The case of Cheshire Mortgage Corporation Limited against Morna Grandison (Judicial Factor on the estate of Longmuir & Co.)  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 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 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.
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.
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.