Penn v Bristol & West Building Society & Ors [1997] EWCA Civ 1416 (16th April, 1997)

LORD JUSTICE WALLER: This appeal raises primarily the question whether in circumstances where a solicitor is acting for a Vendor, and negotiating on the Vendor's behalf with a solicitor whom he knows to be acting on behalf not only of the Purchaser but a Building Society, through whom the Purchaser will be borrowing money to complete the purchase, the solicitor's warranty that he is duly authorised on behalf of the Vendor is given not only to the purchaser but to the Building Society. His Honour Judge Kolbert sitting as a deputy High Court Judge in the Chancery Division held that it was, and it is from his decision that this appeal is brought. He also held on an issue of causation in favour of the Building Society, and made an order for indemnity costs in respect of the Building Society's costs on one aspect of the case, from which decisions appeals are also brought.

In February 1987 Mr and Mrs Penn bought 63 Church Lane, Sutton-on Sea, Lincolnshire (the house). They bought it as beneficial joint tenants for £25,000 with the assistance of a mortgage loan from Bradford & Bingley Building Society (Bradford & Bingley). In 1990 Mr Penn and a Mr Moore, his business partner, got into financial difficulties and decided to execute a mortgage fraud. The fraud was to consist of a purported sale by Mr and Mrs Penn of the house for £80,000 to Mr Patrick Wilson (Mr Wilson). Mr Wilson was a party to the fraud, the main aim of which was to obtain money in the form of a loan from the Bristol & West Building Society (Bristol & West). Mrs Penn was totally ignorant of what was taking place; she did not know that solicitors were to be instructed to negotiate on her behalf; or that contract documents were to be produced and exchanged apparently bearing her name as a joint vendor.

Mr Brill acted on the purported sale of the house for Mr Penn and appeared also to be acting for Mrs Penn. Mr Brill indeed thought he was acting for Mrs Penn as well as Mr Penn, and in all the pre-contract correspondence, negotiations and completion, Mr Brill held himself out as duly instructed by Mr and Mrs Penn jointly. The correspondence, negotiation and completion took place with solicitors acting for both Mr Wilson and Bristol & West, that firm ultimately being Messrs Gartons (Gartons).

The negotiations for the sale proceeded superficially just like any ordinary purchase and sale of a house with building societies involved. Mr Brill, thinking that he was instructed by both Mr and Mrs Penn to sell the house, obtained the title documents from the Bradford & Bingley on 17 January 1991 against an undertaking to discharge the Penns' mortgage on receipt of the proceeds of sale. Mr Brill obtained from what he assumed to be Mr and Mrs Penn a property questionnaire, the contract and the conveyance, but unknown to him on each Mr Penn had forged Mrs Penn's signature. We have not been troubled with the complete correspondence between Mr Brill and Mr Thorley for Gartons, but the usual correspondence took place including enquiries before contract and requisitions on title duly completed by Mr Brill at Gartons' request Mr Brill purporting to act for both Mr and Mrs Penn. In reliance on the fact that Mr Brill was acting for both Penns, and on the fact that accordingly Mr and Mrs Penn were going to pass the legal title in the house to Mr Wilson, Gartons and Bristol & West arranged for Mr Wilson to execute a charge over the house in favour of Bristol & West to enable the transaction to be completed. In the result, Bristol & West advanced £75,293. All issues in relation to quantum have now been compromised, and accordingly all it is necessary to say is that the major part of that sum was paid to Mr Brill as part of the purchase price, enabling him to pay £31,769.78 pursuant to his undertaking to the Bradford & Bingley, and the remainder on the instructions of Mr Penn to Barclays Bank. The sum paid to Barclays Bank, unbeknown to Mr Brill, went without Mrs Penn's knowledge or consent in discharge of Mr Penn 's business indebtedness.

Mrs Penn claimed inter alia against Bristol & West a declaration that their purported charge over the house was null and void; against Mr Wilson, a declaration that the contract and transfer to him was null and void; damages against Mr Penn and Mr Wilson for Mr Penn's breach of trust and Mr Wilson's assistance in that breach; and damages in negligence against Mr Brill. Bristol & West in their turn counterclaimed first against Mrs Penn to be subrogated to Bradford & Bingley's interest in the house, and to a declaration that they were entitled to a charge over 50% of the equity of redemption in addition to their rights of subrogation; damages against Mr Wilson and Mr Penn for their part in the fraud; and damages against Brill & Co. for breach of warranty of authority.

The Judge held (1) that Mrs Penn's signatures had been forged; (2) that the transfer to Mr Wilson was ineffective as was the charge in favour of Bristol & West; (3) that Mr Wilson and Mr Penn were liable in damages to Mrs Penn, and were liable in damages to the Bristol & West; (4) that Mr Brill was liable in negligence to Mrs Penn; (5) that Bristol & West were subrogated to the rights of Bradford & Bingley, but not entitled to a charge over 50% of the equity of redemption; and (6) that Bristol & West were entitled to succeed against Mr Brill for breach of warranty of authority. He further held that the argument on behalf of Mr Brill on causation that if there was a breach of warranty, no loss was suffered, (the argument being that the loss was caused by the forgery of Mrs Penn's signature), was misconceived. The judge finally made rulings as to the costs. Mrs Penn obtained an order for costs with specific directions as to the basis of taxation against Mr Wilson, Mr Penn and Brill & Co (not against Bristol & West). Bristol & West obtained an order for costs against Brill & Co. "of all proceedings in this action including the counterclaim to be taxed if not agreed on a standard basis save that (Bristol & West's) costs of defending (Mrs Penn's) claim, and (Bristol & West's) costs of counterclaiming against (Mrs Penn) are to be taxed if not agreed on the indemnity basis."

"Where a person by word or conduct, represents that he has authority to act on behalf of another, and a third party is induced by such representation to act in a manner in which he would not have acted if that representation had not been made, the first mentioned person is deemed to warrant the representation is true, and is liable for any loss caused to such third party by a breach of that implied warranty, even if he acted in good faith, under a mistaken belief that he had such authority".

"One who expressly or impliedly warrants that he has the authority of another is liable in contract for breach of warranty of authority to any person to whom the warranty is made and who suffers damage by acting in the faith of it, if in fact he had no authority. This is a specific type, in fact probably the original type, of collateral contract: the agent offers to warrant his authority in return for the third party's dealing with his principal"

Mr Jackson Q.C. for Mr Brill accepts the statements of general principle as far as they go, but submits that in order to found liability the warranty express or implied must have been given to the plaintiff, and further submits that the transaction into which the plaintiff was induced to enter must have been some form of dealing with the supposed principal. He submits that the whole basis for implying a warranty rests on the fact that the plaintiff has been induced to deal with the purported principal, by the words or conduct of the agent. He gains some support for this second contention from the last sentence of the general principle stated in Chitty, and indeed, so far as I can see, from the text of Chitty thereafter. But Bowstead and Reynolds at p.596 quote the following passage from Lord Esher M.R.'s judgment in Firbank's Executors v Humphryes (1886) 18 Q.B.D. 54 at 60 in support of a broader view:

"The rule to be deduced is, that where a person by asserting that he has the authority of the principle induces another to enter into any transaction which he would not have entered into but for that assertion, and that assertion turns out to be untrue, to the injury of the person to whom it is made, it must be taken that the person making it undertook that it was true, and he is liable personally for the damage that has occurred".

Mr Jackson points out that in Firbank's the transaction into which the plaintiff was induced to enter was a transaction with the supposed principal, and he suggests accordingly that the case itself falls within the limits that he suggests should be placed on the situations in which a warranty of authority could be established. His difficulty is that there are other authorities where the constraints which he seeks to apply have not apparently been adhered to. In Starkey v The Bank of England (1903) AC 114

Frederick and Edgar Oliver jointly owned Consols and bank stock. Frederick instructed Starkey a stockbroker to sell them. Frederick signed the necessary powers of attorney in his own name and forged Edgar's signature. Starkey presented the powers of attorney to the Bank of England, who duly affected the transfer. Once the forgery was established the Bank was liable to replace the Consols and the stock, and sued Starkey for breach of warranty of authority. Starkey was held liable. Earl of Halsbury L.C. described the notion that it was necessary to establish a contract between the purported principal and the plaintiff as illogical, and confusing the question whether the facts established a contractual warranty between plaintiff and defendant, with the question as to whether a contract follows in consequence of a representation. He said:

"that which does enforce the liability is this - that under the circumstances of this document being presented to the Bank for the purpose of being acted upon, and being acted upon on the representation that the agent had the authority of the principal, which he had not, that does import an obligation - the contract being for good consideration - an undertaking on the part of the agent that the thing he represented to be genuine was genuine".(see page 118)

Mr Jackson was also forced to try and explain away the Judgment of A.L.Smith J in West London Commercial Bank v Kitson (1883) 12 QBD 157 at 162, on the bases first that that case was concerned with a bill of exchange, and second that A.L.Smith J was alone of all the Judges both at first instance and in the Court of Appeal (1884) 13 QBD 360, in resting his judgment upon breach of warranty of authority. He furthermore tried to distinguish V/O Rasnoimport v Guthrie & Co. Ltd (1996) 1 LLR 1 on the basis that the case was concerned with a bill of lading, and, (as he submitted) an instrument akin to a negotiable instrument. It is only necessary to look at this latter decision in any detail since the reasoning of A.L.Smith J was relied on by Mocatta J in reaching the conclusion he did. The facts of V/O Rasnoimport were that the defendants as agents of the owners signed bills of lading stating that 225 bales of rubber had been shipped. In fact, because of a fraud of which the defendants were unaware and totally innocent, only 90 bales were shipped. The plaintiffs were indorsees for value of the bills of lading, and claimed against the defendants for breach of warranty of authority in that it was alleged the defendants only had authority to sign bills of lading for 90 bales.

"The defendants must be taken as knowing when they signed the bill of lading, that in the ordinary course of commerce it would be likely to pass from hand to hand and that one or more indorsees from the original shipper would receive the bill, would rely upon the statements in it and would pay money for the goods represented in it to have been shipped which he or they would not otherwise have paid.....I can see nothing extravagant or heterodox in holding that the implied warranty of authority ... was given by the defendants to all whom they could reasonably foresee would become such indorsees and become actionable by such persons on proof of their having acted in reliance upon the warranty and having suffered damage thereby. Common sense and principle alike seem to require this conclusion and I so hold."

That authority must of course be read in its context in this sense that outside the ambit of bills of exchange or bills of lading, it may be difficult to contemplate the offer or promise of a warranty of authority being given to such a wide number of people. But the authority does supply further support for there not being the constraint contended for by Mr Jackson, that to give rise to the cause of action a transaction between the plaintiff and the would be principal must have been induced.

In truth as I see it, the question whether a warranty of authority has been given rests on a proper analysis of the facts in any given situation, and not on any preconceived notions as what is essential as part of the factual analysis. Of course there is no issue that to establish a warranty of authority as with any other collateral warranty there must be proved a contract under which a promise is made either expressly or by implication to the promisee, for which promise the promisee provides consideration. But consideration can be supplied by the promisee entering into some transaction with a third party in a warranty of authority case just as it can in any other collateral warranty case. Furthermore, the promise can be made to a wide number of people or simply to one person, again all depending on the facts. It follows, as Mr Jackson has submitted, that the plaintiff, whether as one of the wide number of people to whom the offer is made or by virtue of being the only person to whom the offer is made, has to establish that the promise was made to him. There is also no doubt that what he has to establish is that a promise was being made to him by the agent, to the effect that the agent had the authority of the principal, and that he provided consideration by acting in reliance on that promise.

Mr Brill undoubtedly was representing throughout the negotiations with Mr Thorley of Gartons that he was authorised to act for Mrs Penn. It is accepted by Mr Jackson that if Mr Wilson had not had knowledge of the fraud, he, as Gartons' principal, would have been entitled to rely on the warranty being given by implication by Mr Brill. This is a concession properly made in my view, but it is important to recognise that the facts of Suleman v Shahsavari (1988) 1 WLR 1181 referred to by Mr Jackson in his skeleton in making the concession were different in one material respect. In that case the solicitor actually signed the contract purporting to act for his client. In the instant case it is the negotiation up to the point of signature, and the acting in the exchange of documents which produces the representation on which reliance was placed by Gartons. During the negotiation, following which a number of documents were to be executed in order to bring the transaction to fruition, and in completing the transaction, Mr Brill knew that Gartons were also acting for the building society. He knew indeed that Gartons would be arranging the completion of the purchase including arranging for Mr Wilson to execute a mortgage so as to obtain from the building society the purchase price and secure the building society's interest in the house. Thus he knew that Gartons, in their capacity as the solicitors for the building society, would be relying on his having the authority of Mrs Penn to bring the transaction to fruition, just as much as they were relying on the same as the purchaser's solicitor. What is more, Bristol & West through Gartons did rely on Mr Brill having the authority of Mrs Penn to bring the matter to fruition, in that having obtained from Mr Wilson execution of a charge, money was advanced and available for the purpose of completing the transaction. If at any stage Mr Brill had said he did not have the authority of Mrs Penn the result would have been that Bristol & West would have proceeded no further.

There was a debate at the trial as to whether Mr Brill knew the actual name of the building society. The Judge found that it did not matter whether he knew the actual name or not, but was of the view on balance that it was likely that the actual name had been given by Mr Thorley to Mr Brill. I am clear that it matters not whether the actual name of the building society was known to Mr Brill. I should however also add, that on the oral evidence to which we were referred, if it had mattered I would have been somewhat doubtful if the judge's finding that Mr Thorley told Mr Brill the actual name, could have been upheld.

The promise which on the above analysis was made, was that Mr Brill had the authority of Mrs Penn to negotiate and complete the transaction on her behalf. It was that warranty that was broken. If Mr Brill had actually obtained Mrs Penn's instructions, then either the transaction would never have gone as far as completion, and Bristol & West would not have advanced any money or (and not very likely) the transaction would have been completed properly without forged signatures and they would have had security for their loan.

The Judge made a special order in relation to those costs that Bristol & West had incurred in fighting the action and the counterclaim against Mrs Penn. We were told that the Judge had made the order that those costs should be taxed on an indemnity basis simply on the ground that Bristol & West would have been entitled to recover those costs as damages against Mr Brill if the action against Mr Brill had been a separate action.

"A party to court proceedings may not recover his costs in those proceedings from any other party to them except by an award of costs by the court. The costs of other proceedings, however, stand on a different footing. Where, as a result of the defendant's wrong, the plaintiff has incurred costs in other proceedings the plaintiff may, subject to the rules of remoteness, recover those costs from the defendant as damages."

Thus a party cannot claim by way of damages for those parts of the costs incurred which he will not recover on taxation against his opponent either in the same action or in a separate action. On the other hand if in a separate action a party is seeking damages which include fighting an action against a third party, the damages for incurring costs will be assessed in the same way as any other damages at common law.

A note in The Supreme Court Practice 62/B/144 (page 1157), suggests that if a plaintiff succeeds against a defendant, and the latter against a third party, then where the defendant is entitled to an indemnity against the third party, the defendant may be entitled to an order for the costs of fighting the plaintiff on an indemnity basis, but an order from the court in that regard is necessary. The note also refers to an authority which makes clear that on the other hand the costs as between a defendant and third party will normally be payable on a standard basis. What the note does not make clear is whether the basis for being entitled to an order for indemnity costs in relation to those costs of fighting the plaintiff is thought to arise from an express indemnity, or whether it is said to arise where the claim is to damages and to an indemnity by virtue of that claim.

The problem as it seems to me is that there are competing considerations which do not necessarily lie easily together. The first consideration is that a wrongdoer should indemnify in damages for the wrong done. The second is that when it comes to costs a wrongdoer is only liable to pay on a standard basis unless "it appears to the court to be appropriate to order costs to be taxed on an indemnity basis" - see Order 62 rule 3(4). In other words, a wrongdoer is normally thought to be compensating the person wronged so far as costs are concerned by paying costs on a standard basis, and it takes something out of the norm for there to be an order for indemnity costs.

It is in my view important that it is expressly provided by Order 62 rule 3(2) that "No party to any proceedings shall be entitled to recover any of the costs of those proceedings from any other party to those proceedings except under an order of the court". Thus a defendant cannot claim as part of his damages against a third party the costs of fighting the plaintiff, and it also follows that even if the third party is bound to indemnify the defendant under an express contract of indemnity, the note in the annual practice is correct in saying that an order for costs awarded on an indemnity basis would have to be obtained if an indemnity is to be achieved.

I am however concerned as to accuracy of the note insofar as it might encourage the thought that in any situations in which costs might have been recoverable as damages if separate proceedings had been brought, it would be appropriate on that basis alone to order taxation on an indemnity basis. As I would see it, the philosophy that lies behind Order 62 rule 3(2) is to prevent costs being included in an award of damages in third party and other proceedings in the same action, in order that costs will be assessed normally on a standard basis. It seems to go contrary to that philosophy for the court then to order costs to be assessed on an indemnity basis where, but for Order 62 rule 3(2), they would have been recoverable as damages. The other side of the coin (I accept) is that it could be said that if the court does not order indemnity costs where such costs would have been recoverable as damages, if a separate action had been brought, that will discourage the bringing of third party and other claims in the one action. That however I do not think is a serious risk having regard to the many other benefits of proceeding in one action and having all issues tried at the same time. In any event the philosophy which lies behind Order 62 rule 3(2) would seem to me to be clear. If it is followed, it should not by itself be a ground for awarding indemnity costs that the costs of defending or fighting another party would have been recoverable as damages if separate proceedings had been brought. I have accordingly concluded that for an order for indemnity costs to be appropriate there should be some additional factor of the nature which normally gives rise to such an order. I am not going to attempt further definition of the ingredients of that additional factor, because as I understand it, no factor other than that the costs would have formed part of the claim to damages in a separate action was relied on in this case.

England and Wales Court of Appeal (Civil Division) Decisions

DEBORAH ANN PENN v. BRISTOL & WEST BUILDING SOCIETY; PATRICK WILSON; PETER PENN; IAN BRILL and Co. (A Firm) [1997] EWCA Civ 1416 (16th April, 1997)

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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Penn v Bristol & West Building Society & Ors [1997] EWCA Civ 1416 (16th April, 1997) URL: http://www.bailii.org/ew/cases/EWCA/Civ/1997/1416.html Cite as: [1997] 1 WLR 1356, [1997] EWCA Civ 1416, [1997] WLR 1356, [1997] PNLR 607