McHugh & Anor v Kerr & Anor

By section 10 of the Partnership Act 1890:

In Dubai Aluminium Co Ltd v Salaam [2002] 3 WLR 1913 (H.L.) it was held that what is the ordinary course of the business of a firm is a question of fact, and whether the partner’s act is to be regarded as done in the ordinary course of business is a question of law to be based on an assessment of the primary facts. The speeches of Lord Nicholls, Lord Hobhouse and Lord Millett treat the liability imposed by section 10 as embodying the same principles as vicarious liability for the acts of employees. The following points emerge from the speeches: (1) the liability is based on the legal policy that carrying on a business enterprise involves a risk to others and that if wrongful acts are carried out by the agents of a business then the responsibility to compensate the person who was wronged will fall on the business (Lord Nicholls, para. 21); (2) what the ordinary course of business comprises is a question of fact (para 18, and Lord Millett, para 112); (3) whether an act is in the ordinary course of business is not dependent on whether a partner was "authorised" by the co-partners to do the act he did and it is sufficient if the partner is authorised to do acts of the kind in question (Lord Nicholls, para 21; Lord Millett, para 122); (4) the test is whether the wrongful conduct is "so closely connected with the acts that the partner … was authorised to do that, for the purpose of the liability of the firm … to third parties, the wrongful conduct may fairly and properly be regarded as done by the partner in the ordinary course of the firm’s business …. " (Lord Nicholls, para 23; cf Lord Millett, para 129); (6) whether the test is satisfied is a conclusion of law, based on primary facts (Lord Nicholls, para 25) or a factual conclusion based on an assessment of primary facts (Lord Millett, para 112); (7) but the "close connection" test in itself affords no guidance on the requisite type or degree of connection, since there is an inevitable lack of precision given the infinite range of circumstances where the issue arises, and essentially the court has to make an evaluative judgment in each case (Lord Nicholls, paras 25-26).

Mr McHugh’s evidence was as follows. Apart from the transactions in the name of Miss Porterfield, there were client investment money transactions in the names of only 3 other clients: E M M Wilson, H R Bedi and W Oliver. The entries in the name of E M M Wilson were connected with another series of frauds committed by Mr Gordon.

The firm did not provide a share dealing service as such. A small amount of client money in terms of purchase money and proceeds of sales of shares went through the ordinary client account. Mr Oliver was a client of Mr McHugh, who owned shares in a local company which Mr McHugh sold for Mr Oliver at his request in 1989. The proceeds of sale passed through the firm from D M Wright & Partners.

During the relevant period, Mr Gordon processed 3 transactions for close friends of his. The first was in May and June 1990, when Mr Gordon bought shares for his friend, Mr Fitzgerald, and Mr Fitzgerald’s partner, Ms Magowan. Mr Fitzgerald was a retired bank manager, and he and his partner wanted to buy some shares in the bank which Mr Fitzgerald had worked for. They bought £2,000 worth of shares. The second was a sale of shares for Mr Gordon’s friend, Mr Henderson. The third occasion was in October 1990, and concerned a sale of shares for Mrs Blair, who was a senior employee of a friend of Mr Gordon.

In April 1993 Mr McHugh sold some shares for his client Mr Mullan, who came into the office and wanted to sell very quickly some shares which he had been following on teletext.

A few clients (Smith, Christie, Aiken, Smyth, M Porterfield) used the firm as a post-box for the payment of dividends and interest.

Between 1989 and 1994 the firm billed and received income of between £350,000 and £400,000 per annum (apart from the year ended May 31, 1993 when billings and income were affected by the Coleraine office being damaged by a bomb). There was no fee income from share purchases or sales.

The Appellants’ defence was filed and served on April 26, 2002. The Appellants contended that the Respondents relied upon their own investigations and therefore placed no reliance upon any warranty of authority given by Mr Gordon; they had suffered no loss as a result of the breach of warranty; and they assumed responsibility for the consequences of the stock transfer forms and were liable to Glaxo in negligence, which could be taken account of under the Civil Liability (Contribution) Act 1978.

Shortly before the hearing before Deputy Master Mark on the Respondents’ application for summary judgment, the Appellants indicated that they wished to amend the defence to plead that Mr Wilson’s wrongful acts were not done in the ordinary course of business of the firm.

Deputy Master Mark decided that the forwarding of the share transfers was done in the ordinary course of business of the firm, and the fact that the stockbrokers certified that the signatures on the transfers were those of Miss Porterfield did not break the chain of causation. Laddie J, in granting permission to appeal, ordered the Appellants to produce an amended draft defence.

The draft amended defence pleads that the business of the firm consisted of preparation of accounts, the auditing of accounts, tax advice, completion of tax returns, business advice, financial advice limited to pensions and life assurance, and introducing clients to a firm of independent financial advisers. The firm completed Miss Porterfield’s tax returns, but it is not admitted that the firm carried out any investment business for Miss Porterfield or that she instructed the firm to act for her in relation to investments in shares. The stock transfer forms were forwarded by Mr Gordon rather than the firm. In committing the frauds, Mr Gordon was not acting as a partner in the firm, but was acting personally. It was D M Wright & Partners who lodged the stock transfer forms, and Glaxo and/or its registrar did not rely on the signatures forged by Mr Gordon but relied on the confirmation by D M Wright & Partners of the genuineness of the signatures. It is denied that the proceeds of sale were received by the firm. The proceeds were received by Mr Gordon, although he used an account in the name of the firm as a conduit for the money, before paying it out for his own benefit. It is admitted that he committed the tort of deceit, but it is denied that the deceit caused any loss to Glaxo.

Mr Gordon was Miss Porterfield’s sole point of contact. Share buying and selling on behalf of clients was not the ordinary business of the firm. The few honest share purchases and sales carried out by the firm were carried out for friends, or were "one off" transactions in special circumstances. The firm did not charge or receive any fees for share transactions, and the stock transfer forms contain nothing to suggest the involvement of the firm. The signature purported to be that of Miss Porterfield, the address was hers, and the forms were not stamped with the name of the firm. The firm received no benefit, in terms of fees, from the fraudulent transactions, and it was never intended by Mr Gordon that the transactions would be of any benefit to the firm.

The Appellants submit they have a real prospect of defending the claim brought against them on the basis that (a) they are not vicariously liable for the relevant frauds of Mr Gordon; and (b) Glaxo’s loss (for which the Respondents were liable) was caused not by Mr Gordon’s breach of warranty of authority, but by the Respondents’ investigation (or lack of it) as to the genuineness of the signatures on the forms.

They rely in particular on Lord Millett’s statement in Dubai Aluminium, para 112, that if the actions of the party primarily liable are legally capable of being performed within the scope of his employment or in the ordinary course of his firm’s business, the question whether they were so performed is a question of fact, not of law. They say that the Deputy Master found as a fact that Mr Gordon had purported to act on behalf of the firm, whereas the only evidence on the question – the stock transfer forms – pointed to Mr Gordon having not purported to act on behalf the firm. The Deputy Master regarded as conclusive his finding that Mr Gordon had purported to act on behalf of the firm.

The present case is not one where the firm undertook a responsibility to a third party and then entrusted the discharge of that responsibility to the dishonest partner. It is not admitted that Miss Porterfield entrusted the firm with her share certificates, and there is no evidence at all that the firm was so entrusted. Miss Porterfield did not instruct the firm to sell her shares; the firm did not entrust Mr Gordon with the carrying out of any such responsibility.

Nor is the present case one where the wronged party was defrauded by a partner acting within the scope of his apparent authority: (1) the immediate victim of the frauds, Miss Porterfield, was ignorant of the selling of her shares, so there is no question of her having given instructions in reliance on any apparent authority; (2) as for reliance by the Respondents: (a) there is no evidence that Mr Gordon purported to act on behalf of the firm; (b) even if Mr Gordon did purport to act on behalf of the firm, the speech of Lord Millett shows that this fact alone might well not tip the balance towards vicarious liability; (c) Mr Gordon purporting to act on behalf of the firm would have amounted to a representation of authority by Mr Gordon (rather than the firm); it would not have amounted to "holding out" by the firm, and would be no basis for a finding of apparent authority.

In order to decide whether Mr Gordon acted in the ordinary course of the business of the firm, it will be necessary for the court to hear evidence and make findings of fact in relation to: (1) the actual (honest) business of the firm; (2) the ordinary (honest) role played by Mr Gordon in the business of the firm; (3) the extent to which Mr Gordon used the firm (its office facilities, staff, stationery, bank accounts) as an instrument in the fraud; (4) the extent (if any) to which Mr Gordon purported to act on behalf of the firm; (5) the extent (if any) to which the firm benefited from the fraud, or would have benefited if the fraud had not been discovered.

The Appellants accept that some factors point in the direction of vicarious liability: (1) it is common knowledge that it is part of the ordinary business of many firms of accountants to buy and sell shares on behalf of clients; (2) the firm bought and sold some shares on behalf of its clients; (3) Mr Gordon used the firm’s Investment Business Client Money Account as a conduit for the proceeds of sale.

But in this case the following factors point away from vicarious liability: (1) share buying and selling on behalf of clients was not the ordinary business of the firm; (2) the few honest share purchases and sales carried out by the firm were carried out for friends of the partners, or "one-off" transactions in special circumstances; (3) Miss Porterfield used the firm to complete her income tax returns; (4) (as far as the Appellants are aware) the firm did not carry out investment business for Miss Porterfield; (5) against billings and income of £350,000 - £400,000 per annum, the firm did not charge or receive any fees for share transactions; (6) the stock transfer forms contained nothing to suggest the involvement of the firm (the signature purported to be that of Miss Porterfield; the address was hers, and the forms were not stamped with the name of the firm); (7) the firm received no benefit, in terms of fees, from the fraudulent transactions, and it was never intended by Mr Gordon that the transactions would be of any benefit to the firm.

Accordingly, the Appellants have a real prospect of showing that the relevant frauds of Mr Gordon were not carried out in the ordinary course of business of the firm.

On causation, the amended draft defence is that, negligently, D M Wright & Partners failed to discover that the signatures on the stock transfer forms were not those of Miss Porterfield, and endorsed a confirmation that the forms bore her signature. They relied upon their own investigation as to genuineness, and placed no reliance on any warranty of authority given by the firm. In acting on the stock transfer forms, Glaxo, its registrar and/or the London Stock Exchange relied on the confirmation of the signatures by D M Wright & Partners, rather than the original signatures forged by Mr Gordon, and accordingly D M Wright & Partners have suffered no loss as a result of any breach of warranty of authority on the part of Mr Gordon and/or the firm. Alternatively, in lodging the transfer forms D M Wright & Partners assumed responsibility for the consequences of the stock transfer forms being acted upon by Glaxo and/or Glaxo’s agents, and became liable to Glaxo for breach of warranty. The Appellants are entitled to an indemnity or contribution from the Respondents.

The Appellants say that the crucial fact is that D M Wright & Partners did not simply send the forms to the LSE for onward transmission to the registrar of Glaxo, but they were requested by the registrar to confirm that the signatures were genuine. They either did nothing about determining whether the signatures were genuine, or they sought confirmation from Mr Gordon. Mr Gordon was the source of the stock transfer forms, so he was the most obvious suspect (probably the only suspect) if the signatures were forged.

As a result of the decision in Standard Chartered Bank v Pakistan National Shipping Corp [2003] 1 AC 959 it is not argued by the Appellants that D M Wright should bear some or all of its own loss on the basis that it is guilty of contributory negligence.

But it is argued that this case involves a series of claims along a chain of warranties of authority, from Mr Gordon to D M Wright & Partners to Glaxo. In terms of this chain, the confirmation of the signature by D M Wright & Partners amounted to a direct link between Miss Porterfield and D M Wright & Partners: (1) by returning the forms for signature confirmation, the registrar expressly refused to rely on the signature forged by Mr Gordon; (2) by accepting the forms endorsed by D M Wright & Partners, having previously refused them, the registrar must have relied upon the endorsements rather than the original signatures.

There is a real prospect that it will be found that Glaxo’s loss (for which D M Wright & Partners were liable) was therefore caused not by Mr Gordon’s breach of warranty of authority, but by D M Wright & Partners’ investigation (or lack of it) as to the genuineness of the signatures on the forms.

The Respondents’ case is that there is no evidence which supports any reasonable prospect that the Appellants have a defence to this action.

The firm was a firm of accountants. It defies common sense to suggest that the completion of share transfer forms, if in fact authorised, would be outside the scope of an accountant’s business. It is clearly an activity that is legally capable of being performed by an accountant in the ordinary course of his firm’s business. It is clear from the evidence of Mr McHugh that the Appellants did in fact carry out some share transfer work.

There can be no doubt that the cause of the loss to the Appellants was the fraudulent behaviour of Mr Gordon. He forged the stock transfer forms and took the proceeds of sale for himself. That fraud was effectively perpetrated on Miss Porterfield, on the Respondents and on Glaxo. Whilst the fact that the Respondents themselves were defrauded was no defence to the action against them from Glaxo, it forms the proper basis of a claim against the partners of the fraudulent Mr Gordon, who take statutory responsibility for his actions.

The only question for me is whether the Appellants can show that there is a real prospect of a successful defence: Swain v Hillman [2001] 1 All ER 91.

There is no doubt that the acts of deceit of which Mr Gordon was guilty was a wrongful act for the purposes of section 10 of the Partnership Act 1890. The only substantial questions are whether it is seriously arguable that he was not acting in the ordinary course of business of the firm, or that it was not his acts, but the negligence of the Respondents, which caused their loss.

For the purposes of the first question, the issue is whether his wrongful conduct was so closely connected with acts he was authorised to do that, for the purpose of liability of the firm to third parties such as the Respondents, the wrongful conduct may fairly and properly be regarded as done by him while acting in the ordinary course of the firm’s business: Dubai Aluminium, at 1920, para 25.

Mr Gordon was, of course, not authorised by the Appellants to commit fraud, but it does not need the citation of Dubai Aluminium to make the point that whether an act is done in the ordinary course of business does not depend on whether a partner was authorised to do the very act he did. The question is whether there is a sufficient connection between the partners’ wrongdoing, and the class of acts in which the firm engaged.

In this case the Appellants accept that it is common knowledge that it is part of the ordinary business of many firms of accountants to buy and sell shares on behalf of clients; and their own evidence is that the firm bought and sold some shares on behalf of its clients. In these circumstances it is almost impossible to see how the acts would not be within the ordinary course of business of the firm.

It is true that there are a number of factors which indicate that the sale of shares on behalf of clients was a small part of the firm’s business, and that it did not normally charge for the service. It may also be true that the few honest share purchases and sales carried out by the firm were carried out for friends of the partners, or were one-off transactions in special circumstances. But these are not factors which affect the question whether it was part of the ordinary business of the firm. A firm of solicitors may specialise in litigation, but if it does occasional conveyancing work as a favour for individual clients, it cannot be heard to say that conveyancing is not part of the ordinary course of its business. Nor can it matter in the circumstances of this case that the firm was never intended to receive any benefit, and in fact, received no benefit, in terms of fees, from the fraudulent transactions. Nor can it be said that the Respondents knew that they were not dealing with the firm. At least two of the share transfers were sent under cover of a letter written and signed by Mr Gordon on behalf of the firm. In my judgment there is no basis for a defence that Mr Gordon’s act were not in the ordinary course of business of the firm.

Nor, in my judgment, can it be seriously argued that the negligence of the Respondents breaks the chain of causation. Mr Gordon was guilty of fraudulent misrepresentation, and his partners are "liable therefor to the same extent as" Mr Gordon (section 10): see also Dubai Aluminium Co Ltd v Salaam [2002] 3 WLR 1913, 1926, para 49. This is not a case where the Appellants can claim contribution under the Civil Liability (Contribution) Act 1978, but if the conditions of the Act were met, it would be a case in which they (standing in the shoes of the wrongdoer who has been the sole beneficiary of the wrong) would not be entitled to contribution: ibid paras 53-54.

It is no answer to a claim in deceit or fraudulent misrepresentation that the falsity might have been discovered by the exercise of reasonable care and skill: eg Dobell v Stevens (1825) 3 B&C 623. The same policy which imposes wider liability on an intentional wrongdoer (Smith New Court Securities Ltd v Scrimgeour Vickers [1997] AC 254, 279 per Lord Steyn) and which excludes a plea of contributory negligence to a claim for deceit (Standard Chartered Bank v Pakistan National Shipping Corpn and others (Nos 2 and 4) [2003] 1 AC 959) inevitably leads to the conclusion that the fraud is treated as the sole cause of the damage caused to the Respondents. For the purposes of this claim the Appellants stand in the place of Mr Gordon. There can be no serious dispute that Mr Gordon intended the Respondents to rely upon his fraudulent misrepresentation.

The appeal will therefore be dismissed.