Appeal court rejects identity fraud claim against solicitors



Lenders have failed in an attempt to make two legal firms liable for losses caused by fraudulent individuals who stole the identity of innocent property owners.

The decision by the Inner House of the Court of Session (Lord Clarke, Lord Mackay of Drumadoon and Lord Bonomy) refused an appeal against a ruling by Lord Glennie, after proof, that the solicitors, who had acted in good faith, did not have to make good the losses.

In both cases, Cheshire Mortgage Corporation v Grandison (Longmuir & Co’s Judicial Factor), and Blemain Finance Ltd v Balfour & Manson LLP, borrowers had applied for loans from the pursuers, pretending to be the people registered as the owners of property over which the loans were to be secured. The lenders instructed one firm of solicitors and the borrowers the respective defenders, who carried out identity checks in accordance with normal practice. The transactions were completed and the fraudsters disappeared with the money.

The lenders argued that the solicitors had been in breach of their implied warranty of authority as agents. Lord Glennie held that the solicitors’ only representation was that they were acting for the people with whom the lenders were already engaged in a process of finalising a loan transaction. The Inner House, following a recent English decision, Excel Securities v Masood (2010), agreed that it did not follow from the rule of implied warranty of authority “that, in every case, an agent must be regarded as warranting the identity of his client and not merely the fact that he has authority to act on the client’s behalf”.

No express warranty had been asked for, the judges added, and it was unlikely it would have been given if it had. “We are of the clear view that there are no reasons in principle or practice, for extending the somewhat limited scope and nature of the implied warranty of agents in the way in which the reclaimers’ submissions in the present cases contended for”, they concluded.

Derek Allan of bto, who acted for the defender firms, said:

“The decision of the court is significant in the sense that this is the first time that a decision has been handed down by an appeal court in Scotland on this area of the law, and it is considered that this is a good and sound decision for the benefit of the profession at large, as otherwise there would be a situation where all solicitors were held to be guaranteeing the identity of their clients.

“Identify fraud is definitely a growth area and I am currently dealing with several fraud cases for the Law Society of Scotland Master Policy Insurers. bto is delighted with today’s result as these were the first such cases that had proceeded to proof on this issue in Scotland. The decision will be of considerable interest to solicitors in England as well as Scotland who may unwittingly find themselves acting on behalf of parties who turn out to be fraudsters.”

Click here to view the judgment.