Davisons were jointly instructed in relation to a house purchase by Nationwide and the borrower. Notwithstanding that Davisons confirmed the existence and office of the purported vendor’s solicitors, the transaction was fraudulent: the vendor’s solicitors were imposters, who had submitted a false office address to the Law Society, and absconded with the completion monies.
Nationwide’s charge could not be registered, as the prior charge over the property had not been discharged. Nationwide sued Davisons alleging breach of trust and breach of retainer.
At first instance, the High Court held Davisons to be in breach of retainer for releasing the mortgage advance without securing a registered legal charge. The court considered this to be a "strict" contractual duty. Davisons were also held to be in breach of trust in paying away monies where completion could not have taken place - as the transaction was a sham. Relief from liability under s.61 of the Trustee Act 1925 ("the Act") was denied on the basis that Davisons had not acted reasonably, notwithstanding their checks into the existence of the purported vendor’s solicitors.
On appeal by Davisons, the Court of Appeal held as follows:
- The trust could only be discharged by completion of the transaction or the return of the mortgage monies. In the event of a sham transaction, completion could never be achieved. Accordingly, Davisons were in breach of trust by parting with the loan money prior to completion.
- The discretionary relief conferred by s.61 of the Act would be exercised where a solicitor’s conduct was honest and reasonable and he ought fairly to be excused. It was accepted that Davisons had behaved honestly throughout and held that they had obtained the benefit of an undertaking to redeem the prior charge from those they reasonably believed to be the vendor’s solicitors. To act reasonably did not necessarily demand best practice at all times, rather reasonableness in all the circumstances. Accordingly, Davisons were granted relief from all liability for the breach of trust.
- Davisons were not in breach of their retainer, as the terms set out in the Council of Mortgage Lenders Handbook imposed an obligation to exercise reasonable skill and care in pursuing the intended outcomes and not an absolute obligation.
This is an important decision from the Court of Appeal which will be welcomed by careful solicitors who have been duped by sophisticated fraudsters. Over the last few years, claims such as this have become commonplace, with sophisticated fraudsters impersonating solicitors to commit fraud against mortgage lenders. In those circumstances, the Solicitors’ Compensation Fund will not respond (as the loss has not been caused by the dishonest act of a solicitor) and, until this decision, the loss was likely to fall on insurers, rather than mortgage lenders.
Where duties are owed in trust and contract, honesty and reasonableness on the part of an innocent solicitor are likely to be the difference between escaping liability and being hit with a substantial judgment for damages (particularly as breach of trust claims are generally considered to be incapable of reduction on the basis of contributory negligence). Although best practice should be adopted whenever possible, a deviation - committed honestly and reasonably - will not necessarily impose liability on a solicitor for breach of contract or trust.
Read other items in the January 2013 Insurance Brief