Solicitor – Breach of trust – Claimant suffering loss as a result of property fraud – Claimant seeking damages against defendant firm of solicitors for breach of trust and duty of care – Whether claimant establishing breach of trust – Whether defendant discharging onus of proving acted honestly and reasonably for purposes of claiming relief from personal liability – Whether claimant entitled to damages for breach of common law duty of care – Claim allowed in part
In July 2010 a property fraud at the centre of which was an impostor vendor, assisted by one or more associates, was carried out. The claimant, for whom the defendant firm of solicitors acted, purportedly contracted to buy a property in north London. Although at one stage there was a possibility that he would obtain mortgage finance, in the event he bought without it. Therefore, it was not a mortgage fraud case.
A firm of solicitors (F) signed the contract for the supposed vendor, who was said to be their client. The full purchase price, £350,000, was remitted to F, as would be the normal course if the Law Society Code for Completion by Post were being used. The claimant was informed that completion had taken place, collected the keys and began an extensive programme of improvement works on the property. Following the purported completion, a transfer in form TR1 failed to appear from F. The purchase monies disappeared. F did not tender even a forged transfer of the property and F had not been acting for the actual owners of the property. Six and a half weeks later the Law Society intervened in their practice. No money was forthcoming from F, any insurers or anyone.
The claimant became aware that his ownership was in doubt when possession proceedings were commenced in respect of the property. He claimed against the defendant for breach of trust and breach of contractual and parallel extra-contractual duty of care. He claimed reconstitution of the trust fund (money paid to the defendant for the purposes of the purchase) by repayment of £315,000, or equitable compensation, and damages.
The defendant submitted that, from the purchaser’s side, the transaction proceeded in a conventional way until, following the supposed completion, a transfer in form TR1 failed to appear from the vendor’s solicitors. Although the defendant denied any breach of trust, it claimed to have acted honestly and reasonably, and ought fairly to be relieved, either wholly or partly, from personal liability pursuant to section 61 of the Trustee Act 1925. The claimant submitted, among other things, that the defendant should have become suspicious of the bona fides of the vendor, and warned the client accordingly.
Held: The claim was allowed in part.
(1) It was necessary in every case to identify what the terms of the trust on which the defendant received funds were. One then had to consider whether, on the facts, what happened was sufficient to discharge the trust. Subject to any application by the solicitor for relief under section 61 of the Trustee Act 1925, if there was a breach of trust and the underlying commercial transaction had not completed, then the beneficiary could still require the solicitor to restore the trust fund; or if there was a breach of trust followed by completion of the underlying commercial transaction, the beneficiary would be entitled to equitable compensation which looked not to the fact of loss of the fund but to the loss which, using hindsight and common sense, could be seen to have been caused by the breach. What the claimant lost when the breach occurred was the amount of money which was not retained when it should have been. While the authorities showed that, in cases of actual completion, the result would be an award of compensation reflecting the loss which the claimant would not have suffered but for the breach, they did not show that, if completion did not occur, compensation would be awarded on that basis. In cases in which completion did not occur, and that was what was needed to discharge the trust, the solicitor had to restore the amount which had been lost from the trust fund unless he was relieved of liability under section 61: Target Holdings Ltd v Redferns (a firm) [1996] AC 421, Lloyds TSB Bank plc v Markandan and Uddin [2012] EWCA Civ 65; [2012] PLSCS 27, Nationwide Building Society v Davisons Solicitors [2012] EWCA Civ 1626; [2013] 1 EGLR 73; [2013] 10 EG 148, AIB Group (UK) Ltd v Mark Redler & Co [2013] EWCA Civ 45; [2013] PLSCS 51 and Santander (UK) plc v RA Legal Solicitors [2013] EWHC 1380 (QB); [2013] PLSCS 141 considered.
Applying those principles to the present case, there had been a breach of trust by the defendant when the monies were appropriated by F. The trust on which the defendant had received the sum of £315,000 could only be discharged by genuine completion or by the return of that sum. Therefore, subject to the application for relief under section 61 of the 1925 Act, the claimant was entitled to payment of £315,000 with interest.
(2) The trustee had the onus of proving honesty and reasonableness and that he ought fairly to be excused. The standard of reasonableness was just that: the section did not predicate that the trustee must necessarily have complied with best practice in all respects. The careful, conscientious and thorough solicitor, who conducted the transaction by the book and acted honestly and reasonably in relation to it in all respects but still did not discover the fraud, might still be held to have been in breach of trust for innocently parting with the loan money to a fraudster but he was likely to be treated mercifully by the court on his section 61 application. In identifying what conduct of the defendant it was relevant to take into account, when considering whether the trustee had acted reasonably, the relevant action must at least have been connected with the loss for which relief was sought.
In the present case the defendant had proved that it had acted reasonably because of the lack of causal connection between the defendant’s behaviour and the loss. Therefore, the court would give relief from liability for the £315,000.
(3) As regards the claim for damages for breach of duty at common law, the claimant had been largely successful and, adopting a practical and realistic approach, damages were calculated in the sum of £45,379 and there would be judgment for the claimant in that amount.
Peter Dodge (instructed by Memery Crystal LLP) appeared for the claimant; Spike Charlwood (instructed by Caytons Law) appeared for the first defendant.
Eileen O’Grady, barrister
