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The price of probity

17 November 14

In what circumstances is a solicitor liable to the party on the other side of a transaction for failing to disclose a client’s fraud? The Inner House recently decided a case on this point

by Grant Markie

The case of Frank Houlgate Investment Co Ltd v Biggart Baillie LLP [2014] CSIH 79 (25 September 2014) has brought into focus the duties a solicitor owes to the other side of a transaction involving the transfer of money which is secured by a standard security. The decision of the Extra Division in this matter marks the latest, but perhaps not final, chapter in a litigation which has engaged the court since 2009.

The unusual circumstances of the case have caused the court to examine whether, and on what basis, liability is created when a solicitor becomes aware of a fraudulent transaction and fails to inform the other side. It has been recognised by the Extra Division and the Outer House that the parties to the litigation are both victims of the villain of the piece, John McGregor Cameron (“JMC”).

In January 2007, a Mr Mair, then a partner in the defender, acted for JMC. JMC was a fraudster with a number of convictions. This was unknown to Mair at the point at which he began to act for him. JMC had persuaded the pursuer to invest in various business ventures purportedly owned by JMC. In order to provide security for these investments JMC offered a standard security to the pursuer over an estate JMC claimed to own in Fife. The value of the final standard security was £800,000. That sum was in excess of the value of the investment that the pursuer had made in the companies, but perhaps was indicative of his future intentions. The standard security was executed by JMC and registered on 28 September 2006. By December 2006, the pursuers had invested £280,000.

During the process of registering the security, Mair noticed a discrepancy regarding the registered proprietor of the subjects. He had raised the matter with JMC who gave conflicting and inconsistent answers. That notwithstanding, the pursuers agreed to provide JMC with a further £500,000. Mair prepared a deed of variation to increase the sums secured and witnessed JMC signing the deed. The pursuer then gave JMC £100,000 on 2 January 2007 and a further £100,000 on 30 January. The action related to that final payment.

It became apparent that JMC was not who he had represented himself to be. By 16 January 2007, Mair had met with JMC and he had confessed his fraud. He was not the heritable proprietor of the estate in Fife and accordingly, the standard security which he had granted – through Mair – to the pursuer was worthless. Mair advised JMC that the standard security should be discharged “immediately”. On JMC’s assurances that he would personally sort the matter out with the pursuer, Mair undertook not to advise the pursuer’s solicitors of his client’s fraud. Regrettably, this allowed JMC to extract the final payment of £100,000 on 30 January from the pursuer and gave rise to the cause of action against the defender.

At first instance, Lord Hodge concluded that liability attached to the defender, as an accessory to the principal delict of fraud. This was so, despite his finding that the defender did not possess the mental element required of the principal delict. Lord Hodge declined to determine the issue on the basis of a continuing implied representation made by the defender, which Mair had a duty to correct when he became aware of its falsity, as had been argued by the pursuer. The defender reclaimed and the pursuer cross appealed.

Continuing representation

The Extra Division, in the end, was easily persuaded that “a solicitor acting for the recipient in a transaction which involves the transfer of money from one party to another secured by a security over heritable subjects 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” (per Lord Menzies at para 36).

The duty owed by a solicitor is not delictual in nature and is not composed of the Caparo type duty of care. As Lord Menzies concludes, “It arises from Mr Mair’s position as a solicitor acting for one of the parties to this transaction, and the obligation of honesty incumbent on him as a result.” Lord Menzies was at pains to point out the high standards of probity that are impliedly represented by members of the solicitors’ profession, and rightly expected by both the public and fellow solicitors. It was a breach of that duty of honesty, once the disclosure of fraud had been made, which sounded in damages in this case.

The cognate question of the extent of such a duty, and the consequent risk of solicitors being exposed to an “indeterminate liability”, was resolved by the approach taken by Lord Malcolm when he concluded: “In the present case the actionable negligence arises because Mr Mair came to learn of the fraud and knew, or should have foreseen, that further harm to the pursuer could ensue if he did not take care to protect them” (para 75). These conclusions were sufficient for the Extra Division to decide the case by granting the pursuer’s cross appeal.

The recent Supreme Court case of Cramaso LLP v Viscount Reidhaven’s Trustees [2014] UKSC 9 also concerned the issue of a continuing representation. In that case, however, the representation was made to a party who was not the contracting party, was express and not implied, and was negligent in nature. Its relevance to the present case was to illustrate the enduring effect of a representation. As Lord Reed observed: “The law is thus capable, in appropriate circumstances, of imposing a continuing responsibility upon the maker of a pre-contractual representation in situations where there is an interval of time between the making of the representation and the conclusion of a contract in reliance upon it, on the basis that, where the representation has a continuing effect, the representor has a continuing responsibility in respect of its accuracy.”

In Cramaso, liability for a failure to correct a negligent continuing representation sounded in damages. It now appears that the short step to attach liability for a solicitor’s failure to correct an implied representation of the probity of the transaction, in the face of an apparent duty of confidentiality, has been made.

Accessory liability

The Extra Division’s disposal of the reclaiming motion arguably renders the judges’ views on accessory liability as obiter. Nonetheless their examination, assisted by submissions from counsel, of this interesting area of the law is well worth further consideration. Whether, to bring home liability in delict, an accessory must be possessed of the same mental element as the principal actor, divided the Division.

Lord Menzies was of the view that the Scottish authorities were hostile to any suggestion that an accessory required the mental element necessary in the principal delict, and had he been required to decide the matter, would have affirmed the approach taken by Lord Hodge. Applying the following passage in Stair to the present case, he concluded that Mair’s actions were redolent of Stair’s definition of accessory liability, “by connivance in foreknowing, and not hindering those, whom they might and ought to have stopped… or generally in knowing and not restraining the common and known inclination of the actors towards delinquencies of that kind” (para 44). Therefore, in the particular circumstances of this case, they were sufficient to bring home liability against the defender.

The court had been referred to Cairn Energy v Greenpeace Ltd 2013 SLT 570, and noted that, in the opinion of Lord Glennie, there need not be a common intent to act unlawfully. Any intention to act unlawfully was irrelevant; it was sufficient that the course of action upon which the actors agreed, in the end proved to be unlawful.

Lord Malcolm, on the other hand, was reluctant to extend the reach of liability so far. Drawing on authorities from south of the border, Lord Malcolm preferred an approach requiring that there is something of the nature of furtherance of a common design – in other words, concerted action to a common end (para 63). The proposition that the solicitor’s silence and failure to alert the other side made him an accessory to a common plan, was not one to which Lord Malcolm was prepared to subscribe. He concluded that to do so would be to extend liability and claims for recovery far wider than had previously been recognised.

Lord Malcolm could not reconcile Lord Hodge’s finding that there was no subjective dishonesty on the part of the defender, with the attachment of accessory liability. In that event, Lord Hodge was wrong to conclude that accessory liability did not require the same mental element on the part of the accessory as the principal actor. Lord Malcolm preferred to recognise the flexibility which is inherent in the law of delict and the “universal right to reparation for wrongous injury” (para 72). Such a right may exist, even though previously undiscussed or uncategorised wrong forms the subject of the claim. A tension could be said to exist with this approach and the retrospective analysis which the court will apply to the unlawfulness of a particular course, as discussed in Cairn Energy. This aspect will be more relevant when the wrong is less obvious than in Frank Houlgate Investments. How, one might ask, is a solicitor to determine whether, by taking a particular course of action, he assumes an accessory liability, if that forms an as yet undefined wrong or delict?

Lord McEwan, in his opinion, was anxious to avoid the importation of English authorities on the law of equity into Scots law. He determined that if the law of Scotland was absent authority for the proposition that Mair was an accessory in delict, the court should create it. However, such a step was unnecessary, as he agreed with Lord Menzies that Stair provided the necessary authority for such a liability.

The ratio of Frank Houlgate Investments determines that liability could not attach on the basis of accessory liability in delict, or as a breach of the duty of honesty, provided the solicitor acted in ignorance of the fraud. If a solicitor continues to act in the knowledge of fraud, or indeed, assumes a position of inactivity, the law now recognises, if it did not before, that absent the mental element of the principal delict, liability attaches to the solicitor.

The court was invited to conclude that it would be an affront to Scots law if, in the particular circumstances of this case, the law did not impose liability on the defender. If any restatement were required of the standards of probity and honesty expected from solicitors, this case provides it. As Lord McEwan observed, this is a story as old as time: a tale of three men, one an honest businessman, the second a crook and the third a respectable solicitor (para 86). The cost to the pursuer and the solicitor has been great, the former losing financially and the latter his reputation.  

Grant Markie is an advocate with Hastie Stable

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