Fraudsters sometimes pose as solicitors while relieving lenders of their cash. Therefore, the Law Society advises conveyancers to check the identity of firms they do not know by consulting the appropriate professional directory. In Nationwide Building Society v Davisons [2012] EWCA Civ 1626 the solicitors retained by a lender did just that and were reassured to discover that the solicitor and branch office of the firm with whom they were dealing appeared on the Solicitors Regulation Authority website.
The lawyer noted that his client had already paid a substantial deposit and reported this to the lender and to SOCA because he could not verify where the money had come from. Both confirmed that they were happy for the transaction to proceed. The solicitor “exchanged and completed” the purchase simultaneously, only to discover that he and the Solicitors Regulation Authority had been duped and that he had been dealing with a bogus branch office of a law firm. The fraudster pocketed the mortgage advance and disappeared, leaving the lender without the charge it had instructed its solicitor to obtain and its solicitor to face claims for breach of contract and breach of trust.
The High Court upheld both claims. The law firm had failed to secure the first legal charge that it had been instructed to obtain and had parted with the lender’s money, which it held on trust, without obtaining a genuine undertaking to redeem the seller’s mortgage. The law firm pursued the case to the Court of Appeal. It agreed that the firm had parted with the mortgage advance in breach of trust, but applied section 61 of the Trustee Act 1925, which empowers the court to relieve a trustee from liability if he has acted honestly and reasonably and ought fairly to be excused.
The trial judge had accepted that the law firm had behaved honestly, but had concluded that the solicitor had not acted reasonably because he had not received anything that could be construed as an undertaking to discharge the existing mortgage. She took the view that the replies to requisitions were unsatisfactory and, despite the adoption of the Law Society’s Code for Completion by Post, ruled that the solicitor had failed to obtain an undertaking to discharge the seller’s mortgage.
However, the Court of Appeal held that section 61 requires reasonableness, as opposed to perfection. It agreed that the answers to the requisitions were odd. However, they did not undermine the clear acceptance and undertakings given in the Code for Completion by Post. The law firm had obtained an undertaking to redeem the existing charge from a person that it reasonably believed to be the seller’s solicitor. The fraudster would have done whatever else had been required of him and would still have disappeared with the money. In its view, therefore, it would be just to exercise its discretion to relieve the law firm from liability for its breach of trust.
Lenders will be dismayed by the ruling that the law firm was not in breach of its retainer, even though it had been instructed to obtain a “fully enforceable first legal charge”. Their Lordships agreed that the obligation imposed by the lender’s mortgage instructions was not absolute and that the instruction requires law firms only to exercise reasonable skill and care in seeking to procure the stated outcome. Perhaps the lender missed a trick? Its claim for breach of retainer was based on an absolute obligation. It is not clear what the court would have decided, had the lender claimed that the solicitor had failed to exercise reasonable skill and care (even though its damages might then have been reduced, had the law firm been able to show that the lender had been contributorily negligent).
Allyson Colby, property law consultant
