Inner House rules on solicitors' implied representations
A solicitor who is aware of a fraud by his borrower client and who fails to alert the lender, is liable for losses incurred by the lender who subsequently advances money to the borrower, the Inner House of the Court of Session ruled yesterday.
Lords Menzies, Malcolm and McEwan agreed in this result, while giving different reasons, in an action by Frank Houlgate Investment Co Ltd against Biggart Baillie LLP.
The case arose from an agreement by the pursuers to lend money to a John Cameron, who fraudulently represented to them that he was the owner of an estate in Fife which belonged to a different John Cameron. Biggart Baillie's then partner Gregor Mair, who acted for the first Mr Cameron, became aware in January 2007 of wrongful conduct by his client, who admitted to fraud but promised to sort matters out and asked Mr Mair not to tell the pursuers meantime. Mr Mair believed that he owed his client a duty of confidentiality and did not alert the pursuers' solicitors prior to the pursuers advancing a further £100,000 to Mr Mair's client.
The Lord Ordinary, Lord Hodge, held that Biggart Baillie were liable to the pursuers as an accessory to fraud because Mr Mair failed to dissociate himself from Mr Cameron's continuing fraud by withdrawing from acting and by warning the pursuers or their solicitors that they could not rely on the security he had granted. He found it unnecessary to decide a case based on implied representation. (Click here for report.)
Biggart Baillie appealed this decision and Frank Houlgate cross-appealed the failure to uphold their case based on representation.
All three judges agreed that the cross-appeal succeeded. Lord Menzies said that given the high standards of honesty expected of solicitors, he was "easily persuaded" that a solicitor acting for the recipient in a secured loan transaction "gives a continuing implied representation to the solicitor for the transferor that he is not aware of any fundamental dishonesty or fraud which might make the security transaction worthless".
He also agreed with the reasoning of Lord Malcolm, who preferred to found his decision on the actionable negligence that arose when Mr Mair "came to learn of the fraud and knew, or should have foreseen, that further harm to the pursuers could ensue if he did not take care to protect them". His failure to do so, and in particular his decision to trust the fraudster to resolve matters, fell far below the standard of care reasonably to be expected of a solicitor in these circumstances. Although the case concerned pure economic loss, the solicitor should be held responsible for the consequences of his failure to take proper professional care for the pursuers’ interests. Lord McEwan agreed with both lines of reasoning.
Regarding the ground upheld by the Lord Ordinary, Lords Menzies and McEwan agreed with his decision that Mr Mair became "an accessory to the fraud" by failing to tell anyone, in his own firm or otherwise, of what he knew. The fraud relieved him of any duty of confidentiality. However Lord Malcolm was of the view that "in themselves, acts or omissions which facilitate a wrong do not create a liability in damages to the victim as a joint wrongdoer. Something in the nature of conduct in furtherance of a common design is required... It must be possible to describe the defender as a party to the unlawful act or scheme".