EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

Lord Clarke Lord Mackay of Drumadoon Lord Bonomy

[2012] CSIH 66 CA100/09 and CA103/09 OPINION OF THE COURT delivered by LORD CLARKE in the reclaiming motion by CHESHIRE MORTGAGE CORPORATION LIMITED Pursuers and Reclaimers; against MORNA GRANDISON (JUDICIAL FACTOR ON THE ESTATE OF LONGMUIR & CO) Defender Respondent: and in the reclaiming motion by BLEMAIN FINANCE LIMITED Pursuers and Reclaimers; against BALFOUR & MANSON LLP Defenders and Respondents _______

Pursuers and Reclaimers: Lord Davidson of Glen Clova; McCall; Davidson Chalmers LLP

Defenders and Respondents: A Young QC; Duncan; bto

5 September 2012

[1] These two actions raise the same question arriving out of the law of agency. In the Cheshire Mortgage Corporation Limited ("CMC") case a separate point also arises as to the meaning and effect of a letter of obligation.

[2] After proof before answer the Lord Ordinary, Lord Glennie granted decree of absolvitor in both actions. The facts found, in both actions, reveal a striking resemblance. The pursuers and reclaimers in both cases belong to the same group of companies known as the Blemain Group. Both companies are in the business of secured lending. They lend both to individuals and corporate borrowers against security provided by the borrowers, normally in the form of a standard security over heritable property. The respondent in the CMC action is the judicial factor appointed to the estates of a firm of solicitors known as Longmuir & Co who acted in the security transaction to which the action at the instance of CMC relates. The respondents in the action at the instance of Blemain Finance Limited ("BFL") are Balfour & Manson LLP a firm of solicitors who acted in a security transaction with which the action at BFL's instance is concerned. In each case the respondents have been the victims of mortgage fraud. The frauds perpetrated upon them as a result of fraudsters, each of the reclaimers involved two different pairs of individuals applying for a loan, pretending to be husband and wife who were owners of heritable property which was to institute the security for the loans.

[3] In the CMC case Messrs Longmuir & Co were instructed by the borrowers to prepare the appropriate standard security in favour of CMC in return for CMC lending money to them. In the BFL case Messrs Balfour & Manson were instructed by the borrowers to prepare the appropriate standard security, in favour of BFL Both firms of solicitors then engaged with Messrs Mellicks Solicitors, acting for the lenders, in relation to the execution of the standard securities. In both cases the couple, who turned out to be fraudsters, executed pretended standard securities over the heritable properties which they claimed they owned. The reclaimers in each case advanced the loans in the belief that the borrowers owned the subjects in respect of which the standard securities had been granted. The fraudsters, in the event, have disappeared. The reclaimers have been unable to recover the sums advanced. It was not contended on behalf of the reclaimers, nor was it found by the Lord Ordinary, that either Messrs Longmuir or the respondents in the BLF case had acted in anything other than good faith or that they had not understood that the borrowers had title to the subjects over which they granted the pretended securities.

[4] In the present proceedings, both sets of reclaimers sue the respondents for loss which they aver they suffered through the respondents' breaches of their warranty of authority. In the CMC case the reclaimers sue the respondents for their losses also on the basis of the alleged breach of a letter of obligation granted by Messrs Longmuir & Co. In neither action do the reclaimers seek to recover their losses on the basis of any negligence or other breach of duty on the part of the respondents.

CMC v Morna Grandison Judicial Factor to the estate of Longmuire & Co - the factual position

[5] The more detailed facts in relation to the two transactions, which form the basis for these actions, are set out fully in the Lord Ordinary's opinion to which reference is made. It is sufficient to highlight certain of these matters for the purposes of disposing of these reclaiming motions.

[6] In the CMC case the fraudsters presented themselves as Christopher Paul Cheetham and Mrs Juliet Cheetham of 34 Danube Street, Stockbridge, Edinburgh, EH4 1NT. They made an application for a loan on or about 20 October 2004, initially through a broker. The amount of loan being sought by them was £350,000. The purpose of the loan was said "to assist the purchase of overseas property". On 27 October CMC issued an offer letter addressed to Mr and Mrs Cheetham, referred to as "the Borrowers". The terms of the loan were set out in the letter. The offer letter was signed for acceptance on 2 November by "Mr and Mrs Cheetham". On 1 November, the day before signing the acceptance of the offer letter, the fraudsters, again representing themselves as Mr and Mrs Cheetham, wrote to CMC on writing paper headed with the address 34 Danube Street, Edinburgh to confirm that the monthly payments in the respect of the loan were affordable by them. On 5 November 2004 CMC received from DM Hall, Chartered Surveyors, a mortgage valuation report dated 3 November over subjects at 34 Danube Street. The report stated that the property had been inspected on 2 November and the valuation was in the sum of £600,000. In a subsequent telephone conversation on 23 November 2004 Messrs DM Hall confirmed the value of the subjects, if a sale had to be effected within 90 days, to be £575,000. The Lord Ordinary at para 16 of his opinion states:

"It is clear that the CMC were provided with a number of documents purporting to confirm the identity and address of the borrowers. They received a BT bill addressed to Mr C.P. Cheetham at 34 Danube Street, a Scottish Power payment reminder similarly addressed, a Scottish Gas bill addressed to Mrs J Cheetham at that address, a driver's licence in the name of Christopher Paul Cheetham at that address and a driving licence in the name of Juliet Cheetham also at that address."

The Lord Ordinary reached the conclusion that all of that material had come to CMC from the broker or from the fraudsters themselves.

[7] The Lord Ordinary at para 17 of his opinion held, on the facts, that the representatives of CMC, apart from any matter arising from question of implied warranty of authority, had no specific basis for believing that the solicitors appointed by the borrowers were giving an assurance that their clients were who they said they were or that they lived where they said they lived.

[8] Messrs Mellicks Solicitors were instructed to act on behalf of CMC in the loan transaction. They were sent an instruction letter on 8 November 2004 from CMC which identified the borrowers as Christopher Paul Cheetham and Julie Cheetham with a correspondence address at 34 Danube Street, Edinburgh, which was also given as their security address. The borrowers' solicitors were identified in this document as Longmuir & Co. The instructions contained in the document issued to Mellicks on 8 November contained inter alia the following:

"A Matters specific to this transaction

1. Please note we wish to take a 1st charge over the property.

2. Please check and confirm that the property is in the sole name of Christopher Paul Cheetham and Juliet Cheetham.

3. Please check and confirm when the customers purchased the property and for how much. Please revert this information back to us...."

Under the heading "B Standard instructions" there appeared as follows:

"11. Please check and confirm that there is nothing that would adversely affect our security on any of the searches.

12. Please liaise with client's solicitor to ensure that the client is fully aware of the legal implications of signing the loan agreement forms.

13. Please contact the clients' solicitor as soon as possible and keep us updated at all times...."

The instruction letter to Messrs Mellicks noted that a copy of the borrowers' identification documents and a copy of the valuation of the property over which the security was to be taken would follow.

[9] On 24 November a formal mortgage offer was issued by CMC. It named the borrowers as Mr and Mrs Cheetham and the address of the property to be mortgaged as 34 Danube Street, Edinburgh. The offer, which was valid for three months, was for a loan for one year of £350,000 plus £4,868 in fees to be added to the loan, and contained details of the repayment schedule. The value of the property was noted as £600,000. It was a term of the mortgage offer that the loan be secured by a first mortgage over the property in the form of the draft standard security accompanying the offer. Messrs Mellicks were to be involved in the obtaining of the standard security and were instructed to liaise with the borrowers' solicitor for that purpose.

[10] On 25 November 2004 Mellicks wrote to CMC in the following terms:

"Dear Sirs

Mr & Mrs Cheetham

34 Danube Street, Edinburgh

Reference: CH04112201800

We write to advise that we have will (sic) receive the Credit Agreement signed by Mr & Mrs Cheetham the Standard Security duly signed together with a Standing Order Mandate on Friday 26^th November 2004. We confirm that they are in order. We have had sight of the necessary Searches in respect of the properties. Nothing is disclosed that would adversely affect your security...".

The sum of £354,868 was transferred by CMC to Mellicks on 26 November 2004. On 30 November Mellicks then sent to Longmuir & Co a cheque in that amount, less certain fees, which was to be held as undelivered, pending confirmation that Longmuir & Co had executed the documentation and would deliver that documentation along with the title deeds and their letter of obligation by return.

[11] The fraudsters met a representative of Messrs Longmuir & Co, Mr Martin Longmuir on 27 October. Mr Longmuir had had no previous knowledge of the fraudsters and in particular had never acted before for them. The client opening form, completed by Mr Longmuir in manuscript on that day, showed the full names of those for whom he thought he was acting, namely Christopher Paul Cheetham and Juliet Cheetham, and it gave their address 34 Danube Street, Edinburgh, EH4 1NT. Mr Longmuir wrote down a mobile telephone number which they gave him for the purposes of contacting them. He noted that Messrs Mellicks had been acting for the lenders. The figure of £600,000 was noted by him in brackets on the form. Mr Longmuir asked for identification documents to be produced. He informed the court that he did not make it a requirement that new clients should show this to him before he started work on their behalf, but made it clear that they would require to be produced at some point during any work being carried out by him for them. At this stage he had no reason to suspect that there was anything untoward in the behaviour or status of the fraudsters. His dealings were with Mr Cheetham. He never in fact met Mrs Cheetham. On 30 November Mr Cheetham brought an electricity bill and driving licence as proof of identity to Mr Longmuir's office. Mr Longmuir's secretary photocopied these. Mr Cheetham informed Mr Longmuir that the title deed to the subjects at 34 Danube Street had been mislaid, as a result of which Mr Longmuir had to work from an extract of the title deed which he had obtained from the Land Registry.

[12] On 12 November 2004 Mr Longmuir received a letter from Messrs Mellicks which was dated 11 November. It was in the following terms:

"Dear Martin,

Loan to Christopher Paul Cheetham and Juliet Cheetham

34 Danube Street, Stockbridge, Edinburgh, EH4 1NT

We act for Cheshire Mortgage Corporation Ltd who have agreed to grant a briding (sic) facility to your above named clients in the sum of £355,000 to be secured as a first charge over 34 Danube Street, Stockbridge, Edinburgh....

If your clients wish to proceed please could you let us have the title deeds as a matter of urgency. We will also require a property enquiry certificate, a Form 12 and details of the buildings insurance cover for the property. The surveyors report also indicates that alterations have been made to the property and we should be pleased to receive the appropriate building warrants and completion certificates. We look forward to hearing from you.

Yours sincerely

...."

Upon receipt of that letter Mr Longmuir wrote to Mellicks confirming that he was taking his clients instructions. He wrote also to the fraudsters at 34 Danube Street including a copy of Mellicks' letter and requested them to contact him in order that he could take their further instructions. What followed thereafter was what would routinely be expected to follow in a secured loan agreement of the sort in question. In particular on 17 November, Mr Longmuir wrote to Mellicks enclosing for their examination extracts (i) of the disposition in favour of Mr and Mrs Cheetham recorded in the Register of Sasines on 28 June 1989 and (ii) of the discharge by the building society in favour of Mr and Mrs Cheetham recorded in that Register on 24 April 1995. He confirmed that they had requisitioned copies of the prior title deeds. He also enclosed a draft of their letter of obligation. On 22 November Mr Longmuir sent Mellicks copies of the prior title deeds which he had obtained from Miller & Bryce. On the same day Mellicks wrote to Longmuir & Co enclosing the standard security document together with a standing order mandate. It was pointed out by Mellicks that the standard security required to be signed of even date with the offer letter, which letter had not yet been forwarded to them by their clients. They also returned the draft letter of obligation drafted by Longmuir & Company.

[13] On 26 November Messrs Mellicks wrote to Longmuir & Co enclosing the formal offer of loan together with the acceptance form which required to be signed and returned to them along with the standard security document and the standing order mandate. The documents were then sent on by Longmuir & Co to the borrowers under cover of a letter addressed to them as Mr and Mrs C Cheetham at 34 Danube Street, Edinburgh. On 30 November Messrs Mellicks sent Longmuir & Company a cheque in the sum of £350,220.50 representing the loan of £354,868 less certain fees and dues. As previously noted Mr Cheetham came into the offices of Longmuir & Co on 30 November. He handed over to Mr Longmuir's secretary a driving licence and electricity bill to be photocopied for identification purposes. He also advised the secretary that payment of the funds was to be made electronically to "Elmwood Contracts". These instructions were set out more fully in two letters of 30 November which Mr Cheetham left with Mr Longmuir's secretary in an envelope for passing to Mr Longmuir. Both of these letters were headed "34 Danube Street". The first letter was accompanied with certain documents signed by Mr and Mrs Cheetham. In that letter the following appeared:

"Once the loan monies are received these are to be paid over to complete our purchase of property in Spain.

As we are now under pressure to make settlement of this matter I wonder if you could ask the lenders solicitors to electronically transfer the loan funds to yourself and on receipt of these could you (after deducting your fees) transfer them direct to the seller.

I enclose a separate letter of instruction in this regard signed by myself and my wife...".

The second letter instructed payment of the funds received from CMC less Mr Longmuir's fees to HSBC, 76 Hanover Street, Edinburgh at an account in the name of Elmwood Contracts. As previously noted, on 30 November 2004, Messrs Mellicks wrote to Longmuir & Company enclosing the loan cheque which was to be held as undelivered pending confirmation that Longmuir & Company had the executed documentation from the borrowers and that they would deliver that documentation along with the title deeds and their letter of obligation by return. On 2 December Longmuir & Company wrote to Messrs Mellicks enclosing the standard security, acceptance and standing order "all duly signed by our clients". On the next day, 3 December, they forwarded to Messrs Mellicks the letter of obligation dated 2 December together with extracts of a disposition and discharge "in our clients favour" these being the title deeds already shown to Mellicks under cover of their letter of 17 November. Longmuir & Company on 7 December wrote to Mr and Mrs Cheetham at 34 Danube Street advising them that the foregoing had been carried out and that the balance of funds after deduction of their fee had been forwarded as instructed by telegraphic transfer.

[14] The terms of Longmuir & Co's letter of obligation, insofar as material were as follows:

"Dear Sirs

Mr and Mrs C Cheetham

Cheshire Mortgage Corporation Limited

34 Danube Street, Edinburgh

With reference to the settlement of the above transaction today, we hereby undertake to deliver to you within twenty four months of this date, a Land Certificate issued by the Keeper of the Land Registers of Scotland in favour of our clients showing the interest of our clients as registered proprietors of the above subjects, which Land Certificate shall contain no exclusion of indemnity and will disclose no entry, deed or diligence prejudicial to your clients interests therein other than such as may be created by or against your clients and further will disclose the standard security granted in favour of your clients..."

Mr Longmuir admitted at the proof that there was an error in that letter. Title was recorded in the Register of Sasines not in the Land Registry.

BFL v Balfour & Manson LLP - the factual position

[15] In this case the borrowers were fraudsters who claimed to be Mr Geoffrey Ellison Morgan and Mrs Margo Clark Morgan. The transaction in this case followed closely the path of what happened in the CMC case.

[16] The application to BFL for a loan came via their website on 9 August 2004 and was for a loan for £203,000 repayable with interest over a period of 12 months. BFL issued an offer letter to the borrowers the same day i.e. 9 August. It was signed for acceptance by Mr and Mrs Morgan. On or about 29 September BFL instructed Messrs Mellicks to act in relation to the proposed loan and security documentation. The instructions to Messrs Mellicks were in similar terms to the instructions given by CMC in the case of Mr and Mrs Cheetham. In particular the standard and specific instructions were the same. BFL gave Messrs Mellicks a correspondence address for Mr and Mrs Morgan at 30 Guthrie Court, Gleneagles, Auchterarder, Perth which was not the address of the security subjects which were 3 Mentieth View, Dunblane, Perth, FK15 0PD (though the address was expressed to be 30 Mentieth View). In the correspondence the security address was, and this was apparent from other documentation, 3 Mentieth View. Together with the instructions were included a valuation of the secured subjects by DM Hall and copies of driving licences for both Mr and Mrs Morgan for identification purposes. These documents, the Lord Ordinary held, must have come to BFL in the first place from Mr and Mrs Morgan.

[17] In due course, some time in late September 2004, Balfour and Manson solicitors obtained instructions to act on behalf of Mr and Mrs Morgan. This came about by Mr Morgan telephoning Balfour and Manson's offices and asking to speak to a solicitor in connection with the granting of a standard security over a property. The call was taken by Ms Anne Sinclair an employee of Balfour and Manson. She had never met or acted for Mr and Mrs Morgan previously. Mr Morgan asked Ms Sinclair to put in place a standard security over 3 Mentieth View, Dunblane which he said he owned jointly with his wife. He explained that he wished to raise money and was keen to have the transaction completed quickly. The proposed security subjects were free of any other mortgage or standard security.

[18] Ms Sinclair agreed to act. She required both Mr and Mrs Morgan to attend Balfour and Manson's offices for the purposes of showing identification documents in the form of a passport or driving licence and a utility bill confirming their address. Mr Morgan explained that they were not currently living at 3 Mentieth View which was presently let. They were living at 30 Guthrie Court, Auchterarder to which all correspondence should be sent. Messrs Mellicks, who had been informed that Balfour and Manson were acting for Mr and Mrs Morgan, wrote to Ms Sinclair on 29 September giving details of the proposed loan and requesting details of the title and the short assured tenancy which they understood was in place in relation to it.

[19] No further movement in the transaction appears to have occurred until 26 October 2004 when Ms Sinclair met Mr Morgan and received from him extract registered title deeds for the proposed secured subjects. He explained that the original title deeds had been lost. Mr Morgan also produced the paper part of the driving licences of himself and his wife and two utility bills, one each in the name of himself and Mrs Morgan, which Ms Sinclair considered satisfactory identification.

[20] On 2 November Ms Sinclair responded to Messrs Mellicks letter of 29 September by sending the extract title deeds to them to enable them to prepare the draft standard security. Details of the short assured tenancy she said would be forwarded to them as soon as possible. The details of the tenancy were in fact provided by Mr Morgan and sent to Mellicks under cover of a letter dated 4 November.

[21] The rest of the transaction appeared to proceed in a straightforward and routine manner. On 11 November Ms Sinclair wrote to Mr and Mrs Morgan asking them to come to her office to sign the standard security and other documents. Mr and Mrs Morgan attended, as requested, on 23 November. Ms Sinclair explained to them the effect of the standard security and the interest rates applicable to the loan. Mr and Mrs Morgan signed the documents. Mr Morgan explained that they required the loan in order to buy property in Spain and requested that the funds be paid direct to parties in Spain. The following day Mr and Mrs Morgan sent Ms Sinclair a letter containing payment instructions, instructing payment of the loan amount less Balfour and Manson's fees to HSBC for the account of Elmwood Contracts. On 25 November the signed documents were forwarded to Mellicks. On 26 November Messrs Mellicks confirmed receipt of the documents including the standard security and confirmed that the funds had been transferred to Balfour and Manson. At the beginning of December Ms Sinclair arranged for the transfer of the net balance to the account of Elmwood Contracts as instructed by Mr and Mrs Morgan. As in the CMC transaction the "borrowers" subsequently disappeared, the standard security has proved to be a nullity and no recovery has been made of the sums advanced by BFL.

[22] It was argued before the Lord Ordinary on behalf of the reclaimers that those factual situations allowed the reclaimers, in each case, to sue the respondents for their losses on the basis that the respondents in each case had been in breach of their implied warranty of authority as agents. Having considered the relevant authorities on this topic the Lord Ordinary reached the following conclusions in both cases, at para 64 of his opinion:

"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 the Willes J's formulation of the warranty in Collen v Wright, the solicitors here in each case did not 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 going beyond this".

In the CMC case the reclaimers' pleas-in-law are as follows:

"1. The pursuer having suffered loss as a result of Longmuir & Co's breach of representation as to their authority et separatim as a result of the breach of the Letter of Obligation by Longmuir & Co, is entitled to reparation therefor.

2. The sum first concluded for representing a reasonable estimate of the pursuer's loss as a result of Longmuir & Co's breach of representation as to their authority et separatim their breach of the Letter of Obligation, decree should be granted therefor.

3. Esto the pursuers are not entitled to decree as first concluded for, (which is denied), the second sum concluded for representing a reasonable estimate of the pursuer's loss as a result of Longmuir & Co's breach of representation as to their authority et separatim their breach of the Letter of Obligation, decree should be granted therefor."

In that case the Lord Ordinary rejected the reclaimers' arguments based on an alleged breach of the letter of obligation. He did so at paras 73 and 74 of his opinion by saying that the letter of obligation was collateral to the principal transaction and "could not be enforced if that principal transaction was void (as it was here)" and that, in any event, the pursuers could show no damage flowing from any failure by Longmuir & Company to produce a title encumbered with the standard security "since the standard security referred to in the Letter of Obligation was itself void".

[23] The Lord Ordinary proceeded to absolve both sets of respondents from the conclusions of the summons in each case. The reclaimers in each action now reclaim against those decisions of the Lord Ordinary.

[24] It should be noted that before this court counsel for the reclaimers and respondents did not seek to attack the Lord Ordinary's findings in fact. Significantly the reclaimers accepted that in each case the security transaction had been conducted according to normal good practice. The reclaimers' sole complaint was that the borrowers, having turned out not to be the owners of the subjects over which the reclaimers wished to have security for their lendings the respondents were in breach of their respective implied warranty of authority. As already noted the reclaimers also disclaimed, as they had before the Lord Ordinary, any claim which is to any extent dependent on some failure of duty of care said to be owed to them by the respondents. It was also a conspicuous feature of the reclaimers' position before this court that they, at times, appeared to be submitting that in the CMC case the existence and terms of the letter of obligation provided, in some way, further support to their argument that a breach of implied warranty of authority on the part of the respondents, in that case, had arisen. At other times however they appeared to be arguing that the letter of obligation founded a separate basis of claim. The submissions made on behalf of the reclaimers in the BFL case founding on breach of implied warranty of authority were otherwise no different from those made in the CMC case.

[25] At the outset of his submissions, junior counsel for the reclaimers informed the court that the principal argument to be advanced arose from and was based on the statement of principle set out in the dictum of Willes J in Collen v Wright 1857 8E B 647 at 657 which is to the following effect:

"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. This 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 induced 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 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."

It should be noted that that formulation of principle is but an example of what the courts in England and Wales and, during the 19^th century, in the context of certain well known mercantile transactions, namely imply terms into them in the absence of their having been expressly excluded by the parties, to render the contract commercially sensible or workable. In some cases these terms were, in due course, given statutory force in, for example, the Sale of Goods Act, the Bills of Exchange Act etc. Although the implied warranty of authority in agency, as enunciated in the case of Collen was of English origin it was adopted into the law of Scotland like many of the other instances of judicial legislation in commercial matters just referred to. A modern statement of the position in Scotland is to be found in the current edition of Gloag and Henderson The Law of Scotland (12^th Edition) at para 19.26 where the following can be found:

"If he (the agent) honestly thought he had the principal's authority, as where an auctioneer, by mere mistake, sold a horse which was not for sale (Anderson v Croall (1903) 6F 153), or solicitors believed that they were representing a trust when in fact there were no trustees (Scott v J.B Livingston and Nicol 1990 SLT 305) the agent will incur liability on the theory that an agent impliedly warrants that he has the authority of the principal whom he names, and is liable in damages for breach of that warranty if it turns out that he has no authority. (Collen v Wright (1857) 8 EL and BL 647)".

Having regard to the circumstances of the present case it is, in our opinion, of some significant interest to have regard to what is said shortly after in the passage just cited:

"But where a plumber had done work on the instructions of an agent who, as it turned out, had no authority, but the principal named was a company which was insolvent and had no assets, it was held that as the obligation of the company was valueless, the plumber had lost nothing by the want of it, and therefore could recover no damages from the agent for breach of his implied warranty. (Irving v Burns 1915 SC 260)."

That last mentioned case was not, in the event, cited to the court by either side. It appears, however, to highlight the limitations placed on an implied warranty of authority in such a situation as it was understood in at least that case.

[26] Having regard to the history of the concept it is appropriate to have careful regard to English authority. One of the leading and authoritative English textbooks on the topic of agency, namely Bowstead and Reynolds on Agency (19^th Edition) at page 581 sets out the following points:

"Article 105

Warranty of Authority

(1) Where a person, by words or conduct, represents that he has actual authority to act on behalf of another, and a third party is induced by such representation to act in a manner in which he would not have acted if that representation had not been made, the first-mentioned person is deemed to warrant that the representation is true, and is liable for any loss caused to such third party by a breach of that implied warranty, even if he has acted in good faith, under a mistaken belief that he had such authority.

(2) Every person who purports to act as an agent is deemed by his conduct to represent that he has in fact been duly authorised so to act, except where the purported agent expressly disclaims authority or where the nature and extent of his authority, or the material facts from which its nature and extent may be inferred, are known to the other contracting party".

These propositions clearly focus on the conduct of the agent involving an expressed or implied representation by him that he has authority to act for the principal he says he is acting for in the transaction he is entering into with the third party. That is made clear in Bowstead and Reynolds at para 9-066 where the writers state:

"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".

Counsel for the reclaimers submitted that the question as to what the nature and extent of the liability was in a particular case was a fact sensitive issue. That is correct insofar as it goes. Thus, for example, as has been noted, the agent may expressly disclaim or qualify any implied representation by his words or conduct. In the absence of such circumstances the extent of the warranty which arises by implication of law is as described in Bowstead and Reynolds. It is frequently said to be narrow in its scope. (It should be noted that while the substantive law in both England and Scotland is the same in its effect the English tend to classify the liability as resulting from a collateral contract and the English system has also been concerned with judging as to whether there was consideration in respect of it, a factor that does not trouble the law of Scotland. In the law of Scotland the legal foundation of the liability created is described by Gloag on Contract (2^nd edition) at page 155 as:

"The rule that the assertion of authority implies a contract that the authority exists is of general application".

We were referred to a modern English consideration of the topic in the case of Penn v Bristol and West Building Society and others [1997] 1 WLR 1356. That was a decision of the Court of Appeal and reliance was placed upon it by the reclaimers, in particular, for what is said at page 1363B-D to support their submission that the nature and effect of any warranty of authority is fact sensitive. At page 1361 Waller LJ giving the judgment of the court cited the following from Chitty on Contracts: Specific contracts, 27 ed (1994), Vol 2 page 61, para 31-093:

"One who expressly or impliedly warrants that he has the authority of another is liable in contract for breach of warranty of authority to any person to whom the warranty is made and who suffers damage by acting in the faith of it, if in fact he had no such authority. This is a specific type, in fact probably the original type, of collateral contract: the agent offers to warrant his authority in return for the third party's dealing with his principal."

The Penn case was not concerned with an issue as between the third party and an agent contending that he had authority to act for a principal. The case involved a solicitor warranting that he acted for both a husband and wife in the granting of a security over a home jointly owned by them. Whilst as per the belief that he was instructed by the husband, which he was, and for the wife, which he was not. It was held that it was not necessary for the plaintiff in that case a building society who had lent on reliance of the security given, and to whom the representation of authority had not been directly made by the solicitor, to establish that he had been induced to enter into some form of dealing with the supposed principal in that case the wife. It seems to us that that decision does not assist in relation to the specific issue we have to determine in the present cases.

[27] In SEB Trygg Liv Holding AB v Manches (2006) 1 WLR 2276 the limited nature of the implied warranty of authority was emphasised by the Court of Appeal in a case involving solicitors who commenced arbitration proceedings in the name of a company which was no longer in existence. The court held that the warranty given by a solicitor, when conducting proceedings, was that he had a client who had instructed him to assert or deny the claims made against the opposing party. The warranty did not extend to warranting that the client had title to sue, was solvent, had a good cause of action or defence or had any other attribute asserted on his behalf. Moreover the solicitor did not warrant that the client had the name by which he appeared in the proceedings. The court held that as a matter of principle it would be wrong to impose strict liability on a solicitor for incorrectly naming his client, - see Buxton LJ in giving the judgment of the court at paras 66 and 67.

[28] The principal argument advanced by the reclaimers, in the present actions, as to the nature and extent of the implied warranty of authority given by a solicitor in acting for clients in the granting of a security over a property in return for a loan being made to them by a professional lender fell to be considered in a recent English case Excel Securities v Masood [2010] Lloyds Rep. P.N. 165. Counsel for the reclaimers accepted that if the decision in that case fell to be considered to be good law for Scotland then they would fail on the main point raised by them in both cases, namely the scope of any implied warranty of authority by the respondents. We have reached the clear conclusion that the decision in Excel Securities was correct and is good law for Scotland. As already indicated Scots and English law reach the same result in such questions albeit, perhaps, on occasions using different terminology or concepts. We remind ourselves that Collen v Wright has been held to be the leading authority in this area in the law of Scotland for more than 150 years.

[29] In the Excel Securities case Judge Hegarty QC, sitting in the Queen's Bench Division of the High Court of Justice, Manchester District Registry Mercantile Court reviewed this area of law in a comprehensive and careful decision. The factual situation in that case had strong similarities with the situations in the present actions. Professional lenders were seeking to recover from a firm of solicitors their losses resulting from identity fraud by borrowers for whom the solicitors had acted in preparing security documents over property of which the borrowers claimed they were the true owners. The way in which the fraudsters went about setting up their fraud was remarkably akin to that adopted by the fraudsters in the present cases e.g. they produced passports and utility bills to the solicitors to support their identity. The lenders sued the solicitors for their loss on the grounds, inter alia, of breach of warranty authority "as to the identity" of their clients. In dealing with the scope of the warranty the judge at para 59 of his judgment stated:

"The essential legal principles applicable to such a claim are not in doubt. An agent acting on behalf of an identified 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 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".

The judge then went on to refer to the case of Collen v Wright and also the cases of Yonge v Toynbee [1910] 1KB 215 and Firbank's Executors v Humphreys [1886] 18 QBD 54 and Penn cited supra. As regards the last mentioned case, without in any respect criticising the decision given in it, Judge Hegarty at para 67 of his judgment said:

"...It does not follow that, in every case, an agent must be regarded as warranting the identity of his client and not merely the fact that he has authority to act on the client's behalf."

We agree. Reference was also made in Judge Hegarty's judgment to the case of Bristol and West Building Society v Fancy and Jackson [1997] 4 All ER 582, Bowstead and Reynolds particularly at para 9-065, SEB Trygg and a number of other English authorities. After analysing these authorities and considering the submissions made to him the judge, at para 90 of his judgment, stated:

"The fundamental reason why a person, purporting to act as agent for another would normally be deemed to have warranted his authority so to act is to ensure that any person dealing with the supposed agent is protected against the risk that he does not have the authority which he claims. The supposed agent will normally know whether he has the authority which he claims, or the ability to determine whether he has such authority; whereas any party dealing with him will not. So it is only right that the risk of lack of authority should be borne by the agent by way of an implied warranty. That risk normally manifests itself in the fact that, if the agent does not, in truth, have the authority which he claims, the other party will be deprived of any effective redress against the assumed principal. In such circumstances, the warranty of authority will give equivalent redress against the agent. This appears to have been a major consideration in the emergence and development of the doctrine. But its application is not limited to cases where a transaction entered into in reliance on the supposed authority of the agent was with the alleged principal himself. That is demonstrated by a number of reported cases, most recently Penn... But I nonetheless I (sic) agree with Mr Berkley that the core problem sought to be addressed by the imposition of a warranty of authority is whether the person acting as agent did or did not have authority so to act."

His Lordship then went on at para 91 to state:

"On the other hand, a person acting on behalf of another will not normally be deemed to warrant any particular attributes of his principal or any other aspects of the transaction in which he claims to be acting on his behalf"

Reference was made to SEB Trygg. His Lordship at para 96 sought to base his conclusion as to the limits of a warranty of authority in any particular case as something to be determined by reference to the specific circumstances which had given rise to the warranty. However having gone on to look at the background of the case before him, and having described at para 99 the transaction as proceeding as an "ordinary conveyancing transaction", he concluded at para 100:

"In those circumstances, I am quite unpersuaded that BM Solicitors impliedly warranted either the identity of their client or his title to the property in question. They would, of course, have warranted that they had authority to act on behalf of their client. That was a person identifying himself by the name of James Charles Whittaker Golding and claiming to be the registered proprietor of the property at 17 Richards Place. Furthermore, he was almost certainly the person with whom Excel itself had been dealing on the basis of the same misapprehension as to his name and identity. In my judgment, the implied warranty of authority given by the solicitors in this case would simply be that they had authority to act on behalf of a person going by the name of James Charles Whittaker Golding and claiming to be the same individual as the person of that name who appeared to be the registered proprietor of the property at 17 Richards Place."

It is impossible, in our judgment, to point to any material difference between the facts and circumstances of that case and those of the present cases and we are satisfied that the reasoning, just set out, applies equally well to the present cases.

[30] We would simply add this. 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 qualities 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. As Judge Hegarty observes at page 103 of his judgment however: "It is...almost inconceivable that an agent would agree to this". 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 as a matter of law the extent and nature of which was defined correctly in the Excel case.

[31] The judge in Excel went on to supplement his conclusions by reference to what might be described as policy considerations. We were advised that commercial lenders, like those involved in the proceedings before us, are not infrequently being made the victims of identity fraud. We were told that in such situations they may seek to recover their losses from others such as the respondents in the present cases. In para 97 of his judgment Judge Hegarty said:

"Excel carries on business in the financial sector, specialising in making short-term commercial loans. It must be well aware of the commercial risks involved in making such loans, including the risk of fraud and, in particular, identity theft. When the impostor was introduced to it as a prospective client, it carried out certain checks in order to satisfy itself that he was the person whom he represented himself to be, that he lived at the address at which he claimed to be living and that he was indeed the registered proprietor of the property at 17 Richards Place. Having done so, it decided to proceed with the proposal and enter into a transaction with the impostor, albeit on the mistaken footing that his name was James Charles Whittaker Golding, the owner of the property in question.

[98] BM Solicitors, on the other hand, were a firm providing professional services and, as such, would not normally be expected to do more than carry out those services with reasonable professional skill and care...

[99] In the present case, BM Solicitors were almost certainly instructed by the self same impostor as had been dealing directly with Excel itself. Though they may not have had any specific knowledge of the inquiries made by Excel, they could reasonably have assumed that Excel would have carried out sufficient investigations to satisfy itself as to the identity and creditworthiness of the individual concerned. But they nonetheless carried out their own checks, which were, in fact, similar to those which had previously been carried out by Excel; and, after they had done so, like Excel, they were content to accept that their client was the person whom he represented himself to be".

His Lordship then referred to certain considerations which were set out and discussed in the case of Midland Bank Plc v Cox McQueen [1999] PNLR 593 as to the limited scope there is for implying obligation to third parties to the given by person such as solicitors providing professional services, the third parties in question not being their clients. Having so referred to those considerations Judge Hegarty concluded at para 102:

"They strongly suggest that the court should not readily impose upon a person rendering professional services an absolute, unqualified obligation amounting, in effect, to a guarantee of his client's identity and title. The risk that the law has sought to address by the implication of a warranty of authority is that the agent may not have the authority which he claims; and the justification for such an allocation of risk is that the agent is in much the better position to know or ascertain whether he has the requisite authority. But the risks against which Excel is seeking to be protected in these proceedings are the commercial risks involved in lending to a person who may not be all that he claims to be. For my part, I can see no justification why risks of this kind should be transferred from the shoulders of a commercial concern such as Excel on to those of a professional firm such as BM Solicitors."

We endorse those views entirely. Quite apart from what we consider is clearly and authoritatively the existing law on the matter, 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 cases contended for.

[32] Insofar as the reclaimers position was to argue that, under the existing law there could be an implied warranty of authority, in respect of what they called "the identity" of the agent's client, we have already commented on the appropriateness of the use of the word "identity" in this context. But we require to say that the submissions that were made in that respect failed completely to focus on the concept of authority and what was implied by that word. All that the agent is warranting is that he has a client and that client has given him authority to act. It would be quite unreasonable and inappropriate to extend this to an implied warranty that his client has a certain attribute or attributes. Compare SEB Trygg and compare Frank Houlgate Investment Co Limited v Biggart Baillie LLP 2010 SLT 527 at paras 27-28.

The letter of obligation in the CMC case

[33] It follows that in relation to the BFL case the reclaiming motion is refused. In relation to the CMC case we require to address the effect of the letter of obligation relied upon by the reclaimers in that case. Insofar as it was referred to to bolster the argument based on the implied warranty of authority, we do not consider that it had any such effect. The extent and effect of that warranty was, in the absence of something specifically addressed to the question of the fraudsters' attributes in particular as to their ownership of the subjects in question, as we have just defined it. Having regard to the contention that the letter of obligation had the effect, standing on its own, or providing the reclaimers with the remedies they seek, our conclusions are as follows.

[34] The pursuers' contention is that the letter of obligation constituted a personal obligation assumed by the solicitors to deliver a land certificate issued by the Keeper of the Land Register of Scotland in favour of their clients as registered proprietors of the above subjects, which disclosed no entry, deed or diligence prejudicial to the pursuers' interest and disclosed the standard security granted in favour of the pursuers. Since no such land certificate had been delivered, the defender was in breach of that obligation and bound to compensate the pursuers for their resultant loss.

[35] The terms of the letter of obligation are unusual and the period of time covered extraordinary. There was also a letter of obligation in the Blemain case. It was in more or less the usual terms as follows:

"Dear Sirs,

GEOFFREY MORGAN AND MRS MARGO MORGAN

BLEMAIN FINANCE LIMITED

3 MENTEITH VIEW, DUNBLANE

With reference to the settlement of the above transaction today, we hereby undertake to clear the records of any deed, decree or diligence (other than such as may be created by or against your clients) which may be recorded in the Property or Personal Registers or to which effect may be given in the Land Register in the period from the date of certification of the latest Form 10, 11, 12 or 13 (which is appropriate) exhibited to you until fourteen days from this date inclusive (or to the earlier date of registration of the purchasers' interest in the subjects) which would cause the Keeper to make any entry on, or qualify his indemnity in the Land Certificate to be issued in respect of the interest."

[36] The peculiarities of the Cheshire Mortgage letter do not end with the terms in which the obligation is stated. In addition to being written in unusual terms, the letter refers to a land certificate in relation to a title which is recorded in the Sasine Register. However, that particular error was not relied upon by the defenders as a defence to the claim for failure to implement the letter. It was accepted that steps could be taken, if the Keeper agreed, to effect a first registration in the Land Register. It could, therefore, not be said that the obligation could not be complied with.

[37] Although the obligation assumed in the Cheshire Mortgage letter of obligation was much wider, both in terms of its duration and the content of the obligation, than is normally the case, it was plainly written and delivered as a letter of obligation ancillary to the mortgage transaction being settled on the date of its delivery. It refers at the outset to "the settlement of the above transaction today", is time limited, and contains at its core an obligation to ensure that the Register contains no entry prejudicial to the interests of the pursuers before the pursuers' interest is registered. Although it is not in the "classic" form, the letter bears all the hallmarks of a letter of obligation, long recognised as an obligation ancillary to that of the solicitor's client, designed to provide protection to, in this case, lenders during the gap period between settlement of the transaction and the recording of the lenders' interest. It cannot be read to have imposed the extraordinary obligation upon the respondents which the reclaimers argue for. It is noteworthy, indeed, that no such claim is made in the Blemain case where a similar letter of obligation was granted. It appears to us that this letter has exactly the same status and meaning as that recognised, apparently by the parties, as applying to the letter in the Blemain case. We accordingly agree with the Lord Ordinary that, for that reason, the letter could not be enforced if the principal transaction were void as this one was.

[38] The Lord Ordinary found support for that view in the opinion of Lord Cameron of Lochbroom in Mason v A & R Robertson & Black 1993 SLT 773, at pp.778G-I and 779I-L. As the Lord Ordinary said at paragraph 74 of his opinion:

"The loan transaction, the Standard Security and the letter of obligation are so intermixed that it is difficult to conceive how there could be any obligation on Longmuir & Co under the letter of obligation to produce a title encumbered with a Standard Security which, because of the fraud, was a nullity. The point is incapable of much further elaboration."

[39] We also agree with the secondary basis on which the Lord Ordinary rejected the claim based on the letter, viz that the pursuers could show no loss since the obligation to which the letter of obligation was ancillary, the standard security, was void. An example of an analogous situation is to be found in Irving v Burns. While the Lord Ordinary saw that as a separate basis for rejecting the claim, it may be that it is simply another way of expressing the result of the letter being ancillary to a void obligation.

[40] It follows that the reclaiming motion in the action at the instance of CMC for all the foregoing reasons falls to be refused.