Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2013] CSOH 80
CA25/09	OPINION OF LORD HODGE in the cause FRANK HOULGATE INVESTMENT COMPANY LIMITED Pursuers; against BIGGART BAILLIE LLP Defenders: ________________

Pursuers: Dewar, QC; Thomson; Wilson Terris & Co SSC

Defenders: Hanretty QC; Paterson; HBM Sayers

28 May 2013

[1] In this action the pursuer ("FHI") seeks damages of £100,000 from the defenders ("BB") for a loss which it incurred as a result of the fraud of one of BB's clients, Mr John MacGregor Cameron ("JMC"). FHI claims that Mr Gregor Mair, a former director of BB, while not intending to deceive, acted in furtherance of KMC's fraud. That, FHI claims, exposes BB to liability to make reparation.

[2] The action has had a long history. On 10 December 2009 (2010 SLT 527, [2009] CSOH 165) Lord Drummond Young dismissed a claim for a larger sum which FHI had pleaded on the bases (i) that BB had failed in a duty of care to it and (ii) that BB had breached an implied warranty of authority. He suggested (para 21) that a solicitor might be liable for participating in a fraud once he knew of a client's fraud if he did not take steps to dissociate himself from the fraud and to prevent the victim suffering further loss. FHI lodged a reclaiming motion but amended its pleadings with the result that an Extra Division remitted the case to the Outer House. On 31 August 2011 ([2011] CSOH 160) Lord Glennie dismissed the amended claims based on negligence and breach of warranty of authority. He allowed a claim based on BB's participation in the fraud to proceed to proof before answer.

[3] FHI's case is now based on two closely related grounds, namely (i) misrepresentation and (ii) participating in and furthering a fraud. In reality the two grounds are different ways of looking at the same issue. Most of the relevant facts are not disputed. The principal legal issue is whether BB is liable in reparation to FHI because of Mr Mair's conduct if he, without any subjective dishonesty but knowing of JMC's prior fraudulent activity, acted in a way which assisted JMC to continue his fraudulent scheme and thereby caused FHI to suffer further loss.

The factual background

[4] FHI invests in shares and similar corporate investments. In 2004, Mr Frank Houlgate, the founding director and shareholder in FHI, was introduced by his investment advisers to JMC, who like Mr and Mrs Houlgate, lived in Leeds. JMC was developing a newly established business to provide secure storage for motorcycles through a company, Securimax Limited ("SL"). Between June and August 2004, FHI invested £100,000 in SL. In 2005 JMC proposed to Mr Houlgate that FHI should invest further in SL. Mr Houlgate was willing to increase FHI's investment to £500,000, but stated that he would require some security for the investment.

[5] JMC represented to Mr Houlgate that he owned an estate called Balbuthie in Fife which was worth £2.6 million and they discussed the possibility of a joint venture to create a luxury golf development there. In reality, a well-known Scottish farmer and businessman, Mr John Bell Cameron, lived at and owned Balbuthie farm. JMC and Mr John B. Cameron were not related and had not met. Mr John B. Cameron did not know of JMC.

[6] Mr Houlgate's son, who is a professional golfer, carried out a superficial search on the internet to confirm JMC's representation and found that a Mr John Cameron owned Balbuthie. In mid-2006 Mr Houlgate, his son and Mr Greg Norman's planning director visited Balbuthie Farm with JMC and then met the planning consultants, Montgomery Forgan Associates, whom JMC had engaged for the development. They did not visit the farmhouse at Balbuthie because JMC stated that it had been let to the Church of Scotland.

[7] FHI instructed A B & A Matthews LLP ("ABAM"), solicitors in Newton Stewart, to act for it in obtaining a standard security over Balbuthie farm. Mr Patrick Baxter of ABAM wrote to BB on 24 January 2006 to introduce himself as FHI's solicitor in the proposed transaction. He stated that "we understand that you act for Mr Cameron, the proprietor of the above farm". Mr Mair wrote back on 27 January to confirm that BB acted for "Mr Cameron" and to state that it had not yet received instructions in relation to the transaction. Between January and August 2006, Mr Mair corresponded with ABAM about the security transaction. Mr Mair prepared a standard security incorporating a personal bond for £300,000 in the name of "John Bell Cameron, residing at Balbuthie Farm, Kilconqhar, Elie, Fife" and on 24 August 2006 witnessed JMC's signature of that security. The standard security was registered on 28 September 2006.

[8] This case does not turn on Mr Mair's knowledge before JMC signed the standard security because the claim against him rests on what he came to know in January 2007. Nonetheless, I set out briefly his prior dealings with JMC as background to the later events and the context of his subsequent knowledge.

[9] JMC first instructed Mr Mair in January 2004 when he sought to obtain funding from HSBC. At that time he told Mr Mair that he owned Balbuthie jointly with his cousin, whom Mr Mair described in a file note as Mr Bell. At a meeting on 17 February, after Mr Mair had seen the title sheet to Balbuthie farm, JMC explained that his cousin was Mr John Bell Cameron. In July 2004, when Mr Mair was on holiday, a representative of HSBC told Mr Mair's secretary that he understood that JMC and a female called Bell Cameron, who was elderly and in a nursing home, owned the property jointly. The HSBC representative did not wish to process the loan application unless it was shown that the property was jointly owned and that JMC and "Bell Cameron" could grant the security. JMC confirmed to Mr Mair's secretary that the property was jointly owned with Bell Cameron and that she was in a nursing home. JMC said that he owned 80% of the property and his cousin, Bell Cameron, owned 20%. He represented that an attorney acted for his elderly cousin and agreed to give Mr Mair his contact details. Mr Mair must have been aware of these exchanges at the time or shortly afterwards as they were recorded in entries in his file.

[10] Time passed. In a telephone conversation in July 2005, JMC informed Mr Mair that there was confusion about the ownership of the property. The registered proprietor of Balbuthie was Mr John Bell Cameron. But JMC informed Mr Mair that the land certificate should have read "John and Bell Cameron" and that he and his female cousin owned the property in the ratio of 80:20. Mr Mair obtained a copy of the land certificate and sent it to JMC. At a meeting on 28 September 2005 Mr Mair expressed concern about the ownership of the property but JMC confirmed the joint ownership.

[11] Later, when FHI proposed the security transaction, JMC came up with a different story. On about 29 March 2006 JMC informed Mr Mair that he had not used his name, John McGregor Cameron, when he took title because he had been a "name" at Lloyds and wished to shield the property from any liabilities from that involvement. Over the following months JMC discussed with Mr Mair his proposals to develop Balbuthie farm in a joint venture with Mr Houlgate. At a meeting on 24 August 2006 JMC again explained that he had used the name "John Bell Cameron" on the title deeds in order to keep at arm's length from his involvement as a name in Lloyds. In accordance with normal conveyancing practice, Mr Baxter of ABAM prepared a request for a form 12A report for "John Bell Cameron" residing at Balbuthie Farm and Mr Mair approved the terms of that request.

[12] FHI had provided a further £80,000 to JMC between March and May 2006, before JMC purported to grant the standard security. It provided a further £50,000 on 29 August 2006 and £50,000 on 13 December 2006. By that time FHI had provided £280,000 to SL.

[13] FHI agreed to provide a further £500,000 to JMC for investment in SL. Following correspondence with BB, ABAM on JMC's instruction, prepared a deed of variation of the standard security in December 2006 to increase the sum secured from £300,000 to £800,000. Mr Mair prepared heads of terms for the distribution of the proceeds of the sale of Balbuthie, approved ABAM's draft deed of variation and witnessed JMC's signing of both documents on 20 December 2006.

[14] FHI then gave JMC £100,000 on 2 January and a further £100,000 on 30 January 2007. FHI's claim in this action relates to the second payment of £100,000.

Mr Mair's knowledge of JMC's fraud in January 2007

[15] In December 2006 solicitors acting for Galen Finance Limited ("Galen") wrote to Mr John B. Cameron to intimate that Galen had obtained a county court decree against him in relation to a hire agreement and guarantee. Mr John B. Cameron, who had not entered into those transactions, consulted his solicitor, Mr Andrew Weatherley of Stevenson & Marshall LLP. Mr Weatherley wrote to Galen's solicitors to explain that Mr Cameron was not involved in any dealings with Galen. After learning of BB's involvement from Galen's solicitors, on 10 January 2007 Mr Weatherley also wrote by fax to BB. In that faxed letter he informed Mr Mair that Mr John B. Cameron of Balbuthie had never instructed BB or had dealings with Galen. He also stated that he had seen a credit finance agreement completed on behalf of SL and signed by a John MacGregor Cameron. He asked Mr Mair to contact him as soon as possible to "resolve what appears to be a case of mistaken identity".

[16] Mr Mair emailed JMC on 11 January to ask that he contact him urgently about correspondence which he had received concerning Balbuthie. He also telephoned JMC's home and his mobile phone. On the same day Mr Mair telephoned both Galen's solicitor, who alleged fraud against JMC, and Mr Weatherley, who explained that there was only one property called Balbuthie in Fife and expressed Mr John B. Cameron's anger at the attempt to steal or use his identity. In the late afternoon Mr Mair contacted JMC, who said that he had been at a funeral and undertook to contact him on the following day. He also faxed JMC a copy of Mr Weatherley's letter and reported on his discussion with Galen's solicitor. He stated in that fax:

"This is a development which concerns me greatly and I am sure you will understand the full ramifications relative to your arrangements with Frank Houlgate. It is essential that matters are clarified immediately and, in my view, it is also necessary to make Mr Houlgate and his solicitors fully aware of the position.. I shall not contact them however until we have spoken again, on the understanding that you will contact me first thing tomorrow morning, Friday 12 January 2007."

Unfortunately for FHI and for himself, Mr Mair did not persist in that determination to inform FHI.

[17] JMC phoned on 12 January to say that the position with Balbuthie was "not as bad as it looks". He said that he could not discuss it on the phone but that he would sort matters out and then come to BB's offices on 16 January. Mr Mair repeated his concerns about FHI's security but agreed to discuss the matter on 16 January. Mr Mair followed up the phone call with a fax to JMC. He attached a copy of the letter of apology that he had sent to Mr Weatherley. He stated:

"I hope that this [the letter of apology] will suffice on the meantime but, as mentioned, if they do explore further, and in particular carry out a search at the Registers in relation to the Balbuthie Farm title, they will become aware immediately of the standard security granted in favour of Frank's company. This would be of extreme concern and I have to stress again the absolute importance of resolving and clarifying the issue at the earliest possible opportunity, otherwise the consequences are likely to be severe."

He stated that he would not contact Mr Weatherley before the proposed meeting with JMC on 16 January. Mr Mair gave evidence that he was not thinking about fraud at this time. But it seems to me that he knew then that JMC had deceived Mr Houlgate.

[18] JMC met Mr Mair on 16 January 2007 and confessed to the fraud. He said that he had taken advantage of the fact that he had the same name as Mr John B. Cameron, who was a significant landowner. He admitted that Mr Houlgate was not aware that the security over Balbuthie was worthless but explained that he had enjoyed a business relationship with Mr Houlgate and that he would sort out the problem. Mr Mair advised JMC to have the security discharged urgently so that reference to it was removed from the register. JMC requested Mr Mair not to tell FHI or its solicitors about the fraud. BB's file record stated:

"You are well aware that what you have done is fraudulent and you accept full responsibility for all the consequences. On the basis however that you are absolutely sure you will be able to sort matters out you requested that we do not contact A B & A Matthews at least until you have had a chance to speak to Frank."

[19] Mr Mair, although very concerned about JMC's disclosure, complied with his request in the belief that he owed his client a duty of confidentiality. Surprisingly, although he was not certain about the extent of his duty of confidentiality, he did not consult another partner in BB or seek the advice of the Law Society of Scotland (the "Law Society"). On 19 January Mr Weatherley wrote to Mr Mair to state that his client was dissatisfied with his letter of apology. He stated:

"We would, therefore, be pleased to hear from yourselves confirming that you have withdrawn from acting on behalf of John MacGregor Cameron and that this matter, clearly an attempted financial fraud and theft of identity, has been reported to SOCA."

Mr Mair received that letter on 22 January. Unfortunately, he took no such action. He faxed JMC a copy of the letter and explained that SOCA was the Serious Organised Crime Agency. He stated that it was "a matter of absolute priority" to have the standard security discharged.

[20] Thereafter, on 30 January 2007, FHI provided JMC with the £100,000 which is the subject matter of this claim.

[21] After some discussion on the phone between 22 and 31 January, Mr Mair met JMC again on 5 February 2007. JMC explained that he had had discussions with Mr Houlgate but had not told him about the invalid security. He hoped to raise money to pay off FHI and asked Mr Mair to "keep the lid on it" while he resolved the problem. He proposed to acquire Balbuthie from Mr John B. Cameron and agreed that BB should present a fee note for its work. BB did so.

Subsequent events

[22] Between February and April 2007 JMC occasionally phoned Mr Mair or met him to report on his purported progress in raising funds to pay off his debt to FHI. On 20 June 2007, after JMC represented that he had reached a deal with Mr Houlgate, Mr Mair prepared a discharge of the standard security in favour of FHI on JMC's instruction. He sent the discharge to JMC, who forged the signatures of Mr Houlgate and his daughter in law on it. He returned the forged discharge, which was dated 11 July 2007, to BB and Mr Mair sent the discharge to the Land Register on 16 July.

[23] In about July 2007 Mr Houlgate read in a newspaper in Leeds that JMC had been convicted of an unrelated fraud and that he had previous convictions for fraud. He then discovered that JMC did not have title to Balbuthie. His son spoke to Mrs Cameron, Mr John B. Cameron's wife, who informed him that she and her husband had already had problems with JMC's impersonation of her husband. Mr Houlgate approached Mr Weatherley who agreed to act on behalf of FHI. On 27 July 2007 Mr Weatherley wrote to BB on behalf of FHI to request evidence that BB had adequately checked the identity of its client when it acted for JMC.

[24] Mr Weatherley also complained on behalf of FHI to the Law Society, whose professional conduct committee ruled that Mr Mair should not have continued to act for JMC after he confessed to the fraud and observed that he had had a professional responsibility to contact FHI or its solicitors before he dealt with the discharge of the fraudulent security. In May 2009 Mr Mair pleaded guilty before the Scottish solicitors discipline tribunal to a complaint of professional misconduct for failing to advise the money laundering officer in his firm of the fraud, for continuing to act for JMC when he was aware of his fraud, and for sending the discharge to JMC rather than FHI in view of the obvious risk of further fraud. The Tribunal censured him and imposed a fine of £10,000.

[25] That was only part of Mr Mair's troubles. His involvement with JMC cost him his position in BB and has seriously affected his ability to earn a living as a lawyer. I acknowledge that there is truth in Mr Hanretty's observation that Mr Mair, as well as FHI, was a victim of JMC's fraud.

FHI's case against Mr Mair

[26] Mr Dewar submitted that BB was liable to make reparation to FHI because by 10 January 2007 at the latest, Mr Mair was aware that JMC had fraudulently instructed the preparation of, and had forged the signature of Mr John B. Cameron on, the standard security and deed of variation. Mr Mair was aware that FHI proposed to make further advances to JMC up to the new maximum of £800,000. Because he knew that the security was invalid, and that FHI was likely to advance further funds in the belief that it held a valid security, his inaction meant that BB participated in and furthered JMC's fraud. Through him BB was liable as an accessory to that fraud. He referred to Viscount Stair's discussion of accession to delinquencies in Institutions, i.9.5. This was an example of concomitant or posterior accession. He submitted that once Mr Mair knew of the fraud, he had to dissociate himself from it (a) by withdrawing from acting for JMC and (b) by warning FHI or its solicitors of JMC's fraud.

[27] Mr Dewar advanced two bases for that liability. First, he submitted that Mr Mair in his dealings with ABAM had represented that he was acting for Mr John B. Cameron. Drawing on Lord Glennie's opinion ([2011] CSOH 160 at paras 31-36), he submitted that he had also made an implied representation that he did not know the information, which he passed on in good faith, was false. In particular, he impliedly represented in his correspondence and in delivering the standard security and deed of variation that he believed that he was acting for the registered owner of Balbuthie. Those representations were continuing representations while the transaction was live. Once he discovered the fraud, his duty of honesty required him to correct the representations promptly. Secondly, he submitted that Mr Mair, by failing to withdraw from acting and to inform FHI of JMC's fraud, had acted recklessly and so participated in and furthered the fraud.

[28] In relation to the obligation to correct a continuing representation which was discovered to be untrue, Mr Dewar referred to Brownlie v Miller (1880) 7 R (HL) 66, Lord Blackburn at 79; Shankland & Co v John Robertson & Co 1920 SC (HL) 103, Lord Dunedin at 111; Gloag on Contract (2^nd ed.) p.461; Gloag & Henderson at para 7.16 and With v O'Flanagan [1936] Ch 575, Lord Wright MR at 584-586.

[29] He submitted that to establish the second basis of liability it was not necessary that Mr Mair had been subjectively dishonest. Mr Dewar did not suggest that he had been. It was sufficient that Mr Mair acted recklessly. He ought to have known that FHI would advance further funds; he had no basis for trusting JMC after his admission of fraud; and he carried out no research and took no advice on his belief that he was under a duty of confidentiality. In support of the test of recklessness Mr Dewar relied principally on the famous dictum of Lord Herschell LC in Derry v Peek (1889) 14 App Cas 337 (at 374) in which he stated that one of the grounds on which fraudulent misrepresentation could be established was if the person made representation

"recklessly, careless whether it be true or false."

He also referred to Professor Joe Thomson's discussion of fraud in the Stair Memorial Encyclopaedia ("SME"), Vol. 11 at paras 719-729, Gloag on Contract (2^nd ed.) p 478, Boyd & Forrest v Glasgow and South-Western Railway Co 1912 SC (HL) 93, Robinson v National Bank of Scotland 1916 SC (HL) 154, and Cramaso LLP v Reidhaven's Trs [2010] CSOH 62.

[30] Mr Dewar submitted that a person could incur liability for participating in a fraud without an extensive involvement in that fraud (Falconer v North of Scotland Banking Company (1863) 1 M 704; Glegg on Reparation (4^th ed.) p. 260).

BB's defence

[31] Mr Hanretty submitted that BB had no liability to make reparation. He advanced eight grounds in support of his submission. First, he pointed out that Mr Mair had not been guilty of any positive act. He had not been involved dishonestly in a fraud, which was a "machination or contrivance to deceive" (SME, Vol. 11. paras 702, 712, 719-725). There had to be subjective dishonesty and an intention to deceive (McBryde, The Law of Contract in Scotland (3^rd ed.) paras 14.11-14.12; Clerk & Lindsell on Torts (20^th ed.) paras 18.19-18.20, 18.30; Gordon, The Criminal Law of Scotland, (3^rd ed.) paras 18.02, 18.30, 18.32). Recklessness in Lord Herschell's dictum in Derry v Peek was a species of dishonesty. That was not alleged. Secondly, liability through concealment could arise only if Mr Mair were under a duty of disclosure; and there was no such duty in this case (Broatch v Jenkins (1866) 4 M 1030; McBryde at paras 14.15-14.18).

[32] Thirdly, there was no authority to support the imposition of liability in this case; the idea had grown from an obiter dictum in Lord Drummond Young's opinion at para 21. Fourthly, the acquisition of knowledge that JMC was a fraudster and inaction thereafter did not amount to a breach of duty on the basis of reckless omission (Mitchell v Glasgow City Council 2009 SC (HL) 21). Equally, rules which were concerned with the principle that a person should not profit from the fraud of another had no application to accession to the delict of fraud. In any event, Mr Mair did not profit from the fraud.

[33] Fifthly, there was no basis for a case of a representation by Mr Mair, other than as JMC's agent, that JMC was the title holder of the security subjects or for the implied representation. Such a case had not been put to Mr Mair. There was no evidence that FHI or Mr Baxter relied on the asserted implied representation by Mr Mair. Sixthly, if liability were to be based on a continuing representation and a duty to correct as Mr Dewar argued, that would expose solicitors to an open-ended liability, for example, in a context where a client granted an "all sums" standard security and long after the transaction a solicitor learned of facts from which he might deduce that there had been a fraud. Here the transaction was complete in the sense that the solicitor had done all that he needed to do to complete the transaction in which he was engaged and the deed of variation had been registered. No representation continued beyond that point. Seventhly, there was no evidence that ABAM relied on any representation by Mr Mair.

[34] Eighthly, any disclosure by a solicitor that his client's security could not be relied on would expose the client to a charge of fraud. The obligation of confidentiality which a solicitor owes to his client prevented Mr Mair from voluntary disclosure of his client's confession to a crime. That obligation is in the wider public interest (R (on the application of Prudential plc) v Special Commissioner of Income Tax [2013] UKSC 1, [2013] 2 WLR 325, Lord Neuberger at paras 17 and 21 and Lord Sumption at para 119). Further, a solicitor was under no duty to disclose to the authorities the possibility that a client would commit a crime in future.

Discussion

[35] The issue is whether BB incurred a liability to make reparation to FHI when Mr Mair, knowing of KMC's fraud, did nothing to prevent JMC from obtaining further funds from FHI.

[36] Both Lord Drummond Young and Lord Glennie considered that his behaviour, if proved, was not only professional misconduct but also gave rise to civil liability. Lord Drummond Young stated (at para 21):

"If, however, the solicitor becomes aware of some fact that points towards a fraud on the other party to the transaction, it appears to me to be a matter of fundamental professional integrity that he should refuse to act further in the transaction. In some cases the duty may go further, and require that the solicitor disclose the fraud to the other party..."

He referred to Primrosso Holdings Ltd v Alpers [2006] 2 NZLR 455, in which the New Zealand Court of Appeal rejected a case against a solicitor on the basis of the breach of a duty of care but permitted proceedings to be brought in deceit. Lord Glennie (at paras 31-36) stated that a solicitor might be under a duty to correct information, which he passed on in good faith but which he later discovered to be false. He suggested that the solicitor impliedly made a continuing representation that he did not know that the advice or information that he passed on to the other party was false. If the solicitor discovered that the information was false while the transaction was still live and while the other party might still act on the faith of that information, he was obliged promptly to inform the other party of the falsity of that information.

[37] While it may be possible to analyse the liability of a solicitor in such circumstances in terms of implied representation, I wonder if that might not be unnecessarily complicated. I can readily understand how Mr Baxter could infer from the correspondence at the outset (para [7] above) and from Mr Mair's delivery of the signed standard security and the deed of variation that Mr Mair believed that JMC was the registered owner of Balbuthie. But Mr Mair's acts did not amount to a warranty of his client's identity or title (Cheshire Mortgage Corporation Ltd v Grandison [2012] CSIH 66; [2013] PNLR 3) and it is difficult to see in those acts a representation of that identity or title by Mr Mair, except as JMC's agent. Mr Baxter relied on Mr Mair to behave honestly. That might support an implied obligation as Lord Glennie stated. But I think that a more direct analysis is that Mr Mair had to dissociate himself from the fraud and alert FHI to the risk of further loss if he wished to avoid liability as accessory to the fraud.

[38] In my view when Mr Mair learned of JMC's fraud in mid-January 2007 he made himself an accessory to the fraud when he failed (i) to withdraw from acting for JMC and (ii) to warn FHI or its solicitors that FHI could not rely on the security over Balbuthie Farm.

[39] As I have said, it is not suggested that Mr Mair intended that FHI should suffer loss. In my view his liability arises not from such subjective dishonesty but from his failure to come up to the objective standard of honest behaviour which the law requires. I do not think that the concept of recklessness, of which Lord Herschell spoke in Derry v Peek, assists in this context. There he was speaking of a species of subjective dishonesty in the context of a fraudulent misrepresentation. Here we are considering inactivity by a solicitor after discovering his client's fraud. To my mind we are dealing with a form of accessory liability.

[40] I am satisfied that in our law a person can make himself an accessory to a delict without having the mental element necessary for commission of the delict itself. In Cairns v Henry Walker Ltd 1914 SC 51, the owners of a British ship had been fined when the ship was in Argentina because members of the crew had smuggled goods which a merchant had provided the steward of the ship on credit. The owners successfully sued the merchant to recover the amount of the fine as damages. Lord Skerrington at first instance held that the liability arose from the merchant's knowledge that the crew intended to sell in a foreign port the goods which he provided on credit. The merchant was aware of their intention to engage in the illegal activity of smuggling. He thus knew of and was an accessory to the wrongful and illegal use of the ship. Lord Skerrington suggested that it would have been sufficient that the merchant did not believe that the steward intended to pay the duty on the goods when he sold them in the foreign port. He referred to the discussion of accession to a criminal act in MacDonald's Criminal Law (3^rd ed.) p.6f and stated that a similar rule should apply in delict. The Inner House upheld his decision.

[41] The circumstances of this case are different. Mr Mair did not know for certain in January 2007 whether JMC would sort matters out with Mr Houlgate as he said he would. He did not know whether JMC would take further funds from FHI. But he knew that the standard security was worthless, that JMC had committed a fraud against FHI and that he and BB had innocently facilitated that fraud. He knew that FHI had agreed to provide up to £500,000 more to SL and only weeks before he had prepared and witnessed the signing of the deed of variation to facilitate that lending. He had no proper basis for accepting JMC's assurance that he would sort things out with Mr Houlgate. When he gave evidence, Mr Mair did not seek to justify his actions. He recognised that he could not. In my view he had sufficient knowledge by 11 January, and certainly by 16 January 2007, to conclude that he had become involved in a fraud which was still in progress and was capable of inflicting further loss on its victim.

[42] That did not make Mr Mair subjectively dishonest. Mr Dewar did not suggest otherwise. But in my view he knew enough to conclude that he had become an accessory to a potentially continuing fraud. His decision to leave it to the fraudster to "sort it out with Mr Houlgate" was at best what Sir Siegmund Warburg used to call "wishful unthinking". That unthinking cannot absolve him from civil liability.

[43] In this case Mr Mair was a solicitor engaged in a security transaction by the apparent granter of the security. The transaction was designed to obtain further advances to JMC. Mr Mair was in a position where his knowledge of the facts in mid-January 2007 required him to dissociate himself from the fraud in which he had unwittingly become involved and which he had facilitated. As I have said, Lord Skerrington in Cairns (above) stated that the court could use as an analogy the criminal law of accession when considering accession to a delict. In MacDonald's Criminal Law (5th ed.) at p. 8, the author wrote of circumstances in which a failure to intervene could make a party an accessory to a crime. He stated:

"The situation in which a strong case would be required to justify conviction is that of a person present at the perpetration of an offence not interfering to prevent it. This alone, without proof of previous concert or concurrence at the time, might or might not justify a conviction according to circumstances. If a person stood by and witnessed, without remonstrance, the protracted efforts of one individual to ravish a woman, or to drown a person, or to throw him over a precipice, it would be difficult to draw a distinction between such a case and one of direct participation. Perhaps the strongest example that can be imagined is that of an official standing by and not doing his duty, and so allowing a breach of the law."

By analogy, in the circumstances of this case, a solicitor acting for a deceitful client in a fraudulent transaction is in a position similar to the official who does not intervene. This is not principally because he is a solicitor but because he has unwittingly facilitated a fraud and then discovered the fraudulent nature of the transaction in which he was involved. Mr Mair required to speak out to protect the victim of the fraud from suffering further harm from the fraud. He had to withdraw from acting in the transaction. But that of itself would not have alerted FHI or its solicitor as there is no standard practice of informing the other party to a transaction that a solicitor is no longer acting for his client once the legal documentation has been completed even where the clients are still implementing the transaction. In my view the solicitor would have to go further to dissociate himself from the fraud by intimating to the other party that it could not rely on the security if it were to lend further sums to the fraudster.

[44] In this regard I rely on the concept of bad faith which appears in several areas of Scots law. In so doing, I bear in mind Professor Thomson's observation (SME Vol. 11, para 720) that a failure to distinguish fraud as a ground of liability in delict and fraud used in the wider sense of bad faith in the context of rescission or reduction of contracts has caused confusion in our case law. I recognise that distinction and use concept of bad faith as an objective standard of dishonesty in the context of accession to the delict of fraud. It seems to me that the informed dispassionate observer would consider that a solicitor fell below the objective standard of honesty if he unwittingly facilitated a fraudulent transaction and failed to warn its intended victim when he discovered his client's fraud. In other words the objective observer would consider the solicitor to be in bad faith.

[45] Bad faith and gratuitous receipt are separate grounds on which a person must repay funds obtained through the fraud of another (Clydesdale Bank v Paul (1877) 4 R 626, Lord Shand at 628-629; Thomson v Clydesdale Bank (1893) 20 R (HL) 59, Lord Herschell LC at 60). Bad faith also underpins the offside goals rule (Rodger (Builders) Ltd v Fawdry 1950 SC 483, Lord Jamieson at 499). In Rodger (Builders) Ltd the court held that knowledge rather than moral delinquency was sufficient to undermine the defender's title; knowledge of the prior contract put the defender under a duty to make enquiries and his failure to enquire meant that he was in bad faith. Bad faith may have different shades of meaning in different contexts. Actual knowledge may be required to make one an accessory to a fraud while some knowledge and a failure to enquire further may be sufficient to bring into effect the offside goals rule. But in each case, subjective dishonesty is not needed. Thus the fact that Mr Mair did not contrive to deceive FHI is not a defence against its claim.

[46] I do not accept that such accessory liability imposes an indeterminate liability on legal advisers. Liability as an accessory will arise only where a transaction is live in the sense that the legal adviser ought reasonably to foresee that the victim of the fraud will suffer loss or further loss from the fraud. On learning much later about a client's dishonesty, a lawyer would not have to search through long-closed files to ascertain whether it was likely that someone would suffer loss. In this case Mr Mair learned of JMC's fraud when it was highly likely that FHI would be providing further funds on the strength of the security. As a result he had to dissociate himself from the fraud by disclosure.

[47] Mr Hanretty argued that the solicitor's duty of client confidentiality would prevent such disclosure. I do not accept that. First, communications made with the intention of furthering a criminal purpose do not enjoy such legal privilege (Micosta SA v Shetland Islands Council 1983 SLT 483, Lord President Emslie at 485; Dickson on Evidence, para 1678; Kelly v Vannett 1999 JC 109, Lord Justice Clerk Cullen at 115D-116A). JMC's prior discussion of the title was not confidential on that basis. While his confession may not appear to have been designed to further the fraud, Mr Mair knew that the transaction was fraudulent and had the potential to cause further harm. In fact JMC's request that he be allowed to sort out the problem with Mr Houlgate was designed to further the fraud. In this context I do not think that lawyer/client confidentiality constrained Mr Mair.

[48] Secondly, Mr Mair was under a duty to report the fraud to SOCA. Mr Weatherley had pointed this out (para [19] above). Under section 328 of the Proceeds of Crime Act 2002 a person is guilty of an offence if he is concerned in an arrangement which he knows or suspects facilitates the acquisition of criminal property, unless he makes an authorised disclosure under section 338. To avoid committing such an offence, Mr Mair would have had to have disclosed the facts to the nominated officer in BB, Mr Campbell Smith, who in turn would have to inform SOCA, as otherwise he would be guilty of an offence (section 331). Where, as here, the solicitor knows that he has been working on a fraudulent transaction that involves him in an offence under section 328, lawyer/client confidentiality cannot prevent the solicitor from disclosing to SOCA communications from the client about the transaction. Mr Mair therefore could not protect his client from the consequences of his actions.

[49] Had Mr Mair informed FHI that it could not rely on the standard security, it would not have provided the £100,000 which it gave JMC on 30 January 2007 and which it has failed to recover from JMC. BB's accession to JMC's fraud thus caused FHI to lose that sum.

Conclusion

[50] I am satisfied that BB is liable in reparation to FHI as an accessory to fraud because Mr Mair failed to dissociate himself from JMC's continuing fraud by withdrawing from acting and by warning FHI or its solicitors that they could not rely on the invalid security. He thereby acted in furtherance of JMC's fraud which caused FHI to lose £100,000.

[51] I propose therefore to sustain the second and third pleas in law for the pursuer, repel the defender's pleas in law and to grant decree for payment to the pursuer of £100,000. But as parties requested that I give them an opportunity to make submissions on the appropriate rate of judicial interest, I will put the case out by order to hear those submissions before I pronounce decree.