Case No: A2/2002/1954
 Neutral Citation No: [2003] EWCA Civ 1057
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN’S BENCH DIVISION
(Mr Justice Mackay)
Royal Courts of Justice
Strand,
 London, WC2A 2LL

Monday  21st July 2003

Before :

LORD JUSTICE PETER GIBSON
LORD JUSTICE DYSON
and 
LORD JUSTICE LONGMORE
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Between :

	J. J. COUGHLAN LIMITED	Appellant	
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	RUPARELIA and Others	Respondent	

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(Transcript of the Handed Down Judgment of
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040,  Fax No:  020 7831 8838
Official Shorthand Writers to the Court)

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Mr Andrew Sutcliffe QC and Mr David Quest (instructed by Messrs Woolsey Morris & Kennedy) for the Appellant
Mr Michael Pooles QC and Mr Mark Cannon (instructed by Messrs Reynolds Porter Chamberlain) for the Respondent

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Judgment
As Approved by the Court

Crown Copyright ©

Lord Justice Dyson :

Outline of the case

1.	The defendants have at all material times been in practice as partners in a firm of solicitors known as Ruparelia Thaker.  In these proceedings, the claimant alleges that it was the victim of a fraud in which Mr Ruparelia participated, whereby it lost US $500,000.  There are two principal claims.  The first is a claim in the tort of deceit on the basis of statements made by Mr Ruparelia on 28 June 1999.  The liability of the firm in relation to this claim depends on whether the statements were made “in the ordinary course of the business of the firm” within the meaning of section 10 of the Partnership Act 1890 (“the 1890 Act”).  The second is a claim for damages for breach of an Escrow Agreement.  The firm’s liability in relation to this claim turns on whether the making of the agreement was “an act for carrying on in the usual way business of the kind carried on by the firm” within the meaning of section 5 of the 1890 Act.

2.	Following a trial, Mackay J found for the claimant against Mr Ruparelia in respect of both claims, and awarded damages in the sum of $622,520  (inclusive of interest). But he dismissed the claims against the firm on the grounds that the acts of Mr Ruparelia were not in the ordinary course of the business of the firm.  He considered that there was no material difference between “the ordinary course of the business” within the meaning of section 10, and “the usual way of business of the kind carried on” within the meaning of section 5.  In my judgment, he was right to do so, and the contrary has not been argued on this appeal.  The claimant appeals against the dismissal of its claim against the firm with the permission of Ward and Jonathan Parker LJJ.

The facts

3.	The claimant company is a successful ground work contractor in the building and engineering field. Its managing director is Mr McGarry. The company’s turnover is about £5 million a year. By 1999, it had built up a sum of about £1 million surplus cash. The directors of the company were looking for investment opportunities. To this end, Mr McGarry engaged the services of Mr Mohanan, who describes himself as a “corporate strategy analyst”.  In the middle of 1999, a man called Maher telephoned Mr Mohanan from Canada, saying that he was aware of an investment opportunity. The upshot of this was that on the 28 June Mr McGarry and Mr Mohanan attended a meeting to hear a presentation of a proposed investment. The meeting was also attended by Mr Hinojosa, who produced a business card purporting to show that he represented “Economic Solutions”, which dealt in joint ventures and international bank programmes. Also present were Mr Sarasia of Grosvenor House Finance Corporation (“GHFC”) and Mr Ruparelia.  Mr Hinojosa introduced Mr Ruparelia as his solicitor. Mr Ruparelia produced a company letterhead from notepaper showing the name of his firm as “Ruparelia Thaker” with an address in Leicester, and Mr Thaker as his only partner.  The judge described Mr Hinojosa as “a fraudsman from beginning to end”, and said that the others (including Mr Ruparelia) “were party to his fraudulent intentions”. There is no challenge to these findings.  The investment scheme was described by Mr Hinojosa. It involved the claimant paying $500,000, in return for which it would have the use of a $10 million investment fund for one month. The $500,000 would be paid into Mr Ruparelia’s solicitor’s account. It would be released only after Mr Ruparelia had confirmed that the $10 million was in place with a major bank and he had verified that “bank pay orders” were in his possession. Mr Hinojosa explained that a “bank pay order” was a binding obligation from a bank to pay the claimant its share of the profits.  As Mr Hinojosa put it, this would “give the company guaranteed security from the bank”. In return, the claimant would receive as its share in the venture $2.5 million in one month, an annualised return of 6000%.   At paras 20 and 21 of his witness statement, Mr McGarry said that he was “rather sceptical” as to whether this return would be achieved, and that his main concern was to ensure that his company’s money was safe.  But the judge found that, in the presence of Mr Ruparelia, Mr Hinojosa promised a return of 6000% per annum, and Mr Ruparelia later confirmed this.   There is no challenge to this finding of fact.  Indeed, there is no challenge to any of his findings of primary fact.

4.	Mr McGarry was anxious to obtain reassurance that his funds would be entirely safe. He was given a number of documents. These included a “Partnership Financial Undertaking” which appeared under the name of an entity called “Solegasa Del Norte” from an address in Mexico. Other documents supplied to the claimant by Mr Ruparelia were drafts of a Principal Agreement and Escrow Agreement.  Mr Ruparelia held the Principal Agreement on the disk of a laptop computer that he had with him. He printed off copies at the meeting. He did the same in relation to the Escrow Agreement.

5.	The judge found that Mr Hinajosa assured Mr McGarry that he had effected this investment scheme a number of times previously, that everyone had been paid, returns were very good and that he hoped to have a long-standing relationship with Mr McGarry. After Mr Hinojosa had left the room, Mr McGarry asked Mr Ruparelia for confirmation of what he had been told by Mr Hinojosa.  Mr Ruparelia provided that confirmation.  The judge found that Mr Ruparelia said that he had worked with the group on a number of occasions, that the returns were very good and that “everybody gets paid and I will ensure that your funds are protected and there is no risk to your money”. Mr Ruparelia’s statements at this meeting form the basis of the claim in tort.

6.	Mr McGarry and Mr Mohanan perused the documents with some care. Mr McGarry wanted some amendments. A further meeting took place on 30 June. Mr McGarry was unable to attend, but Mr Mohanan met Messrs Hinojosa, Ruparelia and Sarasia. Mr Ruparelia said that they could not amend the contract because it was approved by “major authorities or regulatory authorities”. He would, however, give a separate solicitor’s undertaking. Mr Mohanan reported this to Mr McGarry, who authorised the matter to proceed on that basis.  Mr Ruparelia drafted a letter of undertaking whose terms did not meet with the approval of Mr McGarry. Another meeting was arranged for 1 July. This was attended by Messrs McGarry, Mohan and Hinojosa. At this meeting, Mr McGarry signed the Principal Agreement  and the Escrow Agreement. He did so on the understanding that the funds would not be forthcoming from him until the solicitor’s undertaking was in an acceptable form.

7.	The judge found that the two agreements were “shams” to the knowledge of Mr McGarry. The Principal Agreement was between GHFC and the claimant.  It contained a number of recitals which were untrue.  These included:

“A  The Applicant for himself his agents and principals and all persons for whose benefit he is acting represents and warrants to the Company that:
(1)	he and they are familiar with the type of transaction provided for and contemplated by this Agreement and the Escrow Agreement;
(2)	he has been involved in transactions of the nature of the transaction provided for and contemplated by this Agreement and the Escrow Agreement; ……
….
(4)  the Applicant has been advised of and is aware of the   
      need for it to take and has taken independent legal
      advice in relation to this Agreement and the Escrow   
       Agreement;”

8.	The operative part of the agreement provided that, upon the parties entering into the Escrow Agreement and upon the Escrow Agents (the defendant firm) receiving the “arrangement fee” of $500,000 from the claimant, the “Bank Advice” evidencing the existence of the investment funds of $10,000,000 would be delivered by the Escrow Agents to the bank nominated by the claimant for that purpose.  The agreement contained other detailed provisions to which it is not necessary to refer.  

9.	The Escrow Agreement was between the defendants (as Escrow Agents), GHFC and the claimant.  This provided for the payment of the arrangement fee to the defendants and the “verification” by them of the “due issue of the Bank Advice by the issuing Bank” (clause 3.1).   Clause 4.1 provided: 

“The Escrow Agents shall irrevocably pay and release the Arrangement Fee to either the Company or to the Applicant (as the case may be) as follows:
…..
B.  In the event that the Bank Advice is not issued within 7 banking days after the date of compliance by the Applicant with the conditions precedent set out in clause 2.1 of the Principal Agreement or that the Escrow Agents are unable to satisfy themselves that the Bank Advice has been duly issued by the Issuing Bank or that it does not in all material respects conform to the text set out in Schedule A of the Principal Agreement, then the Escrow Agents shall release and pay the Arrangement Fee to the Applicant or to its order”.

The claimant’s contractual claim is that there was a breach of clause 4.1 of the Escrow Agreement.
 
10.	In support of his conclusion that this agreement was a sham, the judge relied on a number of false statements contained in some of its provisions.  He referred to clause 5(h) whereby the parties agreed that “the Escrow Agents are not solicitors…for either the [claimant] or [GHFC]…and have not advised either of them in relation to the Escrow Agreement or the Principal Agreement…”.  He also relied on clause 5(i)(j) and (k) which contained “warranties” that (save in immaterial respects) the Escrow Agents had not given the claimant any advice or made any representations prior to the making of the Principal Agreement and the Escrow Agreement.   Our attention was drawn by Mr Pooles QC to other provisions of the Escrow Agreement which he submitted also contained untrue statements.  

11.	On 2 July, Mr McGarry wrote to Mr Ruparelia confirming that he had signed the two agreements, and stating:

“ Mr Medina [this was a reference to Mr Hinojosa] has assured me that he will send me an amendment to the Principal Agreement to confirm that the Escrow will be released only after you have received copies of the pay orders in our favour and verified their authenticity. We can also accept if you give this undertaking in a separate letter. On receipt of this, we will transfer $500,000 to your co-ordinates immediately”.

12.	On 3 July, there was a further meeting at which Mr Ruparelia generated a further document on his word processor. This was a letter of undertaking which, following further amendments, was in a form acceptable to Mr McGarry. Following further meetings, on 6 July, Mr McGarry transferred $500,000 to the dollar account of the firm Ruparelia Thaker. He never saw that money again.  On 13 July, Mr Ruparelia wrote to the claimant stating that the firm had received and verified the documentation and had paid away the funds. Copy documentation was later sent to the claimant on 27 July. There was in fact no genuine investment and no bank pay order was ever produced.

The judgment

13.	In relation to the question whether the acts of Mr Ruparelia and the Escrow Agreement were in the ordinary course of business of the defendant firm, the judge said that it was agreed between the parties that the legal test was:

“…whether, viewed subjectively and objectively, what Ruparelia did was in the ordinary course of business of the firm or was an action carried out in the usual way of the kind carried on by it.  It is necessary, in order for this to obtain, for the person dealing with the partner subjectively to have formed the honest belief that this is so.  Of course, if he does not, that is the end of the matter”.

14.	So far as the objective element was concerned, he set out the following propositions of law:

“(1) The principles of vicarious liability of partners for each other’s actions derived from and were developed out of the principles of vicarious liability of principal and agent and employer and employee (see Dubai Aluminium Company v Salaam [2001] QB 113 per Evans LJ 132H-133A).

(2) This liability can extend to fraudulent acts or omissions if those were carried out in the course of the employment or within the scope of the apparent authority, albeit by an employee or a partner conducting the business of a type which he had a right to conduct (see Lloyd v Grace, Smith & Co [1912] AC 716).

(3) It is necessary to show that all the acts or omissions which make the partner liable were committed within the scope of his authority as a partner (see Dubai Aluminium, 133C-D). If the partner deals as part of the dishonest scheme with others, who are party to that dishonesty, his acts will not be in the ordinary course of business of the firm. If, however, those with whom he deals are not parties to his dishonesty but innocent of complicity in it, then his partners may be liable (see Dubai Aluminium, 133E-134E and 142E-143A per Aldous LJ).

Where solicitors are concerned, it will only be in the ordinary course of business of the firm for the solicitor to do an act where there was an underlying transaction of a kind which was part of the usual business of a solicitor. I adopt what was said by Glidewell LJ in United Bank of Kuwait Ltd v Hammoud and Others [1988] 1 WLR 1051. “On the facts represented to the [third party] would a reasonably careful and competent person [such as the third party] have concluded that there was an underlying transaction of a kind which was part of the usual business of a solicitor?”

That citation, in my judgment, properly preserves the distinction which Mr Sutcliffe was anxious to preserve between the character of the act, on the one hand, which is important and the manner in which it was carried out, on the other.

The important question is how the facts reasonably appeared to the third party rather than what was in fact going on (United Bank of Kuwait v Hammoud and Others, 1064E-F.” 

15.	It is to be noted that the judge did not have the benefit of the decision of the House of Lords in Dubai Aluminium [2002] 2 WLR 1913.  

16.	The judge’s conclusion appears in this passage at page 29:

“I am, therefore, unable to find that the relevant representatives of the claimant, Mr McGarry and Mr Mohan, honestly believed that what Mr Ruparelia was doing up to 3rd July, when he gave the written undertaking, was a normal transaction in the course of the business of a solicitor.

I accept Mr Sutcliffe’s argument that it is the character of the action, not the manner in which it is carried out; and that in many contexts, for a solicitor to attend a negotiation with a client, is a normal and conventional part of his ordinary course of business as a solicitor. But there was nothing normal about this transaction, really, as everyone accepts, and what Mr Hinojosa was apparently doing was not something which any solicitor had business to be actively assisting in. That was so, as I find, as a matter of probability, to the knowledge of Mr McGarry and Mr Mohan. So far as the objective bystander is concerned, I find, as a matter of certainty, that he would have said the same.”

17.	In reaching this conclusion, the judge relied on the following facts: (a) Mr McGarry and Mr Monahan were dealing with a solicitor who was “prepared enthusiastically to “hype” and sell actively what they knew to be an abnormal and incredible scheme” (page 26); (b) when Mr McGarry signed the Principal and Escrow Agreements, he knew that they were “pure shams” (page 26).  

The claimant’s challenge

18.	Mr Sutcliffe QC accepts that the judge correctly described the test to be applied in determining vicarious liability for the wrongful acts of a partner, but he submits that the judge failed to apply that test properly.  In summary, he submits first that it was not reasonably open to the judge to find that the Principal and Escrow Agreements were shams, or that Mr McGarry knew that they were shams; secondly that, apart from the sham points, the judge relied on no other evidence to support his conclusion that the claimant did not believe that Mr Ruparelia was acting in the normal course of business of the defendant firm; thirdly, he gave no reasons for holding that what Mr Hinojosa “was apparently doing was not something which any solicitor had business to be actively assisting in”; and fourthly, in reaching this conclusion, the judge fell into the error of addressing the manner rather than the character of Mr Ruparelia’s acts.  In deciding that what Mr Ruparelia did was not in the ordinary course of a solicitor’s business, he concentrated on the particular nature of the specific transaction.  Instead, he should have addressed the question whether Mr Ruparelia’s acts were of the kind or class of acts which are done in the ordinary course of a solicitor’s business.  Had he done so, he would have reached the opposite conclusion.  

The law

19.	It is common ground that the judge accurately summarised the relevant legal principles in the passage already cited (para 14 above).   As I have said, this summary was made without the benefit of the House of Lords decision in Dubai Aluminium.  In that case, their Lordships made authoritative statements as to the meaning of “acting in the ordinary course of the business of the firm” in section 10 of the 1890 Act.  Lord Nicholls (with whom Lord Slynn and Lord Hutton agreed) said that, except where the wronged party is defrauded by a person acting within the scope of his apparent authority (para 28), authority is not the touchstone of what is done in the ordinary course of employment or business.  At para 23, he said:

“Perhaps the best general answer is that the wrongful conduct must be so closely connected with acts the partner or employee was authorised to do that, for the purpose of the liability of the firm or the employer to third parties, the wrongful conduct may fairly and properly be regarded as done by the partner while acting in the ordinary course of the firm’s business or the employee’s employment”

20.	In the present appeal, both counsel argued the case on the footing that the issue was whether Mr Ruparelia’s statements and his acts in relation to the Escrow Agreement were within the scope of his ostensible authority.  The cases to which our attention was drawn were: Lloyd v Grace, Smith & Co [1912] AC 716, Uxbridge Permanent Building Society v Pickard [1939] 2 KB 248, United Bank of Kuwait v Hammoud [1988] 1 WLR 1051, Hirst v Etherington [1999] Lloyds Rep PN 938, and Langley Holdings v Seakens  (unreported, 19 October 2000).  

21.	These cases demonstrate that an innocent principal is responsible for the fraud of an authorised agent who acts within the scope of his authority.  As Sir Wilfrid Greene MR said in the Uxbridge PBS case (page 254), it is not within the actual authority of a solicitor’s clerk to commit a fraud.  But it is within his ostensible authority to perform acts of the class which solicitors would normally carry out: “so long as he is acting within the scope of that class of act, his employer is bound whether or not the clerk is acting for his own purposes or for his employer’s purposes”.  

22.	The Hammoud case concerned an undertaking given by a salaried partner in a firm of solicitors.  The question was whether the undertaking gave rise to a contract which was binding on the firm by virtue of section 5 of the 1890 Act.  Glidewell LJ formulated the issue (page 1057H) as being whether the giving of the undertaking was an act “for carrying on in the usual way business of the kind carried on by the firm”, the kind of business being that of solicitors.  At page 1059C, he defined the proper question in these terms: 

“On the facts represented to the plaintiff bank, would a reasonably careful and competent bank have concluded that there was an underlying transaction of a kind which was part of the usual business of a solicitor?”

This question had to be considered objectively.  The reference to an “underlying transaction” was dictated by the fact that the relevant act in that case was the giving of an undertaking: it is not part of the ordinary business of solicitors to give undertakings except in relation to underlying transactions of what Lord Donaldson MR called a “solicitorial” nature. 

23.	Staughton LJ also emphasised the fact that the relevant inquiry in these cases is to ask whether the transaction reasonably appears to be of a kind that is within the ordinary authority of a solicitor (page 1064D-F)

Discussion

The general approach

24.	On the basis of these authorities, the central question is whether the acts of Mr Ruparelia (ie his statements at the meeting of 28 June and his entering into the Escrow Agreement purportedly on behalf of the defendant firm) were the kind or class of acts that are carried out by solicitors in the ordinary course of their business.  Mr Sutcliffe submits that they were.  He points out that Mr Ruparelia was acting as Mr Hinojosa’s solicitor in relation to the transaction.  It is part of the ordinary business of solicitors to attend meetings to negotiate deals for their clients, to explain the nature of transactions to the counterparties to deals, and to draft relevant documentation.  Furthermore, acting as a stakeholder is part of the ordinary business of solicitors where to do so is ancillary to a transaction of the kind in which  solicitors are ordinarily involved.  The role of Mr Ruparelia in relation to this fraudulent transaction was not different in principle from the role of the fraudulent managing clerk in Lloyd v Grace, Smith & Co.  In that case, the principal was liable for the fraud of the agent because conveyancing is part of the ordinary business of solicitors.  It was irrelevant that the agent acted with a dishonest purpose for his own ends.  His act was of the class or kind of acts which fall within the ordinary business of solicitors.    

25.	What are the criteria for determining whether an act is of a class or kind which it is the ordinary business of solicitors to carry out?  A useful starting point is to ask whether the general description of the act falls within the scope of the ordinary business of solicitors.  It is a necessary condition that the act should satisfy this requirement.  Thus, for example, if the solicitor enters into a contract for the sale of double-glazing, he cannot bind his firm under section 5, nor will his firm be vicariously liable for any wrongful act in relation to the transaction under section 10.  It is not the ordinary business of solicitors to sell double-glazing.  The transaction is of a general nature that falls outside the scope of a solicitor’s ordinary business.  It is unnecessary to examine the transaction further to see that this is so.  Whatever the terms of the contract of sale, it is not made by the solicitor as part of the ordinary business of a solicitor.

26.	But, in my view, it is not always a sufficient condition for bringing an act within the purview of sections 5 and 10 of the 1890 Act that it can properly be classified as belonging to the general category of acts which are part of the ordinary business of a solicitor.   I do not consider that the issue of whether the acts of a solicitor are of the kind or class which fall within the ordinary business of a solicitor should always be determined without taking into account the nature or characteristics of those acts.  There is nothing in the authorities which compels such an approach to be adopted.  Indeed, in Kooragang Investments Pty Ltd v Richardson & Wrench Ltd [1982] AC 462, 473F, Lord Wilberforce said: 

“the underlying principle remains that a servant, even while performing acts of the class which he was authorised, or employed, to do, may so clearly depart from the scope of his employment that his master will not be liable for his wrongful acts” (emphasis added). 

27.	 I accept that the motive or purpose of the solicitor is irrelevant in this context.  It is immaterial that the solicitor is acting dishonestly.  That is why the solicitor who enters into a conveyancing transaction dishonestly nevertheless renders his firm liable. Conversely, it is also irrelevant that a solicitor who enters into a contract for the sale of double-glazing is acting honestly.  The dishonest motive in the first example does not take the case outside the scope of sections 5 and 10; and the honesty of the solicitor in the second example does not bring it within their scope. 

28.	There are good policy reasons why the solicitor’s motive is irrelevant.  They are the same as those which underpin the liberal approach of the courts to vicarious liability: see Lord Nicholls at paras 21-22 in Dubai Aluminium.  But these policy considerations do not require one to shut one’s eyes to the true nature of the solicitor’s acts when determining whether they fall within the ordinary business of a solicitor.  

29.	Mr Sutcliffe submits that, unless the characteristics of a solicitor’s act are such that it is not reasonable to describe it as belonging to the class of acts which come within the ordinary business of a solicitor, then the partnership is liable for the act under sections 5 and 10 of the 1890 Act.  Thus, in the present case, although the terms of the scheme were as extraordinary as they were, Mr Sutcliffe submits that it was still an investment scheme.  Since it is part of the normal business of solicitors in relation to investment schemes to do what Mr Ruparelia did in relation to this scheme, the defendant firm is liable.  He acknowledges the possibility that the terms of a transaction which purports to be an investment scheme may be so absurd that it would not be reasonable to describe it as an investment scheme at all.  But short of that, he submits that the precise nature and terms of the transaction are immaterial to the question whether the solicitor’s acts in relation to it are in the course of the ordinary business of a solicitor.  The litmus test is always whether the transaction can reasonably be described as belonging to the general class of acts which fall within the ordinary course of a solicitor’s business.  

30.	I cannot accept Mr Sutcliffe’s approach. It seems to me that to debate whether a transaction is so absurd that it is not reasonable to describe it as being what it purports to be is to enter into the arid territory of linguistic analysis.  In my view, that is not how the question whether a principal should be liable for the acts of his agent ought to be determined.  The issue is not how the transaction ought properly to be described, or whether, without distortion of language, it can be given the label of a transaction in which solicitors ordinarily engage.  Rather, it is necessary to examine the substance of the transaction to see whether, viewed fairly and properly, it is the kind of transaction which forms part of the ordinary business of a solicitor. This exercise requires the detail of the transaction to be taken into account.  Most transactions will obviously fall on one side of the line or the other.  There will be a few cases where the answer may not be plain.  For the policy reasons that I have mentioned, the court should not be too ready to find that the ordinary business requirement is not satisfied.     

31.	As has been seen, the judge referred to the subjective element of the test.  If the party dealing with the agent (T) knows or believes that the agent (A) has no actual authority from his principal (P) to do what he is purporting to do on behalf of P, then P cannot be liable for his acts: see the express wording of section 5 of the 1890 Act.   This is consistent with the general law on ostensible authority.  As Lord Nicholls explained at para 28 of Dubai Aluminium, the critical feature of the cases where T sues P for the consequences of a fraud committed by A acting within the scope of his apparent authority is that the wronged person acted in reliance on the ostensible authority of A.  If T knows or believes that A is acting outside the scope of his apparent authority, there is no basis for holding P liable for the fraud.  

This case

32.	In reaching his conclusion, the judge was undoubtedly influenced by the fact that the two agreements were, to use his words, “pure shams”.  Mr Sutcliffe submits that a sham agreement is one which both parties know does not genuinely reflect the obligations and performance that they are undertaking, and that these agreements were not shams in that strict sense.  As he points out, they properly reflected the contractual mechanism as it had been explained to the claimant.  Thus, under the Escrow Agreement, the solicitors agreed to hold the claimant’s deposit in escrow against the verification of Bank Advice.  Under the Principal Agreement, GHFC agreed to procure the Bank Advice in return for the release to it of the sum deposited by the claimant.  Mr Sutcliffe submits that, in finding that the agreements were shams, the judge was influenced by the fact that they contained certain clauses and recitals which were false.  But these false recitals and clauses did not vitiate the contractual effect of the agreements.  Thus, submits Mr Sutcliffe, the false statements contained in the recitals and clauses did not justify the finding that the agreements were shams as a whole. I agree.  The word “sham” should only be used to describe an act or document where the parties have a common intention that the act or document is not to create the legal relations and obligations which it purports to create: see per Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, 802C-F.  It may be that the judge was using the word “sham” rather loosely to describe documents which did not reflect the true position in all respects.  
33.	But even if the use of the phrase “pure shams” was not apt, it does not follow that the fact that the agreements contained a number of false statements is irrelevant to the question whether Mr Ruparelia’s acts were to be regarded as done within the ordinary course of the firm’s business.  In my view, the false statements were of some relevance, although it seems to me that the judge attached too much significance to them.  They certainly did not have the effect of rendering the agreements shams.  Their relevance lay in the fact that they indicated that Mr Ruparelia was willing to be party to a number of false statements in relation to this scheme, and that is not something that it is in the ordinary course of a solicitor’s business to do.  But if the scheme had been otherwise unremarkable, I consider that the false statements would not have enabled the defendant firm to escape liability.  

34.	The judge’s central finding was that there was nothing normal about this transaction.  This finding was not only based on the fact that the two agreements contained the false statements to which I have referred.  Although the judge did not spell this out at page 29 of his judgment, he had earlier (page 25) described the nature of the scheme as “preposterous”.  Moreover, he had said at page 25:
“That said, Mr Mohan, whose understanding must, I think, be imputed to Mr McGarry, because I have found above they must have discussed this matter in much more detail than either of them now admits, accepted that this was “not a normal transaction, and that the return which was being offered was one which in other contexts he would have found simply incredible.  The starting point, therefore, is they are dealing with a solicitor, prepared enthusiastically to “hype” and sell actively an abnormal and incredible scheme”.

35.	In my judgment, it is impossible to impugn this finding.  It was based on clear answers given by Mr Monahan when he was cross-examined by Mr Pooles.  I do not consider that the epithets used by the judge to describe the scheme (“preposterous” and “abnormal and incredible”) were inappropriate.  Once the bank pay orders were in place, the claimant was being offered a risk-free investment with the promise of a return of 6000% per annum.  I do not find it profitable to embark on the exercise of deciding whether this was an investment scheme at all.  It clearly purported to be just that.  But in my judgment, the judge was right to conclude that it was not part of a solicitor’s business to be involved in a scheme of this kind.   That was a sufficient reason for dismissing the claim against the firm.   Even if the judge had found that the claimant’s representatives had believed that Mr Ruparelia’s acts were in the ordinary course of the business of the defendant firm, that would not have availed the claimant, since, viewed objectively, they were not.  But as I have said, the judge also found that Mr McGarry and Mr Mohanan did not believe that Mr Ruparelia was engaged in a transaction in the ordinary course of a solicitor’s business.  In my view, he was entitled to make this finding.
36.	I would, therefore, hold that what Mr Ruparelia did in connection with this transaction was not within the ordinary course of a solicitor’s business.  It was not of a kind or class that it was in the ordinary course of a solicitor’s business to do.  It follows that the Escrow Agreement was not binding on the defendant firm (section 5) and the firm is also not liable for the torts committed by Mr Ruparelia (section 10).  

37.	So far as section 10 is concerned, I would also arrive at the same conclusion, and for the same reasons, by applying the rather broader test propounded in Dubai Aluminium by Lord Nicholls (para 23) and Lord Millett (para 124).  This requires an evaluative judgment to be made, having regard to all the circumstances, of whether the acts of Mr Ruparelia in making statements to induce the claimant to pay $500,000 to join this incredible scheme and in drafting documents to further the fraud, were sufficiently closely connected to what he was authorised to do that they may fairly and properly be regarded as having been done while he was acting in the ordinary course of the firm’s business.   In my judgment, the nature of this incredible scheme was so far removed from what Mr Ruparelia was authorised to do that what he did could not fairly and properly be regarded as having been done in the ordinary course of the defendant’s business.  

38.	For these reasons, I would dismiss this appeal.
Lord Justice Longmore:
39.	It so happens that when the paper application for permission to appeal was made in this case by the unsuccessful claimant, it came before me and, without the benefit of oral argument, I refused permission to appeal. The Full Court granted permission after the two lords justices, then forming the court, had heard Mr Quest on the appellant’s behalf.
40.	The appeal now comes before a court of which I am the junior member. Naturally I have listened with great care to the arguments as now developed by Mr Sutcliffe QC and have approached the appeal with an entirely fresh mind. This fresh approach leaves me now persuaded that the judge’s reference to the “untruths” in the recitals to the escrow agreement was more essential to the judge’s decision than I originally thought. I also now consider that the judge was wrong to treat that agreement and the earlier agreement as “shams” in the strict sense of that word.
41.	I have, nevertheless, come to the same conclusion as Dyson LJ in his judgment. Both sides agree that the question is whether the transactions described in the judge’s judgment were within the ordinary course or usual way of business of a firm of solicitors. Once one appreciates that the proposed transaction was that, in return for the transfer of $500,000 and without risk as to that sum, the claimants would within one month receive $2,500,000 (a return of 500% or, if annualised, 6,000%), it can be seen at once that neither that transaction itself nor advising upon it was within the ordinary course of a solicitor’s business. The judge called it preposterous. So it is and I would dismiss the appeal.
Lord Justice Peter Gibson:
42.	For the reasons given by Dyson LJ I too would dismiss this appeal.