OUTER HOUSE, COURT OF SESSION
[2010] CSOH 162
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CA65/10
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OPINION OF LORD MENZIES
in the cause
ANDREW DAVID BIRD
Pursuer;
against
BANK OF SCOTLAND plc
Defenders:
ннннннннннннннннн________________
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Pursuer: D Thomson; Beveridge & Kellas SSC
Defenders: Howlin, QC; Andersons Solicitors LLP
9 December 2010
Introduction
[1] This action arises as a result of a transaction for the purchase of heritable property in Aberdeen in which the pursuer presently resides, and the arrangements for the financing of that purchase. In about October 2000 the pursuer instructed a solicitor, Mr Russell Taylor, to act on his behalf in the purchase of the property. The sellers of the property were a Mr and Mrs Ralph Townsley. The pursuer intended to purchase the property with the benefit of a loan from the defenders which was to be secured against the property by the grant of a standard security by the pursuer in favour of the defenders. The pursuer avers that he believed that Mr Taylor had concluded a valid contract on his behalf with Mr and Mrs Townsley for the purchase of the property, as he had been instructed to do. The transaction appeared to have settled normally, and the pursuer took entry to the property. He has occupied the property since then.
[2] In fact the transaction did not settle normally. Although Mr Taylor was instructed to purchase the property in the name of the pursuer, in fact he concluded missives for the purchase of the property by a company in which he had an interest, namely Yearcom Limited, at a price of г170,000. He executed a certificate of title and sent it to the defenders with a request for payment of loan funds of г209,077. He fraudulently induced the pursuer to execute a standard security in favour of the defenders, which contained a personal obligation on the part of the pursuer to repay any monies advanced to him by the defenders. The defenders paid the loan funds to Mr Taylor, who used them for his own purposes. Those purposes included paying the purchase price of the property to Mr and Mrs Townsley, and obtaining a disposition (which has not been registered) in favour of Yearcom Limited, of which he was the sole director. Mr Taylor was subsequently sequestrated, found guilty of professional misconduct and struck off the roll of solicitors. The firm of which he was a partner was dissolved and its business was taken over by a judicial factor.
[3] Following the appointment of the judicial factor on 11 September 2002, the parties began to understand that there were problems with this property transaction and its associated financing. Until about October 2004 the defenders' agents carried out investigations into the matter, but then they told the pursuer that they could take matters no further and that he was not the owner of the property. Between about November 2000 and October 2004 the pursuer had paid monthly mortgage payments to the defenders which, together with a loan arrangement fee, totalled г65,100. He has made no further payments to the defenders. The present action was raised in 2005. In it the pursuer seeks (1) reduction of the standard security granted by him in favour of the defenders on the ground that he was induced to execute it by the fraudulent misrepresentations of the defenders' agent Mr Taylor, (2) repetition of the monies paid by him to the defenders in error, or in the alternative (3) damages of г300,000 in respect of the fraudulent misrepresentations of the defenders' agent Mr Taylor. The defenders resist these claims, and in particular deny that Mr Taylor was acting as their agent when advising the pursuer to execute the standard security and when making any representations to him. In their counterclaim the defenders seek payment of the sum of г317,961.62, being the amount of principal and interest due to them in respect of their loan to the pursuer.
[4] The matter came before me at debate, in which the defenders sought decree of dismissal of the principal action and decree in terms of their counterclaim, each on the basis of their general plea to the relevancy. The pursuer also relied on his general pleas to the relevancy, arguing that the defenders' averments should not be admitted to probation in the principal action, and that certain of the defenders' averments in the counterclaim should be excluded from probation. At the outset of the debate parties lodged a Joint Minute (No 34 of process) agreeing that certain copy productions should be deemed to be originals, that they are what they bear to be, and that each party should be entitled to refer to them. In addition, each party helpfully provided the court with written arguments/submissions; the pursuer lodged a Note of Arguments (No 31 of process) and a Supplementary Note of Arguments at the bar, and the defenders lodged Outline Submissions (No 32 of process). I do not seek to repeat these in this opinion, but have taken account of all of the submissions for the party, both in writing and at the bar. Parties were agreed that the case should be put out By Order shortly after the issuing of this Opinion, to enable them to consider the most appropriate further procedure.
The pleadings
[5] There are extensive averments on behalf of each party, and it is neither necessary nor expedient to repeat these in full. However, in order to understand the parties' respective positions, it is appropriate to set out more fully than I would normally do excerpts from their pleadings.
Article 3 of Condescendence includes the following averments for the pursuer:
"The circumstances in which the Pursuer came to be in a position that he wished to submit an offer to purchase the Property are as follows. Mr Taylor mentioned to the Pursuer that the Property was for sale and indeed had been for some time. At that time, Mr Taylor knew that the Pursuer was interested in purchasing a property in Aberdeen. The Property was in a poor sate of repair. A considerable amount of remedial work required to be carried out to the Property. The sellers of the Property were very keen to sell it. In those circumstances, Mr Taylor advised the Pursuer that he thought it should be possible to purchase the Property for less than the figure it might be valued at. Mr Taylor arranged for the Pursuer to view the property in his presence. The viewing took place. The sellers were still living in the Property at the time the viewing took place. Following the viewing the Pursuer determined that he would like to submit an offer for the Property. Mr Taylor advised the Pursuer that he should seek mortgage funding in the amount of г260,000. The Pursuer understood from Mr Taylor that that was the figure at which the Property either had been, or was likely to be, valued. The Pursuer therefore duly submitted an application for such funding to the Defender, on Mr Taylor's advice. Mr Taylor arranged for the Property to be valued by a surveyor on the Pursuer's behalf. Mr Taylor advised the Pursuer that the details of any loan would be finalised once a price had been agreed with the sellers of the Property. To the knowledge of the Pursuer, Mr Taylor then carried out negotiations with the sellers of the Property, which resulted in an agreement being reached, that the Pursuer would purchase the Property for г200,000. The Pursuer understood that to be the case because that is what he was told by Mr Taylor. The Pursuer did not ever understand there to have been any agreement that the price would be г170,000 because his knowledge of what was agreed came from Mr Taylor. Necessarily, therefore, the Pursuer did not know that Mr Taylor had in fact concluded missives for the purchase of the Property by Yearcom Limited at a price of г170,000. Mr Taylor acted as agent on behalf of the Defender as well as agent for the Pursuer in the purported purchase of the Property by the Pursuer. Mr Taylor's duties to the Defender included a duty to obtain a first ranking security over the Property in favour of the Defender. In his capacity as agent for the Defender Mr Taylor fraudulently induced the Pursuer to execute a standard security in favour of the Defender. The Pursuer executed the standard security on 2nd October 2000 before Mr Taylor as a witness (hereinafter referred to as the "Standard Security"). A copy of the Standard Security is produced herewith and referred to for its terms, which are held, to be incorporated herein brevitatis causa. The Standard Security also contained a personal obligation on the part of the Pursuer to repay any monies advanced to him by the Defender. The Pursuer executed the Standard Security in the belief, induced by Mr Taylor as agent for the Defender, that a contract for the purchase of the Property by the Pursuer had been concluded, when in fact as Mr Taylor well knew (and as hereinafter condescended upon in more detail) he had arranged to take title fraudulently in the name of a limited company in which he had a personal interest. Mr Taylor executed a Certificate of Title on 4th October 2000 and forwarded it to the Defender with a request for payment of the loan funds of г209,077. A copy of the Certificate of Title is produced herewith and referred to for its terms, which are held, to be incorporated herein brevitatis causa. In due course, and following receipt of the Certificate of Title from the Defender, the Defender advanced the loan funds to Mr Taylor. With reference to the Defender's averments in answer admitted that the loan of the funds by the Defenders to the Pursuer was governed by inter alia the Defender's General Mortgage Terms and Conditions dated August 1999 (the "Terms and Conditions"). Admitted the Terms and Conditions were incorporated into the contract of loan between the Defenders and the Pursuer in terms of a letter from the Defenders to the Pursuer dated 3rd October 2000. That letter is referred to for its terms beyond which no admission is made. Clause 7.6 of the Terms and Conditions is similarly referred to for its terms beyond which no admission is made."
[6] After making averments which need not be repeated here, the pursuer goes on as follows:
"... Mr Taylor acted as agent for both the Pursuer and the Defenders in respect of this transaction. Before drawdown of the loan funds could take place, certain steps had to be taken in terms of the parties' agreement. In particular, in terms of Clause 1(b) of the Terms and Conditions, before 'the Borrower can use the Loan':
"the legal formalities regarding the security as detailed within this booklet, must have been completed. The terms of the Report on Title to the Property must be acceptable to the Bank."
The granting of a standard security (expressly required by Clause 3 of the Terms and Conditions) was one such 'legal formality' which was required before drawdown of the loan could occur. Necessarily, in preparing the Standard Security and having it executed by the Pursuer, Mr Taylor was acting as agent for the Defenders and not the Pursuer. But for the granting of such a security, the Pursuer could not have begun to have come under any obligation towards the Defender in respect of repayment of the loan. Further, the preparation and execution of the Certificate of Title by Mr Taylor was also an act carried out in his capacity as agent for the Defenders. The issuing of such a report in terms acceptable to the Defenders was again a prerequisite to the creation of any obligation on the part of the Pursuer towards the Defenders. Amongst the various undertakings given by Mr Taylor in the Certificate of Title to the Defenders (in his capacity as their agent) were:
"(i) the Standard Security(ies) will be completed,
executed and in
our possession before settlement"
and
"(vi) We confirm that we have complied, or will comply with your [i.e. the Defenders'] instructions in all other respects."
Further, in requesting payment of the loan funds, Mr Taylor undertook inter alia that:
"(a) we shall use the same only to effect the
purchase of the
Property by the Borrower."
As herein condescended upon, Mr Taylor did not use the funds for that purpose. He never used the funds for any purpose connected with the Pursuer. As a matter of fact the funds were remitted to Mr Taylor and not to the Pursuer. Although Mr Taylor was the Pursuer's agent, he was also the Defenders' agent. He did not ever receive any monies on behalf of the Pursuer since he all along intended to use them for his own fraudulent purposes, unconnected with the Pursuer. Esto the funds were paid to Mr Taylor in his capacity as agent for the Pursuer (which is denied) such that the Pursuer became indebted to the Defenders in that amount, such indebtedness was created as a result of the fraudulent misrepresentations of the Defenders' agent, Mr Taylor, for whom they are in this respect responsible in law. In such circumstances, the Standard Security falls to be reduced and, further, the Defenders are liable to make reasonable reparation to the Pursuer for the loss and damage sustained by him thereby."
[7] In answer, the defenders aver that:
"The Standard Security having been executed by the pursuer who neither had nor subsequently obtained Title to the Subjects, is void and of no effect qua security. So much only of the Standard Security as imports a personal obligation on the part of the pursuer to repay the loan to the defenders together with interest has effect. If and to the extent that Mr Taylor committed any wrongdoing in relation to the taking of the Standard Security, it is the defenders, and not the pursuer, that are the victim of the wrongdoing. Further explained and averred that as the intended purchaser of the Property was the pursuer, not the defenders, it was as the pursuer's Agent, and not as the defenders' Agent, that Mr Taylor acted in relation to the taking of the Title to the Property. Further explained and averred that the borrower of the funds referred to was the pursuer, not Mr Taylor. Accordingly, those funds were never intended to be, and were not in fact, advanced by the defenders to Mr Taylor. They were advanced to the pursuer. Further explained and averred that the loan of the funds by the defenders to the pursuer was governed by inter alia the defenders General Mortgage Terms and Conditions dated August 1999 (the "Terms and Conditions"). The Terms and Conditions were incorporated into the contract of loan between the defenders and the pursuer in terms of a letter from the defenders to the pursuer dated 3 October 2000. That letter (in which the defenders were referred to as "the Bank") stated inter alia that: "The Bank has today issued a formal offer of a mortgage to your Solicitors, brief details in which are set out below. The Offer is subject to the Bank's Special Conditions and on [sic] the conditions contained in the enclosed Terms and Conditions leaflet dated August 1999." The Terms and Conditions provide inter alia that: "7.6 At the time of drawdown, the Loan funds will be remitted to the Borrower's Solicitor by Interbank Electronic Transfer". The funds were in fact remitted by the defenders to the pursuer's Solicitor on or around 4th October, 2000. Accordingly, in terms of Clause 7.6 of the Terms and Conditions they were drawn down by the pursuer at the time of their remittance on that date. On drawdown, the funds ceased to belong to the defenders and belonged to the pursuer instead. From time of drawdown the defenders were a creditor of the pursuer's in respect of the loan and were entitled to receive repayment of the loan together with interest thereon."
[8] There are two further passages in the pursuer's pleadings in article 5 of Condescendence which are relevant for present purposes, as follows:
"The Pursuer did not ever receive the loan funds of г209,077 from the Defender. Rather, those funds were paid by the Defender to its agent, Mr Russell Taylor. ... The Pursuer executed the Standard Security on the basis of the representation made to him by the Defender's agent, Mr Taylor, that the loan funds would be applied towards the purchase of the Property by the Pursuer. They were not so applied. Instead, as hereinbefore condescended upon, Mr Taylor fraudulently misappropriated the monies for his own purposes. The Pursuer would not have executed the Standard Security but for the fraudulent misrepresentations of the Defender's agent, Mr Taylor, for whom they are responsible in law. In these circumstances, the Standard Security ought to be reduced."
Submissions for the defenders
[9] Senior counsel for the defenders divided his submissions into five chapters. First, he considered the contractual relationship between the parties. Within this relationship there were two contracts, namely (i) that constituted by the defenders' offer of loan dated 3 October 2000 (No 7/11 of process), which incorporated the defenders' general mortgage terms and conditions (No 7/12 of process), and the pursuer's acceptance dated 2 October 2000 (No 7/13 of process), and (ii) the unilateral contract constituted by the personal bond contained in the standard security. The pursuer seeks to have the personal bond reduced, but reduction would leave the contract of loan intact. The averment by the pursuer that "in preparing the standard security and having it executed by the pursuer, Mr Taylor was acting as agent for the defenders and not the pursuer. But for the granting of such a security, the pursuer could not have begun to have come under any obligation towards the defenders in respect of repayment of the loan" is irrelevant, and ignores the contract constituted by the offer of loan and acceptance.
[10] Clause 2.1 of the defenders' terms and conditions makes it clear that the borrower's obligation to repay the loan with interest is engaged from the time "when the loan is drawn"; clause 7.6 provides that "at time of drawdown, the Loan funds will be remitted to the Borrower's solicitor ...". The remittance of the funds to the borrower's solicitor is therefore the event which constitutes drawdown. This provides certainty as to the time at which the pursuer is deemed to have drawn down the loan and thus to have become liable to repay the loan with interest. It also identifies the moment at which risk in the money passes from the defenders to the pursuer. This is central to the present dispute. As a matter of contract, the pursuer agreed that the monies were deemed to be drawn down, and were accordingly at his risk, when they were transferred to his solicitor's account.
[11] That in itself is sufficient for the defenders to succeed in their counterclaim. Matters might have been different if the pursuer had averred that he was induced to enter into the loan agreement itself by some impropriety by Mr Taylor as agent for the defenders; however, that is not the case which he makes, nor is he seeking reduction of the loan agreement. From the defenders' perspective, it matters not whether the standard security is reduced in the whole or in part - reduction still leaves the contract of loan in existence.
[12] Senior counsel went on to consider the pursuer's argument that if the standard security is reduced, the personal bond contained within it must fall with the security itself. It was common ground between the parties that the standard security is not an effective heritable security, because the grantor has never acquired title to the subjects intended to be burdened by it. Reduction of the standard security qua security would therefore achieve nothing. Furthermore, as argued above, even if the personal bond contained within the standard security is reduced, the defenders' entitlement to rely upon the contract of loan is not affected. It follows that reduction of the standard security quoad the personal bond would achieve nothing. In any event, there is nothing in principle or authority to justify the proposition that a standard security cannot be reduced in part - "if there are distinct, partial and severable rights or interests, partial reduction will be the appropriate remedy." (Stair Memorial Encyclopaedia of the Laws of Scotland, Vol. 13, para. 63). An unsecured obligation is severable from a secured obligation.
[13] Next, senior counsel examined the pursuer's attempt to found an argument on the certificate of title provided by Mr Taylor to the defenders (No 6/6 of process). This certificate contained undertakings given by Mr Taylor to the defenders, and was concerned with the contract between Mr Taylor and the defenders. The pursuer was not a party to that contract, and was not entitled to found upon it as it was res inter alios acta. There was no suggestion that the requirements for a jus quaesitum tertio were met - see McBryde on the Law of Contract in Scotland (3rd Ed) at para. 10-08. In any event, the certificate of title post-dated the representations founded on by the pursuer.
[14] Turning to the dispute about agency, senior counsel accepted that a principal is liable for a delict committed by his agent if it is committed with the actual, apparent or ostensible authority of his principal. He referred to Bowstead & Reynolds on Agency (18th Ed.) at para. 8-185, and submitted that propositions (a), (b), (d) and (e) were clearly not applicable in the present case. The only basis on which the defenders might conceivably be liable is proposition (c), namely that the agent made the false representation fraudulently, it being within the scope of his actual or apparent authority and within the course of his employment, to make such a representation. In considering this question, it was essential to distinguish between the acts of Mr Taylor as agent for the pursuer and the acts of Mr Taylor as agent for the defenders. The pursuer was seeking to purchase the property; the defenders were not seeking to do so. Instructions to Mr Taylor to implement the purchase can therefore have come only from the pursuer, not from the defenders. In relation to the purchase of the property, Mr Taylor must therefore have been acting as the pursuer's agent, not as the defenders' agent. This applies equally to the payment of the purchase price - it cannot be said that this was paid to the vendor on behalf of the lender, rather than on behalf of the purchaser. On the other hand, the defenders were seeking to obtain a valid heritable security over the property, and instructions to Mr Taylor to obtain such a security can therefore have come only from the defenders. In relation to the obtaining of such a security, Mr Taylor was acting as the defenders' agent and not as the pursuer's agent.
[15] It follows that the pursuer's averment that "Mr Taylor acted as agent on behalf of the defenders as well as agent for the pursuer in the purported purchase of the property by the pursuer" is irrelevant and unsound; in relation to the purchase of the property, Mr Taylor must have been acting solely as the pursuer's agent. Any fraudulent misrepresentation given by Mr Taylor to the pursuer was to the effect that title would be taken in the pursuer's name and/or that the loan monies would be applied in acquiring such a title; it cannot be argued that in making any such representation Mr Taylor was acting as the defenders' agent or the pursuer's averments about Mr Taylor's misrepresentations to him proceed on the erroneous basis that in relation to payment of the purchase price and the taking of title to the property Mr Taylor was acting as the defenders' agent rather than the pursuer's agent.
[16] In support of the proposition that it was necessary to carry out a careful analysis of the transactions to determine for which principal Mr Taylor was acting as agent, senior counsel referred to McCabe v Skipton Building Society 1994 SC 467. particularly at page 472G to 473H. A distinction fell to be drawn between a representation made about something which was the business of the defenders, and therefore within Mr Taylor's ostensible authority as agent for them, and representations about subject matter which is not primarily the business of the defenders but is quintessentially the business of the pursuer, such as the use to which the money would be put. There was nothing in the averments for the pursuer about ostensible or implied authority from the defenders for Mr Taylor to make representations to the pursuer about what would be done with the loan funds. It is also relevant to consider the reliance which a reasonable pursuer would place on a representation; it is surely more probable that a purchaser would place reliance on representations by his own agent (rather than on an agent of a third party such as a lender) as to the completion of the contract for the purchase of property, and the proper application of loan monies. It must be borne in mind that once the money was in Mr Taylor's client account, it ceased to be the defenders' money and was held in trust by Mr Taylor for behoof of the pursuer - Wilson, The Scottish Law of Debt (2nd Ed.) para. 4.1.
[17] Where both parties are innocent victims of a fraud, the court will ask whether one party is "to blame" to any extent - Robb v Gow Brothers and Gemmell 1905 F 90. It was worthy of note in this respect that it was not part of the pursuer's case that the defenders, through any conduct of their own, had facilitated this fraud (nor indeed were the defenders saying this of the pursuer). Senior counsel also referred to Traill v Smith's Trustees (1876) 3 R 770, and observed that the proposition that a principal cannot benefit from the fraud of his agent is too broadly stated - there are circumstances in which he may do so, if he has given valuable consideration. The same point was made in Clydesdale Bank v Paul (1877) 4 R 626 (particularly per Lord Shand at 628/9, and Rose v Spavens (1880) 7 R 925. In order to obtain reduction of the standard security, the pursuer requires to show that the fraud of the defenders' agent induced him to enter into the contract from which he seeks to be released. He does not aver this; rather he avers that the fraud induced him to execute the standard security.
[18] In summary, the defenders' position on the questions of agency was as follows:
(i) In making the representations on which the pursuer relies, Mr Taylor was acting as agent for the pursuer, for the reasons given above.
(ii) This is not a case in which the defenders are said to have facilitated the fraud in any way.
(iii) In any event the defenders are an innocent party which gave valuable consideration.
If the pursuer fails on any of these three tests, his claim for reduction of the standard security must fail.
[19] Finally, senior counsel for the defenders addressed a variety of points arising from the pursuer's pleadings. The averments in article 6 of Condescendence that the monies paid by the pursuer to the defenders were paid as a result of error are irrelevant. These monies were paid on the basis of the contract of loan between the parties, which is not challenged by the pursuer. The pursuer does not aver what the error is on which he relies. Moreover, there is no relevant averment of essential error, which is necessary for reduction on this ground - Stewart v Kennedy (1889) 16 R 857 at 864.
[20] The pursuer's averments (at pages 11 and 25 of the closed record) cannot be justified against the productions, and are irrelevant. Any attempt to rely upon unjustified enrichment is also irrelevant, as the relationship between the pursuer and the defenders is governed by the contract of loan, which constitutes the requisite legal justification for any enrichment - Dollar Land (Cumbernauld) Limited v CIN Properties Limited 1999 SC (HL) 90.
Submissions for
the pursuer
[21] Counsel for the pursuer accepted that it
was necessary to analyse for whom Mr Taylor was acting as agent at each
material point, and that the court could not proceed simply on the pursuer's
averments in that regard. He also accepted that in order for a principal to be
bound by his agent, it is necessary for the act in question to be within the
authority (actual, ostensible or implied) of the agent; it was therefore
necessary to look at the appearance of the contract and ask whether what was
being said or done by Mr Taylor was within his authority. When
Mr Taylor procured the pursuer's signature on the standard security,
Mr Taylor knew that he had not concluded a contract for the purchase of
the property by the pursuer. He obtained the pursuer's signature on the
standard security as agent for the defenders; it cannot be said that he did
not have that knowledge at that time, so he was acting fraudulently when he
made representations to the pursuer and induced him to sign the standard security.
[22] It was instructive to analyse what might have happened if parties had been separately represented (an exercise considered by the Second Division in McCabe v Skipton Building Society). Two possible situations fell to be compared, both on the hypothesis that the pursuer was represented by Mr Taylor and the defenders by an independent solicitor. First, if Mr Taylor formed a fraudulent intention not to take title to the property in the name of the pursuer, and to use the funds for an unauthorised purpose, and the defenders' solicitor caused the pursuer to execute a standard security over the property, there would be no basis for reduction of the standard security, as the defenders' agent would be blameless. Second, if Mr Taylor told the defenders' solicitor what he intended to do, and had concluded missives not for the pursuer but for his own company, and the defenders' solicitor then proceeded to have the pursuer execute the standard security, the defenders' agent would be impressed with the knowledge of the fraud, and the standard security would fall to be reduced, as the defenders' solicitor would have participated in the fraud. This was an act within the scope of his authority, for which the defenders were responsible. Everything in such a transaction would have the cloak of normality attached to it, and failure to disclose to the pursuer the fraudulent intent would amount to a misrepresentation by the defenders' agent. In the present case, although the same solicitor was acting for both parties, the second of the above situations applied. While it was accepted that Mr Taylor made misrepresentations to the pursuer in his capacity as the pursuer's agent, he also made misrepresentations to him in his capacity as the defenders' agent. Crucially, one of these was to induce the pursuer to execute the standard security. This was done in his capacity as the defenders' agent, but in the knowledge that the missives had been concluded not in the name of the pursuer but in the name of Yearcom Limited.
[23] In response to the defenders' argument that reduction of the standard security would still leave the contract of loan standing, counsel relied on the points made in his Supplementary Note of Argument. As a matter of fact and law, the defenders would not, and did not, advance any monies without the other contractually stipulated conditions being fulfilled, including the execution by the pursuer of a standard security. The defenders' argument might have some substance if the defenders had simply offered to advance a loan and the pursuer had bound himself to accept it, and the defenders had then simply advanced monies to the pursuer following on the execution of that contract. However, that is not what happened, nor is it what the terms and conditions provided for. The pursuer was not bound to accept the loan, and the offer of loan was conditional on the granting of a standard security. If the standard security is reduced, it cannot be argued by the defenders that there remains a contract of loan.
[24] The general rule that a principal cannot take advantage of the fraud of his agent applies in this case. By trying to recover monies advanced to the pursuer the defenders are attempting to take advantage of the fraud of their agent. The fact that the defenders no longer possess the money which they once had is irrelevant - the concept of valuable consideration having been given applies only in special circumstances.
[25] In considering the question for whom Mr Taylor was acting when he received the monies, the defenders focus on clause 7.6 of their Terms and Conditions. However, that clause is an administrative provision - it merely sets out a practical arrangement about the method to be adopted for the release of monies by the defenders. The defenders argue that by virtue of clause 7.6 the parties have agreed that from that moment the monies will cease to be the property of the defenders and will immediately become the property of the pursuer - i.e. that both ownership and risk has transferred from the defenders to the pursuer. That is not what the clause says. Moreover, such a construction would not make business sense - if the pursuer were to be sequestrated whilst the monies were still in Mr Taylor's hands, this would mean that the defenders could not require repayment of the monies by Mr Taylor. The pursuer's argument is reinforced by the terms of clause 1 of the Terms and Conditions. This sets out certain events which must have occurred before the borrower can use the loan (such as providing the bank with an acceptable valuation, an acceptable report on title and a signed acceptance of the offer). Looking to the terms and conditions as a whole, the defenders' construction does not make sense.
[26] The defenders' argument that the pursuer is not entitled to pray in aid the certificate of title because it is res inter alios acta is misconceived. Clause 1(b) of the Terms and Conditions requires a certificate of title which is acceptable to the bank. The terms of that certificate must be something on which the pursuer is entitled to rely. The pursuer's pleadings (in the passages quoted above, and in article 5 of Condescendence) make detailed reference to the certificate of title. That certificate included confirmation that Mr Taylor had complied or would comply with the defenders' instructions in all respects, and that he would use the loan funds only to effect the purchase of the property by the borrower. The terms of the certificate are consistent with the submission that ownership of the money remained with the defenders even after they were transferred to Mr Taylor's account.
[27] The pursuer's averments are sufficient to instruct a relevant
case of fraudulent misrepresentation - see McBryde on Contract (3rd
Ed.) paragraphs 14-36 to 14-48; Esso Petroleum Limited v Mardon [1976]
1 QB 801; and Cramaso LLP v Viscount Reidhaven's Trustees
[2010] CSOH 62. No person can take advantage of the fraud of his agent - Mair
v Rio Grande Rubber Estates Co 1913 SC (HL) 74; Gloag on Contract
at 464/5; Traill v Smith's Trustees; Clydesdale Bank v Paul;
Stewart v Kennedy; Laing v Provincial Homes Investment
Co 1909 SC 812; Crossan v Caledon Shipbuilding Co 1906 14
SLT 33.
[28] Although Mr Taylor acted on behalf of each of the parties at
different times, the most critical moment was when he caused the pursuer to
execute the standard security. The grant of that deed was a sine qua non in
respect of the transaction which was contemplated. In having the pursuer
execute the standard security Mr Taylor was carrying out a duty which he
owed to the defenders.
[29] The general rule is that the principal is liable for the fraud
of his agent. However, the defenders argue that the principal can take
advantage of the fraud of his agent as long as he has given valuable
consideration. This argument is misconceived. The fundamental rule is that
the principal is liable for the delicts (including frauds) of his agent, if
committed within the scope of his agency. The apparent contradiction is
explained by the concept of gratuitous benefit, which is a separate ground of
reduction that has been applied in cases where one agent has been acting for
more than one principal at the same time, and which was discussed in McBryde
on Contract at 14-45/46, and Traill v
Smith's Trustees and Clydesdale Bank v Paul.
In the present case, if the standard security falls to be reduced as executed
as a result of the fraud of the defenders' agent, although it is true that
there is an underlying contract of loan, the monies paid out cannot be paid as
if nothing had happened: it was not the contract of loan which caused either
party to change its position, and no monies have been advanced under that loan.
[30] Counsel referred to the discussion in McCabe v Skipton Building Society about the difference between a case where the person committing a fraud was acting for both parties jointly and a case where the person committing a fraud was, at the material time, acting for only one party (see the Opinions of Lord Morison at 477B-G, and Lord Osborne at 480F-H). The pursuer's averments in the present case are in the same category as those of the pursuer in McCabe, that is to say, that when Mr Taylor was causing the pursuer to execute the standard security, he was acting as agent for the defenders. The general rule that the principal is responsible for the actings of his fraudulent agent therefore applies, and the defenders' submission that there is an exception because consideration has been given is misconceived. Counsel accepted the series of propositions contained in paragraph 8-185 of Bowstead & Reynolds on Agency; there was nothing in proposition (c) to suggest that a principal may escape liability just because he has given consideration. This is consistent with the authorities already considered.
[31] Counsel contrasted the defenders' position in their original Note of Arguments (No 22 of process), in which it was maintained (at paragraph 2) that "in procuring the pursuer to execute the standard security Mr Taylor was acting for the pursuer, for he was procuring him to fulfil a condition which he required to fulfil in order to obtain a loan from the defenders", with the argument advanced for the defenders at debate and contained in their Outline Submissions (No 32 of process) where at paragraph 4.1(4), (5) and (6), the argument is advanced that:
"The defenders were seeking to obtain a valid heritable security over the property. Instructions to Mr Taylor to obtain such a security can therefore have come only from the defenders. It follows that in relation to the obtaining of such a security over the property Mr Taylor was acting as the defenders' agent and not as the pursuer's agent."
Counsel for the pursuer indicated that he accepted all of the propositions in paragraph 4.1 of the Outline Submissions for the defenders. The pursuer avers that Mr Taylor's duties to the defenders included a duty to obtain a first ranking security over the property in favour of the defenders. This averment is admitted. The position adopted by the defenders in their Outline Submissions is therefore correct - when Mr Taylor got the pursuer to execute the standard security he was acting as agent for the defenders.
[32] Mr Taylor acting admittedly as the agent of the defenders when he procured the pursuer's signature of the standard security by fraud, it is sufficient for the pursuer to offer to prove that he was acting within the scope of his authority and that he did so actually possessing the knowledge that he had not concluded a contract on behalf of the pursuer to buy the property, and by so doing committed a fraud for which the defenders were liable. There was nothing unreasonable about the pursuer signing the standard security on the basis of Mr Taylor's representations that everything was being done properly and in accordance with the parties' instructions.
Reply for the defenders
[33] Senior counsel adhered to his Outline Submissions (No 32 of process) but with one modification, namely that paragraph 4.1(5) should read "Instructions to Mr Taylor to obtain such a security must have come predominantly from the defenders." He made this modification because there was an element of Mr Taylor acting for both parties in this respect. However, the key point of his submissions remained the primacy of the contract of loan; there is no relevant defence to the counterclaim. It matters not whether clause 7.6 of the Terms and Conditions of the contract of loan was a general or administrative provision - it is the effect which is important, namely at the time of drawdown the loan funds are remitted to the borrower's solicitors, not the lender's solicitor. The ownership of the money was transferred to the pursuer when the funds were transferred to the pursuer's solicitor. The money would come out of the bank's balance sheet and be replaced by an identical debtor figure. The remedies open to the bank do not include ordering the solicitor to repay them the money.
[34] The pursuer now argues that he would never have come under an obligation to the bank had it not been for Mr Taylor procuring the signing of the standard security. That argument is flawed, principally because it assumes that the money is borrowed and advanced only if all the conveyancing is carried out as it should be. If the conveyancing was not carried out as it should be, and there was a failure to comply with the provisions of clause 1 of the Terms and Conditions, it would be nonsense for the pursuer to suggest that he has not borrowed the money. If such an argument could be advanced, a similar argument could be advanced if another security was registered ahead of the standard security in favour of the defenders. The result of that would be that the bank only obtained a second security, yet the pursuer could argue that the terms and conditions had not been complied with and he had not borrowed the money.
[35] Counsel for the pursuer had accepted that there were no known grounds for reduction of the loan agreement. This is fatal to the pursuer's position.
[36] On the question of benefit, senior counsel referred again to Traill v Smith's Trustees. He maintained that where a principal is innocent of his agent's misdeeds, and receives no consideration, he can benefit from those misdeeds. However in the present case, there was no question of bad faith on the part of the bank, and it was difficult to see how a party who has paid out г200,000 is not giving value. The bank has obtained no benefit from this fraud (except in relation to the obtaining of a personal bond). There has been no suggestion that the pursuer entered into the loan agreement with the defenders as a result of fraud, so the defenders have not benefitted from any fraud.
Discussion
[37] On the basis of parties' pleadings and
the documentary evidence relied on, I regard the categorisation of this action
by the pursuer as one involving a dispute between two parties, each of whom
has, in different respects, been the innocent victim of the fraudulent conduct
of Mr Taylor as accurate. Neither side sought in the course of their
submissions to impute wrongful conduct or actual knowledge of Mr Taylor's
fraudulent scheme to the other side. There is nothing in the productions which
would support such an imputation. This truly appears to be a dispute between
two innocent parties as to where the loss should lie consequent on fraudulent
actings of a third party. I observe that the procedure whereby the same
solicitor acts for the purchaser of heritable property in a conveyancing
transaction (who is also the borrower in terms of a contract of loan which is
necessary for the funding of the property) and for the lender in that contract
of loan is one which may result in savings of cost and time, and may result in
other practical advantages, but it is one which may be thought to give rise to
a conflict of interest and makes the completion of a fraudulent scheme which
may cause loss to both borrower and lender easier than would be the case if
parties were separately represented. This was described by Lord Morison
in McCabe v Skipton Building Society in 1994 as an "undesirable
practice".
[38] The pursuer makes a rather general averment that Mr Taylor acted as agent on behalf of the defender as well as agent for the pursuer in the purported purchase of the property by the pursuer. Counsel for the pursuer accepted that this averment was couched in terms that were rather too vague and general. Both parties accepted that Mr Taylor was not instructed to act on behalf of them jointly - rather, at some points he was acting as agent for the pursuer and at others as agent for the defenders. It is necessary to analyse for whom he was acting at the relevant points.
[39] The analysis by senior counsel for the defenders seems to me to be generally sound. Mr Taylor was instructed by the pursuer in respect of the purchase of the property; he was not acting as agent for the bank in this transaction, which was (or which Mr Taylor held out to be) between the pursuer and the vendors. In the transaction for the loan of monies from the defenders to the pursuer; Mr Taylor was at times acting in his capacity as agent for the pursuer, and at other times acting in his capacity as agent for the defenders. He undertook certain specific obligations to the defenders, as set out in the certificate of title (No 6/6 of process). One of his obligations to the defenders was to obtain for them a first ranking standard security over the property.
[40] There are two points of particular relevance at which it is necessary to consider for whom Mr Taylor was acting as agent in the present case - (i) when he procured the pursuer's signature on the standard security, and (ii) when the loan funds were transferred to him. With regard to the first of these points, the pursuer's position has always been that Mr Taylor was acting as agent for the bank when procuring the pursuer's signature on the standard security. This is the position adopted for the defenders in their Outline Submissions (No 32 of process at paragraph 4.1(6)), although the directly opposite argument was advanced at paragraph 2 of their Note of Arguments (No 22 of process) to the effect that at this point he was acting as agent for the pursuer, and in his closing reply senior counsel sought to raise the possibility of a middle line whereby Mr Taylor was acting predominantly for the defenders. At this point I consider that Mr Taylor was acting as agent for the bank. It was part of his duty to the bank to obtain a first ranking standard security over the property. The document which the pursuer signed (No 6/4 of process) was clearly conceived and drawn up to protect the interests of the bank. In it the pursuer granted a heritable security and a personal bond in favour of the bank. Although he might be described loosely as having an interest in executing the document because he wished to benefit from the loan of funds from the bank in order to purchase the property, the document was designed to protect the bank's interest. I consider that when Mr Taylor obtained the pursuer's signature on this document he was acting as agent for the bank.
[41] The second relevant point was the transfer of funds from the bank to Mr Taylor. Although this transfer was effected in response to the request in the certificate of title, I agree with the argument advanced for the defenders that the money was transferred to Mr Taylor in his capacity as agent for the pursuer. This is the point which is described as "the time of drawdown" of the Loan in the defenders' general mortgage terms and conditions, clause 7.6 of which provides for the loan funds to be "remitted to the Borrower's solicitor". At the time of this transfer the bank lost control and possession of the money. Although Mr Taylor gave undertakings to the bank in the certificate of title about what would happen to the money, once transfer had occurred the money ceased to be the bank's. If Mr Taylor acted in breach of his undertakings (as it appears that he did), the bank might have remedies against him, or against the pursuer, but they could not simply instruct Mr Taylor as their agent to return the monies to them. The monies had passed outwith their control. In holding the monies in a client account, Mr Taylor was holding them on behalf of the pursuer rather than the defenders.
[42] The first of the above points is of relevance to the remedy of reduction sought by the pursuer. The general rule is that a principal cannot take advantage of the fraud of his agent. Mr Taylor's actings in obtaining the pursuer's signature on the standard security were within his apparent authority as agent for the defenders; there was nothing in the circumstances known to the pursuer which ought to have put him on his guard or suggested that the transaction was other than normal. Mr Taylor's action in obtaining the pursuer's signature on the document was carried out in pursuance of the fraudulent scheme which he had had devised, but at this time he was acting as agent for the defenders and they cannot benefit from his fraud. On the basis of the general rule, the standard security falls to be reduced.
[43] Senior counsel for the defenders sought to argue that any misrepresentation by Mr Taylor to the pursuer as to the use to which the funds might be put must have been made while he was acting as agent for the pursuer, as this was in the context of the conveyancing transaction, not the loan transaction. I consider this argument to be misconceived for two reasons. First, the basis for reduction of the deed is Mr Taylor's fraudulent obtaining of the pursuer's signature on it in the knowledge that missives had been concluded in the name of Yearcom Limited and that the pursuer would not obtain title to the property. He had knowledge of his own fraudulent scheme and he was acting in pursuance of it when he obtained the pursuer's signature. Furthermore, the obtaining of the standard security and the use to which the loan funds would be put were matters expressly within the duties undertaken by Mr Taylor to the defenders.
[44] The submission was made on behalf of the defenders that if the standard security were to be reduced, only partial reduction should be granted - that is to say, the heritable security element of the deed should be reduced, but the personal bond should be allowed to stand. The heritable security element of the deed is of course of no value, as the pursuer has no title to the property. It is competent in appropriate circumstances to grant partial reduction of a deed, but I do not consider that such circumstances are present in this case. The general rule to which I have referred applies equally to the personal bond element. The pursuer's signature was obtained by Mr Taylor in the pursuance of his fraudulent scheme, while acting as agent for the defenders. I see no justification for allowing the personal bond element to stand.
[45] Reduction of the standard security leaves unaffected the defenders' argument that there was a contract of loan between the defenders and the pursuer. If this argument is sound, the pursuer would not be entitled to repetition of the sums paid by him to the defenders, and the defenders would be entitled to payments due to them in terms of the contract of loan.
[46] I consider that the arguments advanced for the defenders in this respect are sound in law. The contrary argument for the pursuer is clearly stated in his Supplementary Note of Argument. Put shortly, the argument is that it was a condition of the contract of loan that the pursuer should grant a first ranking standard security over the property and a personal bond in favour of the defenders, and that the various undertakings given in the certificate of title were fulfilled. These conditions were not met, so it cannot be argued that the contract of loan is enforceable or that the pursuer is due and resting owing any monies to the defenders in terms of it.
[47] I do not consider that the pursuer's argument on this point is sound. As discussed above, the defenders transferred the loan funds to Mr Taylor in his capacity as agent for the pursuer. At that point the loan had been drawn down, and the funds were in the possession and control of the pursuer's agent. It cannot be argued for the pursuer that because of failures in undertakings after the loan funds were transferred from the bank that there was no contract of loan. If, for example, the loan funds were not used to effect the purchase of the property by the borrower but rather to purchase an expensive car, it would not be open to the borrower to argue that the contract of loan was unenforceable. Again, if another security was placed on the register before this standard security, with the result that the bank did not obtain a first ranking standard security, it could not be argued that the contract of loan fell. The defenders lent money to the pursuer on the basis of their general mortgage terms and conditions. The monies were transferred from the defenders to the pursuer's agent. The defenders are entitled to repayment of those monies with interest in terms of their general mortgage terms and conditions. That entitlement remains notwithstanding the reduction of the standard security and personal bond. The standard security and personal bond might (or might not) have given the defenders security for their loan, but it does not follow from the absence of a valid standard security and personal bond that no contract of loan exists. It is important to remember that it is no part of the pursuer's case that he was induced to enter into a loan transaction with the defenders as a result of fraudulent misrepresentations by Mr Taylor when acting on behalf of the bank. The pursuer is not seeking to reduce the contract of loan - his conclusion for reduction extends only to the reduction of the standard security (including the personal bond).
[48] There were other matters touched on in submissions for the parties which are summarised above but which are not central to the issues before me, and on which I find it unnecessary to make detailed observations. I was not persuaded by the defenders' argument that the certificate of title was res inter alios acta so far as the pursuer was concerned; in the context of this action I consider that the pursuer was entitled to rely on the terms of the certificate when presenting his argument. To the extent that the pursuer's case depended on error (and this is not an aspect which featured prominently in submissions for the pursuer) I agree with senior counsel for the defenders that the pursuer's pleadings do not amount to a case of essential error and are irrelevant. The issue of unjustified enrichment was not developed.
[49] In these circumstances I consider that the pursuer is entitled to decree of reduction of the standard security (including the personal bond). However, I do not consider that he is entitled to repetition of the sums paid by him to the defenders. I consider that the defenders are entitled to payment by the pursuer of sums by way of principal and interest due on the sums advanced to him. I was not addressed as to the details of the amounts which may be due and owing, and I express no view on them at this stage. As agreed by both parties, an interlocutor giving effect to this decision will not be pronounced immediately, but the case will be put out By Order in due course to enable parties to consider this Opinion and address me as to further procedure.