Inner House rejects attempt to extend the solicitor’s warranty of authority

Solicitors can today breathe a sigh of relief with the release of the Inner House decision in the joined cases of Cheshire Mortgage Corporation Limited v Grandison and Blemain Finance Limited v Balfour Manson LLP ([2012] CSIH 66.  The Inner House, in an opinion delivered by Lord Clarke, has rejected an attempt to extend the ambit of the solicitor’s warranty of authority.  Lord Clarke summed up the court's view as follows (para [31]) : “We are of the clear view that there are no reasons in principle or practice, for extending the somewhat limited scope and nature of the implied warranty of agents in the way in which the reclaimers’ submissions in the present case contended for.” 

A solicitor warrants to the party transacting with his client (“the third party”) that he is authorised by his client.  If that warranty proves to be incorrect, the solicitor can be liable in damages to the third party.  The action involves strict liability in contract on the part of the agent, the principles having developed before the emergence of the modern idea of delictual liability for negligence.  The issue before the House in this appeal was whether the warranty extended further than simply the existence of authority, in order to encompass facts about his client such as whether the client was indeed who he purported to be.    

The facts of the case are narrated in a blog entry on the Outer House stage of this case see:  http://www.law.ed.ac.uk/ecclblog/blogentry.aspx?blogentryref=8745.  The fraudulent schemes involved in both cases can be illustrated by reference to the facts in Cheshire.  A man and woman purported to be real individuals, Mr & Mrs Cheetham of 34 Danube Street, Edinburgh, in order to borrow from a lender, with the borrowings being secured over the property in Danube Street. Once the loan had been obtained from the lender the fraudsters disappeared, leaving the lender with an ineffective standard security.  The fraudsters were represented by a solicitor.  It is well established that that solicitor warrants to the lender (as a third party) that he is authorised.  But does he warrant further that his client is who he claims to be?  Notably, the lenders in both of these cases were separately represented: the solicitors acting for the borrowers did not also act for the lenders.  The Inner House has answered this question with an emphatic negative. 

In these cases the deception carried out was highly convincing.  The fraudsters were able to produce driving licences and utility bills showing the correct addresses.  These were shown to the solicitors acting for them at the meetings which took place.  The absence of title deeds was put down to the deeds having been lost, and extract registered title deeds obtained.   In the Outer House Lord Glennie stated (para [64], quoted at para [22] of the IH judgment):
“In 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.  Borrowing from Willes J’s formulation of the warranty in Collen v Wright [1857 8 E & B 647], the solicitors here in each case did not (sic) more than warrant “that the authority which (they professed) to have, did in point of fact exist.”  The authority which they professed to have was this, that they were instructed by the borrowers who were already known to the lenders to assist in drawing up the loan and security documentation.  I do not consider that they gave any implied warranty beyond that.”

The court’s opinion begins with the statement of principle, cited by junior counsel for the reclaimers, and taken from the judgment of Willes J. in the leading English case of Collen v Wright (1857 8 E & B 647at 657):
“I am of opinion that a person, who induces another to contract with him as the agent of 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.  That is not the case of a bare misstatement by a person not bound by any duty to give information.  The fact that the professed agent honestly thinks that he has authority affects the moral character of his act; but his moral innocence, so far as the person whom he has induceed to contract is concerned, in no way aids such person or alleviates the inconvenience and damage which he sustains.  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 or 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.  The fact of entering into the transaction with the professed agent, as such, is good consideration for the promise.”

Lord Clarke characterises this statement, and others like it in English cases, as the simple process of implying a term into mercantile transactions, drawing an analogy with the implied terms put into statutory form in the Sale of Goods Act and the Bills of Exchange Act. 

There is very little Scottish case law on this action, and it is recognised that the principles were received into Scots law from English law.  Lord Clarke notes this point and refers to a statement of the law in Gloag & Henderson the Law of Scotland (12th edition, the agency chapter having been written by Lord Coulsfield), para 19.26.  He also makes reference to a Scottish case not cited to the court, Irving v Burns (1915 SC 260) in order to illustrate the well-established principle that, where the principal was actually insolvent, the agent will not be liable in damages.  The loss to the third party is the expected contract with the principal.  If that principal was not in a position to honour that contract, the third party has suffered no loss.  This case is used by Lord Clarke to emphasise the limited nature of the warranty.    

Given that this is an English concept, reference is made to the statement of the law in the leading English text, Bowstead & Reynolds, Agency, (Article 105).  Significantly the authors of that text note:

“The basic warranty is only that the agent has authority from his principal: this is something particularly within the agent’s knowledge.  If the principal proves unreliable, that is something in respect of which the third party could have made inquiries.  Merely as agent, therefore, the agent does not warrant that his principal is solvent, or will perform the contract (if any).  As can be seen below, in the context of litigation, the warranty is similarly limited in that the agent (normally a solicitor) does not promise that a claim is valid.”    

Lord Clarke notes (at para 26) the classification in English law of the warranty as a collateral contract and also that English law has been troubled with the issue of the consideration provided by the third party who, in a sense, is given something for nothing.  This is not a concern in Scots law. 

Modern English cases are also noted by the court, including Penn v Bristol & West BS and ors ([1997] 1 WLR 1356), which the Inner House found not to be of assistance in this context.  In SEB Trygg Liv Holding AB v Manches ((2006) 1 WLR 2276) a similar attempt to extend the warranty in the context of litigation was unsuccessful.  There is  extensive discussion of Excel Securities Ltd v Masood ([2010] Lloyds rep P. N. 165), a case described by the court (at para [28]) as being “good law for Scotland.”  The facts of that case involve a similar identity fraud.  Lord Clarke quotes (at para [29]) from the opinion of Judge Hegarty:

“The essential legal principles applicable to such a claim are not in doubt.  An agent acting on behalf of an unidentified principal will not normally incur any personal, contractual liability so long as he acts within the scope of his authority.  Anyone contracting with such an agent must look to the principal for any redress to which he is entitled as a matter of contract.  However, it is now well established that, in such circumstances, the agent will normally be regarded as giving an implied warranty as to his authority.  If, therefore, he never had authority to act on behalf of the principal or if his authority has terminated or if he exceeds the scope of his authority, he will be in breach of the implied warranty and will be liable in damages to any person to whom the warranty was given.  In the common case, where the principal refuses to accept liability, the right of action against the agent for breach of his warranty will be an effective substitute for the loss of any right of action against the principal.”   

  
Judge Hegarty had noted the decision in Penn and concluded that, notwithstanding the result, it was not the case that the solicitor always warranted his client’s identity.   Lord Clarke noted (para [29]) “We agree.”

Lord Clarke concluded the discussion of this point with the following (at para [30]):
“We accept that a warranty may be given by a solicitor, or other agent, expressly to a third party as to a particular attribute or attributes of the solicitor’s or agent’s client.  We consider it more appropriate in such discussions to talk of attributes of clients rather than the identity of a client.  The identity of a person is made up from a bundle of qualifies or attributes.  In particular there is nothing in principle in the law of contract to prevent an agent from guaranteeing to a third party that he has a principal who is the same person as appears on property registers, for example, as the owner of a specific property. …but, in any event, where, as here, no such express warranty was asked for, or given, matters must rest on the implied, warranty of authority to be implied (sic) as a matter of law the extent and nature of which was defined correctly in the Excel case.” 

  
Their Lordships also considered the impact of a Letter of Obligation in unusual terms given in the Cheshire case, although their conclusions on this point are not considered here.

This result is very welcome.  The Inner House reminds us (at para [29]) of the policy reasons behind the warranty of authority: the agent is in a better position than the third party to check that he is actually authorised.  It makes sense, therefore to let the risk of loss fall on that solicitor.  To extend the warranty further in order to encompass the client’s identity would be to place on the solicitor a risk which is the lender’s risk in making a commercial decision to lend (as explained by Judge Hegarty in Excel Securities, para 102, noted by the Inner House at para [31]).  It is hoped that this will lay to rest any further attempts to extend the warranty (there is no sign of an appeal in a similar case,  Frank Houlgate Investments Ltd v Biggart Baillie LLP ([2009] CSOH 165 and [2011] CSOH 160) although there the debate has centred around a possible delictual duty of care owed by the solicitor to the party transacting with his client). 

A final point relates to the legal basis of the warranty.  It is not surprising that English law adopted the vehicle of the collateral contract for this action given the difficulties surrounding unilateral obligations caused by the doctrine of consideration.  In English law, consideration is provided when the third party enters into a contract in exchange for the agent’s promise.  It would be more sensible in Scots law to characterise this action as a unilateral promise in terms of which the agent promises to the third party that he is authorised.  Given that this point has never been aired in the very limited number of Scottish cases, and was not argued before the Inner House it is not surprising that the court did not consider it.  It would be a conceptually neater basis upon which this action could rest.    
 

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