Solicitors may be dismayed to find that, when they act in conveyancing and other transactions, they are guarantors of the existence and proper authority of their clients.

This is the effect of Penn v Penn, Wilson, B & Co and the Bristol & West Building Society.

His Honour Judge Kolbert, sitting as a deputy judge of the Chancery Division in Leeds, handed down a detailed judgment on 22 May 1995.B & Co was instructed to act for Mr and Mrs Penn on the sale of their house, but Mr Penn forged his wife's signature, unknown to everyone else involved.

The mortgagee duly advanced the price.

However, no title passed -- for lack of Mrs Penn's consent.

There was no hope of enforcing judgment against Mr Penn or the purchaser.

The mortgagee successfu lly recovered damages from B & Co for breach of its warranty that they had had authority to act for both Mr and Mrs Penn.The result should alert conveyancers to their personal risk if it turns out that they have been misled.

It should also put defrauded purchasers and lending institutions on enquiry as to whether they can recover losses which they may well otherwise have written off.

The horror for conveyancers, the glory of it for purchasers and lenders, is that no amount of diligence can protect the conveyancer.

In the absence of a disclaimer, he or she is the guarantor of the proper authority of his or her clients.

B & Co was found negligent at the suit of Mrs Penn, but it was liable to the Bristol & West regardless of any fault or negligence.

It would have been liable even if members of the firm had visited their clients' house and been misled by a mistress posing as Mrs Penn, or if Mr Penn had brought into the firm's office a false Mrs Penn with convincing identity.It is not a new cause of action, just not adapted to such facts in any previously reported case.

I suspect it has often been overlooked.

It is contractual, nothing to do with tort or negligence.

But who would normally think of the purchaser's mortgagee being able to sue the vendors' solicitors in contract?The elements of the action are: a warranty by the defendant that he or she has his or her principal's proper authority; made to the plaintiff or his or her agent; reliance by the plaintiff; breach of the warranty; and loss to the plaintiff in consequence of the lack of authority.The warranty does not have to be express.

A solicitor or any agent purporting to act for a principal implicitly and by conduct warrants that he or she is properly authorised -- that is, in the absence of lack of authority known to the plaintiff or a disclaimer by the agent.

For example, issuing proceedings in the name of a client is ipso facto a warranty that you are properly authorised; and continuing to act for a client in an action is a warranty that you still have that authority.

In Yonge v Toynbee (1910) 1 KB 215 the solicitor was personally liable for costs when he continued to act for a party who had, unknown to him, become mentally incapable.

In Penn the judge found a continuing warranty by B & Co that it had authority from Mrs Penn, by its writing of letters and its production of the contract and transfer documents.The warranty must be made to the plaintiff or his or her agent, but the person warranting need not know the identity of the person to whom he or she is warranting.

It is enough that he or she knows that there is someone like the plaintiff who may rely on it, or that the warranty is made to a class of persons which includes the plaintiff.

So, a third party endorsee of a bill of exchange can recover against the director or other agent who signed it without the apparent principal's proper authority (see Rasnoimport v Guthrie & Co Ltd [1966] 1 Lloyd's Rep 1).And it was enough, the judge found in Penn, that B & Co knew that the purchaser was getting a mortgage and that the solicitors for the purchaser would also be acting for the mortgagee.

The warranty by B & Co was to those solicitors wearing both hats -- a warranty to the purchaser and a warranty to the Bristol & West.

It was found that B & Co had been told the identity of the mortgagee, the Bristol & West; but the judge stated that B & Co would have been liable to the Bristol & West so long as it knew that there was a mortgagee, regardless of its identity.Reliance on the warranty has to be pro ved.

That should usually be easy.

The passing of good title is crucial both to purchasers and mortgagees.

How are they satisfied that they are getting it? How is the solicitor to give his or her report of good title? By being satisfied both that the vendors have good title and that the vendors are passing it.

They only know the latter because the solicitors say that they are acting for the vendors.The evidence in Penn was that the mortgagee and its solicitors took it without saying that the vendors' solicitors had the authority of their clients, and would have been regarded as impertinent if they had queried it.That was how it was seen in 1909 in Yonge v Toynbee: 'The manner in which business is ordinarily conducted requires that each party should be able to rely upon the solicitor of the other party having obtained a proper authority before assuming to act.

It is always open to a solicitor to communicate as best he can with his own client.

But the solicitor on the other side does not communicate with his opponent's client, and, speaking generally, it is not proper for him to do so.

It is, in my opinion, essential to the proper conduct of legal business that a solicitor should be held to warrant the authority which he claims of representing the client; if it were not so, no one would be safe in assuming that his opponent's solicitor was duly authorised in what he said or did, and it would be impossible to conduct legal business upon the footing now existing.'If the purchaser completes in reliance on the warranty, that is his deemed acceptance and collateral contract with the vendors' solicitors; Suleman v Shahsavari [1989] 2 All ER 460 is an earlier case in which a purchaser in similar circumstances successfully sued the vendors' solicitors.

Similarly there will be a further deemed collateral contract between the vendors' solicitors and the mortgagee.An argument for B & Co was that the mortgagee, in advancing the money to the purchaser, was not reacting to it but doing something independent which could not found a collateral contract.

The answer in law is Lord Esher's formulation of the cause of action in Firbank's Executors v Humphries [1886] 18 QBD 54: '.

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where a person by asserting that he has the authority of the principal induces another person to enter into any transaction which he would not have entered into but for that assertion, and the 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.' The reaction does not have to be a dealing with the warrantor or his or her principal; though anyway in Penn, as will usually be the case, the purchaser's mortgage was crucial to the vendors' sale.The fourth element is breach of the collateral contract.

That occurs merely by the warranty being incorrect.

Fault, if any, is irrelevant.The final element is for the plaintiff to prove that he or she has suffered loss in consequence of the absence of authority.

The measure is contractual.

The formula is the difference between the plaintiff's position (a) as it would have been had the warranty been true and (b) as it is.

The plaintiff cannot recover the advance as it would in an action in tort because it would have made the advance anyway if the warranty had been true.

So, in a case like Penn, the mortgagee's damages are the lost value to the mortgagee of a proper mortgage with good title as security.How can solicitors protect themselves? Extra dilige nce to ensure that they have authority may stop a fraud in its tracks.

The Law Society's 'Guide to professional conduct', para 12.05, requires written instructions where a client is not seen or 'in any case of doubt the solicitor should see the client or take other appropriate steps to confirm instructions'.

However, if the fraud succeeds, no amount of diligence is a defence.

The only answer seems to be to disclaim the warranty of authority which otherwise will be implied.

Yet the purchaser and mortgagee need to be sure that good title is being passed -- and how can they be satisfied of that if the vendors' solicitors are saying that they may not be acting with authority? I imagine that no sane purchaser or lending institution would complete when on notice from the vendors' solicitors that they do not warrant their authority.

The only possibility might be a disclaimer of the normal absolute warranty with, in its place, a positive warranty by the solicitors that they have taken reasonable steps to satisfy themselves that their clients' authority has been properly given.Lending institutions and others who have in the past lost at the hands of fraudsters may now want to reconsider claims previously written off.

And for the future there may be no worry about having to try to sue their own solicitors for breach of their duty in contract or tort; no worry about having to try to prove fraud against anyone; and no worry about having to try to prove a duty of care (there is normally none owed by the vendors' solicitors to the purchaser let alone to the purchasers' mortgagee: Gran Gelato Ltd v Richcliff (Group) Ltd [1992] 1 All ER 865).

There may well be solicitors' liability for breach of warranty of authority in various different sorts of mortgage fraud.This may trouble conveyancers and the Solicitors Indemnity Fund, but is good news for lending institutions and others at the wrong end of fraud.B & Co has indicated an appeal, but the judgment is squarely within the existing case law and textbook commentaries.