Month: September 2011

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.    

FHR European Ventures LLP & Ors v Mankarious & Ors [2011] EWHC 2308 (Ch) provides a useful illustration of the way in which the English courts treat the acceptance by an agent of secret commission as a breach of the agent’s fiduciary duty towards the principal.  It sheds light on the extent of knowledge which the principal must possess before he can truly be held to have “consented” to the retention of such a payment by the agent.  It also focuses on the wider impact on the agent, airing issues such as whether the agent can recover from the principal an allowance for skill and effort in obtaining the profit which he has to disgorge to the principal and the impact on commission earned in other, unconnected transactions.  Finally, it illustrates the fact that in English law the agent holds such funds on constructive trust for the principal.

The party who was alleged to have retained the secret profit was Mankarious, who had established a business venture, Cedar Capital Partners (‘Cedar’).  He had acted on behalf of a consortium in their purchase of a hotel in Monte Carlo, for a price of 215 million euros.  After the consortium had purchased the hotel it was discovered that the agent had accepted a commission payment from the sellers of the hotel amounting to 10 million euros.  The consortium brought the relationship with the agent to an end immediately, and refused to pay any of the agent’s outstanding invoices relating to work which the agent had carried out on the consortium’s behalf.  The action was raised by the consortium against the agent requiring disgorgement of the alleged secret commission to the consortium, and seeking resolution of other issues between the parties such as payment of outstanding invoices.  

Mr Justice Simon began his discussion of the applicable law with reference to what has become a highly influential case on fiduciary duties in English law, Bristol and West BS v Mothew ([1998] 1 Ch 1).  He quoted from the case, including the following words, encapsulating the idea of the agent’s fiduciary duty (at 18, quoted by Mr Justice Simon at para 74):

“The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary.  This core liability has several facets.  A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.  This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations…where the fiduciary deals with his principal.  In such a case he must prove affirmatively that the transaction is fair and that in the course of the negotiations he made full disclosure of all facts material to the transaction.”       

Authorities on the nature of the principal’s consent were reviewed.  Significantly, it was confirmed that the burden of proving full disclosure rests on the agent (para 78, quoting from Bowstead & Reynolds, Agency, para 6-057).  It was also acknowledged that the factual nature of these enquiries mean that it is difficult to use cases as precedents (para 81).  Finally on this issue, the court considered whether, where the agent has more than one principal, disclosure to one principal can constitute disclosure to all.  This raises the issue of authority: one principal may have actual or apparent authority to receive such information from the agent on behalf of the other principals. 

The agent can be made an allowance for the skill and effort which he expended in obtaining the profit which he has to disgorge.  This principle was recently explored by  the Court of Appeal in Imageview Management v Jack [2009] EWCA Civ 63 at [56].  Imageview, the subject of an earlier blog entry available here:
http://www.law.ed.ac.uk/ecclblog/blogentry.aspx?blogentryref=7912.  In that case, the court had approved the statement of this principle in Snell’s Equity, 31st edition, §7-131:

“…a fiduciary who has acted in breach of fiduciary duty and against whom an account of profits is ordered, may nevertheless be given an allowance for skill and effort in obtaining the profit which he has to disgorge where ‘it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it.’ [The quotation is from the judgment of Wilberforce J in Phipps v Boardman [1964] 1 WLR 993, 1018)].  The power is exercised sparingly, out of concern not to encourage fiduciaries to act in breach of fiduciary duty.  It will not likely be used where the fiduciary has been involved in surreptitious dealing…although, strictly speaking it is not ruled out simply because the fiduciary can be criticised in the circumstances.  The fiduciary bears the onus of convincing the court that an accounting of his or her entire profits is inappropriate in the circumstances.”

On the facts it was held that the agent owed duties to each of the principals severally, meaning that the fully informed consent of each one would have been required before the agent could have retained the secret profit.  Unless this consent was obtained “it could not receive and retain the 10 million euros commission from the Vendors.” 

The evidence suggested that the certain of the members of the consortium may have been aware or suspected that the agent was receiving commission from the sellers. Mr Justice Simon held (at para 104) that it was “…incumbent on the Cedar to inform BoS, not only that it was receiving a Commission payment but the amount, 10 million euros.  It was an exceptionally large sum in proportion to the rewards that Cedar was likely to be able to negotiate from its acquisition work for the purchasers…and it was a significantly larger percentage than would have been expected.”  The agent failed to discharge the burden of proving that each of the companies in the consortium had the requisite knowledge. 

Nor was this the type of case in which it would be appropriate to make an equitable allowance to the agent (para 108).  Numerous opportunities had arisen for the agent to inform the principals, but none of these were taken.  The agent was, however, entitled to retain the commission from work performed in relation to another three hotels, presumably on the basis that these other transactions were severable from the tainted transaction (Lord Hunter in Graham & Co v United Turkey Red Co 1922 S.C. 533 at 553, relying on English authority, indicates that a similar priniciple of severability exists in Scots law). 

Although this case is useful for Scots lawyers, a few issues should be borne in mind about the differences between Scots and English law.  Where the agent is in material breach of the agency agreement and yet seeks payment for his skill and effort, the situation moves from a contractual one to an enrichment one.  Given the differences between enrichment law in Scotland and England, this means that, in a Scottish case, a pursuer would be well advised to use Scottish rather than English cases as precedents. The same issue was considered in the case of Graham & Co v United Turkey Red Co (1922 SC 533).  The breach in that case was acting for another principal when that was specifically prohibited by the written agency agreement.  Although the agent was entitled to commission for the period during which he was not in breach, he was not entitled to commission once he placed himself in material, or “flagrant,” breach (per Lord Ormidale at 548).  According to Lords Salvesan and Ormidale, that was not, however, the end of the line for the agent.  He could claim remuneration even after he had placed himself in material breach (at 546 and 549 and see Ramsay & Son v Brand (1898) 25 R. 1212 and Steel v Young 1907 S.C. 360).  As an enrichment remedy, this claim would only be open to the agent (as contract-breaker) if the principal had opted to rescind in response to the agent's material breach.  The onus lay upon the agent to establish that he was entitled to commission (per Lord Salvesan at 546).  If he successfully established that the principal had gained from his services during this time, the measure of recovery would not be quantum meruit the agent, but rather quantum lucratus the principal (i.e. measured not by reference to what the agent deserves, but rather by reference to the principal's enrichment (per Lord Salvesan at 546 and Lord Ormidale at 550).  Thus it is the law of unjustified enrichment and not the law of contract that potentially offers the agent a remedy for remuneration where he has placed himself in material breach of contract.  It should also be noted for the avoidance of doubt that there is no implied term that an agent is not entitled to work for another principal: only an express term can limit the agent’s activities in this way (Lothian v Jenolite 1969 SC 111).

The fact that it was held in this case that the agent held the secret profit on constructive trust for the principals has already been noted.  Whether a constructive trust exists in Scots law, and would apply to the agent in this type of situation is a controversial issue, and one that cannot be analysed here.  Those seeking enlightenment on the constructive trust in Scots law should consult two articles by Professor George Gretton:  Constructive Trusts: Part I (1997) Edin.L.R. 281 and Part 2 (1997) Edin.L.R. 408.