Negligence — Subsale at substantially increased price — Whether solicitor acting for lender and subpurchaser owed duty to inform lender of price increase
In 1990 G, a
partner in the appellant firm of solicitors, was instructed to act for both H
and the respondent lender in relation to the acquisition by H of a flat for
£220,000, and the creation of a mortgage by H to the respondent to secure a
loan of £180,150. When instructed by the respondent, G was sent, inter alia,
a copy of the valuation of the flat in the sum of £199,000. H’s immediate
vendor was simultaneously acquiring the flat for £150,000; this was known to G,
but he did not inform the respondent. H defaulted in his mortgage repayments
and the respondent repossessed the flat and sold it for £96,000. The parties
agreed that at the date of the sale to H the value of the flat was £120,000,
that had the respondent been informed of the sale to H’s vendor at £150,000 it
would have arranged a second valuation and that that valuation would have been
sufficiently different from the first that the respondent would have withdrawn
the mortgage offer to H. The respondent’s appeal on damages has been allowed:
see Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd
[1995] 1 EGLR 129; [1995] 12 EG 144. The appellants cross-appealed the decision
of Arden J that they were liable to the respondent.
purchaser and lender, and learns of information common to both, the question
whether he should pass it on to one client or the other or both or neither
entirely depends on the relevant interest of each client which the solicitor is
engaged to serve. If, in the course of investigating title, a solicitor
discovers facts which a reasonably competent solicitor would realise might have
a material bearing on the valuation of the lender’s security or some other
ingredient of the lending decision, then it is his duty to point this out. The
fact of the simultaneous sale at a figure £50,000 below the valuation relied on
by the respondent might have caused the respondent to doubt the valuation; G
should have informed the respondent of this fact.
The following
cases are referred to in this report.
Anglia
Hastings & Thanet Building Society v House
& Son (Wetheralls, third party) [1981] 2 EGLR 17; (1981) 260 EG 1128
Banque
Bruxelles Lambert SA v Eagle Star Insurance Co
Ltd [1995] 2 WLR 607; [1995] 1 EGLR 129; [1995] 12 EG 144, CA
Scholes
v Brook (1891) 63 LT 837; 7 TLR 214; affirmed
64 LT 674
This was the
hearing of a cross-appeal by Bowerman & Partners from a decision of Arden J
who had given judgment to the respondent, Mortgage Express Ltd, in its claim
for damages for negligence. The respondent’s appeal against the award of
damages has been allowed by the Court of Appeal: [1995] 1 EGLR 129.
Christopher
Gibson QC and Ben Patten (instructed by Pinsent Curtis, of Birmingham) appeared
for the appellants; Nicholas Patten QC and Timothy Harry (instructed by Rosling
King) represented the respondent.
Giving the
first judgment, Sir Thomas Bingham MR said: This is a cross-appeal by a firm of
solicitors, Bowerman & Partners, against a finding of negligence made
against one of their partners on May 11 1994 by Arden J.
The partner
involved is a Mr Gilroy, who was admitted in 1974 and practised in Cricklewood
from 1976 to 1988. During that time he built up a local connection in that
area. In 1988 Mr Gilroy became a partner in Bowerman & Partners. That firm
had their office in Bicester, but a substantial proportion of Mr Gilroy’s
clients continued to be based in London and were referred to him through his
old contacts. In this way he remained conversant with conditions in the London
housing market. During 1990 a number of clients were referred to Mr Gilroy by
Brondesbury Estates, a firm of estate agents and mortgage brokers.
By a letter
dated November 21 1990, Mr Gilroy was instructed to act on behalf of Mortgage
Express Ltd, a company specialising in lending on mortgage and the plaintiff in
these proceedings. The letter related to an application for a loan by Mr A Li
Hadi of 38 Queen’s Court, Queensway, London W2. The leasehold flat which he
wished to buy was 119 Queen’s Court, Queensway, London W2. The purchase price
was £220,000. The amount of the proposed loan was £180,150. The mortgage term and
rate of interest were stated.
Enclosed with
this letter of instruction was a copy of a letter from Mortgage Express to Mr
Hadi containing the offer of a loan. Mr Gilroy, and his firm’s name and
address, appeared in this offer letter under the heading ‘Solicitor’. It was
plain that Mr Hadi had nominated Mr Gilroy to Mortgage Express as the solicitor
whom he proposed to instruct. Also enclosed with the letter of instruction were
the special conditions of Mortgage Express and its ‘Standing Instructions to Solicitors’.
The first of the standing instructions provided:
These
instructions are not intended to be exhaustive and do not in any way limit the
normal duties of a solicitor when acting for a mortgagee …
The standing
instructions made clear that Mortgage Express reserved the right to withdraw
its offer at any time before completion of the mortgage transaction.
Also enclosed
with the letter of instruction was a document central to this appeal. It was
headed ‘Valuation Report’ and was a valuation of the flat which Mr Hadi
proposed to buy. The valuation was made by a valuer practising in Kilburn Lane
and valued the flat in its existing condition at £199,000. It was evident that
the loan of £180,150 which Mortgage Express had offered was based on this
valuation.
Seeing the
name and address of the purchaser, Mr Gilroy assumed that these instructions
resulted from an introduction by Brondesbury Estates, whom he accordingly
telephoned. He learned that the vendor of the flat was a Mr Arrach, that his
solicitor was Mr F G Litchfield and that the purchase price (as stated in his
instructions) was £220,000. It seems that Mr Gilroy then spoke to Mr Hadi and
agreed to act on his behalf.
On November 26
1990 Mr Gilroy received a fax from Mr Litchfield which read in material part:
I have just
been instructed by a Mr Ahmed Arrach in relation to his proposed purchase of
[119 Queen’s Court W2] and its sub-sale to Mr Ali Hadi for £220,000.
I have been
told that you are acting for Mr Hadi and that he already has a Mortgage Offer.
I phoned the Vendor’s Solicitors, John Healy & Co, to ascertain the
position and was advised that their Client had only recently purchased the
property and they expect the Purchaser to register the Transfer to their Client
…
Mr Gilroy
replied to Mr Litchfield by fax on the same day, confirming that he had
instructions from Mr Hadi and that he had a mortgage offer from Mortgage
Express.
Also on
November 26, Mr Gilroy wrote to Mr Hadi, whom he had not up to then met.
Dear Mr Hadi,
Re: 119 Queens
Court
I am
enclosing a copy of a fax from Mr Litchfield together with a copy of my reply.
I will let you know as soon as I receive documentation.
You will note
that this is a sale on and accordingly it can be assumed that Mr Arrach is
purchasing the property and is selling on to you immediately at a profit. I do
not know the price that Mr Arrach is paying.
The fax and
reply referred to were those already quoted. But it seems that Mr Gilroy then
received a further message from Mr Litchfield, dated November 26, enclosing a
further letter from John Healy & Co also of November 26. In this letter
John Healy & Co wrote to Mr Litchfield:
We refer to
our telephone conversation this morning and understand that you have been
instructed by Mr Ahmed Arrach who has agreed, subject to contract, to purchase
the leasehold interest in [119, Queen’s Court] from our Client at a price of
£150,000.
As you are
aware, our Client has only recently completed his purchase of the leasehold
interest on 2nd November and the Transfer has yet to be stamped …
The letter
went on to deal with the mechanics of the conveyancing, which was to be done
very quickly. Receipt of a copy of this letter caused Mr Gilroy to add a
postscript to his letter to Mr Hadi. This read:
PS I enclose
a copy of a fax from John Healy & Co dated 26th November. Please note the
price being paid by Mr Arrach and the timetable required. I will be in touch as
soon as I receive documents.
In his written
witness statement Mr Gilroy described his state of mind at this stage:
8. Whilst I
considered that I should draw the fact of the sub-sale and the obvious
discrepancy between the price being paid by Mr Arrach and the price being paid
by Mr Hadi to his attention in case he was not aware of it I did not regard
this as particularly unusual or as a matter giving rise to any cause for
concern provided the purchasing client understood and accepted the situation.
9. In this
case I was aware that Hadi was to pay £220,000 for the property when his
immediate vendor Arrach was only paying £150,000. I was of course conscious
that this was a large difference and recall that I discussed this with Mr Hadi
and also pointed out to him the discrepancy between the valuation of £199,000
and the price he was paying. This caused me the greatest concern since it
appeared that Mr Hadi was paying too much. I was satisfied that he understood
the position (he spoke perfect English). He said that he wanted a flat in that
block and was prepared to pay the price and to accept that Arrach was making a
substantial profit.
On the
following day, November 27, Mr Gilroy wrote to Mr Hadi giving details of what
was required to carry out the purchase. He made no further reference to the
price at which Mr Arrach had bought or to the sale to Mr Arrach or to the
valuation of the flat. He also wrote to Mr Litchfield asking for a copy of the
transfer to Mr Arrach. Mr Litchfield wrote back to him on November 30,
enclosing a copy of a letter of November 28 from John Healy & Co to Mr
Litchfield. With this letter to Mr Litchfield John Healy & Co enclosed a
copy of the transfer to their client, from whom Mr Arrach was buying the flat,
but they wrote that:
until
contracts have been exchanged our Client is unwilling to disclose the
consideration.
From the
transfer it was apparent that John Healy & Co’s client was a Mr Rasool, who
had bought the flat from a Mr Khedair.
On December 10
1990 contracts were exchanged for the sale by Mr Rasool to Mr Arrach at
£150,000 and for the sale by Mr Arrach to Mr Hadi at £220,000.
Mr Gilroy made
his written report on title to Mortgage Express on December 11. The report was
made on a form supplied by Mortgage Express and confirmed that the title was
good and marketable and might safely be accepted as security. No mention was
made of Mr Arrach’s contemporaneous purchase at £150,000. Mortgage Express duly
advanced £180,150 to Mr Gilroy on behalf of Mr Hadi, and both sales were
completed on December 19. Mr Hadi provided, apparently from his own resources,
the difference between the mortgage advance and the purchase price.
At the time of
both exchange and completion Mr Gilroy was acting for both Mortgage Express and
Mr Hadi. He knew that Mr Hadi was buying for £220,000 a flat valued at £199,000
on the security of which Mortgage Express was lending £180,000. He knew that Mr
Hadi was buying from Mr Arrach, who was at the same time buying the flat for
£150,000. He knew that the vendor to Mr Arrach had bought the flat on November
2 1990 at a price which he did not know but which that
he thought it ‘obviously quite likely’ was less than the figure of £150,000
which Mr Arrach was paying. He knew that at this time the housing market in
London was not rising and if anything was falling.
Mr Hadi made
only one interest payment to Mortgage Express, who repossessed the flat and
sold it for £96,000, the best price then obtainable. On April 15 1993 Mortgage
Express issued proceedings claiming damages for negligence against Mr Gilroy’s
firm. Its central contention was that Mr Gilroy acted in breach of his duty to
it in failing to draw attention to the simultaneous purchase by Mr Arrach and
the price at which he was buying. The parties are agreed that the open market
value of the flat at the time of this transaction was £120,000.
The judge held
(and her finding has not been challenged) that if Mortgage Express had been
informed that Mr Arrach was simultaneously buying for £150,000 it would have
arranged for a second valuation as a matter of urgency. The parties are agreed
that if a second valuation had been performed the figure given would have been
sufficiently different from that on which Mortgage Express relied to have
caused it to withdraw its offer of a loan to Mr Hadi.
The learned
judge found for Mortgage Express on liability but accepted the solicitors’
submissions on the measure of damage. Mortgage Express appealed against that
ruling and the solicitors cross-appealed on the issue of liability.
The appeal of
Mortgage Express was heard as one of a group of six cases raising the same or a
similar issue on the measure of damages. In the result, the court allowed the
appeal by Mortgage Express: see Banque Bruxelles Lambert SA v Eagle
Star Insurance Co Ltd [1995] 2 WLR 607* particularly at p641. Thus it is
only now that the solicitors’ cross-appeal on liability, although logically
prior to the appeal on damages, comes before us.
*Editor’s
note: Also reported at [1995] 1 EGLR 129.
Before
addressing the issues which fall for consideration in this appeal, it is
helpful to clear out of the way matters which are not in issue:
1. No
aspersion of any kind has been cast on Mr Gilroy’s professional integrity. I
must emphasise that this is not, and has never been presented as, the case of a
solicitor shutting his eyes to nefarious practices of which he was or should
have been aware.
2. Mortgage
Express has not advanced its case on the basis that Mr Hadi was engaged in any
dishonest practice. It has not accused him of acting dishonestly, although it
does not accept that he was necessarily acting honestly.
3. It is
common ground that neither of Mr Gilroy’s clients retained him to advise on the
commercial merits of the transaction. Thus, he was not asked to advise Mr Hadi
on the wisdom or unwisdom of buying this flat at the proposed price, nor was he
asked to advise Mortgage Express on the valuation of the security against which
it was lending. Mr Gilroy was a solicitor not a valuer. He had no duty to
second guess the valuer. He knew, as any solicitor in his position would, that
Mortgage Express would rely on the reliability of the valuation it had
obtained, but he had no duty to investigate whether that valuation was reliable
or not.
4. It was
expressly accepted on behalf of Mr Gilroy in argument that the fact that Mr
Gilroy was acting for Mr Hadi did not reduce the duty he would have owed to
Mortgage Express had he been acting for Mortgage Express alone. Mr Gilroy owed
a full duty to Mortgage Express, as he did to Mr Hadi. What that duty required
is the central issue in this cross-appeal. But we are not asked to, and do not,
approach this case on the basis that Mr Gilroy’s duty to Mortgage Express,
whatever it may have been, was cut down as a result of his acting also for Mr
Hadi.
5. The
information which Mr Gilroy received concerning the sale to Mr Arrach at
£150,000 and the subsale to Mr Hadi at £220,000, was information which Mr
Gilroy received as solicitor to each of his respective clients. It was directly
relevant to the conveyancing transaction he was carrying out for Mr Hadi since
it went to show how and when Mr Arrach would acquire title to sell. For the
same reason it was relevant to Mr Gilroy’s instructions from Mortgage Express,
who wanted to be sure that its borrower was obtaining a good and marketable
title which might safely be accepted as security. The present case is not,
therefore, one in which a solicitor acting for two parties receives information
confidential to one of them. In such a case it may be necessary for the
solicitor to obtain the consent of the client whose information it is to
disclose it to the other and, if consent is refused, the solicitor may be
obliged to cease to act for the other party or both parties. But that is not
this case. It has not been suggested that Mr Gilroy would have been in breach
of any duty to Mr Hadi if he had disclosed the information in question to
Mortgage Express.
6. It was
suggested in argument that Arden J had held that as a matter of principle any
information which a solicitor in the position of Mr Gilroy, acting for both
purchaser and lender, gives to one party he should give to the other. I do not,
with respect, think that the judge laid down any such principle. Had she done
so the principle would, in my view, have been manifestly wrong. Where a
solicitor acting for purchaser and lender receives information common to both,
the question whether he should pass it on to one client or the other or both or
neither entirely depends on the relevant interest of each client which the
solicitor is engaged to serve.
That leads on
to the question which, in my view, lies at the heart of this cross-appeal. What
duty did the solicitors, by Mr Gilroy, owe to Mortgage Express? Before the
judge it was argued for the solicitors that the duty was to do what was
necessary to report to Mortgage Express on title — no more and no less. There
were problems about this contention. In the first place, it did not seem to
accord with the standing instructions issued by Mortgage Express to solicitors
acting for it. These referred to the ‘normal duties of a solicitor when acting
for a mortgagee’ and did not suggest that the solicitor’s duty began and ended
with the report on title. Second, as Mr Gilroy’s evidence made clear, this
strict and rather legalistic approach did not accord with the realities of
practice. Mr Gilroy acknowledged that matters might come to the notice of a
solicitor in his position which he would be under a professional duty to report
to the lender. For example, such a solicitor was not retained to second guess
the valuation on which the lender was relying, but if he received information
of previous transactions so apparently inconsistent with that valuation as to
give possible reasons for doubting its reliability, that might be something
which he should report. Thus, Mr Gilroy accepted that questions of fact and
degree would affect the solicitor’s duty.
Third, this
strict approach does not, in my view, lie comfortably alongside the general
guidance given to solicitors on professional conduct. In December 1990 guidance
was given on mortgage fraud in annex 24L of the Guide to the Professional
Conduct of Solicitors in these terms:
Solicitors
must not withhold information relevant to a transaction from any client and for
a lender this includes not only straightforward price reductions but may also
include other allowances (eg for repairs, payment of costs, the inclusion of
chattels in the price and incentives of the kind offered by builders such as
free holidays and part-subsidisation or mortgage payments) which amount to a
price reduction and which would affect the lender’s decision to make the
advance.
This guidance
is not something which Mr Gilroy, in all probability, saw before completion of
these transactions and he is not to be criticised for that. But guidance of
this kind is not the product of parthenogenesis. It represents a distillation,
or codification, of existing good practice and it represents, as it seems to
me, sound practical commonsense. A client cannot expect a solicitor to
undertake work he has not asked him to do, and will not wish to pay him for
such work. But if, in the course of doing the work he is instructed to do, the
solicitor comes into possession of information which is not confidential and
which is clearly of potential significance to the client, I think that the
client would reasonably expect the solicitor to pass it on
I would
accordingly reject the submission originally made on behalf of the solicitors
as to the narrow ambit of the duty, as the judge did, and accept, as I
understand her to have done, the submission of Mortgage Express. This was that
if, in the course of investigating title, a solicitor discovers facts which a
reasonably competent solicitor would realise might have a material bearing on
the valuation of the lender’s security or some other ingredient of the lending
decision, then it is his duty to point this out.
In reaching
this decision I do not gain much help from previous authority. It is, however,
worthy of note that in Scholes v Brook (1891) 63 LT 837 a claim
in negligence was made by a mortgagee against solicitors’ on the ground that
they had failed to report to the mortgagee striking differences in the price
paid for the property which had come to the solicitor’s attention in the course
of doing the legal work necessary to perfect the mortgage. The claim failed,
but only on the basis that the solicitors had discharged their duty by
reporting the discrepancies to the valuers and, in effect, inviting them to
reconsider their valuation. Romer J said at p838:
But it is
said that they were guilty of default towards the plaintiff because, having
ascertained the existence of some striking differences in the price paid for
the property, they ought to have called the attention of the plaintiff to it.
In my judgment, knowing as they did that what the plaintiff relied upon was
Brook and Dransfield’s valuation, knowing that she would be guided by that in
carrying out the transaction, they did what they ought to have done in calling
Mr Brook’s attention to the discrepancies; and, when they had obtained from him
a statement that, notwithstanding those discrepancies, his valuation still
stood unaffected, they discharged their duty, and were guilty of no negligence.
One infers
that the judge would have taken a different view had the solicitors done
nothing.
In Anglia
Hastings & Thanet Building Society v House & Son (Wetheralls,
third party) (1981) 260 EG 1128*, negligence was admitted by defendant
valuers and third party solicitors and the issue was one of apportionment. The
case is of interest only to the limited extent that the main complaint against
the solicitors (who were ordered to bear the major share of the blame) was that
they had failed to disclose to the plaintiff mortgagee facts of which they
became aware in the course of performing their conveyancing duties.
*Editor’s
note: Also reported at [1981] 2 EGLR 17.
What, then,
did Mr Gilroy’s duty as stated above require of him on the facts of this case?
From the outset he knew that his client, Mr Hadi, was proposing to buy the flat
at £20,000 over the professional valuation figure. That was possibly a little
surprising in a flat or declining market, but perhaps not in itself remarkable.
But he then learned that this was a subsale by a vendor who was simultaneously
buying the flat at £70,000 below what Mr Hadi was agreeing to pay and £50,000 below
the valuation figure on which Mortgage Express was relying. Mr Gilroy thought
it important to draw these facts to Mr Hadi’s attention because, as he agreed
in evidence, he was concerned that Mr Hadi might be paying too much for the
flat. He was, after all, paying much more than the valuation and very
considerably more than Mr Arrach.
It seems to me
clear beyond argument that Mr Gilroy would have failed in his duty to Mr Hadi
had he not alerted Mr Hadi to these new facts which had come to his attention, so
that Mr Hadi could take such action, if any, as he wished.
It does not
follow from that conclusion that it was necessarily Mr Gilroy’s duty to pass
the information to Mortgage Express. But I think any lender in Mortgage
Express’s position would have been greatly concerned to learn of a simultaneous
sale at a figure £50,000 below the valuation on which it was relying and
£30,000 below its proposed advance.
The
transaction might, of course, be explained by special circumstances, but an
obvious alternative explanation was that the flat had been significantly over
valued. A moment’s reflection would, I think, have alerted Mr Gilroy to this
second possibility and to the need to give Mortgage Express the opportunity to
review it. In fact, it is clear this second possibility did not occur to Mr
Gilroy. He was aware that Mortgage Express had obtained its own valuation and
regarded valuation as no concern of his. Up to a point he was right. But he
rightly accepted a duty to report the facts to Mortgage Express if he had
reason to doubt the valuation and, on the facts here, I find it impossible to
escape the conclusion that if he had applied his mind to these facts he would
have appreciated that they might have caused Mortgage Express to doubt the
valuation. The contemporary sale at a much lower value was itself evidence of
value for Mortgage Express to assess. He should not be too harshly judged for
this oversight in the course of a busy and, no doubt, pressured professional
life, but if his only client had been Mortgage Express and his only duty had
been to them, I find it very hard to think he would not have recognised the
need to alert it to these potentially significant facts.
In the course
of his argument for the solicitors, Mr Christopher Gibson QC indicated that the
judgment of Arden J had aroused widespread concern as to its implications for
solicitors at large. Mr Nicholas Patten QC for Mortgage Express suggested that
the decision was one closely dependent on the facts of the case. I accept the
latter view. I do not think either the judge’s decision or this judgment
extends the duties to which solicitors are subject. I would affirm the judge’s
decision and dismiss the cross-appeal.
Agreeing, Millett LJ said: Mr Gilroy, a
conveyancing partner in the defendant firm of solicitors, was instructed to act
for Mr Ali Hadi in connection with his purchase of a flat at 119 Queen’s Court,
Queensway, London W2. Mr Hadi was buying the flat for £220,000 with the
assistance of a mortgage offer from the plaintiffs of £180,150. The offer
represented approximately 90% of a professional valuation which the plaintiffs
had obtained and which valued the flat at £199,000.
As is common
in such cases, Mr Gilroy was also instructed by the plaintiff to act for it in
connection with the purchase and mortgage of the flat. The plaintiff forwarded
to him copies of its mortgage offer to Mr Hadi (though not of his mortgage
application) and of the valuation.
Shortly after
accepting his instructions to act, Mr Gilroy learned that the registered
proprietor was a Mr Khedair. He was not, however, the vendor from whom Mr Hadi
was buying the flat. Mr Hadi was buying from a Mr Arrach, who had
simultaneously agreed, subject to contract, to buy the flat for £150,000, not
from Mr Khedair himself but from someone (later identified as a Mr Rasool) who
had only recently completed his purchase from Mr Khedair and had not yet
registered his title at a price which his solicitor was reluctant to disclose
but which Mr Gilroy assumed was less than £150,000. Mr Gilroy informed Mr Hadi
that his vendor, Mr Arrach, had agreed, subject to contract, to buy the flat
for £150,000. He did not, however, pass this information on to the plaintiffs.
Contracts were
exchanged for Mr Hadi’s purchase on December 10 1990. Mr Gilroy gave a clear
report on title to the plaintiff on the same day. Following receipt of the
report on title the plaintiff advanced £180,150 on December 18 1990. Completion
of the purchase and a legal charge in favour of the plaintiff followed on
December 19 1990.
Mr Hadi
defaulted almost at once. Possession proceedings were commenced and an order
for possession was obtained in November 1991. In due course the flat was sold.
It realised only £96,000. In the present action the plaintiff sues the
defendants for negligence and breach of duty as its solicitors in failing to
inform it of the fact that Mr Hadi’s vendor was a person who agreed, subject to
contract, to buy the flat for only £150,000.
At the trial
it was common ground that in November 1990 the open market value of the flat
was only £120,000. The judge found that if Mr Gilroy had informed the plaintiff
of the price which Mr Hadi’s vendor was paying for the flat they would have
commissioned another valuation, that this would have produced a figure not
materially in excess of £120,000 and that the transaction with Mr Hadi would
not have proceeded. There is no appeal from those findings. The judge
also found that Mr Gilroy ought to have communicated the information in
question to the plaintiff and that his failure to do so was negligent. The
defendants appeal that finding.
It is
important at the outset to recognise that it would not have involved Mr Gilroy
in any breach of duty to his client, Mr Hadi, if he had communicated the
information in question to the plaintiff. A solicitor who acts both for a
purchaser and a mortgagee lender faces a potential conflict of duty. A
solicitor who acts for more than one party to a transaction owes a duty of
confidentiality to each client, but the existence of this duty does not affect
his duty to act in the best interests of the other client. All information
supplied by a client to his solicitor is confidential and may be disclosed only
with the consent, express or implied, of his client. There is, therefore, an
obvious potentiality for conflict between the solicitor’s duty of
confidentiality to the buyer and his duty to act in the best interests of the
mortgage lender.
No such
conflict, however, arose in the present case. It is the duty of a solicitor
acting for a purchaser to investigate the vendor’s title on his behalf and to
deduce it to the mortgagee’s solicitor. He has the implied authority of his
client to communicate all documents of title to the mortgagee’s solicitor. In
the present case, the information in question appeared on the face of the
vendor’s title, which consisted of his agreement, subject to contract, to
purchase the flat for £150,000. Had the plaintiff instructed other solicitors,
Mr Gilroy would have had to provide them with a copy of that agreement. It
would then have been for those solicitors to consider whether they ought to
inform their client of the price which Mr Arrach was paying for the flat. In
the present case Mr Gilroy was instructed to act both for the buyer and the
mortgagee and it was his duty to investigate the vendor’s title on behalf of
each of his clients. He must, therefore, be taken to have been in possession of
the documents of title, including Mr Arrach’s purchase agreement, not only as
solicitor for Mr Hadi but also, with Mr Hadi’s implied authority, as solicitor
for the plaintiff. He then came under a duty to the plaintiff to consider
whether he ought to disclose the information which that documentation contained
to it.
Mr Gilroy
recognised as much. In cross-examination he said at p33F:
If I had had
any cause to doubt the valuation, that is something I should have passed on,
but I did not doubt the valuation.
It might be
thought from that answer that the question which the judge should have asked
herself was: ‘Would a solicitor of ordinary competence have regarded the
information that Mr Arrach was paying only £150,000 for the flat as throwing
doubt on the valuation of £199,000?’ That, however, would not, in my opinion,
be an accurate formulation of the question. Mr Gilroy was not a valuer and it
was not his responsibility to doubt a professional valuation. The question
which the judge had to ask herself was whether a solicitor of ordinary
competence would have regarded the information in question as information which
might cause the plaintiff to doubt the correctness of the valuation which it
had obtained.
The judge, in
effect, answered this question in the affirmative. In my judgment, her
conclusion is unassailable. Mr Hadi was paying £220,000, ie £20,000 or 10% more
than the valuation. That was not something which should necessarily arouse
suspicion. But he was also paying £70,000 (or 50%) more than Mr Arrach was
paying, or than the price at which Mr Khedair and Mr Rasool were selling. At
least two people (Mr Khedair and Mr Rasool) evidently thought that the flat was
not worth more than £150,000, that is to say, £50,000 less than the valuation
and £30,000 less than the mortgage advance.
The judge
accepted Mr Gilroy’s explanation that it never occurred to him to doubt the
valuation. I do not find it easy to follow Mr Gilroy’s process of reasoning. He
told the judge that he communicated the information in question to Mr Hadi
because he was concerned that Mr Hadi was paying too much for the flat. But Mr
Gilroy knew that Mr Hadi was aware of the valuation and that he might be paying
£20,000 too much for the flat. Mr Gilroy, then, must have been concerned that
Mr Hadi was not only consciously taking the risk of paying £20,000 or 10% over
the odds, but that he might unconsciously be taking the risk of paying £70,000
or 50% over the odds. But that is only another way of saying that Mr Gilroy
realised that Mr Hadi might think that the information threw doubt on the correctness
of the valuation.
Mr Gilroy did
ask Mr Hadi about it and told the judge that he was satisfied by Mr Hadi’s
response. But Mr Hadi gave him no explanation why he was willing to pay
£220,000 for a flat which had been professionally valued at £199,000 and which
had twice recently changed hands at £150,000 or less, particularly when his
vendor had not even got a binding contract of purchase.
Whether the
information in question was of such a nature that it might have caused the
plaintiff to doubt the correctness of the valuation depended upon the size of
the discrepancy between the price which Mr Arrach was paying for the flat and
the price at which he was selling it. It was, therefore, essentially a question
of fact and degree on which it is impossible to challenge the judge’s finding.
In my
judgment, her conclusion that a solicitor of ordinary competence would have
passed the information to the lender and that Mr Gilroy’s failure to do so was
negligent cannot be faulted. I would dismiss the cross-appeal.
Schiemann LJ
agreed and did not add anything.
Cross-appeal
dismissed.