Solicitor acting for both lender and borrower – Extent of solicitor’s duty as fiduciary to report to lender matters pointing to fraud by borrower – Matters including subsale at increased price – Whether contributory negligence on part of lender – 12 cases heard together
The plaintiff mortgagees had sued a number of solicitors who on different occasions had acted for both the plaintiffs and the applicant for the mortgage in question. By judicial arrangement 12 decisions were handed down in a single judgment, the issue in each case being whether the defendant solicitor had failed to warn the plaintiffs in circumstances where he allegedly knew or ought to have known of the likelihood of an attempt by that applicant or others to defraud the plaintiffs. In nearly every case the fraudulent scheme involved a collusive purchase by the applicant at an inflated price from a vendor accomplice, who had acquired or agreed to acquire the property at a keen market price. Typical of most of the actions were allegations that the defendant should have alerted the plaintiffs on becoming aware of certain matters, notably: that the property had recently changed hands at a significantly lower price; that the contemplated sale was to be a subsale; that the deposit was to be, or had been, paid directly to the vendor; or that the applicant did not intend to reside in the property. Each defendant had been engaged on standard conditions requiring him, inter alia, to check and report any discrepancies immediately and likewise report any matter that might affect the value of the property. All relevant events had taken place before the publication in March 1991 of the Law Society’s Green Card warning on mortgage fraud.
Nine of the decisions went against the respective defendants, three of whom were found to be in breach of their fiduciary duty in so far as they had subordinated the interests of the plaintiffs to those of the applicants. The remaining six were found to have been in breach of their contractual duties both express and implied, though in each case substantial reductions in damages (ranging between 30 and 90%) were made on findings of contributory negligence on the part of the plaintiffs.
Before considering the cases in turn, the judge reviewed the relevant principles of law.
Held:
1. The plaintiffs’ instructions were not limited to reporting on title; nor did they contain anything to exclude or cut down the duty, impliedly undertaken by a solicitor engaged by a mortgagee, to communicate such information as might cause the mortgagee to doubt the correctness of the valuation that it had obtained: see Mortgage Express Ltd v Bowerman & Partners [1996] 1 EGLR 126, CA. Without professing valuation expertise, a solicitor of reasonable competence, knowing that he had to report matters affecting value, would regard it as his duty to report the fact that the property had been recently traded in an arm’s length transaction at, say, two-thirds of the amount that the plaintiffs were proposing to lend. The defendants could not rely on National Home Loans Corporation plc v Giffen Couch & Archer [1997] 3 All ER 808; [1997] PLSCS 182, CA (no liability for not reporting arrears owing on existing mortgage loan), as the information in question went to personal creditworthiness rather than the value of the security. Moreover, the terms of the instructions were significantly different.
2. In the light of Bristol & West Building Society v Mothew [1998] Ch 1, CA, the plaintiffs could not establish breach of fiduciary duty without showing that the solicitor had intentionally withheld the information or advice he was obliged to provide. However, it was not necessary to show that the solicitor had been actuated by bad faith in acting in the way complained of.
3. As analysed by Millet LJ in Mothew (supra), the duty of loyalty that a solicitor owed, as a fiduciary, to his client did not preclude him from reporting to a mortgagee matters that he would have been obliged to treat as confidential if he had acted for the borrower alone. By agreeing that his solicitor should also act for the mortgagee, the borrower had to be taken to have authorised the solicitor to make whatever disclosures were necesssary to enable the solicitor to comply with the mortgagee’s instructions, without which the advance would not be forthcoming. If unable to fulfill his obligations to the mortgagee without breaching his duty of confidence to the borrower, the solicitor had to cease to act for at least one, and possibly both, of the clients: see Moody v Cox & Hatt [1917] 2 Ch 71 per Lord Cozens-Hardy MR at p81.
4. The duty to report did not, as a general rule, apply to matters discovered otherwise than in the course of investigating title in the subject transaction: see Bristol & West Building Society v Baden Barnes Groves & Co (unreported 22 November 1996). However, where such matters indicated or strongly suggested that the borrower was intending to defraud the mortgagee in the instant transaction, then the solicitor, if continuing to act for the mortgagee, had to disclose the information in order to alert the mortgagee to the intended deception: Darlington Building Society v O’Rourke James Scourfield & McCarthy The Times 20 November 1998; [1998] PLSCS 284, CA; this being but an illustration of the dictum that there is no confidence as to the disclosure of iniquity: see Gartside v Outram (1856) 26 LJ Ch 113 per Page-Wood VC at p114 .
5. A failure by a solicitor to report that the borrower and the vendor had subsequently agreed a price different to that stated on the mortgage application would as a general rule amount to a breach of the express requirement to report discrepancies: see the observations on the Law Society’s published guidance made by Sir Thomas Bingham MR in Bowerman (supra). In subsale cases such discrepancies could be expected to come to light where the vendor was not shown as the registered proprietor of the property in question, but claimed either that his purchase had only recently been completed or that it was about to be completed. The solicitor could not prepare his report on title without verifying that the vendor either was entitled to be registered or had the benefit of an unconditional contractual entitlement to the property. In either case the relevant documentation would inform him of the price paid or payable by the vendor.
6. As regards the payment or notification of payment of the deposit directly to the vendor, the court adopted the reasoning of Chadwick J in Bristol & West Building Society v Fancy & Jackson and other actions [1997] 4 All ER 582. It was for the plaintiffs to establish that the circumstances of the alleged payment would have caused a competent solicitor to doubt whether it had been made; it would then be for the defendant to establish either that it took sufficient steps to discharge its duty, or that payment was in fact made.
7. In those cases where the plaintiffs had established a breach of fiduciary duty, it was common ground that the Law Reform (Contributory Negligence) Act 1945 had no application. On the question whether lender’s fault should be taken into account – a highly contentious topic on which academic opinion was sharply divided – the court took the view that no corresponding reduction in damages should be allowed. The necessary finding that the fiduciary had been consciously disloyal disabled him from asserting that the other had contributed, by his own want of care, to the loss he had suffered. Such an approach was consistent with equity’s concern . . . to keep persons in a fiduciary capacity up to their duty: see Nocton v Lord Ashburton [1914] AC 932 per Lord Dunedin at p963.
Editor’s note: The judgment also explored causation issues where the breach was one of fiduciary duty: Target Holdings Ltd v Redferns (a firm) [1996] AC 421 and Swindle and others v Harrison and another [1997] 4 All ER 705 considered.
Nicholas Patten QC, Timothy Higginson, Ian Gatt, Tom Leech and Micahel Pryor (instructed by Burges Salmon, of Bristol) appeared for the plaintiff; Nicholas Davidson QC, Jonathan Simpkiss, Francis Bacon, William Flenley, Tony Oakley and Spike Charlwood (instructed by Barlow Lyde & Gilbert) appeared for the defendants.
Alan Cooklin, barrister
