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The case of Cheshire Mortgage Corporation Limited against
Morna Grandison (Judicial Factor on the estate of Longmuir &
Co.) [2012] CSIH 66 provides useful guidance on the nature and
extent of the implied "warranty of authority", and the
extent and effect of letters of obligation.
The Facts
The Cheshire Mortgage Corporation Limited ("CMC")
provides secured loans to both individuals and companies. In
October 2004, two fraudsters posing as a married couple called
"the Cheethams" from Stockbridge, Edinburgh, applied to
CMC for a loan of £350,000 through a broker. The loan was to
assist them in purchasing property overseas. The loan was to be
secured by a standard security over their home in Stockbridge.
CMC instructed solicitors to confirm the fraudster's
ownership of the property. Longmuir & Co., solicitors acting
for the Cheethams, provided them with the title deeds for the
property, along with a letter of obligation. A formal loan offer
was subsequently made. After checking the identity of the couple,
Longmuir & Co. returned a signed copy of the offer, a standard
security over the property in favour of CMC, and a standing order
mandate. In return funds were transferred to the fraudsters.
The Issues
The fraudsters have since disappeared. As a result, CMC sued
Longmuir & Co. on the basis that they breached their implied
"warranty of authority". The principal argument was that
if they alleged to have the authority to act, and it was later
found that their clients did not exist, then they must be liable in
damages to CMC.
CMC also argued that the letter of obligation further evidenced
the breach, and that the letter of obligation could form a separate
basis for their claim. The letter provided that Longmuir & Co.
would deliver to CMC a Land Certificate for the property from the
Land Register that showed the standard security. The property in
question was not registered in the Land Register, rather in the
Register of Sasines. CMC argued that as no Land Certificate was
delivered, the solicitors were in breach of their obligation.
The Decision
Lord Glennie rejected CMC's arguments regarding both breach
of the implied warranty of authority, and the letter of obligation.
By the time the solicitors became involved CMC had been given
numerous forms of identification from the fraudsters and brokers,
and approved the loan. Therefore, CMC had no basis for believing
that Longmuir & Co. were warranting who the fraudsters were, or
where they lived.
He also noted that a letter of obligation is collateral to the
principal transaction, and if that is void, as it was in this case,
then the letter cannot be enforced. Further, CMC could not show
that their loss stemmed from the failure to produce the Land
Certificate.
Upholding the decision on appeal, Lords Clarke, Mackay of
Drumadoon, and Bonomy noted that Longmuir & Co. were merely
warranting that they had a client who had instructed them to act.
They were not declaring that the couple had any particular
attributes.
The court also noted that the letter of obligation was written
plainly and simply provided protection in the gap between
settlement and registration of the lender's interest. The
letter could not be read to impose the obligation that CMC argued
for, nor could it be enforced when the principal transaction was
void.
Comment
This case illustrates to lenders that they may have to
re-examine the checks that they make into the identities of those
that they lend money to. Solicitors can take comfort that the
implied warranties of authority, and letters of obligation, are
narrow and limited in scope. However, the court did note that if
the facts of the case had been slightly different, the decision may
have gone the other way.
The material contained in this article is of the nature of
general comment only and does not give advice on any particular
matter. Recipients should not act on the basis of the information
in this e-update without taking appropriate professional advice
upon their own particular circumstances.
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