fact exist.”

This action is contractual in nature.  Lord Glennie referred to the judgment of Buxton LJ in SEB Trygg Liv Holding AB v Manches [2006] 1 WLR 226 at para 60 who identified the existence of a collateral contract between agent and third party.  There is, of course, no contract between these parties: the action rests on an implied contract, a legal fiction.  This author has argued that the relationship between the two parties is better analysed in Scots law as a unilateral promise or undertaking (‘Unauthorised Agency in Scots Law’ in D. Busch and L. Macgregor, The Unauthorised Agent: Perspectives From European and Comparative Law, (2009)).  This more accurately reflects the one-sided nature of the dealings between agent and third party. The agent undertakes to the third party that he is authorised.  The third party does not place himself under any similar obligation to the agent.  This analysis is not possible in English law given the lack of an enforceable unilateral promise in that legal system.  Consideration, although not part of Scots law, could potentially help us to analyse the fictitious contract which exists.  Lord Glennie stated  (at para [56]):

“…the acts which amount to consideration may also indicate the acceptance necessary to turn the representation or unilateral promise by the agent into a contract between the agent and third party collateral to that purportedly entered into between the third party and the agent’s professed principal.”  

It is unclear whether Lord Glennie in using the phrase “unilateral promise” means the exchange of promises which lies at the heart of contracts in English law, or the Scottish idea of a binding unilateral promise.  If the latter, this may provide a hint of support for a promissory analysis.  The contractual analysis is highly unsatisfactory: agent and third party clearly have no intention to form a contract.  An implied promise more neatly suits the factual context.  

  
Lord Glennie explained that outcomes are highly dependent on the facts (para [56]):  “…one cannot simply assume the existence of a warranty of authority in all cases.  It is necessary in each case to look at the relationship between the parites, and to examine closely what was said, expressly or impliedly, by the agent in the context of that relationship, how what was said could reasonably have been understood by the other party (the test, as always in contract, being objective.)”

Quoting Lord Drummond Young in Houlgate, he confirms the limited scope of the warranty (at para [57], quoting from para [27] of Lord Drummond Young’s judgment:

“Thus the representation relates to the person for whom the supposed agent purports to act.  It does not relate to the capacity in which that person, the supposed principal, will enter into the transaction, or as to the property that person holds, or as to that person’s title to property.”

Finally, Lord Glennie confirms that liability is strict: it makes no difference to the agent’s liability that he honestly believed himself to be authorised (para [58]).

Going back to the facts, Lord Glennie sought to establish whether the warranty in this case could extend to the principal’s identity.  He emphasised the high degree of contact between the mortgage company and the fraudsters before the solicitor became involved (para [62]). “Of particular importance, to my mind, is the fact that, by the time the borrowers’ solicitors became involved, the lenders knew who they were (or thought they were) dealing with.  They had made the decision in principle to lend to those individuals.  The solicitors were instructed by the borrowers for a limited purpose, namely to help draw up the relevant loan and security documentation and to liaise with the Mellicks, solicitors instructed by the lenders, to that end. (para [63])”
This led him to conclude (at para [64]) that “[i]n those circumstances, it is, in my opinion, difficult to see any room for any implied representation by the solicitors as to the identity of the borrowers for whom they were acting, other than that they were acting for the people with whom the lenders were already engaged in a process of finalising a loan transaction.”  

Researches of counsel suggested that there is no reported Scottish case in which a party has been held liable for breach of warranty of authority.    Judicial analysis nonetheless exists in cases such as Anderson v Croall (1903) 6F 153, Rederi Aktibolaget Nordstjernan v Christian Salvesan & Co [1903] 6 F 64, Irving v Burns 1915 SC 260 and Scott v JB Livingstone & Nicol 1990 SLT 305.  To that list of cases to which Lord Glennie was referred could have been added statements made by Lord MacKay in RBS v Skinner (1931 SLT 382 at 387) on the requirement of reliance of the third party on the warranty. 

This case usefully sets out the requirements of a successful case of breach of warranty of authority.  The action is undoubtedly unusual: contractual damages are available in a situation in which there is, in reality, no contract.  The law of agency contains other similar anomalies.  In apparent authority contract again supplies the measure of the damages even there is no contract between principal and third party though (the agent having been unauthorised).  No doubt the contractual measure is appropriate for the commercial situations in which this action operates.  Agency law could be accused of over-use of legal fictions.  Perhaps we need to be more creative and analysis the tri-partite legal relationships which exist in agency in different, non-contractual, ways. 
On a practical level, banks and building societies may now need to rethink the checks they carry out on borrowers.  An action against the borrower’s solicitors is clearly not the easy option.  Lord Glennie did not entirely close the door on this possibility, however.  The outcomes of cases of this type are highly fact-dependent.  In these particular cases, the fraudsters had become well-known to the mortgage company before the fraudsters’ solicitors became involved.  Lord Glennie seems to suggest a remote possibility that, had the facts differed, the outcome too might differ.    

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