Solicitors – Breach of trust – Mortgage – Respondent firm of solicitors acting for appellant mortgage lender on transaction involving mortgage loan to borrower for purpose of purchasing property – Fraud perpetrated by firm of solicitors purporting to act for vendor – Respondent paying over loan funds to that firm but completion not occurring and no charge executed in appellant’s favour – Whether respondent acting in breach of trust – Whether appellant’s conduct reasonable so as to justify discharging it from liability pursuant to section 61 of Trustee Act 1925 – Appeal dismissed
In 2009, the appellant made a mortgage loan of £150,000 to a borrower to finance his purchase of a property, over which the loan was to be secured by a first legal charge. The respondent firm of solicitors acted for both the appellant and the borrower on that transaction. The appellant’s instructions to the respondent incorporated Parts 1 and 2 of the Council of Mortgage Lenders (CML) handbook (2007 ed), including the requirement, under para 5.6, for the respondent to provide on completion a fully enforceable first legal charge over the property and, under para 10, for it to hold the loan on trust for the appellant until completion.
In connection with that transaction, the respondent dealt with another firm of solicitors who purported to act for the registered owner of the property as vendor. In fact, while that firm was a real firm of solicitors in good standing with the Law Society, it was acting fraudulently and the owner had never agreed to sell the property. In July 2009, the appellant transferred the loan funds to the respondent’s account. The respondent in turn transferred the £200,000 purchase price, comprising the appellant’s loan and the borrower’s own funds, to the fraudulent firm’s client account for the purpose of achieving simultaneous exchange of contracts and completion. The following day, it released those funds to the fraudulent firm on apparent completion. In fact, completion, within the meaning of the CML handbook, never took place and the appellant never obtained any charge or security over the property.
The appellant brought a claim to recover £150,215 from the respondent for breach of trust. In the court below, the judge found that the respondent had acted in breach of trust by paying away the loan funds without completion taking place; he held that, while it was not a breach to transfer those funds into the bank account of a genuine firm of solicitors, on terms that they were to hold the monies to the respondent’s order pending completion, it was a breach then to release those funds without effective completion actually taking place. However, the judge held that the respondent should be relieved of liability for its breach, pursuant to section 61 of the Trustee Act 1925, on the ground that it had acted honestly and reasonably and ought fairly to be excused: see [2013] EWHC 1380 (QB); [2013] PLSCS 141. The appellant appealed.
Held: The appeal was allowed.
(1) A solicitor that held a loan advance on trust until completion necessarily committed a breach of trust if it parted with the advance otherwise than on completion. Where an intending lender transferred loan funds to a purchaser’s solicitor on terms that it held the money on trust until completion, the purchaser’s solicitor had implied authority to transfer that money to the client account of solicitors acting for the vendor prior to completion, to hold to the order of the purchaser’s solicitor pending completion. That was an ordinary incident of residential conveyancing in the modern works, with which institutional lenders were familiar. However, the purchaser’s solicitor did not have implied authority to transfer the money pending completion to the client account of any other solicitor than the firm that was in fact acting for the owner and intending vendor of the property over which the lender was to obtain a charge on completion. The fraudulent solicitor in the instant case did not fit that description since it was not actually acting for the owner of the property, had no instructions either to contract for or complete the sale and had no intention of using any part of the money transferred to its client account for the purpose of discharging the existing first mortgage on the property. Consequently, contrary to the view of the judge below, the respondent had committed a breach of trust when it first transferred the funds into the fraudulent firm’s client account, not merely later when it released those funds: Nationwide Building Society v Davisons Solicitors (a firm) [2012] EWCA Civ 1626; [2013] 1 EGLR 73; [2013] 10 EG 148 and Lloyds TSB Bank plc v Markandan & Uddin (a firm) [2012] EWCA Civ 65; [2012] PLSCS 27 applied.
(2) A trustee could be released from liability for breach of trust pursuant to section 61 of the 1925 Act if it could show that it had acted honestly and reasonably and the court decided that it ought fairly to be excused for the breach. As to the reasonableness of the trustee’s conduct, it had to prove that it acted reasonably only in relation to those aspects of its conduct that were connected with the beneficiary lender’s loss: Davisons applied. The relevant conduct was not to be identified narrowly by the application of a strict causation test or a “but for” test. Given that the current best practice for conveyancing solicitors had evolved over many years, with the purpose of providing reasonable protection from fraud to both lenders and purchasers, it would not be appropriate to exclude as irrelevant conduct that involved a departure from best practice and increased the risk of loss caused by fraud, even if the court concluded that the fraudster would none the less have achieved his goal had the solicitor acted reasonably. On the other hand, relevant conduct did not encompass every aspect of the solicitor’s conduct that played any part in the process. Some element of causative connection had to be shown so as to exclude conduct, even if unreasonable, that was irrelevant or immaterial to the loss. The test was one of reasonableness not perfection; it was not appropriate to elaborate on that test by reference to other legislation, such as the similar provisions in section 727(1) of the Companies Act 1985.
(3) In the context of a routine conveyancing transaction, the incidence of the burden of proof might be crucial to the outcome. Such transactions were so routine and frequent in the working life of those involved that a specific recollection of any part of them, not precisely recorded in contemporaneous correspondence, documents, or attendance notes, would rapidly fade. If the reasonableness of a solicitor’s conduct depended on anything not so recorded, it might be unable to discharge the burden of proof. The solicitor should not be given the benefit of the doubt as to the reasonableness of its conduct. Consequently, in order to show that its conduct was reasonable, the solicitor would need to provide a paper trail demonstrating that the whole of its conduct sufficiently connected with the loss satisfied the reasonableness test.
(4) In deciding whether the trustee ought fairly to be excused for a breach of trust, the court exercised a discretionary power, which it should exercise having regard to the effect of granting relief not only on the trustee but also on the beneficiaries. In connection with mortgage fraud, much might depend on the position of the beneficiary. An institutional lender might be insured for the consequences of third-party fraud, whereas an innocent purchaser might have contributed his life’s savings to the purchase and have no recourse at all other than against his insured solicitor.
(5) The respondent’s conduct had departed from best practice in various respects that were unconnected with the appellant’s loss. However, certain other departures from best practice were relevant. The respondent had made inadequate requisitions on title and accepted inadequate replied to them before transferring the completion money. Where the fraudulent solicitor had not offered any appropriately worded undertaking to procure the discharge of prior mortgages, a reasonable solicitor in the respondent’s position should have expected an immediately effective discharge document to be handed over as part of the process of postal completion, but the respondent had received neither such a document nor an undertaking on purported completion. That should have been sufficient warning to a reasonably careful purchaser’s solicitor that completion had not taken place in the proper way.
Further, the respondent had neither sought nor obtained the fraudulent firm’s agreement to adopt the Law Society’s Code for Completion by Post. An affirmative answer to the relevant requisition would have provided a written obligation to hold the purchase money to the order of the respondent, which the respondent could have enforced if completion did not take place. The respondent should not have transferred the completion money to the fraudulent firm’s client account without imposing any written obligation on the firm to hold it to its order or receiving any written undertaking from the firm to do so, either by the adoption of the Completion Code or in any other written form. It had acted unreasonably both by failing to obtain written evidence of the necessary obligation and by transferring the completion money in the absence of written confirmation of that matter. Those failures were serious omissions that were plainly connected with the appellant’s loss, since they had the consequence of disabling the respondent from seeking, by any summary means of enforcement, to protect the appellant from the loss of its money. Even assuming that the fraud would probably have succeeded even if the respondent had acted reasonably, that did not mean that its conduct was unconnected to the loss. It would not be fair to excuse the respondent from liability in whole or part: Patel v Daybells [2001] EWCA Civ 1229; [2001] 32 EG 87 (CS) considered.
Thomas Grant QC (instructed by Matthew Arnold & Baldwin LLP) appeared for the appellant; Michael Pooles QC and Imran Benson (instructed by DAC Beachcroft LLP, of Bristol) appeared for the respondent.
Sally Dobson, barrister