[1995] 4 All ER 656

EQUITY: LAND; Mortgages: FAMILY; Ancillary Finance and Property: PROFESSIONS; Lawyers

In 1991 the defendants, Mr and Mrs S, applied to the plaintiff for a loan by way of a further mortgage on their home, which was then worth an estimated £195,000 and was subject to an existing mortgage of £99,000. The purpose of the loan as stated in the loan application was the purchase of shares in the family business, but Mr S informed his solicitor that the advance would be used to pay off the first656 mortgage, settle his business debts and cover the costs of various legal fees. The plaintiff agreed to the advance and instructed the same firm of solicitors acting for Mr and Mrs S to act on its behalf as the lender in the transaction. The advance was duly made but Mr and Mrs S almost immediately fell into arrears with their payment of the mortgage instalments. Thereafter, the plaintiff brought proceedings against Mr and Mrs S and obtained an order for possession of the property. Mrs S appealed, contending that she had a right as against her husband to have the mortgage set aside on the ground that knowledge of the true purpose of the loan was to be imputed to the plaintiff because the solicitors firm acting for the plaintiff had acquired such knowledge which they had a duty to communicate to the plaintiff and, accordingly, the plaintiff was put on inquiry and had constructive notice of the fact that the loan was not going to be used for the joint benefit of husband and wife and should have taken steps to ensure that she was independently advised about participating in a transaction which was manifestly disadvantageous to her.

Held - Where a solicitor was acting for both a borrower and a lender in the same transaction and he obtained from the borrower knowledge of some fact which it was his duty not to disclose to the lender without the borrower's consent, and which it was his duty to communicate to the lender, the solicitor's knowledge of that fact could not be imputed to the lender because, in the absence of the borrower's consent to disclosure, his prima facie duty to the lender was superseded by a duty to notify the lender that he could no longer act for it because a conflict of interest had arisen, and at no time was he free to pass on information which had only come into his possession as solicitor for the borrower. It followed on the facts that, notwithstanding the relationship of principal and agent between the plaintiff and the solicitor, the solicitor's knowledge of the true purpose of the loan could not be imputed to the plaintiff and consequently the plaintiff did not have notice that any part of the loan was to be applied for a purpose which was not for the joint benefit of Mr and Mrs S, with the result that it was not put on inquiry and could not be fixed with constructive notice of the misrepresentation or undue influence on which Mrs S relied. It followed further that the plaintiff was entitled to enforce its legal charge and that the order for possession was correct. Mrs S's appeal would accordingly be dismissed (see p 671 g to j and p 672 f g, post).
   Re David Payne & Co Ltd, Young v David Payne & Co Ltd [1904] 2 Ch 608 and El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 applied.

Notes
For solicitors acting for opposing interests, see 44 Halsbury's Laws (4th edn) para 133, and for cases on the subject, see 44 Digest (Reissue) 126-127, 1227-1240.

657

Appeal
By notice dated 18 October 1994 the second defendant, Penelope Stepsky, appealed from the order of Master Moncaster dated 12 July 1994 on an application for summary judgment by the plaintiff mortgagee, Halifax Mortgage Services Ltd (formerly BNP Mortgages Ltd), that Mrs Stepsky and her husband, Joseph Emanuel Stepsky (the first defendant), deliver up possession of the property known as 88 Osidge Lane, Southgate, London, to the plaintiff, and applied for the order to be set aside and for leave to defend the action. Mr Stepsky took no part in the proceedings. The appeal was heard and judgment given in chambers. The case is reported by permission of Edward Nugee QC. The facts are set out in the judgment.

16 June 1995. The following judgment was delivered.

EDWARD NUGEE QC. This is an appeal by the second defendant, Mrs Penelope Stepsky, from a decision of Master Moncaster given on 12 July 1994, by which he ordered that the defendants, Mrs Stepsky and her husband, Mr Joseph Stepsky, should deliver to the plaintiff, then known as BNP Mortgages Ltd, possession of a dwelling house known as 88 Osidge Lane, Southgate, London N14 5JG.

658

   This is another in the long line of cases in which a wife has joined in a mortgage of the matrimonial home to secure repayment to an institutional lender of a loan which has been used in her husband's business, and, when the business has failed and the mortgagee has sought possession of the property, has asserted a right to set aside the mortgage on the ground of misrepresentation or undue influence on the part of her husband.
   It is common ground that, this being an appeal against a summary judgment given on affidavit evidence, the issue at this stage is, using the words of Ackner LJ in Banque de Paris et des Pays-Bas (Suisse) SA v Costa de Naray [1984] 1 Lloyd's Rep 21 at 23, 'whether ¼ there is a fair or reasonable probability of the defendants' having a real or bona fide defence'. (See National Westminster Bank plc v Daniel [1994] 1 All ER 156 at 159, [1993] 1 WLR 1453 at 1457 per Glidewell LJ.) Unless that question can be answered in the negative, the action should go to trial and directions should be given for it to continue as if begun by writ.
   The leading authorities in this field are Barclays Bank plc v O'Brien [1993] 4 All ER 417, [1994] 1 AC 180 and CIBC Mortgages plc v Pitt [1993] 4 All ER 433, [1994] 1 AC 200. The principles established by those authorities are not in doubt. For present purposes they may be summarised as follows.
   (1) Where a wife has been induced to execute a mortgage of jointly owned property by her husband's undue influence, misrepresentation or some other legal wrong, she has a right as against him to have the mortgage set aside.
   (2) The wife's right to have the mortgage set aside is enforceable against a third party who had actual or constructive notice of the circumstances giving rise to her right or for whom the husband was acting as agent.
   (3) Where the mortgage transaction is on the face of it not to the wife's financial advantage and carries a substantial risk of the husband committing a legal or equitable wrong entitling the wife to set aside the transaction, as for example where it is apparent that the wife is acting as a surety for her husband, the creditor is put on inquiry and has constructive notice of the wife's rights unless he takes reasonable steps to ensure that her agreement to participate in the transaction was properly obtained.
   (4) Where there is no indication that the transaction is anything other than a normal advance to husband and wife for their joint benefit, the creditor is not put on inquiry and, if the husband is not acting as the creditor's agent and the creditor has no actual notice of the circumstances giving rise to the wife's rights, the creditor cannot be fixed with constructive notice of them.
   In the present case the argument proceeded for the most part on the assumption that Mrs Stepsky had a right as against her husband to have the mortgage set aside. The main area of contention centred on the question whether the plaintiff had actual or imputed knowledge of the fact that the advance was going to be used to support Mr Stepsky's business rather than for the joint benefit of Mr and Mrs Stepsky. The principal submission on behalf of Mrs Stepsky was that such knowledge should be imputed to the plaintiff because the solicitors acting for the plaintiff had acquired such knowledge and had a duty to communicate it to the plaintiff. In order to examine the correctness of that submission I must set out the facts more fully.
   Mr and Mrs Stepsky bought the property in 1971 for £11,000. The freehold title to it was registered in their joint names on 16 November 1971, with a joint proprietorship restriction being entered, which suggests that they may have bought as tenants in common rather than joint tenants, though nothing seems to turn on this in the present case. The property was bought with the aid of a659 mortgage advance from the Abbey National Building Society, which appears to have been in the sum of £7,700. The property was remortgaged several times to secure further advances, most recently by a charge in favour of the Guardian Building Society dated 22 September 1989.
   On 7 May 1990 Mr and Mrs Stepsky signed a mortgage application in a form supplied by the plaintiff through J & G Insurance Brokers Ltd. Among the particulars stated in the form were the following.
   (1) Mr Stepsky's bank account was with Abbey National plc, account No 12520089 (it was subsequently shown that this was an account in his name alone, not a joint account in the names of Mr and Mrs Stepsky). (2) Their solicitors were Roiter Zucker, Mr David Franks being the person acting. (3) The property was subject to an existing mortgage to the Guardian Building Society, on which the amount outstanding was £99,000. (4) Mr Stepsky was employed at a salary of £44,000 as a director of Ashley & Sons Ltd, a company in which he held 50% of the shares, and which carried on the business of soft furnishing and domestic textiles. He had been employed by them for 28 years. (5) Mrs Stepsky was employed as a sales person by a ladies fashion shop at a salary of £2,500. (6) The amount of the loan required was £128,000 for 20 years. The property had been bought in 1970 for £11,000 with the assistance of a mortgage advance of £7,500, and its estimated value was £195,000. The purpose of the remortgage/further advance was 'to buy family shares in business'.
   Although the application was signed on 7 May 1990, it appears that it was not posted until 12 June: at all events it was not received by the plaintiff until 13 June. On the same day, 13 June, the plaintiff sent Mr Stepsky three documents.
   (1) An offer of a home loan of £7,500 on account No C756748, the purpose of the loan being 'Remortgage', and the security address being the property, 88 Osidge Lane. The borrowers' solicitors were stated to be Roiter Zucker; the lender's solicitors were to be advised. Additional security was to be provided in the form of a life policy for £7,500 to be effected with Scottish Life Assurance Co. The printed general conditions accompanying the offer provided (inter alia) that the lender reserved the right to withdraw the offer at any time in the event of any misrepresentation or non-disclosure of pertinent facts; that the lender required an 'all monies' first legal charge to be taken over the security property; and that all security documentation was to be prepared by the lender's solicitors. The typed special conditions provided (inter alia): 'Solicitors to read this offer in conjunction with account number C756797.'
   (2) A similar offer of a home loan of £120,500 on account No C756797, the purpose of the loan being 'purchase shares'. The additional security was to be a life policy with Scottish Life Assurance Co for £120,500. The offer was accompanied by the same printed general conditions. The typed special conditions provided: 'Solicitors to read this offer in conjunction with account number C756748.'
   (3) The plaintiff's printed form of 'General Instructions to Solicitors'. These included the following provisions.
   (i) An introductory sentence: 'Neither the General Instructions to Solicitors set out herein or the form of Report on Title detract from or limit the general responsibility of the Solicitor instructed by the Lender under general law as Solicitor for the Lender.'
   (ii) '1. SOLICITOR'S CONDITIONS The Borrower named in the enclosed Offer of Home Loan has today nominated your firm to act in this matter and you are therefore requested to act on behalf of the Lender in the investigation of title to660 the Security Property and perfection of the Lender's title to the security required by the said Offer ...'
   (iii) '4. TITLE ... Please report any matter which ought to be brought to the attention of the Lender ...'
   (iv) '12. OFFER Please ensure that all the details as shown on the Offer of Home Loan are correct and report to the Lender any discrepancies ...'
   Accompanying the general instructions to solicitors was a form of report on title, to be completed and signed by the solicitors, which included their confirmation that 'title is good and marketable and can properly be accepted as security'.
   It appears that Mr Stepsky passed these documents on to Mr Franks at Roiter Zucker on Tuesday 19 June.
   On 12 June, that is to say a week before Roiter Zucker received instructions from the plaintiff to act as its solicitors, Mr Stepsky telephoned Mr Franks. His attendance note, so far as is material, is as follows:

Bank Leumi were bankers to Ashley & Sons Ltd; as appears from this note, the company owed them more than £20,000, and Mr Stepsky told Mr Franks that the remortgage was being effected largely in order to pay this debt and the company's indebtedness to Roiter Zucker.
   Mr Franks carried out normal conveyancing procedures, and on 12 July attended on Mr and Mrs Stepsky at 88 Osidge Lane and obtained their signatures to the mortgage documentation. Mr Franks lived quite close and, in view of Mr Stepsky's business commitments, visited them at their home. His contemporary handwritten attendance note reads as follows:

(Wayne was Mr and Mrs Stepsky's adult son, and the plaintiff required a written consent to the mortgage from him.)
   Mr Stepsky subsequently telephoned Mr Franks with instructions to pay the balance of the mortgage advance into his account at Abbey National, No 12520089 (the account referred to in the form of application for the loan). As appears from Mr Franks' attendance note, one of the purposes of paying the money into his own account rather than the company's account with Bank Leumi was to prevent the money being 'snaffled' by the bank.
   Mr Franks duly signed the report on title without any relevant qualification and sent it to the plaintiff. Completion took place on 19 July, when the amount required to discharge the Guardian Building Society's charge was £104,081á62, and after legal costs and disbursements (including those of the Guardian's solicitors and Roiter Zucker's fees) a balance of £23,199á38 was paid into Mr Stepsky's account.

661

   The defendants fell into arrears with the payment of the mortgage instalments almost immediately. The originating summons in this action was issued on 27 January 1992, at which date the arrears amounted to £15,658á06. No payment has been made since February 1994, and the arrears now amount to about £60,000. In his affirmation sworn on 3 November 1992, and expressed to be authorised by Mrs Stepsky as made on her behalf as well as his own, Mr Stepsky stated that his business had failed and that he was going to register as unemployed. It appeared that at one time, as he was unemployed, the Edgware Foundation, a charity, might be prepared to make funds available to enable the arrears to be paid off; but negotiations with the foundation came to nothing, and there is no prospect of the defendants now being able to pay off the arrears within a reasonable period. Mr Stepsky's affirmation contained no mention of the defence on which Mrs Stepsky now relies, which is referred to hereafter. On 12 July 1994 Master Moncaster made the order for possession against which Mrs Stepsky now appeals.
   Mrs Stepsky's case is summarised in two paragraphs of her affirmation made on 9 October 1994:

   In a second affirmation, made on 3 February 1995, Mrs Stepsky says:

   If Mr Franks' attendance note of 12 July 1990 is accurate, it is apparent that Mrs Stepsky's statement that she did not know of her husband's business debts is untrue, since he records that he discussed business problems at quite a long meeting at their home, though he does not in terms say that Mrs Stepsky was present throughout the whole of the meeting. Mr Franks also stated, in a letter which is in evidence, that it was at this meeting that the mortgage was executed; and if this is correct, it is apparent that Mrs Stepsky's second affirmation is also untrue.
   Mr Jackson, counsel for the plaintiff, submitted that Mrs Stepsky's evidence was simply not credible. If she thought the amount owing to the Guardian662 Building Society was only £85,000, the surplus moneys available from a loan of £128,000 would be more than £40,000, and it is difficult to believe that she really thought that the purpose of such an advance was for home improvements and the purchase of carpets, in the absence of any supporting detail. The original advance to purchase the house had been for only £7,500 or £7,700; and she must have known that the further advances had been utilised in her husband's business. Moreover she had signed the mortgage application form, which stated clearly (though on a different page from that on which she signed) that the purpose of the advance was 'to buy family shares in business'.
   On the affidavit evidence it seems likely that Mr Jackson would have a strong case at trial for submitting that there was no misrepresentation inducing Mrs Stepsky to execute the mortgage. However, although the evidence sworn by Mrs Stepsky is very thin, and clearly conflicts in important respects with Mr Franks' contemporary attendance note and subsequent letter, I am reluctant to conclude that there is no fair or reasonable probability that she has a defence on this ground or on the ground of undue influence, since there is really nothing to show whether she took any interest in her husband's business affairs or whether, as is not uncommonly the case, she simply signed what he asked her to sign. As Lord Browne-Wilkinson said in Barclays Bank plc v O'Brien [1993] 4 All ER 417 at 429, [1994] 1 AC 180 at 196:

   Mrs Stepsky's statement that she did just this is not inherently incredible, and I am not prepared to shut her out from a trial on this ground, notwithstanding my considerable doubt about the truthfulness of other parts of her evidence.
   Miss Harington, counsel for Mrs Stepsky, went to the other extreme and submitted that the plaintiff must have known that the advance was not being made for the joint benefit of Mr and Mrs Stepsky. The mortgage application form showed that the amounts secured on the property had increased from the original £7,500 to £99,000, and the plaintiff can hardly have thought that the further advances had been wholly spent on the property, and should not have assumed that it had been spent in some other manner for the joint benefit of Mr and Mrs Stepsky. The additional money to be advanced over and above the amount required to discharge the Guardian Building Society's mortgage was stated to be required 'to buy family shares in business'; but while Mr Stepsky had a 50% shareholding in the business of which he was a director, Mrs Stepsky was not employed in that business or indeed a businesswoman at all, but a fashion sales assistant at a salary of £2,500; and the plaintiff should have realised from the facts disclosed in the form that the further advance was probably required for the purpose of Mr Stepsky's business.
   I do not consider that the factors on which Miss Harington relies are sufficient to give the plaintiff actual or constructive notice that the further advance was not going to be applied for the joint benefit of Mr and Mrs Stepsky. They had both signed an application form stating that the money was going to be used for the purpose of buying family shares in business. There was nothing to show that the business of which Mr Stepsky was a director was not prospering-indeed one would not expect further shares to be bought in it, or in any other business, unless663 it was, while Mr Stepsky's annual income from the company was stated to be £44,000. The application form showed that Mr Stepsky owned 50% of the shares in Ashley & Sons Ltd: it did not show whether the other 50% were owned by Mrs Stepsky or by someone else, since it did not ask about her shareholding in that company but only about her shareholding in the company by which she herself was employed. The plaintiff clearly accepted that the loan, in so far as it was not used to pay off the existing mortgage, was going to be used to purchase shares, as this was the purpose of the loan stated in the offer of home loan of £120,500 which it made to Mr and Mrs Stepsky. It was in my judgment entitled to assume that the money which it was being asked to advance to Mr and Mrs Stepsky for the purpose of buying shares was going to be applied in buying shares for their joint benefit.
   Miss Harington had a more formidable argument. Roiter Zucker, she said, were acting as solicitors for the plaintiff in the transaction. They knew that the further advance was going to be used to meet Mr Stepsky's company's business debts, and that this was not the purpose for which Mr and Mrs Stepsky had applied for the loan and was not a purpose which benefited them jointly. That knowledge, she submitted, must be imputed to the plaintiff, since it was knowledge obtained by the plaintiff's agents in the course of the transaction in which they were acting as such, and which they had a duty to communicate to the plaintiff. The plaintiff was therefore fixed with knowledge that the loan was not going to be used for the joint benefit of Mr and Mrs Stepsky and should have acted accordingly. Miss Harington relied on the statements of principle to this effect contained in 1(2) Halsbury's Laws (4th edn reissue) para 149, and in Bowstead on Agency (15th edn, 1985) p 412, and supported them by reference to a number of authorities.
   In Wyllie v Pollen (1863) 3 De GJ & Sm 596, 46 ER 767 Lord Westbury LC held that the transferee of a mortgage was not affected by the knowledge of the solicitor acting for him in the matter of the transfer of an incumbrance subsequent to the original mortgage, so as to prevent him from making further advances which would have priority over the subsequent incumbrance, because such knowledge was not material to the business of the transfer. Lord Westbury LC said ((1863) 3 De GJ & Sm 596 at 634-635, 46 ER 767 at 770):

   In the present case, said Miss Harington, Roiter Zucker's knowledge of the purposes to which the additional money was to be applied was derived from the same transaction, was material to it, and was something that Roiter Zucker had a duty to make known to the plaintiff.
   In Rolland v Hart (1871) LR 6 Ch App 678 a solicitor induced a client to advance money on the mortgage of certain land in Middlesex, and soon afterwards induced another client, Mr Stagg, to advance money on a mortgage of the same land, without informing him of the existence of the first mortgage. Mr Stagg registered his mortgage under the Middlesex Registry Act 1708 before the first664 mortgage was registered. Lord Romilly MR held that he had priority, and that to deprive him of it it must be proved either that he had notice of the prior security, or that it was highly probable that the solicitor communicated the fact to him. His decision was reversed by Lord Hatherley LC, who held that Mr Stagg must be taken to have had, through the solicitor, notice of the first mortgage, and could not by the prior registration obtain priority. He said that there must be actual notice of the first incumbrance, implying fraud in the person registering the second incumbrance, to deprive him of priority thereby gained over the first incumbrance; that is to say (as he puts it), where the second incumbrancer has actual notice of the first incumbrance, his attempt to get priority through the medium of the Registration Acts amounts to fraud (see LR 6 Ch App 678 at 681, 684). He continued:

   Lord Hatherley LC recognised that there was an exception when the solicitor himself took part in some fraud on his client, so as to make it necessary for the solicitor to conceal the facts from his client in order to defraud him (see Kennedy v Green (1834) 3 My & K 699, [1824-34] All ER Rep 727); but he held that Mr Stagg's solicitor, though he had grievously neglected his duty, could not be fixed with any such fraud.
   This exception is well established (see the cases referred to in 1(2) Halsbury's Laws (4th edn reissue) para 150). In Cave v Cave (1880) 15 Ch D 639 a solicitor acted for the legal mortgagee of land which was, to the knowledge of the solicitor, trust property being mortgaged in breach of trust. Fry J said (at 643-644):

   In Cave v Cave Fry J concluded that the solicitor in the case was party to a fraud on his client (the legal mortgagee), that it was impossible to suppose that he would have communicated the real facts to his client, and that, whichever view one adopted, the circumstances were such as to repel the construction or imputation of the solicitor's knowledge to the client.
   In the present case Mr Jackson did not suggest that Mr Franks intended a fraud on the plaintiff. He submitted, however, that Mr Franks owed a duty to his clients, Mr and Mrs Stepsky, not to inform the plaintiff of the purpose to which they actually intended the further advance should be applied, unless they consented to his doing so; and that in these circumstances, notwithstanding that Mr Franks also had a duty to inform the plaintiff of Mr and Mrs Stepsky's intention, the conclusion of law that he had done so, and that the plaintiff therefore had the knowledge which Mr Franks had, did not arise.
   The issue between the parties can thus be stated as follows: where a solicitor is acting for both a borrower and a lender in the same transaction, and he obtains from the borrower knowledge of some fact which it is his duty to the borrower not to disclose to the lender without the borrower's consent, and which it is his duty to the lender to communicate to him, is knowledge of that fact to be imputed to the lender?
   Miss Harington submitted that the correct analysis was this. (1) Where a solicitor acts for both borrower and lender, there is no problem so long as there is no conflict of interest. (2) If the borrower tells the solicitor something material to the transaction which the solicitor ought to disclose to the lender, a conflict arises if the borrower objects to that information being disclosed. (3) However the fact that a conflict has arisen does not take away the solicitor's duty of disclosure to the lender. (4) The solicitor must either (a) tell the lender that a conflict has arisen and cease to act; or (b) tell the lender that a conflict has arisen and obtain the lender's informed consent to continuing to act for both; or (c) tell the lender the material fact; or (d) by carrying on acting for the lender and telling the lender nothing, be in breach of duty to the lender.
   Mr Jackson did not dissent from this analysis; and he drew attention to the principles set out in Frances Silverman's The Law Society's Conveyancing Handbook 1994 (3rd edn) A.11, which govern the duties of a solicitor who is acting for both borrower and lender, and which, so far as is material, are as follows.

666

   It is thus common ground between the parties that Roiter Zucker, by continuing to act for both the defendants and the plaintiff after being told that the purpose of the remortgage was not to purchase shares for the benefit of both defendants, as the plaintiff had been led to believe, but to enable the debts of Mr667 Stepsky's business to be discharged, and by failing to inform the plaintiff of this material fact, were in breach of their duty to the plaintiff. Mortgage Express Ltd v Bowerman & Partners [1994] 2 EGLR 156 illustrates that, in such a situation, the lender's solicitor may be in breach of his duty to the lender by continuing to act without disclosing material information given to him by the borrower, notwithstanding that the borrower did not consent to his doing so. As Arden J said (at 162):

She accordingly held that the solicitors were liable in damages to the lender for their failure, while continuing to act for the lender, to inform it of matters which might have led it to withdraw from the transaction, notwithstanding that it would have been a breach of the solicitors' duty to the borrower to communicate such matters to the lender without the borrower's consent.
   What is the consequence, however, as between the borrower and the lender if the solicitor does not carry out his duty, which is either, with the borrower's consent, to inform the lender of the material fact, or to tell the lender that a conflict of interests has arisen and that he must cease to act for it? Is the solicitor's knowledge of the material fact to be imputed to the lender?
   A similar issue has arisen in two cases in the Court of Appeal in which the question has arisen whether knowledge of a material fact is to be imputed to a company, where such knowledge was acquired by one of its directors in the course of acting for a third party with conflicting interests. In both cases it was held that the knowledge of the director could not be imputed to the company.
   In Re David Payne & Co Ltd, Young v David Payne & Co Ltd [1904] 2 Ch 608 at 611 Buckley J said:

He went on to point out that, where a company has a general power to borrow, there is no duty on a lender to inquire what the borrower is going to do with the money.
   Buckley J's decision was upheld by the Court of Appeal. Vaughan Williams LJ said (at 616-617):

The reasoning of Romer and Cozens-Hardy LJJ was to similar effect.
   The decision in Re David Payne & Co Ltd was applied in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, although the court reached a contrary conclusion on other grounds. Nourse LJ said (at 698):

Rose LJ said (at 700):

Hoffmann LJ analysed the agency cases in more detail. He said (at 702):

He went on to mention three such categories. The first is not relevant to the present case. As to the second, he said (at 702):

669

The third category is where an agent has actual or ostensible authority to receive communications on behalf of the principal. In such cases communication to the agent is communication to the principal. Hoffmann LJ continued (at 703-704):

He then considered the judgments in Re David Payne & Co in some detail, and concluded (at 704):

   In the light of these authorities Mr Jackson's submissions were as follows. If Roiter Zucker were instructed by Mr Stepsky that the advance was to be used to pay creditors, they would know that he had misrepresented to the plaintiff the purpose for which it was required; but knowledge of these facts was not to be imputed to the plaintiff for the following reasons.
   (1) Roiter Zucker did not acquire the knowledge as the plaintiff's agent: they acquired it from Mr Stepsky before they were instructed by the plaintiff.
   (2) It was a term of Roiter Zucker's retainer by the plaintiff that they should ensure that the details shown on the offers were correct and to report discrepancies. In the absence of the consent of the borrowers, however, Roiter Zucker were not at liberty to notify the plaintiff of the true purpose of the loan.

670

   If the borrowers were not prepared to consent to Roiter Zucker informing the plaintiff that the purpose of the loan was in fact other than as stated in the offers, then Roiter Zucker's obligation was to inform the plaintiff that a conflict of interest had arisen and to terminate the retainer.
   (3) Knowledge cannot be imputed where Roiter Zucker were not entitled to inform the plaintiff, as there cannot in this situation be said to be a duty to communicate the information.
   (4) Even if Roiter Zucker had a duty to notify the plaintiff, the plaintiff was not put on inquiry by anything in the mortgage application form and had no duty to investigate how the loan was to be applied, with the result that Roiter Zucker's knowledge is not to be imputed to the plaintiff; for the existence of such a duty raises only a rebuttable inference of fact that the information was communicated, and it is clear that the plaintiff was not in fact informed.
   Miss Harington sought to distinguish the position of directors, which was considered in Re David Payne & Co Ltd and El Ajou v Dollar Land Holdings plc, from that of solicitors acting in a conveyancing transaction, on the ground that directors have an ongoing role and cannot decline to act from time to time for their company simply because they acquire knowledge relevant to the company's business from another source which they do not want or are under a duty not to disclose. The importance of placing a limit on the imputation of knowledge simply because the director is a director, she said, explains the rules developed by the courts in that context. No such consideration applied to a solicitor appointed by two clients in relation to the same transaction, provided the controls stated in Wyllie v Pollen (1863) 3 De GJ & Sm 594, 46 ER 767 are applied.
   I do not consider that the suggested distinction can be drawn in such broad terms. In my judgment the principles stated in Re David Payne & Co and El Ajou v Dollar Land Holdings plc in relation to information communicated to a director are equally applicable in the case of other agents such as solicitors; but the circumstances in which they have to be applied may differ from case to case, and care is needed in analysing the position in each case and in applying the principles to it.
   In the present case Mr Jackson's submissions which I have numbered (1) to (3) are in my judgment correct. When Roiter Zucker received their instructions from the plaintiff, they had already been told by Mr Stepsky that the true purpose of the loan was different from what the plaintiff believed it to be. Their prima facie duty to the plaintiff was to communicate this information to the plaintiff. This duty, however, conflicted with their duty to the defendants not to inform the plaintiff without the defendants' consent. In the absence of such consent, their duty to communicate the information to the plaintiff was superseded by a duty to tell the plaintiff that they could no longer act for it because a conflict of interests had arisen. Roiter Zucker were at no time free to pass on to the plaintiff the information which they had obtained as solicitors for the defendants. In the words of Vaughan Williams and Nourse LJJ, they had no duty as solicitors for the plaintiff to receive such information, which had only come into their possession as solicitors for the defendants. In this situation it is in my judgment clear that, notwithstanding the relationship of principal and agent which came into existence between the plaintiff and Roiter Zucker as a consequence of the plaintiff's instructions to Roiter Zucker to act for it, Roiter Zucker's knowledge of the true purpose of the loan cannot be imputed to the plaintiff.
   I do not consider that it would have made any difference if the plaintiff had been put on inquiry by the mortgage application form and come under a duty to671 investigate the purpose for which the loan was going to be applied or the manner in which Mrs Stepsky was going to receive legal advice; or in other words if the case had been governed by the principles stated in Barclays Bank plc v O'Brien, rather than by those stated in CIBC Mortgages Ltd v Pitt. Even if the plaintiff had employed Roiter Zucker to discharge such duty, Roiter Zucker would still not have been free, except with the defendants' consent, to pass on to the plaintiff the information which they had obtained from the defendants, their duty to the plaintiff would still have been to tell it that they could no longer act for it because a conflict of interests had arisen, and their knowledge of the true purpose of the loan could still not, in my judgment, have been imputed to the plaintiff.
   I think that this conclusion is consistent with all the judgments in Re David Payne & Co Ltd and in El Ajou v Dollar Land Holdings plc. As between the two explanations referred to by Fry J in Cave v Cave (1880) 15 Ch D 639 for the exception to the imputation of notice from the agent to the principal, I think that that given by Romilly MR (as he then was) in Thompson v Cartwright (1863) 33 Beav 178, 55 ER 335, namely that you must inquire whether there are such circumstances in the case as to raise an inevitable conclusion that the notice has not been communicated, is preferable to and more in line with the modern authorities than that given by Lord Hatherley LC in Rolland v Hart (1871) LR 6 Ch App 678, which makes the exception depend on whether the court can see that the solicitor intended a fraud which would require the suppression of the knowledge from the person upon whom he was committing the fraud. Roiter Zucker were committing a breach of their duty to the plaintiff by failing to tell it that they could no longer act for it and by continuing to do so after the conflict of interests had arisen; but, unless their continuing to act for the plaintiff in breach of such duty can itself be characterised as a kind of fraud, which seems to me to be going further than Lord Hatherley LC or Romilly MR were prepared to go and further than is necessary, I do not think it is essential to find that they were committing a fraud on the plaintiff in order that their knowledge should not be imputed to it.
   I conclude therefore that the plaintiff did not have notice that any part of the loan was going to be applied for a purpose which was not for the joint benefit of the defendants, and that it was not therefore put on inquiry and cannot be fixed with constructive notice of the misrepresentation or undue influence on which Mrs Stepsky relies.
   It follows that the plaintiff is entitled to enforce its legal charge, that the order for possession made by Master Moncaster on 12 July 1994 was correct, and that Mrs Stepsky's appeal must be dismissed.

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