Where, in the course of carrying out their instructions, solicitors representing lenders come into possession of information that is clearly significant to their clients – for example, indicating that a security has recently changed hands at a much lower price – they have a duty to report this to them: Mortgage Express v Bowerman & Partners [1996] 2 All ER 836.
The Connaught Income Fund, Series 1 (in liquidation) v Hewetts [2016] EWHC 2286 (Ch) concerned the scope of that duty in circumstances where a firm of solicitors had addressed a certificate of title to a lender and a third-party funder. The lender was taking a charge over the property named in the certificate and had a contractual relationship with the law firm that was acting for the buyer/borrower and providing the certificate. The fund, which pooled investors’ money for investment in the loan market, was taking a sub-charge and had no such relationship with the firm. The borrower became insolvent and the property was sold at a loss.
The fund argued that the law firm had owed the same duty of care to both the parties named as the recipients of the certificate. It claimed that the solicitors knew, or ought to have known, that information that they had acquired during the course of their due diligence might have had a material bearing on the fund’s decision to lend to the lender.
The law firm argued that its duties to the fund were very much more limited in scope and extent, and did not extend to giving the fund advice. It had not been asked to, and was not given any means to, communicate with the fund. The fund had no mechanisms or ability to deal with issues raised by the solicitors and expected such matters to be dealt with by the lender, who was managing the legal work. Therefore, it did not owe a Bowerman duty to the fund. Instead, its duty was limited to exercising due skill and care when making the statements and setting out the opinions in the certificate.
The High Court agreed that the solicitors’ duty of care to the fund was limited to exercising due skill and care when speaking in the certificate. The transactions between the law firm and the lender, and the law firm and the fund, differed, involving different lending considerations and decisions. Furthermore, the firm was not privy to the basis upon which the fund was taking and making its lending decisions. Therefore, although the law firm owed a duty to the fund to act competently when completing the certificate, which was how it “spoke” to the fund, its obligation to “speak” did not go further than that.
The judge accepted that the fund had relied on the certificate. However, he dismissed all but one of the fund’s allegations that the certificate had contained negligent mis-statements or omissions. Certificate providers are required to state the date and consideration given when the property was last sold. The law firm should have confirmed the value stated, in lieu of the purchase price, in the office copy entries, but had failed to do so. However, the judge considered that the fund would have advanced the money anyway. Consequently, the law firm was absolved from liability on the ground that its omission was not the cause of the loss suffered by the fund.
Allyson Colby is a property law consultant
