Scottish Court of Session Decisions

You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Cheltenham Gloucester Plc v. Sun Alliance London Insurance [2002] ScotCS 141 (21st May, 2002)
URL: http://www.bailii.org/scot/cases/ScotCS/2002/141.html
Cite as: [2002] ScotCS 141

[New search] [Help]

Cheltenham Gloucester Plc v. Sun Alliance London Insurance [2002] ScotCS 141 (21st May, 2002)

OUTER HOUSE, COURT OF SESSION

OPINION OF LORD CLARKE

in the cause

CHELTENHAM & GLOUCESTER PLC

Pursuers;

against

SUN ALLIANCE & LONDON INSURANCE PLC

Defenders:

________________

Pursuers: Davidson Q.C.; D.L.A.

Defenders: Murphy Q.C.; Brechin Tindal Oatts

21 May 2002

Introduction

In this action the pursuers seek payment from the defenders of the sum of Ł103,720.89. They do so on the basis that they had a claim against a solicitor William Graeme St. Clair in respect of his failure, in breach of his instructions from the pursuers, to obtain a first ranking security over certain heritable subjects in security of their having lent Ł94,480 to clients of St. Clair. The pursuers aver that St. Clair was insured in respect of that claim under a policy of insurance effected with the defenders under the Master Policy Scheme for the Law Society of Scotland professional indemnity insurance.

The pursuers sued St. Clair in the Sheriff Court in respect of the said claim. Decree by default was granted on 27 June 1995. The pursuers have been unable to recover any payment in respect of the decree. The insured, St. Clair, was sequestrated on 10 September 1997 and no dividend was paid from his sequestrated estates. In the foregoing circumstances the pursuers rely upon the provisions of Section 1 of the Third Parties (Rights Against Insurers) Act 1930 and now claim St. Clair had a right of indemnity against the defenders in respect of his liability under the said decree and this right has transferred and vested in the pursuers.

The case came before me for proof before answer. The defenders, while not conceding any questions of onus, agreed that it would be appropriate that they should lead at the proof. The case has been previously the subject of a procedure roll debate, before Lord Carloway, - reported 2000 S.L.T. 347. His Lordship's decision was the subject of a reclaiming motion which was decided by the First Division and is now reported in 2000 S.C. 265. Both Lord Carloway's decision and the decision of the First Division were involved with an issue which is no longer live before me. In the course of their judgments, both Lord Carloway at p349, and Lord President Rodger at p967 did, however, draw attention to the fact that at that stage of the proceedings, the pursuers were not apparently admitting or denying averments of the defenders regarding St. Clair's lack of good faith, a matter which was very much alive before me. A denial in response to the defenders' averments about this matter was included in a Minute of Amendment moved by the pursuers at the commencement of the proof.

The defenders' defence to the action is a three fold one.

The first line of defence is that the act or omission of the insured. St. Clair, in releasing advances by the pursuers, without getting them a first ranking security, was a deliberate one - a risk not covered by the terms of the insurance policy. The second line of defence was that, in any event, if the act or omission could be said to be covered by the relevant terms of the policy, it was not an act, or omission, which occurred when the insured was in good faith and, accordingly, no obligation of indemnity on the part of the defenders arose. The third line of defence was that in support of his claim to be indemnified by the insurer, under the policy, the insured had forged a file note which he claimed was contemporaneous with the events recorded therein but which, in fact, was compiled by him some time after the event and whose contents, in any event, were falsehoods. In so acting, the insured had forfeited any right to be indemnified under the policy, and, as the pursuers stood in the shoes of the insured, no enforceable right of indemnity against the defenders had transferred to the pursuers.

It is right that I set out the relevant terms of the policy in question, which is 6/3 of process. Under the heading "Insurance" it is provided as follows:

"The insurers will indemnify the insured.

1. Against liability at law for damages and claimant's costs and expenses in respect of claims or alleged claims made against the Insured and notified to the Brokers during the Period of Insurance specified in the Schedule by reason of any negligent act, neglect, error or omission on the part of

(a) the Insured or the predecessors of the Practice;

(b) any agent or correspondent of the insured or of the predecessors of the Practice;

occurring or committed or alleged to have occurred or to have been committed in good faith in connection with the Practice."

General condition 5 of the policy is in the following terms:

"If any claim be in any respect fraudulent or if any fraudulent means or devices be used by the Insured or anyone acting on the Insured's behalf to obtain benefit under this Certificate all benefit hereunder in respect of the individual or individuals committing or condoning the fraud shall be forfeited."

I heard evidence from the following witnesses - for the defenders, Sheriff Neil Douglas, Dennis Dunn, Claims Manager of the defenders, David Young, Bank Manager, Bank of Scotland, Dumfries, and Ms Isobel Todd, Solicitor. The only witness led by the pursuers was the insured, St. Clair.

Ultimately, there was very little dispute about the facts and history of this case. Indeed a great deal of the relevant facts are the subject of a joint minute, number 34 of process. The dispute between the parties centred largely on the way in which the actings of St. Clair should be characterised, having regard to the relevant terms of the policy.

The Evidence

In 1990 St. Clair was practising, as the sole partner of a firm of solicitors, whose office was at 90 Battlefield Road, Glasgow. Included among his then clients were a married couple, William Joseph Gallagher and Georgina Gallagher. St. Clair had business interests with this couple, in particular Mrs Gallagher. He had been, since early 1987, a director and shareholder in a company known as Brookfield Developments Limited of which Mr and Mrs Gallagher were also shareholders. St. Clair was also the solicitor of the company. Prior to September 1990 debts of the said company had been secured over heritable subjects owned by Mr and Mrs Gallagher (hereinafter referred to as "the said subjects"). A first ranking security had been granted to the Bank of Scotland and a second ranking security had been granted in favour of the Clydesdale Bank. The security in favour of the Bank of Scotland was recorded on 11 July 1989. The security in favour of the Clydesdale Bank was recorded on 10 April 1990. St. Clair had provided personal guarantees for the company's indebtedness and these were secured over heritable subjects owned by him.

In September 1990 Mr and Mrs Gallagher made an application to the pursuers for a loan to be made to them for the purposes of the said business. The loan monies to be obtained from the pursuers were, in large measure, to be employed to pay off the company's indebtedness to the Clydesdale Bank. The loan was to be secured by means of a standard security to be granted by Mr and Mrs Gallagher over the said subjects. In the first place the pursuers agreed to advance the sum of Ł119,500 to Mr and Mrs Gallagher, on certain terms and conditions, including a term that the loan was to be secured by a standard security granted by the borrowers over the said subjects as a first ranking security. The term, in question, was included in the loan agreement between the pursuers and Mr and Mrs Gallagher, described as mortgage loan agreement and which is 6/4/33 of process. The term provided as follows:

"The Society requires this mortgage to be registered as a first charge. All other charges must be either repaid or postponed".

St. Clair was instructed by the pursuers to act for them in the loan transaction and, in particular, in relation to the obtaining of the necessary security on their behalf.

In a document headed Acknowledgement of Instructions/Report on Title - 6/4/32 of process, St. Clair confirmed to the pursuers that he would "ensure the mortgage deed/standard security and ALL Loan Agreements are properly executed and in our possession or control". He also undertook, inter alia, "to hold all loan money strictly to the order of the Society and not to release the same until we have complied with all aspects of your instructions". In their instructions to St. Clair, 6/4/39 of process, the pursuers had directed him, inter alia, in the following terms:

"1. Prior to completion you must have in your possession BOTH the properly executed Mortgage Deed/Standard Security AND ALL LOAN AGREEMENT(S) also properly executed. Under no circumstances may the Society's funds be released until this is the case".

St. Clair was, accordingly, fully aware that, prior to releasing any loan money advanced by the pursuers, under the loan agreement, he had to have in his possession a first ranking standard security, granted by the borrowers over the said subjects in favour of the pursuers. I should add, at this point, that the evidence revealed that St. Clair, at the time of the application being made for the said loan from the pursuers, was also seeking to obtain funds on behalf of Mr and Mrs Gallagher from Scottish Mutual Assurance Society and Leamington Spa Building Society. These applications, it seems, were, however not proceeded with.

On 24 August 1990, St. Clair sent to Messrs Miller & Bryce a memo for continuation of search together with the search over the said subjects (6/4/63 of process). The search in question 7/8 of process revealed, inter alia, that on 23 June 1989 Mr and Mrs Gallagher had granted a standard security over the said subjects to the Bank of Scotland. The interim report on search received by St. Clair in response to his request to Messrs Miller & Bryce, on 24 August 1990, to continue the search also revealed, inter alia, that on 24 November 1989 Mr and Mrs Gallagher had granted a further standard security over the said subjects to the Clydesdale Bank plc. While St. Clair's position, as communicated to the defenders, and those acting for them, had been that, as at 24 August 1990, he understood the position to be that the Bank of Scotland had only a second ranking charge over the said subjects, in examination-in-chief, and on being referred to the search, 7/8 of process, he accepted that he must have, in his capacity as Mr and Mrs Gallagher's solicitors, who had been his clients for some seven years, seen the content of that search before 24 August 1990. That being so, in my opinion, he knew or ought to have known, as at 24 August 1990, that the true position was that the Bank of Scotland had a first ranking charge over the subjects and, having regard to the evidence as a whole, I have reached the conclusion that, on the balance of the probabilities, he did, in fact, know that this was the case at that date.

The banking business of the said Brookfield Developments Limited and Mr and Mrs Gallagher had been handled, for some time, by Mr D. Young, Manager of the Bank of Scotland Office at 110 St. Vincent Street, Glasgow. On 28 August 1990 St. Clair wrote to Mr Young in a letter, 6/59 of process. That letter was, inter alia, in the following terms:

"I understand Gina has spoken to you regarding the re-mortgage of her house at 25 Brackenbrae Avenue. Naturally, as the bank has a Second Charge on the property at present it is necessary for me to formally seek confirmation that the bank is prepared to have its charge postponed to that of the new lender.

You are aware of the reasons for the re-mortgage and there is no need for me to go into this. It is however important that I point out the intention to apply some of the funds from the re-mortgage to reduce the indebtedness of Brookfield Developments Limited to the bank. I am not in a position at this stage to give an indication of how much will be required to reduce the Company's indebtedness but, of course, the Bank's security will still be in place.

As you will appreciate, I am keen to bring the re-mortgage to fruition as quickly as possible and indeed, I have now received the offer of loan from the Building Society. I cannot finalise matters however until the Bank's consent is obtained and I shall be pleased if you would deal with this as quickly as possible."

The rest of the letter then went on to inform Mr Young about certain other matters relating to the company's business and concluded as follows "I look forward to hearing from you as soon as possible with confirmation of the Bank's consent to the re-mortgage."

As St. Clair accepted in his evidence, at the proof, the terms of that letter were clearly incorrect in saying that the Bank had a second charge over the subjects. In any event, the Bank of Scotland, never agreed to the subjects being re-mortgaged and a first charge being granted to the pursuers. Nevertheless, on or about 13 September 1990, St. Clair, having obtained from the pursuers the sum of Ł94,480, in terms of the loan agreement, and without having obtained a first ranking charge of the subjects in the pursuers' favour, released the money in question, to the extent of Ł81,500 to the Clydesdale Bank, to satisfy indebtedness of Mr and Mrs Gallagher to the Clydesdale Bank at that time. The balance of the sum was apparently forwarded to Mr and Mrs Gallagher. St. Clair did not inform the pursuers that the security in their favour of the said subjects was postponed to that of the Bank of Scotland and took no steps thereafter, to obtain a first ranking security in favour of the pursuers. A meeting took place between St. Clair, Mrs Gallagher and Mr Young of the Bank of Scotland on or about 4 October, but the question of the Bank of Scotland being agreeable to be postponed to the pursuers was not raised at that meeting.

In or around July 1993 Mr and Mrs Gallagher defaulted in their obligations to the Bank of Scotland who then called up the security they held over the subjects. The security subjects were sold on or about 11 March 1994 by the Bank of Scotland. The net free proceeds of that sale were Ł105,220.89. The borrowers' indebtedness to the Bank of Scotland was Ł144,435. Accordingly, no sums were available from that sale for the pursuers. The pursuers raised proceedings against Mr and Mrs Gallagher but were unable to recover any of the sum lent to the couple. The pursuers then raised the Sheriff Court proceedings against St. Clair to which previous reference has been made.

Once the proceedings were raised against St. Clair, in or about July 1994, St. Clair intimated the pursuers' claim to the defenders. The defenders initially arranged for the action to be defended on behalf of St. Clair. At about the same time they instructed Mr Neil Douglas of Messrs Brechin Robb, Solicitors, Glasgow to investigate the claim. Mr Douglas, who is now Sheriff Douglas, and who as I have previously noted gave evidence at the proof, recovered St. Clair's file relating to the transaction. His instructions from the defenders led him to believe that St. Clair was maintaining that he had had an agreement with the Bank of Scotland, prior to the release of the pursuers' funds, that the Bank of Scotland were content to be postponed to the pursuers in respect of their security over the said subjects. In that situation the letter of 28 August 1990 from St. Clair to the Bank of Scotland's Mr Young, was seen to be of some significance. Of even more significance, however, to Mr Douglas, was a typed file note contained in the file - (6/4/53 of process) which was in the following terms:

"Note for the file - Gallagher re-mortgate. 31 August 1990.

Phoning David Young, Bank of Scotland (Glasgow Chief Office) discussing the need for ranking agreement. Going over forms of letter of 28 August. Pointing out that bank presently ranks Second to Clydesdale Bank and that the re-mortgage simply substitutes new lender for the Clydesdale Bank. Bank in no worse position. Noting should be no problem and that he will contact McClure Naismith regarding this.

Engaged: 10 minutes"

It struck Mr Douglas as somewhat remarkable that this was the only file note contained in the file. Nevertheless, its possible significance as seen by both Mr Douglas, and the defenders, was that it potentially provided support for St. Clair's position that he had reached an understanding with the Bank of Scotland that they would be prepared to enter a ranking agreement whereby they would be postponed to the pursuers as security holders over the said subjects. Notwithstanding that the clear fact of the matter was that no such agreement was ever entered into by the bank, it was apparently thought that if the existence of this undertaking could be maintained, the Bank of Scotland might be prepared to contribute towards the pursuers' losses, to some extent.

After certain correspondence had taken place between St. Clair and Mr Douglas and Mr Douglas's assistant concerning St. Clair's claim for indemnity, Mr Douglas made an arrangement to meet and to interview St. Clair. His first meeting with St. Clair took place in December 1994. At that meeting St. Clair told Mr Douglas that he was now aware that the Bank of Scotland had a first ranking charge over the subjects, but that in August/September 1990 he had genuinely believed that they only had a second ranking charge. He maintained, under reference to the file note of 31 August 1990, that he had, in any event, agreed with Mr Young of the Bank of Scotland that the bank would be postponed as security holder to the pursuers, once the pursuers had granted the new lending to Mr and Mrs Gallagher. St. Clair was maintaining that the Bank of Scotland had, in effect, reneged on an agreement he had made with their Mr Young. St. Clair also maintained that the reason that the telephone conversation had never been followed up with the completion of a ranking agreement, executed by the Bank of Scotland, was that his then conveyancing assistant, a Miss Todd, who had been left to deal with the matter, had failed to follow it up. St. Clair emphasised that the reason for his having compiled a contemporaneous file note regarding his conversation with Mr Young was because of the importance of his having the bank's agreement regarding being ranked second to the pursuers.

Mr Douglas subsequently contacted Miss Todd and put what St. Clair had said about her having failed to follow up with the Bank of Scotland the question of obtaining a ranking agreement from them. She denied having had anything to do with this transaction and, in particular, having ever been instructed by St. Clair to obtain a ranking agreement with the Bank of Scotland. She gave evidence to that effect at the proof, which evidence I accepted as truthful.

In January 1995 Mr Douglas met Mr Young at the Bank of Scotland's offices in Dumfries where Mr Young was then working. Mr Douglas drew to Mr Young's attention the fact that St. Clair was maintaining that he had reached an agreement with him over the telephone on 31 August 1990 which was recorded in the contemporaneous file note. Mr Young told Mr Douglas that he thought that he, Mr Young, had been on holiday in Italy at that time. He telephoned his wife and she confirmed that they had been on holiday together in Italy in the latter part of August and early September 1990. They had retained the air tickets and other travel documents relating to the holiday. These he, in due course, faxed to Mr Douglas. Mr Young's recollection was also that he told Mr Douglas that in June 1990 he had been aware that the bank had a first charge over the subjects for lending to Mr and Mrs Gallagher. There had been no repayments made to the bank in respect of the borrowings in question and the bank then wished repayment as soon as possible. There was no question of the bank being prepared to be postponed as security holders to allow any refinancing by other lenders. He did have some kind of recollection that at that time, that is in June 1990, St. Clair had said to him that he, St. Clair, was under the impression that the Bank of Scotland had only a second ranking security over the subjects. Mr Young had told him that that was not so and St. Clair had said that he would check the matter. As a result of his meeting with Mr Young, Mr Douglas reached the conclusion that if Mr Young was telling the truth the file note could not be accurate.

The Bank of Scotland had supplied Mr Douglas with a copy of a letter sent by the bank to St. Clair dated 3 September 1990 (7/22 of process) which simply acknowledged the receipt of his letter of 28 August 1990. There was, however, no copy of that letter to be found in St. Clair's file. In the light of what Mr Young had said to Mr Douglas it was clearly necessary for Mr Douglas to see and interview St. Clair once again. Mr Douglas' second meeting with St. Clair took place on 23 March 1995 at Mr Douglas' office in Glasgow. Also present were Mr Dunn of the defenders, who was responsible for dealing with the claim, and St. Clair who was accompanied by his own solicitor, Mr McCann. Mr Douglas went through again with St. Clair the position which St. Clair had maintained previously. St. Clair did not, in any material respect, depart from his previous position and continued to maintain that he had spoken to Mr Young on the telephone on 31 August 1990 and that, during that conversation, he had reached an understanding with Mr Young that the Bank of Scotland would be ranked after any lender providing fresh borrowing to the Gallaghers. Mr Douglas then put to him what Mr Young had told Mr Douglas namely that he, Mr Young, had been on holiday in Italy on 31 August 1990. He also showed St. Clair the copy travel vouchers which Mr Young had provided. St. Clair did not, however, depart from his position, at that time, although he had to accept that the travel documents were compelling evidence that no conversation had taken place between him and Mr Young on 31 August.

After that meeting Mr Douglas conferred further with Mr Dunn of the defenders. They came to the view that St. Clair had never had any understanding or agreement with Mr Young, as he had been claiming, and that the file note had been concocted by him after the event. They decided that, in the circumstances, indemnity had to be refused. This was done by a letter from the defenders sent to St. Clair and dated 5 April 1995 (7/25 of process). In that letter the defenders' Mr Dunn wrote, inter alia, as follows:

"The building society required a first ranking standard security and you acknowledged that that is what their requirement was.

Contrary to that position, the first ranking security in favour of the Bank of Scotland, which you knew about, was neither discharged nor postponed in circumstances where you were aware of that security.

It is your position that you had agreed with Mr David Young of the Bank of Scotland that there would be a postponement but that, in some way, your assistant failed to follow that matter up.

The crucial elements of your position are that an agreement existed; that such an agreement was enforceable; and, further, that your assistant failed to meet her obligations to your firm.

On the latter matter it is the evidence of Miss Todd that she did not have anything to do with this transaction and that, accordingly, there was no failure on her part because she had never dealt with it.

On the first aspect it is your position that the agreement with the Bank of Scotland was constituted by your letter of 28 August 1990 followed by an agreement with David Young based on the terms of that letter, which agreement was constituted by a telephone conversation between yourself and him on Friday, 31 August 1990.

As you acknowledge, the letter dated 28 August 1990 sets out a clear recognition of the necessity to secure a legally enforceable agreement with the Bank of Scotland in order to meet the obligation to the Building Society.

You have maintained that such an agreement was struck and, in evidence of that, you have produced a file note of a telephone conversation dated 31 August 1990 which is virtually and effectively the only file note on the file.

You indicated at two meetings with us that the file note had been dictated and typed on the date of the conversation with David Young, that is 31 August 1990. You stated that the reason for the file note was that the matter was very important for the transaction and therefore required to be recorded in writing. When the bank maintained that they had no record of such a conversation with you, you maintained that such conversation had indeed taken place on 31 August 1990.

As you know, our investigations have shown that Mr Young maintains not only that the conversation did not take place with you on 31 August 1990 but that the conversation could not have not taken place as he was in Italy on holiday.

Mr Young has produced a copy of the holiday booking and the flight ticket concerned, both of which you have seen and both of which are compelling evidence in support of what he is saying.

Further there has been produced by the bank, a copy of a letter dated 3 September 1990 acknowledging receipt of your letter of 28 August on that day and indicating that Mr Young was on holiday. A signed copy of that letter addressed to your firm is not on your file.

There are surrounding facts and circumstances in support of the evidence of the Bank, including their knowledge from June 1990 that they were first ranking security holders and the fact that at a meeting on 4 October 1990 they indicated they were first ranking security holders which was challenged by you but was not, thereafter, followed up.

As a matter of fact no further steps were taken by you following on that meeting to attempt to vindicate the contract which you maintain had been concluded with the bank and on their behalf by Mr Young, notwithstanding that the consequence of that was that the bank entered into possession and sold Mrs Gallagher's house as first ranking security holders.

It was accepted by you at a recent meeting that in the event that no discussion took place with Mr Young at the Bank of Scotland, there could be no genuine belief that an agreement had been reached with the Bank on 31 August 1990.

Standing your clear memory and insistence as to the accuracy of the file entry and its creation contemporaneously with the conversation the issue is in sharp focus.

Having regard to the evidence given by Mr Young and the documentation supplied by him, in vouching that evidence, we are not satisfied that the conversation took place on 31 August 1990 and, therefore, there is no colourable content to the belief expressed by you that an agreement has been struck.

As you know the transaction with the building society proceeded and when funds were received in mid-September they were disbursed to another creditor to Mrs Gallagher but no funds were made available to the Bank of Scotland, notwithstanding that the letter dated 28 August identified that one of the issues to be discussed and agreed was the extent of the repayment of the Bank of Scotland's indebtedness out of the refinancing proceeds.

In all the circumstances we have come to the view that the terms of the Master Policy have not been met in respect that the carrying out of the transaction required you to act in good faith and we are not satisfied that the transaction carried out in good faith.

The Master Policy provides cover and an indemnity only in respect of acts, errors or omissions in good faith and we regret that in all the circumstances such an indemnity has to be declined."

Thereafter the Sheriff Court action was handled, on St. Clair's behalf by his solicitor, Mr McCann. Both Mr Douglas and Mr Dunn gave evidence that in refusing to grant indemnity in the terms set out in the foregoing letter they were relying on the terms of Clause 1 of the terms of the indemnity policy. Mr Dunn, in evidence, however, said that he had been suspicious that St. Clair had been acting in a deliberately dishonest way and that he had never had any discussions with the Bank of Scotland's Mr Young as was purportedly recorded in the file note. Nevertheless, it was sufficient, he considered, to decline indemnity on the basis that in releasing the monies, without getting the pursuers a first ranking charge, St. Clair had committed a deliberate act and had not acted in good faith. Mr Dunn was of the view that, even if the conversation purportedly recorded in the file note had actually taken place any agreement, in principle, which had been arrived at between St. Clair and Mr Young would have required to have been ratified by Mr Young's superiors and, without any such agreement being ratified, and put in place, by releasing the sums advanced by the pursuers could not have been acting in good faith in terms of Clause 1 of the policy. It was Mr Young's evidence that the letter of 28 August 1990 was never brought to his attention either by St. Clair or the Bank of Scotland during 1990 and it only came to his attention when the pursuers' claim was being investigated by the defenders. He had no recollection of being approached by St. Clair or Mr and Mrs Gallagher regarding the re-mortgaging of the subjects in respect of lending to be granted by the pursuers. He confirmed that he had been on holiday in Italy for 14 nights from 25 August 1990 and that he never spoke to St. Clair during that period. In evidence he also said that had he received the letter of 28 August, he would have required a great deal more information from St. Clair regarding the proposed lending and the arrangements for repaying the Bank of Scotland lending, before he would have been in a position even to consider the possibility of the Bank of Scotland committing itself to entering into a ranking agreement. He would also have corrected the statement that the bank had a second ranking charge over the subjects. He explained that as at 28 August 1990, the bank was anxious to recover the indebtedness due to it by Mr and Mrs Gallagher and that this had been the subject of discussion for some weeks or months previously. He confirmed that after he had returned from holiday he had had a meeting with St. Clair and Mrs Gallagher. Nothing was said, to his recollection, on that occasion, by St. Clair about any ranking agreement, far less that the bank had failed to enter into an agreement, which they had promised to do, to be postponed as security holders to the pursuers. He did recall St. Clair repeating that he believed that the bank had only a second ranking charge but he, Mr Young, had told St. Clair that that was not the case. St. Clair had said that he was going to check out the position. Mr Young had no recollection of his having further dealings with Mrs Gallagher and St. Clair subsequent to that meeting. He was, in due course, transferred to another branch of the bank. I found Mr Young to be a wholly credible and reliable witness in relation to all of these matters.

Miss Isobel Todd, St. Clair's conveyancing assistant during 1990, as I have already indicated, gave evidence. This included evidence regarding the close personal and business relationship between St. Clair and Mrs Gallagher. She told the Court that she herself only did domestic conveyancing and that Mr St. Clair dealt with all matters relating to Brookfield Developments Limited. Her evidence was, furthermore, to the effect that at no time was she instructed by St. Clair to take steps to get a ranking agreement regarding the said subjects and to pursue the Bank of Scotland about this. She said that St. Clair had, at no time, after September 1990 ever taken up with her, any alleged failure on her part to carry out any such instructions. I found Miss Todd to be wholly credible and reliable and, accordingly, I reached the conclusion that she had never been instructed by St. Clair to follow up the question of a ranking agreement with the Bank of Scotland. It follows, therefore, that St. Clair, in suggesting otherwise, to the defenders' representatives was being dishonest, in an attempt to deflect blame from himself. For completeness I should add that I found Sheriff Douglas and Mr Dunn to be entirely credible and reliable.

The witness, St. Clair, who himself gave evidence, on behalf of the pursuers, at the proof, I found to be a very unsatisfactory witness. He sought, at times, to explain his conduct in 1990 and, subsequently, by making remarks like "there were a lot of things going on in my life at that time". Senior counsel for the pursuers sought, in questioning St. Clair, to open up the question of St. Clair's state of health at the material times. This line of questioning was objected to by senior counsel for the defenders on the basis that there was no record for such a line to be developed. Senior counsel for the pursuers did not pursue the line of questioning in the light of the objection taken.

St. Clair is 53 years of age. He qualified as a solicitor in 1980. He worked for approximately three years with Renfrew District Council. Between 1983 and 1989 he was in partnership in the firm of solicitors in Paisley. That partnership was dissolved in 1989 and St. Clair, thereafter, carried on business on his own account. He told the Court that he gave up practice in 1993 because his health had deteriorated and his wife was expecting another child. He then became a part-time chairman of disablement and social security benefit tribunals, working one day a week in that capacity, until 1995, when he took up employment as a solicitor with East Kilbride District Council. He continues in that employment at this time.

As I have previously noted St. Clair, initially in his evidence, continued to maintain that he had believed in August 1990 that the Bank of Scotland had only a second ranking security over the subjects, but faced with the search over the subjects which he had in his possession at the relevant times, he had to accept that he was wrong in so believing. I have already indicated that my conclusion is that St. Clair knew or ought to have known in August 1990 that the Bank of Scotland had a first ranking charge and that the probability is that he did actually know this at that time, even though he was contending otherwise to the Bank of Scotland in his letter of 28 August and at the subsequent meeting with Mr Young on 4 October 1990. He gave evidence to the effect that once the question was raised at the meeting of 4 October 1990 with Mr Young he had no recollection of going to check whether the bank had a first or second charge. In examination-in-chief, he fully accepted that, in the absence of any response to his letter of 28 August, he acted, in complete disregard of his instructions, from the pursuers, by drawing down the monies advanced by them and "settling the transaction", without having obtained for the pursuers a first ranking security over the subjects. He said that he believed that he had "chased" the Bank of Scotland for a reply to his letter of 28 August although there is not a scrap of evidence to suggest that he did so, apart from the file note. He, then, in examination-in-chief, informed the Court that he had put the file note into the file some two years after the events of August/September 1990. That admission came as something of a surprise to the Court and also, I think, to counsel for the defenders since, in their pleadings, the defenders aver that St. Clair had forged the file note and that it was produced mala fides, which averments are met by a denial by the pursuers, the denial having been included in the Minute of Amendment moved by the pursuers at the commencement of the proof. St. Clair went on to say that he concocted the file note as a matter of self preservation in the belief that he had followed up his letter of 28 August with a telephone conversation with Mr Young. He accepted that he had been acting in breach of his instructions with the pursuers in drawing down the loan monies and that he had made no attempt to put matters right and did not inform the pursuers that they only had a second ranking charge over the subjects. He, nevertheless, did not consider that, in so doing, he had acted in bad faith. What he did was, he said, "breathtakingly stupid". Elsewhere, in his evidence, he said that in acting, in the way he did, "he took a chance". He could give no rational explanation for acting in this way. He accepted that in releasing the loan monies on 13 September 1990, without having obtained a first ranking charge in favour of the pursuers he acted "deliberately" but he then said it was not a deliberate act to release the funds because he thought that there would be a ranking agreement. As with a good deal of his evidence I had great difficulty with these answers which were both contradictory and did not provide any comprehensible explanation for describing his act as anything other than deliberate. St. Clair seemed to have a subjective view of his own conduct which sought to reduce significantly the unacceptable nature of that conduct. His ultimate position, in examination-in-chief, with regard to his release of the pursuers' monies was as follows:

"I intentionally released the funds knowing that there was no ranking agreement. I did so in the expectation, or belief, that the ranking agreement would be forthcoming. That was a mistake."

At no stage in his evidence was St. Clair, however, able to enunciate any reasonable basis for this belief.

His explanation, or justification, for writing the file note when he did, and in the terms he did, was even less satisfactory. In examination-in-chief he described this particular conduct as being "crassly stupid". He accepted that it was "not a responsible act". He said that he had been attempting to make "matters look not as bad as they were". Once the pursuers' claim had been intimated and he had occasion to review his file he said that he realised the file did not present a "complete picture" and for that reason he had had the file note typed and inserted into the file. This was done before the file was handed over to the defenders. He accepted that, thereafter, he had explained to the defenders, on more than one occasion, that the file note was important because it was contemporaneous evidence that he had had an agreement, in principle, with Mr Young. St. Clair said that, on being advised by Mr Douglas at the second meeting between them, which took place on 25 March 1994, that Mr Young had been on holiday in Italy on 31 August 1990, he had panicked. He accepted that, at that time, he should have told the defenders' representatives that the file note had been typed and inserted some two years after 31 August 1990. When asked if he felt guilty about any of this, he initially said he did not feel guilty about anything but then said "I suppose I feel guilty about fabricating the note".

In cross-examination, St. Clair again accepted that he must have represented to the defenders that the file was an important piece of evidence supporting his position and that it was contemporaneous. He accepted that, in doing so, his purpose was to further his claim for indemnity. Also, in cross-examination, he said that he had told those acting for the pursuers, when being precognosced on the Thursday before the commencement of the proof, that he had concocted the file note, some two years after the event, and had placed it in the file at that time. He also accepted that he had informed the defenders' representatives that the letter of 28 August and the file note established that he had entered into an agreement in principle with the Bank of Scotland and that in so doing he was relying on "something I knew to be forged". In re-examination he repeated that he had thought that he had an agreement, in principle, with the Bank of Scotland but now accepted that that belief was "irrational".

This witness, as I have already indicated, was at pains, throughout his evidence, to try to avoid having his conduct stigmatised as involving any bad faith or dishonesty on his part. I am afraid that I considered that his attempts to do so were unacceptable. I simply could not understand how a person of his maturity, and years of experience as a solicitor, could seek to deny that his actings, in relation to his failure to carry out the pursuers' instructions amounted to anything other than a deliberate or reckless act, not only in breach of his express instructions but in breach of his professional duties to his clients. The seriousness of the matter was, in my view, compounded by the fact that the sums which were being obtained from the pursuers were benefiting him since they were being used to reduce the liability of a company in respect of which he stood as guarantor.

What was, perhaps, even worse was that he failed, it seemed to me, to recognise, adequately, the seriousness of his dishonest act in concocting the file note and representing to the defenders that it was contemporaneous and was strong evidence in support of his position. He also stooped to the device of seeking to implicate his assistant, Miss Todd, in the matter (something which he sought to deny in evidence) which only compounded his discreditable conduct throughout this sorry affair. While, as I have noted above, he did, at times, seem to seek to explain his conduct on other things going on in his life, at that time, and by making some reference to his state of health, I note that he, at no time, in his discussions with the defenders' representatives, nor in correspondence with them sought to explain matters on any such basis, nor are there any averments to that effect in the pursuers' pleadings.

The Defenders' Submissions

In his submissions, at the close of the evidence, senior counsel for the defenders invited me to sustain the defenders' third plea-in-law and to pronounce decree of absolvitor. He submitted that the issues which the Court had to determine were short and sharp and were as follows.

1. Was the insured, St. Clair, entitled to be indemnified on the basis that the pursuers' claim against him was by reason of a "negligent act, neglect, error or omission" on his part having regard, not only to the meaning of the quoted words, but also to the general principle of insurance law that an insured cannot intentionally provoke the act insured against and claim indemnity.

2. If the answer to the preceding question was in the affirmative, the next question to be answered was whether the negligent act, neglect, error or omission was committed in good faith.

3. The third question was whether or not the insured had used a fraudulent means to obtain benefit under the policy which resulted in general condition 5 in the policy coming into play, so that the benefit of indemnity, which might otherwise have been available, had been forfeited.

While the defenders accepted that the onus fell upon them to establish that the provisions of general condition 5 applied in the circumstances, their submission was that the burden of proof was on the pursuers, standing in the shoes of the insured, to prove, on the balance of probabilities, that the claim fell within the terms of the policy. That latter submission was supported by reference to McGillivray Law of Insurance (9^th Ed.) at paras. 19-6 to 19-9. It was accepted, however, on behalf of the defenders, under reference to McGillivray at para. 19-8 that the onus of showing that the bringing about of the risk insured against had been done by a deliberate act of the insured, lay on the insurers. In the present case senior counsel for the defenders submitted that the policy did not provide cover for claims arising from deliberate acts of the insured. I was referred to the dictum of Lord Atkin in Beresford v Royal Insurance Company 1939 A.C. 556 at page 595 where his Lordship said:

"On ordinary principles of insurance law an assured cannot by his own deliberate act cause the event upon which the insurance money is payable. The insurers have not agreed to pay on that happening".

The claim in the present case was in respect of the insured's failure to obtain a first charge for the pursuers before releasing the funds. Senior counsel for the defenders submitted that if the evidence, in this case, established that the insured, St. Clair, had deliberately released the monies knowing that no first charge had been obtained that was a deliberate and intentional act on his part which was not covered by the policy. Mr Murphy referred to the case of Davies &c v Hosken (1937) 3 All E.R. 192 which was also concerned with a solicitor's indemnity policy. The wording of the relevant clause defined the scope of the indemnity, in that case, in somewhat similar terms to the present case. Indemnity was to be in respect of "loss arising from any claim which might be made against the insured by reason of any neglect, omission or error committed on the part of the insured or any person employed by them in or about the conduct of any business conducted by or on behalf of the solicitors in their professional capacity as solicitors. There is a material addition in the relevant clause, in the present case, and that is that the words "negligent act" appear before the words "neglect, error or omission". In the Davies case, a clerk employed by the solicitors received sums of money from clients of the solicitors for investment in securities, which did not, and were not intended to exist and these sums the clerk had applied to his own purposes. It was held that, in the circumstances, the wording of the policy was not apt to cover the loss sustained by the solicitors as a result of the clerk's fraudulent acts. At page 193 Porter J. said "the insurance's against loss arising from any claim which may be made against the firm by reason of any neglect, omission or error committed on the part of the firm, or any person employed by the firm, in or about the conduct of any business conducted by or on behalf of the firm in its professional capacity as solicitors. The first problem which was raised by Mr Miller was, does this wording include fraud, and in particular, does it include the class of fraud in this case, namely, the obtaining of sums of money for pretended investment in securities which did not, and were not intended, to exist? Prima facie, I should not think the words "neglect, omission or error" were words apt to cover a case of that kind. I should have more difficulty, I think, if the words were "any act, neglect, omission or error". But the word "act" is carefully left out of the wording of the policy, and it is confined to "neglect, omission or error". Prima facie, I should have thought that these words do not point to a fraudulent act, such as the obtaining of money; they point to an omission. Broadly speaking, if one were asked what Mr Digby did in this case, one would have said that he concocted a scheme for obtaining money from persons with whom his previous firm had dealt, and who were clients, also, of his present firm, and obtained money from them by false pretences or by fraud. But, looked at broadly, that is not neglect, omission or error; it is a positive act of fraudulently obtaining money from third parties. But it is said that Digby omitted, fraudulently, to obtain or provide valid security for the money advanced. Now, is that such an omission as the policy covers? To my mind it is not. The policy deals rather with leaving undone the things one ought to have done than with doing things which one ought not to have done. In substance, what Mr Digby did was to obtain money by fraud, not to fail to provide the security". That case does fall to be distinguished from the present one, particularly with regard to the precise wording of the relevant clause, and other facts, but I do consider that counsel for the defenders was entitled at least, to submit that similar reasoning as that adopted by Porter J. falls to be applied in the present case, in the sense that that wording of the relevant clause is not be read to cover deliberate and intentional acts of the insured, rather than acts done, or omissions made, by mistake or through unintentional lack of care, or oversight. In the present case St. Clair admitted, in evidence, that he deliberately disbursed the pursuers' funds in the knowledge that his instructions from the pursuers had not been complied with, in that he had not obtained an agreement from the Bank of Scotland that they would be ranked after the pursuers as security holders. Nevertheless he gave an undertaking to the pursuers that they had in fact a first charge over the subjects which undertaking was contained, impliedly, in the report of title he gave to them. While St. Clair's position, in evidence, was that he believed a ranking agreement from the Bank of Scotland would become available, he was unable to tell the Court upon what basis he held any such belief. Even if such a belief was relevant, which senior counsel for the defenders submitted it was not, it was clearly not reasonable for St. Clair to have held such a belief because he knew full well that the Bank of Scotland were pressing for repayment of the monies due to them and that there was simply no indication that, in that situation, they would be prepared to be postponed as security holders to another fresh lender. The simple fact of the matter was that St. Clair deliberately and recklessly disregarded the pursuers' instructions and a claim, arising as a result of those actings, was not something which attracted the indemnity under the policy, having regard to the wording of the indemnity provided.

In any event, submitted senior counsel for the defenders, even if the claim could be said to be by reason "of any negligent act, neglect, error or omission" on the part of St. Clair, the indemnity was qualified by the provision that the negligent act, neglect, error or omission had to have been committed in good faith. Senior counsel reminded me of the wording in the instructions from the pursuers to St. Clair regarding the monies received from them ie. 6/4/39 of process and, in particular, Clause 3.2 thereof. He reminded me also of the undertakings given by St. Clair in the report on title 6/4/32 of process. Notwithstanding those instructions, and those undertakings, he had proceeded to release the monies without first having obtained a first ranking charge over the subjects in favour of the pursuers. Mr Murphy posed the question as to whether, in the light of St. Clair's actings in this respect, his conduct fell to be categorised as innocent mistake, or negligence, on the one hand, or, on the other hand, conduct which was in bad faith or dishonest. Senior counsel for the defenders invited me to equiparate the words "in good faith" with the word "honesty" in the context of the present case. He did so under reference to the definition of "good faith" in the second edition of the Oxford English Dictionary which is to the effect "honesty of intention in entering into engagements, sincerity in professions". He referred me also to the speech of Lord Nicholls in the case of Royal Brunei Airlines v Tan (1995) 2 AC 378. That case was involved with a question as to whether a third party had dishonestly assisted a trustee to commit a breach of trust, or procured him to do so and, if so, whether the third party would be liable to the beneficiary for the loss, occasioned by the breach of trust, even though the third party had received no trust property and irrespective of whether the trustee had been dishonest or fraudulent. The Privy Council were concerned with analysing the conduct of the third party complained of in considering whether it could fall within the description of dishonesty. In giving the advice of the Board, Lord Nicholls at 389 said that in the context of the question before their Lordships a person acting dishonestly was someone "not acting as an honest person would in the circumstances". His Lordship then continued as follows.

"This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty, are mostly concerned with advertant conduct, not inadvertant conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such a behaviour. In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves the misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless. However, in the situations now under consideration the position is not always so straightforward. This can best be illustrated by considering one particular area; the taking of risks. All investment involves risk. Imprudence is not dishonesty, although imprudence may be carried recklessly to lengths which call into question the honesty of the person making the decision. This is especially so if the transaction serves another purpose in which that person has an interest of his own."

It has to be recognised, of course, that the context in which that statement was made, namely, the English law relating to accessory liability in trusts, was somewhat removed from the context of the present case but, at first sight, at least, it does appear to me that it is difficult to find any proper basis for quarrelling with the submission, made on behalf of the defenders, that it provides the appropriate criteria for deciding whether the actings of St. Clair, in the present case, were in good faith, or otherwise, and senior counsel for the pursuers did not, as I understood him, suggest otherwise. Applying the dicta of Lord Nicholls in Royal Brunei Airlines, senior counsel for the defenders posed the question - could it be said that St. Clair, in obtaining the loan monies from the pursuers and then releasing them without having obtained a first ranking charge over the subjects was acting in good faith? The answer to that question, senior counsel submitted, had to be in the negative. Senior counsel for the defenders referred also to the case of Mortgage Express Limited v S. Newman & Co (2001) P.N.L.R. 86. In that case a solicitor had made a claim against the English Solicitors Indemnity Fund, to be indemnified in respect of a claim made against her by a client concerning a conveyancing transaction. The fund declined to grant the solicitor indemnity on the basis that the claim arose from acts or omissions on her part which amounted, in terms of the Solicitors' Indemnity Rules, to dishonesty or fraud. In giving his judgment Aldous L.J., with whom the other members of the Court of Appeal agreed, observed at page 100 that in determining whether the acts or omissions, in question, fell to be stigmatised as dishonest "no doubt assistance can be obtained from reading the judgment of the Privy Council delivered by Lord Nicholls in Royal Brunei Airlines", but his Lordship then continued "but the essential duty of a judge is to find the facts. In cases where honesty is in issue, the mind of the person responsible, the understanding and practice of solicitors at the relevant time and the events that took place are all relevant. Once the facts have been found, the judge has to decide, according to the standards of right thinking members of society, whether the act or omission was due merely to incompetence or to dishonesty". Senior counsel for the defenders went on to submit that, applying those judicial dicta to the facts of the present case the position was as follows. St. Clair had accepted instructions to act for the pursuer which required him to have obtained a first ranking charge over the subjects, instructions which included a specific direction to him by the pursuers that "under no circumstances may the Society's funds be released until this is the case". He knew that he could not get a first ranking charge for the pursuers, unless he obtained the Bank of Scotland's agreement to be ranked, as security holders after the pursuers. Notwithstanding that he knew he had no such agreement from the bank, he, firstly, requested the loan funds to be sent to him and confirmed to the pursuers that he would, prior to the completion of the loan, ensure that the standard security and all loan agreements were properly executed, and in his possession or control, and undertook also to hold all loan money strictly to the order of the pursuers and not to release the same until he had complied with all aspects of their instructions - see 6/4/32. Secondly he obtained the pursuers' funds on 11 September 1990 and released them on 13 September 1990, without having obtained a ranking agreement from the Bank of Scotland, far less a first ranking security in favour of the pursuers. Mr Murphy submitted that those actings amounted to dishonest conduct because St. Clair knew that the Bank of Scotland had a first ranking security and that to comply with the pursuers' instructions he would require to have obtained a ranking agreement from the Bank of Scotland to be postponed to the pursuers, which he knew he did not have. At best for St. Clair, he had been taking a reckless chance in order to benefit persons with whom he was himself closely associated. Mr Murphy submitted that honest solicitors do not act in such a way. A solicitor acting honestly would not deceive his building society client, to its detriment, by telling it that its instructions had been carried out, when they had not been carried out. An honest solicitor, Mr Murphy submitted, does not participate in a transaction if he knows it involves a misapplication of client's funds, in direct contravention of his express instructions. Moreover an honest solicitor does not close his eyes or ears, or deliberately not ask questions, lest he should hear something he would rather not know and then proceed regardless. In the present case St. Clair's behaviour was not the conduct of an honest solicitor, acting in good faith, and his conduct was further tainted by the fact of the close business relationship he had with the persons who benefited from the obtaining of the pursuers' funds and the clear conflict of interest that arose in the case having regard to his own personal interest in the matter.

Senior counsel for the defenders then turned to discuss the defence based on general condition 5 in the policy. The submissions, in support of this defence, were shortly put. St. Clair having made his claim for indemnity, and while it was being considered by the defenders, concocted the file note in order to represent to the defenders, and their solicitors, that he had some sort of agreement with the Bank of Scotland that might have amounted to some defence of his conduct or, at least, that there was an explanation of his conduct. He, thereafter, represented to the defenders, and their representatives, on more than one occasion, that the note had been made contemporaneously with the alleged telephone conversation it recorded, when, in fact, it had been made up by him some two years later and inserted by him into the file at that time. He had continued to maintain to the defenders that the file note was genuine, until he gave his evidence at the proof. His conduct in this respect was designed to obtain an indemnity under the policy and, no doubt, also to make his behaviour look less culpable. The concoction of the file note, and the representations he made about it, were a means or device by St. Clair "in order to obtain a benefit" under the policy. Accordingly operation of general condition 5 was triggered and the benefit of indemnity under the policy was not available to him or to the pursuers who stood in his shoes as far as any right to indemnification was concerned.

Senior counsel for the defenders concluded his submissions by inviting me to hold that the only witness for the pursuers, that is St. Clair himself, was both unreliable and incredible. He not only had been guilty of dishonest conduct but he had attempted to put the blame for matters on his assistant Miss Todd. He never, at any time, sought to put the record straight with the defenders, prior to giving his evidence at the proof. In giving his evidence at the proof he simply refused to accept or face up to the seriousness of matters. Mr Murphy then raised the question as to how the pursuers could have considered it appropriate to move an amendment on the first day of the proof, which included a denial of the defenders' averments that the file note was not a contemporaneous true record of an actual conversation, when St. Clair had apparently, in advance of the proof, told him that this was not so. Since the pursuers, under the Third Party (Rights Against Insurers) Act were the statutory assignees of St. Clair, questions as to their good faith in this matter fell to be raised.

The pursuers' submissions

In reply Mr Davidson, senior counsel for the pursuers, accepted that Clause 1 of the policy defined the scope of the indemnity and that the onus was on the pursuers to establish that the claim was one which arose out of actings which fell within the wording of that clause. Under reference to the pleadings in the present case and the pleadings in the Sheriff Court action, at the instance of the pursuers, (6/2 of process), Mr Davidson defined the act of St. Clair giving rise to the claim as being the release of the pursuers' funds without having first obtained a first ranking security in the pursuers' favour. In law, he submitted, that act fell to be regarded as either a breach of contract by St. Clair or negligence by him. On the evidence, he submitted, it could also be said to have arisen out of an error on St. Clair's part that he had an agreement with the Bank of Scotland that they would be postponed to the pursuers. St. Clair had said, in evidence, that he had been under considerable pressure at the time and that there were "many things going on in my life" then. This was just the kind of situation when errors could occur and when people have lapses of memory. St. Clair had denied that his motive in acting, as he did, had been, to some extent, to improve his own position. Mr Davidson contended that it was a matter, entirely for the Court, having regard to the evidence, to assess whether it could be said that St. Clair acted honestly in 1990 in relation to the release of the funds, having regard, in particular, to the fact that he now accepted that he had lied regarding the file note. But he submitted, it was perfectly possible to see what St. Clair had done in 1990 as a stupid error, carried out in the genuine belief that he had an agreement that the Bank of Scotland would be prepared to rank second to the pursuers. Since the matter had come to light this had been St. Clair's consistent position. While senior counsel for the pursuers accepted that consistency did not equiparate with veracity, he submitted, nevertheless, that this was a factor for the Court to consider in judging of St. Clair's honesty or otherwise. St. Clair had accepted that his conduct was "irrational". It was for the Court to decide whether the conduct was irrational or dishonest. There was no middle ground. Senior counsel invited me to hold that St. Clair's conduct fell to be characterised as an irrational error on his part, but as an error it fell fully within the terms of Clause 1 of the policy and, in particular, was not a deliberate and intentional act on his part, which was not covered by the terms of the policy.

As regards the defenders' submissions regarding St. Clair's lack of good faith, in acting in the way he did, senior counsel for the pursuers submitted that, to succeed in that submission there had to be established, in the context of the present case, dishonesty or malice or fraud on the part of St. Clair. The Court should, in the first instance, presume good faith, the evidential onus being on the defenders to show the contrary. Senior counsel's submission was that the evidence did not come up to establishing lack of good faith on St. Clair's part. Senior counsel for the defenders referred to the speech of Lord Nicholls in Royal Brunei Airlines. His Lordship, in the passage cited above, had said that carelessness is not dishonesty and had furthermore stated that "for the most part dishonesty is to be equated with conscious impropriety". Lord Nicholls had also said that "imprudence is not dishonesty". Senior counsel, however, had to accept that it was necessary to keep in mind what Lord Nicholls had immediately gone on to say namely "although imprudence may be carried recklessly to lengths which call into question the honesty of the person making the decision. This is especially so if the transaction serves another purpose in which that person has an interest of his own". Senior counsel submitted that, even if the conduct of St. Clair could be stamped as reckless imprudence, it might not amount to dishonesty, but that entirely depended on the Court holding that St. Clair had acted in the honest belief that he had an agreement with the Bank of Scotland, even though he was foolish to think that.

In response to the defence based on general condition 5 Senior Counsel accepted that if it was triggered against St. Clair the pursuers could not claim the indemnity. Senior counsel for the defenders' basic submission was that the issuing by St. Clair of the false file note was not "a means to obtain benefit under the policy". It was rather an attempt by him to "buttress" a possible claim against the Bank of Scotland. While St. Clair did say in his evidence that his motivation for doing this was to put himself in a good light with the insurers, the real objective was to put up a case against the Bank of Scotland. It was conduct, therefore, which was not designed to "obtain benefit" under the policy. In any event it was not all fraudulent conduct by an insured that resulted in the insured being unable to obtain indemnity under a policy of insurance. In this respect senior counsel for the defenders referred me to the recent case of "The Mercandian Continent" (2001) 2 Lloyds Rep 563. That case, like the present, involved a claim made under Section 1of the Third Parties (Rights Against Insurers) Act 1930. The insured had produced to solicitors appointed by the insurers, a forged document which the insured thought (wrongly as it turned out) would assist the solicitors in resisting a claim of negligence, brought against the insured in Court, on the basis that the Court lacked jurisdiction. The insurers now sought to resist the claimant's claim to be indemnified under the 1930 Act in respect of the judgment which had, in due course, passed against the insured in respect of their negligence. The insurers relied on the general principles relating to good faith in insurance law and, in particular, the provisions of the Marine Insurance Act 1906. The case did not turn on the wording, and effect, of any particular clause, similar to general condition 5 in the present case. The Court of Appeal held that, in the circumstances, the insurers were not entitled to avoid the claim because the fraudulent conduct arose after the contract of insurance had been entered into and that for insurers to be entitled to avoid liability under policies, for fraudulent conduct committed after the insurance contract is entered into:

"(A) the fraud must be material in the sense that the fraud would have an effect on the underwriters' ultimate liability ... and (B) the gravity of the fraud or its consequences must be such as would enable the underwriters, if they wished to do so, to terminate for breach of contract". See Longmore L.J. at page 57. His Lordship continued:

"Often these considerations will amount to the same thing; a materially fraudulent breach of good faith, once the contract has been made, will usually entitle the insurers to terminate the contract. Conversely, fraudulent conduct entitling insurers to bring the contract to an end could only be material fraud. It is in this way that the law of post-contract good faith could be aligned with the insurers contractual remedies. The right to avoid the contract with retrospective effect is, therefore, only exerciseable in circumstances where the innocent party would, in any event, be entitled to terminate the contract for breach."

The Court of appeal held that, in the circumstances, the conduct of the insured had not met this test of materiality and gravity such as to allow the insurers to avoid the claim.

In concluding his submissions Mr Davidson sought to answer the questions pointedly put by Mr Murphy regarding the denial by the pursuers, in averment, of the defenders' averments regarding the file note, which denial, as has already been noted was contained in the minute of amendment, moved by Mr Davidson, at the commencement of the proof, in a situation where those acting for the pursuers apparently knew that St. Clair was now admitting that he had concocted the file note. Mr Davidson's response was that "it was not perceived by the pursuers that he, St. Clair, had forged a document nor that he had done so mala fides." Mr Davidson, however, informed the Court that it was perfectly true that, on the Thursday preceding the commencement of the proof, St. Clair had, in precognition, informed those acting for the pursuers that the file note had been created by him two years after the events to which it bears to relate. This, Mr Davidson accepted, meant that the pursuers' pleadings in relation to this matter were "unsound, misleading and untrue". The pursuers had, he said, simply accepted the gloss St. Clair had himself sought to put on the file note. In making these statements Mr Davidson appeared to be informing the Court that the pursuers considered that it was acceptable for them to deny what, objectively speaking, they must have known to be true, because of some subjective view of matters which St. Clair himself had chosen to adopt.

Before turning to my decision on the merits of the parties' respective positions in this case, I am bound to say that what Mr Davidson had to say in reply to Mr Murphy's attack on the pursuers' position in pleading in relation to the file note, appeared to me, absent any further explanation or excuse, to betray, at the very least, a lack of professional candour on the part of those acting for the pursuers to both the other side and to the Court that was unacceptable and it is difficult to imagine how it could be regarded as being otherwise by responsible Court practitioners. Once it was accepted, as it was by Mr Davidson, that, prior to the moving of the minute of amendment on the first morning of the proof, it was known to the pursuers that the defenders' averments regarding the file note were true the denial of those averments should not have been made in the minute of amendment nor should the motion to include that denial in the pleadings have been made.

Decision

I now turn to deal with the merits of the dispute. I have reached the clear conclusion that the defence to the action succeeds in all its three branches, although it is only necessary for the defenders to succeed in one of these for them to be entitled to decree of absolvitor. In the first place I am satisfied that the pursuers' claim does not, in terms of Clause 1 of the policy, arise "by reason of a negligent act, neglect or error or omission" on the part of St. Clair. I have little hesitation in reaching the conclusion, having heard him in evidence, and having considered all the other evidence in this case, that in releasing the pursuers' funds on 13 September 1990, without first of all having obtained a first ranking security in favour of the pursuers over the subjects, St. Clair acted deliberately, knowingly and intentionally, with clear knowledge of the true position, in breach of his instructions from the pursuers. I am also satisfied that St. Clair had no basis for supposing that, in due course, the Bank of Scotland would, apparently for no consideration, be prepared to agree to give up their position as first ranking security holders. The general principle of indemnity insurance law is that the insured cannot recover indemnity for deliberately bringing about the act insured against and, in this case, in my judgment, the wording of Clause 1 was not intended to provide, and did not provide, indemnity for such actings. In any event, even if I be wrong about that and I have misunderstood how the evidence in this case should be judged in this respect, so that St. Clair's actings can be described as involving, as senior counsel for the pursuers maintained, simply an error, perhaps a crass error, on St. Clair's part for the purposes of Clause 1, I am of the view that any such "error" was, on the facts, not committed, or did not occur, when St. Clair was acting in good faith. If it be correct to categorise St. Clair's conduct towards the pursuers, in carrying out the transaction in the way he did, as involving an error on his part, I am of the opinion that it was an error brought about by him acting, to use the language of Lord Nicoll in Royal Brunei Airlines, with "imprudence carried recklessly to such lengths as to become the conduct of someone who cannot be described as anything other than dishonest". St. Clair was unable to give any satisfactory explanation or basis for its conduct which, in my judgment, would entitle that conduct to be described as having been in good faith, if those words are to be given any content, which is consistent with the required and accepted standards of professional practice, and, indeed, personal morality. As I have previously noted St. Clair's evidence, from time to time, displayed, on his part, a view of matters that saw nothing morally wrong with what he did in relation to the carrying out of the transaction for the pursuers and, indeed, in relation to his creation of the file note. But, in my judgment, the pursuers' position in this case, was quite misconceived insofar as it sought to rely upon that being St. Clair's position. As Lord Nicholls said in Royal Brunei Airlines:

"However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual".

I am, furthermore, of the opinion that, on the evidence, the motive for St. Clair's reckless conduct was, at least in part, to serve his own interests since the funds in question were required to deal with the indebtedness of a company whose debts St. Clair had himself guaranteed. As Lord Nicholls again in Royal Brunei Airlines said that is a factor which may turn what otherwise might be regarded as mere imprudence into dishonesty.

Lastly I am also satisfied that the defenders were well founded, in their defence that, on the facts, general condition 5 operated in this case, to bar recovery by the pursuers and that in itself was a sufficient ground for refusing the pursuers' claim. The defenders were correct, in my judgment, in submitting that if, at any time condition 5 applied to prevent St. Clair from obtaining an indemnity under the policy, because of his conduct, it had the same effect against the pursuers since they can be in no better position of the 1930 Act vis-a-vis the insurers than St. Clair himself would have been in and, as I have noted above, counsel for the pursuers did not dispute that submission. I am of the opinion, on the evidence, that St. Clair, by deliberately making up the file note, some two years after the events to which it bore to relate, and in casting it in the terms he did, knowing those terms to be untrue, did so to mislead the insurers, and their representatives, in an attempt to obtain benefit under the policy, that is indemnity. He compounded this by relying on this note, on more than one occasion, in his dealings with the defenders, and their solicitors, and by repeatedly asserting the note's accuracy and importance. It seems to me that, so viewed, his actings in this respect amounted to "a fraudulent means or device" used by him to obtain indemnity under the policy and that, accordingly, the indemnity is forfeited. In reaching this conclusion I reject senior counsel for the pursuers attempt to characterise St. Clair's conduct as something else, namely simply an attempt by him to support a possible case or claim against the Bank of Scotland. That may well have been one of the purposes which St. Clair hoped the note might achieve, but I am satisfied that, in accordance with his own evidence, the main purpose, however foolhardy, was to promote and maintain, fraudulently, the claim for indemnity which he had made, when he realised the evidential basis for making that claim, in terms of the policy, was significantly lacking. Lastly in relation to this aspect of the case it did not appear to me that the decision in the case of "The Mercandian Continent" assisted the pursuers since it was concerned, not with the application of a clause in terms like that of condition 5 in the present case, but rather with the broader question of, in what circumstances can an insurer avoid liability for post contractual fraudulent conduct by the insured applying general principles of insurance law.

For each and all of the foregoing reasons I shall accordingly sustain the defenders' third plea-in-law and assoilzie the defenders from the conclusions of the summons.