Warranty of Authority in Scots Law: Cheshire Mortgage Corporation v Grandison & Ors

by ScotsLawBlog on November 21, 2011

  • SumoMe

I am pleased to welcome Mr Anis Waiz, Solicitor and Partner at Manchester-based law firm, Mohindra Maini LLP, as he pens a very comprehensive guest blog post on the recent Outer House decision of Cheshire Mortgage Corporation Ltd & Anor v. Grandison & Ors [2011] CSOH 157 (23 September 2011). The below is an edited extract of an article which originally appeared in Today’s Conveyancer on 12 October 2011.

Introduction

This case concerned the attempted recover by lenders of monies arising out of fraudulent mortgage applications. Of real interest to lawyers, lenders and insurer’s was that the case applied principles of law more commonly found in the English jurisdiction, the issue of warranty of authority.  Did such principles apply in the Scottish jurisdiction?

Background

The reader is referred to the judgment for the full background facts.

The lenders were the subject of mortgage frauds. The fraudster applied for a loan pretending to be Mr and Mrs X owning property which they offered as security. When the loan was approved, security over the property was executed.

The lenders advanced the money to the fraudsters, believing them to be Mr and Mrs X. The fraudsters subsequently disappeared. Without an obvious remedy the lenders turned to the solicitors who acted for the purported borrowers.

The lenders alleged that the solicitors warranted that they had the authority of the individuals who owned the properties over which standard securities were purportedly granted.

The Solicitors recognising the doctrine of a solicitor giving an implied warranty of authority, argued the warranty does not go that far.

Warranty of authority

The leading textbook on agency Bowstead & Reynolds, 16th ed. (1996) at p.592, para.9-057, sets out the principle

“Where a person, by word or conduct, represents that he has 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 acted in good faith, under a mistaken belief that he had such authority

The doctrine is not confined to cases where a contract is entered into by a person professing to act on behalf of a principal. It applies to every case where, by words or conduct, the person purporting to act as agent represents that he has authority to act on behalf of another, and a third party is induced by such representation to act in a way in which he would not otherwise have acted but for that representation having been made.

The law of breach of warranty of authority is to be found in the English Judgment of Willes J in Collen v Wright [1857] 8 E&B647 at p.657:

“I am of 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. This is not the case of a bare mis-statement 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 and 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 a professed agent, as such, is good consideration for the promise”.

That statement of the law has been accepted and applied consistently  in the English courts since then see for example Penn v Bristol & West Building Society [1997] 1 WLR1356 .

Did this principle apply in the Scottish jurisdiction? In this case the court noted that despite the researches of counsel there was no reported Scottish case in which a party has been held liable for breach of warranty of authority.

However there were  numerous references in leading Scottish textbooks  and in  decided cases which make it clear that the principles were fully recognised in Scots law: see Gloag, Contract (2nd Ed) at pp.155-157, Anderson v Croall (1903) 6F 153, Rederi Aktiebolaget Nordstjernan v Christian Salvesen & Co [1903] 6F 64 (IH), [1905] 7F (HL) 101, Irving v Burns 1915 SC 260 and Scott v JB Livingston & Nicol 1990 SLT 305.

The Scope of the Authority

What was the scope? The Court noted two crucial points

1          The existence and the scope of the warranty of authority is fact dependent.  Waller LJ    in Penn v Bristol & West Building Society at p.1363B-C: noted

“In truth as I see it, the question whether a warranty of authority has been given rests on a proper analysis of the facts in any given situation, and not on any pre-conceived notions as to what is essential as part of the factual analysis. Of course there is no issue that to establish a warranty of authority as with any other collateral warranty there must be proved a contract under which a promise is made either expressly or by implication to the promisee, for which promise the promisee provides consideration. But consideration can be supplied by the promisee entering into some transaction with a third party in a warranty of authority case just as it can in any other collateral warranty case. Furthermore, the promise can be made to a wide number of people or simply to one person, again all depending on the facts”

 In each case one had to look at the relationship between the parties, examine closely what was said, expressly or impliedly, by the agent in the context of that relationship, how what was said was could reasonably have been understood by the other party.

2          Where an implied warranty of authority has been held to exist, the scope of that authority has generally been regarded as very limited. This point is made in a number of cases. In SEB Trygg Liv AB v Manches, a case concerned with a solicitor’s warranty of authority in acting for the claimants in arbitration proceedings, Buxton LJ held

In considering these submissions it is important to bear in mind that generally a solicitor conducting proceedings does not warrant what he says or does on behalf of his client. Thus he does not warrant that his client, the named party to the proceedings, has title to sue, is solvent, has a good cause of action or defence or has any other attribute asserted on his behalf.

 The solicitor relies upon his client’s instructions for all these things, as he will normally do for naming his client correctly. As he gives no warranty as to the accuracy of his instructions generally, it is difficult to see why the naming of his client should be treated as an exception…”

Similar remarks were noted in a Scottish case. Lord Drummond Young in Frank Houlgate Investment Co Ltd v Biggart Baillie LLP 2010 SLT 527 at para.[27]:

What is significant in the formulation of the principle, however, is that the supposed agent, A, represents that he has authority to act for B in a particular transaction, with the result that the third party, C, is induced to act on that representation. 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 that person holds, or as to that person’s title to any property”

Breach

The court considered whether in this case the solicitors were liable for breach of warranty of authority. The lenders contend that the solicitors impliedly warranted that they acted for “Mr and Mrs X of a particular property”.

The lenders accepted that any warranty of authority to be implied in such circumstances does not, on any view of the decided cases, extend beyond what may be called “the identity” of the person for whom the agent purports to act. It does not extend to his capacity, his ownership of assets or his other attributes. As was noted in Trygg, the implied warranty does not extend to the solvency of the person for whom the agent purports to act, not, in the context of litigation for example, to the strength of his case or his title to sue.

 Similarly, as was made clear in Frank Houlgate Investment, in a loan or property transaction, the implied warranty does not extend to ownership or title to the property in question, nor its value.

Thus the lenders argued the warranty by the solicitors that they act “for Mr and Mrs X of a particular property”, is a warranty as to the identity of the person for whom they act.

The question was whether, in the particular circumstances of this case, a warranty to this effect could be implied. The Court noted some key issues as follows:

1          the borrowers had approached the lenders for a loan (in one case via the lender’s website, and in the other direct to an underwriter at the lenders and then, on his direction, via a broker);

2          the lenders had made a decision in principle to lend to these borrowers, and had issued an Offer Letter to them.

3          the lenders had sought and obtained proof of identification directly from the borrowers

4          the lenders had instructed its own Solicitors to act on their behalf to prepare the necessary security and other documentation

5          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 Lenders solicitors.

The court held that it was 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, 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.

There was no implied warranty going beyond this. Therefore  the claim for breach of warranty of authority failed in each case.

There was also a claim by the lenders to enforce a  letter of obligation. That claimed failed for reasons outside the scope of this note.

Conclusion

A very fine subtle distinction is being made here. The solicitors were not warranting as to the identity of their client.

It is well to remember the principle again  Where a person, by word or conduct, represents that he has 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 acted in good faith, under a mistaken belief that he had such authority.

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