Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 157
CA100/09 CA103/09	OPINION OF LORD GLENNIE in the cause CHESHIRE MORTGAGE CORPORATION LIMITED Pursuers; against MORNA GRANDISON, (Judicial Factor on the estate of Longmuir & Co) Defender: and in the cause BLEMAIN FINANCE LIMITED Pursuers; against BALFOUR + MANSON LLP Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: Lord Davidson of Glen Clova; McCall; Davidson Chalmers

Defenders: A Young Q.C.; Duncan; bto

23 September 2011

Introduction

[1] The pursuers in each of these actions are companies within the Blemain Group. The pursuers in action CA100/09 are Cheshire Mortgage Corporation ("CMC"). CMC is the residential lending division for the Blemain Group. In action CA103/09 the pursuers are Blemain Finance Limited ("BFL"). Both companies are in the business of secured lending, that is to say lending money to individual or corporate borrowers against security provided by them, normally in the form of a standard security over heritable property.

[2] In both cases the pursuers have been the subject of a mortgage fraud by a fraudster. Put simply, in each case the fraudster applied for a loan pretending to be Mr and Mrs X of a particular address, owning heritable property which they offered as security. When the loan was approved, a pretended standard security was executed giving the pursuers security over the property which they claimed to be theirs. The pursuers advanced the money to the fraudsters, believing them to be Mr and Mrs X of that address, and the fraudsters have subsequently disappeared.

[3] In setting up the standard security in each case, the fraudsters instructed firms of solicitors, respectively Longmuir & Co (in the case of the loan from CMC) and Balfour + Manson LLP (in the case of the loan from BFL). Those solicitors were themselves deceived by the fraudsters; they accepted instructions believing them to be who they said they were. They liaised with Mellicks, solicitors acting for the pursuers, in relation to the execution of the standard securities.

[4] The pursuers are unable to recover from the fraudsters the sums advanced to them. Nor, for obvious reasons, are they able to rely on the pretended standard securities over the properties. In those circumstances they sue the solicitors (or in the CMC action, the judicial factor) for breach of warranty of authority, contending in each case that the solicitors warranted that they had the authority of the individuals who owned the properties over which standard securities were purportedly granted. The defenders, whilst recognising the doctrine of a solicitor giving an implied warranty of authority, argue that the warranty does not go that far. There is no warranty of the identity of the person for whom they act, nor is there any warranty as to whether he is or is not the owner or occupier of any particular property. They say, in effect, that they warranted only that they had authority from the person or persons who were already known to the pursuers and with whom the pursuers were already dealing.

[5] The cases raise, therefore, an interesting question as to the extent of the warranty for authority. As in all such cases, the issue is fought in each case between two innocent parties.

[6] Since the pursuers are connected companies and the transactions raise similar issues, the two proofs were heard together on the basis that the evidence would be common to both actions. Documents were agreed and five witnesses were called. All, in my opinion, gave their evidence honestly. I am prepared also to accept their evidence as generally reliable, since they all gave their evidence carefully and usually by reference to documents lodged in process. I have only had to decide between their accounts on a few points of detail where their recollection of events or practice differed. With the assistance of witness statements, the evidence was concluded within one day. Detailed submissions with the assistance of notes of argument took slightly in excess of another day. I am grateful to solicitors and counsel for the efficiency with which the cases were prepared and the proof conducted and for the helpful submissions on an interesting and not altogether easy area of law.

[7] Having heard the evidence and arguments, it seems to me that the issues in cases such as these are fact sensitive. I therefore propose to set out the facts in relation to each case before turning to consider the relevant legal principles and their application to the particular circumstances. In the narrative that follows, all dates are in 2004.

CMC v Grandison - the facts

[8] On about 20 October, an application form was submitted to CMC for a loan to "Christopher Paul Cheetham and Mrs Juliet Cheetham" of 34 Danube Street, Stockbridge, Edinburgh, EH4 1NT. The application, which was on a Blemain Finance Application Form, was submitted by Mr Hodges-White, a commercial finance broker then trading as Cestrain Business Finance. It was marked for the attention of Akay Ahmet. It recorded the details of the broker ("CBF"), its phone and fax numbers, and the contact (Barry Hodges-White). The amount required by way of loan was £350,000 and the purpose of the loan was noted to be "to assist the purchase of overseas property".

[9] It is now known that the application for the loan was not in fact made by Mr and Mrs Cheetham but by fraudsters pretending to be Mr and Mrs Cheetham. To avoid unnecessary complication, unless otherwise stated, all references to Mr and Mrs Cheetham in the following narrative of the facts are intended as references to the persons pretending to be Mr and Mrs Cheetham, and not to the real Mr and Mrs Cheetham.

[10] Mr Hodges-White gave evidence as to how this came about. He explained that at about this time he had been brokering into the Blemain Group, including CMC, for about 12 to 18 months. He had developed a good working relationship with staff at Blemain, one of them being Akay Ahmet. He also dealt with another person at Blemain called Scott Marshall. I interject at this point to note that Mr Goldberg, the commercial director of the Blemain Group, who was personally involved in underwriting and approving the loans, explained that he headed a team which included Scott Marshall as underwriting manager and Akay Ahmet as an underwriter under him. The group operated through a team of about 12 people and all decisions would come up to Mr Goldberg. Mr Hodges-White explained that he had in fact worked with Akay Ahmet for about 8 to 9 months when Mr Ahmet was at Sovereign Finance plc and Mr Hodges-White was his supervisor. Mr Hodges-White knew Mr Ahmet well and trusted him.

[11] In relation to this particular transaction, it was Mr Ahmet who approached Mr Hodges-White. Mr Ahmet telephoned him claiming that Mr and Mrs Cheetham had contacted him direct at Blemain regarding the bridging loan. Mr Ahmet said he had told them that he was not able to deal with customers who contacted him directly and that they would therefore have to go through a broker. Since he would be giving this deal to a broker in any event, he asked if Mr Hodges-White would act as broker and take the deal "as a thank you from Blemain Finance". The "thank you" refers to the fee that the broker would earn on the deal. Mr Hodges-White believed everything to be above board.

[12] Mr Ahmet sent all the necessary information to Mr Hodges-White, including a completed application form for Mr and Mrs Cheetham. Mr Hodges-White telephoned Mr Cheetham on a telephone number given to him by Mr Ahmet on the application form and spoke to him. That person confirmed to him that all the details on the application form were correct. After that, Mr Hodges-White reformatted the application form and submitted it to Mr Ahmet at Blemain Finance. That was the last contact Mr Hodges-White had with Mr Cheetham. As he put it in evidence: "I referred the application straight back to Blemain Finance and they carried out their own investigations and money laundering checks as per their usual practice". It was some weeks later that he was contacted and told that this was a suspected fraud. On hearing that, he immediately repaid his commission. Mr Hodges-White had no contact at all with the solicitors involved on either side of the transaction.

[13] On 27 October CMC issued an Offer Letter addressed to Mr and Mrs Cheetham, referred to as "the Borrowers". The Offer Letter identified the amount of the loan as £355,000 plus a Brokers Fee or Arrangement Fee of £3,750, and specified the rate of interest as 1.25% per month. The term of the loan was left blank at this stage, but there was provision for 12 monthly payments of interest only instalments of £4,437.50. That Offer Letter was signed for acceptance on 2 November by Mr and Mrs Cheetham. Their signature also confirmed that they had been advised to seek professional and/or independent legal advice before signing and that they could afford the repayments set out therein. Although on its face the Offer Letter bears to be an unconditional offer, and the acceptance to be an unconditional acceptance, the terms and conditions set out on the back of the Offer Letter made it clear (in Condition E) that CMC reserved the right to vary or alter the terms and to withdraw the offer at any time prior to "completion", i.e. drawdown, of the Loan. Mr Goldberg described such an Offer, correctly as it seems to me, as a "provisional offer".

[14] On 1 November, the day before signing the acceptance of the Offer Letter, the fraudsters, again pretending to be Mr and Mrs Cheetham, wrote to CMC on writing paper headed with the address at 34 Danube Street, Edinburgh, to confirm that the monthly payments on the loan were affordable by them.

[15] On 5 November CMC received from DM Hall, Chartered Surveyors, a Mortgage Valuation Report dated 3 November over the property at 34 Danube Street. The Report stated that the property had been inspected on 2 November. The valuation was in the sum of £600,000. On 23 November there was a telephone conversation between Mr Ahmet and Ms Law of DM Hall about the value of the property on the assumption that a sale had to be effected within 90 days. In that conversation, and in a letter to CMC on that same day, 23 November, Ms Law confirmed that, in the opinion of DM Hall, the value of the subjects on that basis was in the region of £575,000. I heard no evidence from anyone from DM Hall, but I have no reason to doubt that they acted throughout in good faith on the basis of instructions from the fraudsters pretending to be Mr and Mrs Cheetham.

[16] It is clear that the CMC were provided with a number of documents purporting to confirm the identity and address of the borrowers. They received a BT bill addressed to Mr C P Cheetham at 34 Danube Street, a Scottish Power payment reminder similarly addressed, a Scottish Gas bill addressed to Mrs J Cheetham at that address, a driver's licence in the name of Christopher Paul Cheetham at that address and a driving licence in the name of Juliet Cheetham also at that address. It is not clear precisely when this documentation was given to them or by whom. Mr Goldberg in his witness statement at para.4(b) explained that the documentation was for the purposes of identification and was required under the "Know your Customer" ("KYC") rules. He explained that

"the identification received at this stage is part of a process that is completed by the solicitor confirming that their clients are the same as the borrowers applying for Mortgage finance and offering the property in question as security."

I do not think that Mr Goldberg is correct in suggesting that the identification documentation came as a matter of course from the borrowers' solicitors. It does not appear to have done in the BFL case (see para.[44] below). I prefer the evidence on this aspect given by Fiona Johnston, a solicitor with Mellicks who was instructed by CMC in respect of this transaction. It is clear that the borrowers' solicitors did not correspond directly with CMC; accordingly, if the identification documentation had come to CMC from them, it would have come from them through Mellicks, with whom they corresponded. Ms Johnston said at paragraphs 18 and 19 of the statement which she gave to the defenders (and this was not contradicted by anything in the statement which she gave to the pursuers or in her oral evidence) that she "did not obtain any identification documentation from or relating to the Borrowers, the purported Mr and Mrs Cheetham." She continued:

"This was done by my clients and sent on to me. Whatever identification documents Cheshire had, they would have obtained those from the Broker because they would never have seen the Borrower themselves either. ...

I did not ask the Borrowers' Solicitors, Longmuir & Co, in this case for any identification documents relating to the Borrowers to be sent on to my clients, Cheshire, because at the time of this transaction, around 2005, I was not asked to get identification documents from the Borrowers' solicitors. As far as I was aware, my clients had obtained the Borrowers' identification documents either from the Borrowers direct or from the broker".

She went on to say that the procedure was different now and that it is now part of her remit to have the borrowers' solicitor certify the borrowers' identification documents and give them to her to pass on to her clients. I formed the view that Mr Goldberg was looking back to the events of 2004 on the assumption that practices and procedures were in place which only came in later.

[17] I did not find Mr Goldberg's evidence on the whole of this part of the case altogether easy to accept. He asserted in his witness statement (at paras.4(f) and (g)) that he relied on Longmuir & Co having satisfied themselves as to the identity of their clients:

"The confirmation which our solicitors received from Longmuir & Co that they were acting for the borrowers was of paramount importance not least in fulfilling our company procedure but more importantly, such representations legitimised the transaction."

By "legitimised" he meant that it made sure that everything was verified by the borrower's lawyer. He continued in that passage:

"By such representations, we would have expected Longmuir & Co to have carried out all necessary checks to verify identity ... It is of huge importance to us that we can rely on the fact that a solicitor states they act for a borrower, and delivers the security on their behalf. As previously stated, the nature of our business is secured lending and this transaction would not have completed had Longmuir & Co not represented that they were delivering a security on behalf of the borrowers, that is the Cheethams of 34 Danube Street, Edinburgh"

However, in cross-examination, he confirmed that Blemain/ CMC did not ask the borrowers' solicitors to confirm the identity of the borrowers; nor did they ask Mellicks to ask them for such confirmation. Yet soon afterwards he went back to the line adopted in his statement and insisted that, if solicitors said that they were acting for the borrowers, "you accept it". He did not agree with the suggestion that the main point of getting potential borrowers to appoint their own solicitors was so that the solicitors could explain the transaction to them; the main point was that the borrowers' solicitors would liaise with his solicitors, Mellicks, to obtain all the relevant information. He relied on the fact that the borrowers' lawyer would have received instructions from his clients. I am not persuaded that this ultimately matters, since the claim made in this action is limited to a claim for breach of warranty of authority, and the argument revolves around the scope of that warranty rather than any consideration of the duty of care owed by a solicitor in such circumstances. However, in case it should matter, I am prepared to accept that, in a somewhat unconsidered way, Mr Goldberg did assume that the presence of a solicitor acting for potential borrowers provided a measure of further assurance that the transaction would proceed in a satisfactory way; but, apart from such warranty as may be implied as a matter of law (which I discuss below), I am satisfied that he had no specific basis for believing that the solicitors appointed by the borrowers were giving their own assurance that their clients were who they said they were or that they lived where they said they lived.

[18] Mellicks were instructed by the Blemain Group (acting for the lender, CMC) on 8 November, after the Offer Letter had been issued and accepted. Details of the loan were set out in the instruction document, identifying the borrowers as Christopher Paul Cheetham and Julie Cheetham with a correspondence address at 34 Danube Street, Edinburgh, which was also given as their security address. The security was to be a first charge on the property, and the loan was described as a bridging loan of £355,000, with a flat rate of interest of 1.25% and a repayment period of 12 months (the document in fact says 112 months, but this was obviously an error). In that instruction document, the borrowers' solicitor is identified as Longmuir & Co. This is the first reference to them being the borrowers' solicitor, though they were in fact instructed by the borrowers on about 27 October. It was clear from the evidence that the information as to the name of their solicitors must have come from borrowers themselves.

[19] The instructions contained in the document issued to Mellicks on 8 November contained a number of instructions divided into "A. Matters Specific to this Transaction" and "B. Standard Instructions". Under "A. Matters Specific to this Transaction" was the following:

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

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

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

The following appeared under "B. Standard Instructions":

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

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

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

The instruction letter asked Mellicks to act on behalf of the lender in connection with the advance to be made to the borrower, and ended with the following:

"We will consider your request for the advance cheque or your request for us to telegraphically transfer the funds or your presentation of the enclosed advance cheque as your confirmation that, subject to completion of the Legal Charge, we will acquire a Charge in the priority mentioned herein and that the Title to the property being offered as security for the advance is good and marketable and that all appropriate searches have been effected to your satisfaction and reveal no entries that will prejudicially effect the security being offered to the company upon completion of the loan".

The letter noted that a copy of the borrowers' ID and a copy of the valuation of the property over which security to be taken were to follow.

[20] Mr Goldberg explained that CMC worked on a debt to income percentage in terms of assessing the affordability of the loan or, to put it another way, assessed the monthly instalments due on the loan as a percentage of the borrowers' monthly income. CMC would conduct credit reference searches for all applicants and, in addition, Mellicks were requested to undertake a "bankruptcy search". They would ask the borrower either to provide payslips or an accountant's reference ("a full-status basis") or to produce a letter saying what they do and what their income is ("a self-certified basis"). The loan to Mr and Mrs Cheetham proceeded on a combination of full-status and self-certifying bases, CMC being provided on 23 November with wage slips and, in addition, with a letter purportedly from Mr Cheetham confirming that he had further disposable income in excess of £4,000 per calendar month which not shown on the wage slips.

[21] On 22 November Ms Johnston of Mellicks wrote to Scott Marshall at CMC. She looked forward to receiving from him the offer letter (presumably the Mortgage Offer referred to below) which was to be signed by Mr and Mrs Cheetham simultaneously with the Standard Security. She then answered a question which had obviously been raised about certain alterations within the property. She said that "the solicitors", i.e. the solicitors acting for the Cheethams, had advised her that Mr and Mrs Cheetham had indicated that the bathroom and the kitchen had been refurbished rather than altered. She also referred to the subdivision of the house which had taken place over 50 years before, and asked CMC to confirm with the valuer whether that was consistent with his valuation. CMC did so. By letter to CMC of 24 November DM Hall referred to the subdivision of the house and confirmed that CMC could rely upon their valuation report of 2 November for valuation purposes.

[22] A formal Mortgage Offer was issued by CMC on 24 November. It named the borrowers as Mr and Mrs Cheetham and the address of the property to be mortgaged as 34 Danube Street, Edinburgh. The offer, which was valid for 3 months, was for a loan for one year of £350,000, plus £4,868 in fees to be added to the loan, and contained details of the repayment schedule. The value of the property was noted as £600,000. It was a term of the Mortgage Offer that the loan be secured by a first mortgage over the property in the form of the draft Standard Security accompanying the offer.

[23] Mellicks were to be involved in setting up the Standard Security. Mr Goldberg explained that Mellicks were asked to liaise with the borrowers' lawyers.

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

"Dear Sirs

Mr and Mrs Cheetham

34 Danube Street, Edinburgh

Reference: CHO4112201800

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

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

[26] I turn now to the involvement of Longmuir & Co. I heard evidence from Mr Martin Longmuir, who carried on business as a sole practitioner under the firm name. By reference to documents from his file, he confirmed that he was first approached in connection with this transaction on 27 October. This was the day on which CMC issued their Offer Letter to the people they believed to be Mr and Mrs Cheetham. Mr and Mrs Cheetham, as they pretended to be, were new clients to the firm. Mr Longmuir had never before acted for them or even met them. They told him that they had been referred to him by a Mr Stephen, a financial adviser for whom Mr Longmuir had acted in relation to one or more transactions in the past (though it is only fair to Mr Stephen, who did not give evidence, to record that Mr Stephen has no record of any contact between himself and the Cheethams). The Client Opening Form, completed by Mr Longmuir in manuscript on that day, shows the full names of those for whom he thought he was acting, namely Christopher Paul Cheetham and Juliet Cheetham, and it gave their address as 34 Danube Street, Edinburgh, EH4 1NT. He also wrote down a mobile phone number for contacting them. He noted that they required a bridging loan and wrote down the name of Mellicks, presumably having been told that they were acting for the lenders. Although Mellicks had not formally been instructed by CMC in relation to this transaction at this stage, it was no doubt clear that they would be instructed and it is to be inferred that CMC would have told this to the borrowers. The figure of £600,000 was noted in brackets, which was presumably a reference to the approximate value of the property at 34 Danube Street.

[27] Mr Longmuir asked for identification documents to be produced. He explained that he did not insist on these being shown to him before he started carrying out the work for the client, but made it clear that they would have to be produced at some point during the transaction. He had no reason to suspect that anything was untoward. All his dealings were with Mr Cheetham. He never met Mrs Cheetham. The only proof of identity in fact given to him was the documentation left with his temporary secretary on 30 November (see para.[35] below). Under cross-examination as to the inadequacy of the steps taken to check the identity of the Cheethams, he said that neither the money laundering regulations nor any duty owed to the wife (c.f. Smith v Bank of Scotland 1997 SC (HL) 111) required him to advise Mrs Cheetham separately or to do any more than he did.

[28] Mr Longmuir said that one slight peculiarity of the transaction was that Mr Cheetham informed him that the Title Deeds to the property at 34 Danube Street had been mislaid, as a result of which he had to work from an extract of the Title Deeds which they had obtained from the Land Registry.

[29] Mr Longmuir's first contact with Mellicks in connection with this transaction was when he received a letter from them dated 11 November. This was in the following terms:

"Dear Martin,

Loan to Christopher Paul Cheetham and Juliet Cheetham.

34 Danube Street, Stockbridge, Edinburgh, EH4 1NT

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

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

Yours sincerely ..."

Upon receipt of that letter, on 12 November Mr Longmuir wrote to Mellicks confirming that he was taking his clients' instructions, and also to Mr and Mrs Cheetham at 34 Danube Street, enclosing a copy of Mellicks' letter and requesting them to contact him in order that he could take their further instructions. He then wrote to Messrs Millar & Bryce, searchers, on 17 November asking them to send him a copy of Burden Writs, i.e. certain historic deeds relating to title to the property.

[30] On 17 November Mr Longmuir wrote to Mellicks enclosing for their examination Extracts (i) of the disposition in favour of Mr and Mrs Cheetham recorded in the Register of Sasines on 28 June 1989 and (ii) of the discharge by the Building Society in favour of Mr and Mrs Cheetham recorded in that Register on 24 April 1995. He confirmed that they had requisitioned copies of the prior title deeds. He also enclosed a draft of their Letter of Obligation. I shall return to that later.

[31] On 19 November Mr Longmuir received a letter from Mr Cheetham referring to various matters, particularly to do with the alterations to the house. This aspect was communicated to Mellicks. Mr Cheetham emphasised that they were anxious to get the transaction finalised quickly.

[32] Mr Longmuir described what happened thereafter as "routine".

[33] On 22 November Mr Longmuir sent Mellicks copies of the prior title deeds which he had obtained from Millar & Bryce. On the same day Mellicks wrote to Longmuir & Co enclosing the Standard Security document together with a Standing Order Mandate. They pointed out that the Standard Security required to be signed of even date with the offer letter, which letter had not yet been forwarded to them by their clients. They also returned the draft Letter of Obligation drafted by Longmuir & Co.

[34] On 26 November Mellicks wrote to Longmuir & Co enclosing the formal offer of loan together with an acceptance form which required to be signed and returned to them along with the Standard Security document and the Standing Order Mandate. These documents were sent on by Longmuir & Co to the borrowers. The letter, as with previous letters, was addressed to them as Mr and Mrs C Cheetham at 34 Danube Street, Edinburgh. On 30 November Mellicks sent Longmuir & Co a cheque in the sum of £350,220.50 representing the loan of £354,868 less certain fees and dues.

[35] It appears that Mr Cheetham came into the office of Longmuir & Co on 30 November. Mr Longmuir was not available. A temporary secretary was in the office. She left a note for Mr Longmuir saying that Mr Cheetham had come in with proof of identity which she had photocopied for him. Mr Longmuir thought that these consisted of a driving licence and a utility bill. The secretary noted Mr Cheetham's request that payment be made electronically to "Elmwood Contracts". These instructions were set out more fully in two letters of 30 November which, so it appears, Mr Cheetham left with her in an envelope for passing on to Mr Longmuir. Both were on headed paper giving the address of 34 Danube Street. The first returned certain documents duly signed by Mr Cheetham and his wife and went on to say this:

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

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

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

The separate letter of instruction instructed payment of the funds received from CMC, less Mr Longmuir's own fees, to HSBC, 76 Hanover Street, Edinburgh at an account in the name of Elmwood Contracts who, presumably, were "the seller".

[36] As previously noted (see para.[25]), Mellicks wrote to Longmuir & Co on 30 November enclosing a cheque in the requisite amount, to be held as undelivered pending confirmation that Longmuir & Co held executed documentation and would deliver that documentation along with the title deeds and their Letter of Obligation by return. Mr Longmuir accepted in cross-examination that Mellicks would have assumed that he had satisfied himself that his clients were who they said they were. "They were my clients", he said. He did not criticise Mellicks - he would not have expected them to challenge that.

[37] On 2 December Longmuir & Co wrote to Mellicks enclosing the Standard Security, Acceptance and Standing Order, "all duly signed by our clients". On the next day, 3 December, they sent Mellicks, in addition, the Letter of Obligation dated 2 December together with extracts of a Disposition and Discharge "in our clients' favour", these being the title deeds already shown to Mellicks under cover of their letter of 17 November.

[38] On 7 December Longmuir & Co wrote to Mr and Mrs Cheetham, again at 34 Danube Street, Edinburgh, confirming that all this had been done and that the balance due after deduction of their fees had been forwarded as instructed by telegraphic transfer.

[39] Finally, I should note the terms of the Letter of Obligation dated 2 December which Messrs Longmuir & Co sent to Messrs Mellicks. So far as is material, it was in the following terms:

"Dear Sirs

Mr and Mrs C Cheetham

Cheshire Mortgage Corporation Ltd

34 Danube Street, Edinburgh

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

I need not set out the remaining part of the letter. Mr Longmuir admitted to an error in the letter. Title was recorded in the Register of Sasines, not in the Land Registry. A point was initially raised on behalf of the defenders about the possible invalidity of a Letter of Obligation which was entered into in error and which could not be performed according to its terms, but this point was not insisted on at the proof.

BFL v Balfour + Manson LLP - the facts

[40] In this case the borrowers were fraudsters pretending to be Mr Geoffrey Ellison Morgan and Mrs Margo Clark Morgan. For the avoidance of doubt, references hereafter to Mr and Mrs Morgan are references not to the real Mr and Mrs Morgan but to the fraudsters pretending to be Mr and Mrs Morgan. I propose to set out the facts in relation to this case more briefly, since I need not repeat those aspects of the pursuers' practice which are common to both cases.

[41] The application to BFL for a loan came via the pursuers' website on 9 August. I was not shown a copy of the application itself. The loan was for £203,000 repayable with interest over a period of 12 months (12 monthly payments of £2,842.00).

[42] BFL issued an Offer Letter to the borrowers on that very day, 9 August. It was signed for acceptance by Mr and Mrs Morgan.

[43] The loan proceeded on a "self-certified" basis, Mr and Mrs Morgan writing on 22 September to confirm their income. Mr Goldberg said that an Equifax report was also obtained which showed the borrowers to be a good credit risk.

[44] BFL again instructed Mellicks in connection with the proposed loan and security documentation. It appears that they did so on about 29 September, that being the fax transmission date on the copy of the instruction letter lodged in process. But the precise date does not matter. Their instructions to Mellicks were in similar terms to their instructions to Longmuir & Co (see paras.[18] and [19] above). The Standard and Specific Instructions were the same. There were, however, certain differences which may be of relevance. First, they gave Mellicks a correspondence address for Mr and Mrs Morgan of 30 Guthrie Court, Glen Eagles, Auchterarder, Perth, PH13 1SD, which was a different address from the "security address" (i.e. the address of the property over which security was to be taken) of 30 Menteith View, Dunblane, Perth, FK15 0PD. In fact, as is clear from other documentation, the security address was 3 Menteith View, not 30 Menteith View - this was simply an error in the instructions to Mellicks. Second, they enclosed a number of documents, including a valuation of the security property by DM Hall and a copy of driving licences for both Mr and Mrs Morgan for identification purposes. The identification documents must have come to them from the borrowers themselves. Mr Goldberg said that this was acceptable identification documentation of the type required to satisfy KYC rules. Ms Johnston of Mellicks said that it was usually the case that by the time they were instructed by one of the Blemain companies the lending company had instructed and received a valuation, conducted basic credit checks (if not simply relying on the borrowers self-certifying), and issued an Offer Letter. She also confirmed, as was apparent from the instruction letter from BFL to Mellicks, that any identification documents she received came from BFL, not from Balfour & Manson who in due course acted for the borrowers. She did not ask Balfour & Manson for any identification documents relating to the borrowers.

[45] In relation to this aspect of the case, in paras.5(f) and (g) of his witness statement Mr Goldberg gave similar evidence to that given in the case of the Cheethams (see para.[17] above). He said, as he had said in relation to Longmuir & Co.:

"By such representations, we would have expected Balfour & Manson to have carried out all necessary checks to verify identity ... It is of huge importance to us that we can rely on the fact that a solicitor states they act for a borrower, and delivers the security on their behalf. ..."

and concluded:

"... this transaction would not have completed had Balfour & Manson not represented that they were delivering a security on behalf of the borrowers, that is the Morgans of 3 Menteith View, Dunblane"

In light of the fact that BFL obtained the identification documentation directly from the borrowers, the statement that they relied on Balfour & Manson to have carried out all necessary checks to verify identity has to be qualified by noting that they did not rely only on this. As to the statement that the transaction would not have completed had Balfour & Manson not represented that they were delivering a security on behalf of the borrowers, i.e. the Morgans of 3 Menteith View, Dunblane, my comments in relation to that are the same as those in relation to the identical statement made about Longmuir & Co.

[46] Balfour & Manson were instructed on behalf of Mr and Mrs Morgan late in September. The matter was handled within Balfour & Manson by Anne Sinclair, who had only joined them that year. Mr Morgan telephoned the offices of Balfour & Manson on 28 September and asked to speak to a solicitor in connection with the granting of a Standard Security over a property. The call was put through to Ms Sinclair. He told her that he would like her to act on behalf of himself and his wife. She had never acted for them before, nor even met them. She was asked to put in place a standard security over 3 Menteith View, Dunblane, which he owned jointly with his wife. He wanted to raise money and was keen to have the transaction completed quickly. The property was free of any mortgage or Standard Security.

[47] Ms Sinclair agreed to act. She required both Mr and Mrs Morgan to attend Balfour & Manson's offices and show client identification documents in the form of a passport or driving licence and a utility bill confirming their address. Mr Morgan explained that they were not currently living at 3 Menteith View over which the security was to be granted. That was let. They were living at 30 Guthrie Court, Auchterarder. All correspondence should be sent to them there.

[48] Mr Morgan must immediately have told Mellicks that Balfour & Manson were acting for him in connection with this transaction. Mellicks wrote to Ms Sinclair on 29 September giving details of the proposed loan, and requesting details of the title and the short assured tenancy.

[49] The matter went quiet for some time. On 26 October Ms Sinclair met Mr Morgan and received from him Extract registered title deeds for the property. Mr Morgan explained that the original title deeds had been lost. Mr Morgan also brought in the paper part of his and his wife's driving licences and two utility bills, one each in the name of himself and Mrs Morgan. That was satisfactory identification. According to standard practice at the time, it was not the policy to insist on photographic identification. Ms Sinclair told him that she still needed to meet Mrs Morgan - since both were her clients, she required to see both of them and both were entitled to an explanation of the legal consequences of granting a Standard Security. She also required the see the Short Assured Tenancy agreement.

[50] On 2 November Ms Sinclair, responding to their letter of 29 September, sent the Extract title deeds to Mellicks to enable them to prepare the Standard Security. She said that she looked forward to receiving a draft as soon as possible. She said that she would forward to them the details of the Short Assured Tenancy as soon as possible. This was in fact provided by Mr Morgan and sent to Mellicks under cover of a letter dated 4 November.

[51] The remainder of the transaction proceeded in a routine manner. There were discussions with Mellicks about the details of the Standard Security and some other matters. On 11 November Ms Sinclair wrote to Mr and Mrs Morgan asking them to come to the office to sign the Standard Security and other documents. They came in to the office on 23 November. Ms Sinclair explained the effect of the Standard Security and the interest rates applicable to the loan. They signed the documents. Mr Morgan explained that they wanted to loan in order to buy property in Spain and asked for the loan amount to be paid direct to parties in Spain. The next day they sent Ms Sinclair a letter containing payment instructions, instructing payment of the loan amount, less Balfour & Manson's fees, to HSBC for the account of Elmwood Contracts. On 25 November the signed documentation was forwarded to Mellicks. The next day, 26 November, Mellicks confirmed receipt and said that the funds had been transferred to Balfour & Manson. At the beginning of December, Ms Sinclair arranged for transfer of the net balance to the account of Elmwood Contracts as instructed by the Morgans.

Implied warranty of authority - general principles

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

"I am of opinion that a person, who induces another to contract with him as the agent or a third party by an unqualified assertion of his being authorised to act as such agent, is answerable to the person who so contracts for any damages which he may sustain by reason of the assertion of authority being untrue. This is not the case of a bare mis-statement by a person not bound by any duty to give information. The fact that the professed agent honestly thinks that he has authority affects the moral character of his act; but his moral innocence, so far as the person whom he has induced to contract is concerned, in no way aids such person or alleviates the inconvenience and damage which he sustains. The obligation arising in such a case is well expressed by saying that a person, professing to contract as agent for another, impliedly, if not expressly, undertakes to and promises the person who enters into such contract, upon the faith of the professed agent being duly authorised, that the authority which he professes to have does in point of fact exist. The fact of entering into the transaction with a professed agent, as such, is good consideration for the promise".

That statement of the law has been accepted and applied consistently since then. In Penn v Bristol & West Building Society [1997] 1 WLR1356 at p.1360, Waller LJ, quoting from Art.107 of Bowstead & Reynolds on Agency, 16^th ed. (1996) at p.592, para.9-057, stated the principle in this way:

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

The same passage appears in the current (19^th) edition of Bowstead at para.9-060.

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

[54] It is established by the case law that the basis of liability is contractual: see e.g. SEB Trygg Liv Holding AB v Manches [2006] 1 WLR 2276 at para.60 where Buxton LJ, giving the judgment of the Court of Appeal, explained that Willes J in Collen v Wright was describing "what we would now call a collateral contract". Equally, the measure of damages is the contractual measure, to be assessed on the basis of comparing the position in which the person who relies upon the warranty would have been had the warranty been true and the position he is actually in in consequence of its being untrue: Fairbanks' Executors v Humphreys [1886] 18 QBD 54 at p.60.

[55] Although, so far as the researches of counsel could reveal, there is no reported Scottish case in which a party has been held liable for breach of warranty of authority, there are numerous references in the books and in the decided cases which make it clear that the principles to which I have referred are fully recognised in Scots law: see Gloag, Contract (2^nd Ed) at pp.155-157, Anderson v Croall (1903) 6F 153, Rederi Aktiebolaget Nordstjernan v Christian Salvesen & Co [1903] 6F 64 (IH), [1905] 7F (HL) 101, Irving v Burns 1915 SC 260 and Scott v JB Livingston & Nicol 1990 SLT 305. In that last case Lord Coulsfield says that "the normal rule is that the agent is liable in delict", but I do not understand from a reading of the report that the question of whether the liability was based in delict or contract was in issue before him; the point he was trying to make was that the agent who acts without authority does not become liable on the contract (as though he were a party to it), in which case there might be a claim for repetition of part of any sum paid, but is only liable in damages. The weight of authority supports the proposition, stated above, that the warranty arises out of a collateral contract and that damages for breach of warranty are assessed by the contractual measure.

[56] There has been some discussion in the recent cases about the extent or scope of the warranty. Two points are important here. The first is that both the existence and the scope of the warranty of authority are fact dependent. This is made clear by Waller LJ in Penn v Bristol & West Building Society at p.1363B-C:

"In truth as I see it, the question whether a warranty of authority has been given rests on a proper analysis of the facts in any given situation, and not on any pre-conceived notions as to what is essential as part of the factual analysis. Of course there is no issue that to establish a warranty of authority as with any other collateral warranty there must be proved a contract under which a promise is made either expressly or by implication to the promisee, for which promise the promisee provides consideration. But consideration can be supplied by the promisee entering into some transaction with a third party in a warranty of authority case just as it can in any other collateral warranty case. Furthermore, the promise can be made to a wide number of people or simply to one person, again all depending on the facts. It follows, as Mr Jackson has submitted, that the plaintiff, whether as one of the wide number of people to whom the offer is made or by virtue of being the only person to whom the offer is made, has to establish that the promise was made to him. There is also no doubt that what he has to establish is that a promise was made to him by the agent, to the effect that the agent had the authority of the principal, and that he provided consideration by acting in reliance on that promise".

Part of that passage deals with the question of consideration, a concept which forms no part of the law of contract in Scotland, but the acts which amount to consideration may also indicate the acceptance necessary to turn the representation or unilateral promise by the agent into a contract between the agent and the third party collateral to that purportedly entered into between the third party and the agent's professed principal. What is important in that passage is the emphasis that one cannot simply assume the existence of a warranty of authority in all cases. It is necessary in each case to look at the relationship between the parties, and to examine closely what was said, expressly or impliedly, by the agent in the context of that relationship, how what was said was could reasonably have been understood by the other party (the test, as always in contract, being objective), and the extent to which it was so understood and relied on by that other party. In this context, I was also referred to the decision of Judge Hegarty Q.C., in the Mercantile Court in Manchester, in the case of Excel Securities PLC v Masood (unreported 10 June 2009) in which, at para.96, he said that questions as to the existence and scope of an implied warranty could not be answered "in the abstract or at a high level of generality". I agree with that statement.

[57] The second point of importance is this. Where an implied warranty of authority has been held to exist, the scope of that authority has generally been regarded as very limited. This point is made in a number of cases. Thus, in SEB Trygg Liv AB v Manches, a case concerned with a solicitor's warranty of authority in acting for the claimants in arbitration proceedings, Buxton LJ said this:

"66. In considering these submissions it is important to bear in mind that generally a solicitor conducting proceedings does not warrant what he says or does on behalf of his client. Thus he does not warrant that his client, the named party to the proceedings, has title to sue, is solvent, has a good cause of action or defence or has any other attribute asserted on his behalf. The solicitor relies upon his client's instructions for all these things, as he will normally do for naming his client correctly. As he gives no warranty as to the accuracy of his instructions generally, it is difficult to see why the naming of his client should be treated as an exception..."

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

"What is significant in the formulation of the principle, however, is that the supposed agent, A, represents that he has authority to act for B in a particular transaction, with the result that the third party, C, is induced to act on that representation. Thus the representation relates to the person for whom the supposed agent purports to act. It does not relate to the capacity in which that person, the supposed principal, will enter into the transaction, or as to the property that that person holds, or as to that person's title to any property".

[58] Whatever its scope, it is clear that liability for breach of warranty of authority is strict. It does not depend of negligence.

Discussion - the claim for breach of warranty of authority in these cases

[59] It is important to note that the principal claim advanced by the pursuers in each case is a claim for damages for breach of warranty of authority. In the case involving Longmuir & Co, there is also a claim advanced on the basis of the Letter of Obligation (no similar claim is advanced in the Balfour & Manson case). In neither case is there any claim based upon negligent misstatement. Such a claim, had it been advanced, would have raised issues both as to the existence and scope of any duty of care owed to the lender by solicitors acting for a borrower, and as to whether the solicitors were in breach of such duty. Those issues have not been explored in this case.

[60] I turn now to consider the facts of these two cases in light of the guidance given by the authorities. In each case the pursuers contend that the solicitors impliedly warranted that they acted for "Mr and Mrs X of (of the owners of) a particular property". Thus, in the Blemain action, at Article 4, the pursuers aver that Balfour & Manson "represented to the pursuers' agents that they were instructed by, and had the authority of, Mr & Mrs Morgan, of the Property". The expression "the Property" is earlier defined as 3 Menteith View, Dunblane. No express representation to that effect is relied upon. The representation is said in the pleadings, as amplified in oral argument, to have been implicit in (i) Balfour & Manson's whole communications with Mellicks, "which bore to be written on behalf of Mr & Mrs Morgan as their clients" and (ii) the delivery of the Standard Security over the property by Balfour & Manson to Mellicks. Similar averments are made in the CMC action.

[61] In putting their case in this way, the pursuers recognise that the warranty of authority to be implied in such circumstances does not, on any view of the decided cases, extend beyond what may be called "the identity" of the person for whom the agent purports to act. It does not extend to his capacity, his ownership of assets or his other attributes. Thus, as was said in Trygg, the implied warranty does not extend to the solvency of the person for whom the agent purports to act, not, in the context of litigation for example, to the strength of his case or his title to sue. Similarly, as was made clear in Frank Houlgate Investment, in a loan or property transaction, the implied warranty does not extend to ownership or title to the property in question, nor its value. I did not understand this to be challenged. For example, an agent acting for vendors in a sale of heritable property does not impliedly warrant that his clients' title is free of all defects and encumbrances. That is for the purchaser to investigate or on which, if they can, to obtain some express assurance. While there might conceivably be circumstances in which the vendors' agents could be held liable for negligently representing something to be the case when it was not, the circumstances in which a duty is owed to the other party to a transaction will be limited. No such case was argued here, and the basis of liability in such a case would be entirely different from that which arises in the case of an implied warranty.

[62] The pursuers seek to bring their case within the established case law by arguing that the implied warranty, which they assert here, a warranty by the solicitors that they act "for Mr and Mrs X of a particular property", is a warranty as to the identity of the person for whom they act. So the question is whether, in the particular circumstances of these cases, a warranty to this effect can be implied.

[63] It is necessary in my view to stand back and look at the circumstances in which the solicitors for the borrowers came to be involved in the transaction. In both cases, well before the borrowers' solicitors were instructed in relation to the transaction:

(i) the borrowers had approached the lenders for a loan (in one case via the lender's website, and in the other direct to Mr Ahmet and then, on his direction, via a broker);

(ii) the lenders had made a decision in principle to lend to these borrowers, and had issued an Offer Letter to them;

(iii) the lenders had sought and obtained a valuation of the property to be offered as security;

(iv) the lenders had sought and obtained proof of identification directly from the borrowers; and

(v) the lenders had already instructed Mellicks to act on their behalf to prepare the necessary security and other documentation.

Of particular importance, to my mind, is the fact that, by the time the borrowers' solicitors became involved, the lenders knew who they were (or thought they were) dealing with. They had made the decision in principle to lend to those individuals. The solicitors were instructed by the borrowers for a limited purpose, namely to help draw up the relevant loan and security documentation and to liaise with the Mellicks, solicitors instructed by the lenders, to that end.

[64] In those circumstances, it is, in my opinion, difficult to see any room for any implied representation by the solicitors as to the identity of the borrowers for whom they were acting, other than that they were acting for the people with whom the lenders were already engaged in a process of finalising a loan transaction. Borrowing from Willes J's formulation of the warranty in Collen v Wright, the solicitors here in each case did not more than warrant "that the authority which [they professed] to have did in point of fact exist". The authority which they professed to have was this, that they were instructed by the borrowers who were already known to the lenders to assist in drawing up the loan and security documentation. I do not consider that they gave any implied warranty going beyond this.

[65] The position can be viewed, perhaps more graphically, in this way. Imagine the negotiations between lender and borrower happening in a large room. Agreement in principle is reached between lender and borrower. The loan and security documentation requires input from solicitors. The lenders instruct Mellicks, who enter the room. The borrowers decide to instruct solicitors of their own to safeguard their interests. They appoint Longmuir & Co, or Balfour & Manson. They too enter the room. The solicitors begin the process of drawing up the documentation. They eventually complete it, signatures are obtained from their respective clients, the signed documentation is handed over to the lenders or to Mellicks, and the loan is advanced to the borrowers. In those circumstances, if one imagines that the lenders or Mellicks on their behalf were to ask Longmuir & Co, or Balfour & Manson, "who are you acting for?", the terse reply would be something like: "what do you mean, we're acting for the individuals on the other side of the room with whom you have already been in discussions and to whom you have provisionally agreed to lend money". It is to my mind absurd to suggest that in those circumstances one could imply a promise from the solicitors that they were acting on behalf of the Cheethams of 34 Danube Street or the Morgans of 3 Menteith View, still less a promise that these individuals, calling themselves Cheetham and Morgan, did indeed own those properties.

[66] This conclusion is in line with that reached, after careful analysis, by Judge Hegarty in Excel Securities PLC at para.100. It is also, I think, consistent with the Opinion of Lord Drummond Young in Frank Houlgate Investment (see above) and with the English cases to which I have referred.

[67] I should mention two matters which were relied upon in argument for the pursuers. First, it is clear that the solicitors in each case took steps to verify their clients' identity and obtained identification documentation from them. They could have been expected to do so, for internal as well as money laundering purposes. Mr Goldberg said, in a passage set out earlier in respect of each loan transaction, that he relied upon the fact that the solicitor could be expected to have carried out identity checks. This part of his evidence was not challenged. But that fact that a solicitor is required to take these steps does not mean that that solicitor automatically warrants to the other party the accuracy of the information with which he is provided by his clients. That is simply a non sequitur. Second, Mr Goldberg was also insistent that the transaction would not have completed had Longmuir & Co and Balfour & Manson not represented that they were delivering a security on behalf of the borrowers, that is the Cheethams of 34 Danube Street and the Morgans of 3 Menteith View, Dunblane. Again, this part of his evidence was not challenged. But that is evidence as to what he understood to have been represented, and as to his reliance on it. No express representation was relied on. The question of whether such a representation is to be implied is to be answered by looking to all the circumstances, taken objectively. I am satisfied, for the reasons set out above, that no such representation can be implied. Even if a representation to that effect could be implied, it does not follow that it would be actionable as a warranty for which the defenders would be liable without proof of negligence. In those circumstances, if Mr Goldberg believed that the solicitors had in each case given a warranty that they were delivering a security on behalf of the borrowers, that is the Cheethams of 34 Danube Street and the Morgans of 3 Menteith View, Dunblane, he was wrong so to believe and wrong to rely on that belief.

[68] For these reasons, the claim for breach of warranty of authority fails in each case.

[69] It is therefore unnecessary for me to deal with the arguments concerning damages. I should simply record the submission on behalf of the defenders that the pursuers have in any event failed to prove that they have suffered any damage, since they have not shown what would have happened had the alleged warranties been true. At first sight, that submission appears to face some difficulties. One possibility, had the warranty been true, is that the real Cheethams and Morgans wished to raise money on the security of their own properties and would have proceeded with the transaction, granting a valid security, sufficient to protect the pursuers in the (presumably unlikely) event of non-payment. The other possibility is that the real Cheethams and Morgans would have expressed no interest in progressing the loans. The first hypothesis leads to the loan going ahead and being repaid; the second to the monies not being advanced in the first place. On either basis, it does not seem to matter that no evidence was led as to the financial position of the real Cheethams and Morgans. But since I do not have to decide this point, I do not propose to say any more about it.

The Letter of Obligation

[70] This issue only arises in the CMC case. The claim rests on the fact that Longmuir & Co signed the letter of obligation set out in para.[39] above. As noted in that paragraph, it is not argued by the defenders that the letter of obligation is void because, since this was a Sasine transaction and the letter assumes that title was registered title, it could not be performed according to its terms.

[71] The pursuers' case is simple. Longmuir & Co undertook, reading short, to procure the title deeds duly recording the Standard Security granted by the borrower. They failed to do so. Their failure has caused the pursuers loss. Their loan is unsecured and they have no other means of recovering the sums advanced to the fraudsters.

[72] The basic aim of a letter of obligation in terms such as these is well known. It is to deal with the "blind period", the short period before and after settlement (more precisely after any search before settlement and before the new deed is recorded) when other deeds or acts of diligence could affect the title of the party acquiring the real right. In terms of the letter, the solicitors undertake that they will take steps to ensure that any adverse deeds or diligence emerging during that blind period will be cleared. A full discussion of such letters is to be found in an article called "Letters of Obligation, Legal Lubrication" by Professor Rennie (SLPQ 1995/6, p76) and in Gretton & Reid, Conveyancing (Third Ed.) at para.9-25. There is no legal obligation on a solicitor in a transaction such as this to grant a letter of obligation; but if they do so, then, as was expressly accepted on behalf of the defenders in this case (with the result that the point does not arise for decision), such a letter is actionable, not only at the suit of the solicitors, Mellicks, to whom it was addressed but also at the suit of their clients, CMC.

[73] Two points were taken on behalf of the sellers. The first was that the letter of obligation was collateral to the principal transaction between CMC and the borrowers, and could not be enforced if that principal transaction was void (as it was here). Support for this approach was to be found in the Opinion of Lord Cameron of Lochbroom in Mason v A & R Robertson & Black 1993 SLT 773, at pp.778G-I and 779I-L. The second point was that, in any event, the pursuers could show no damages flowing from the failure by Longmuir & Co to produce a title encumbered with the Standard Security, since the Standard Security referred to in the letter of obligation was itself void.

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

[75] The claim under the letter of obligation therefore fails.

Decision

[76] For the reasons set out above, all the pursuers' claims fail in both actions.

[77] In the CMC case, I shall therefore sustain the third, fourth and fifth pleas in law for the defenders, repel the pursuers' pleas and grant decree of absolvitor.

[78[ For the same reasons, in the BFL case, I shall sustain the third and fourth pleas in law for the defenders, repel the pursuers' pleas and grant decree of absolvitor.