Solicitors – Indemnity fund – Mortgage fraud – Defendant solicitor aware that client borrower paying an obviously inflated price – Defendant solicitor deciding not to report to mortgagee or investigate further – Indemnity fund disclaiming liability on ground that solicitor had acted dishonestly – Solicitor’s claim against fund upheld
On 11 April 1990 the first named defendant (SN), a sole practitioner, was engaged to act for the claimant mortgage provider (Express) in the purchase by her client (MS) of a north-west London flat for £275,000. The transaction was completed on 27 May 1990 with the aid of a £200,000 mortgage from Express. Few payments were made under the mortgage, and, in April 1992, Express repossessed and sold the flat, recovering no more than £83,000. Investigations revealed that, on 5 January 1990, the repossessed flat was sold for £88,000 to P1, who, on the same day, sold it for £90,000 to P2. On 27 April 1990 P2 sold it for £110,000 to P3, who, again on the same day, purported to sell it to MS for the £275,000 stated in her mortgage application.
In February 1994 Express commenced proceedings against SN alleging, inter alia, that: (i) she had dishonestly and deliberately stated in her report on title that contracts had been exchanged on 11 (or 12) April, when she knew that exchange and completion were intended to be simultaneous; and (ii) she was aware that MS was paying a £165,000 premium for the flat, and, accordingly, could not have proceeded honestly with the transaction without seeking further instructions from MS and reporting the suspicious circumstances to Express. The pleading ended with a general allegation that SN was dishonest, in that she had wilfully shut her eyes to the obvious or had wilfully or recklessly failed to make the inquiries that an honest and reasonable solicitor would have made, because she did not want to prevent the use of Express funds to complete the transaction.
On 9 March 1994 SN was formally notified that the Solicitors’ Indemnity Fund had refused to indemnify her in respect of the claim, such refusal being founded on r 14(f) of the Solicitors’ Indemnity Rules, which prohibits indemnity where the claimed loss arises “in respect of any dishonest or fraudulent act or omission”. SN instituted third party (now Part 20) proceedings, contending that r 14(f) did not apply.
On 2 September 1999, after numerous interlocutory hearings, it was ordered that the Part 20 proceedings should be tried separately from the main action. At the hearing, it was found as a fact that SN, both in her actions and omissions, had failed at various important points to act as an honest and reasonable solicitor. This failure stemmed from her grossly defective appreciation of her duties and a determination, at the outset, not to concern herself with matters that were not strictly related to title. However, it was also found that: (i) she agreed to act only with considerable reluctance; (ii) she was pressed by various parties to complete the transaction over a very short period, which period coincided with a 10-day holiday; (iii) she encountered, shortly before completion, a serious doubt over whether P3 could give vacant possession; and (iv) she assumed throughout that Express was content with its own valuation. For those reasons, and because of the narrow view she had taken, the judge was unable to find that she had been (subjectively) conscious of the possibility of mortgage fraud. The judge then considered whether SN had been “dishonest” for the purpose of r 14(f).
Held:
1. SIF could not rely on r 14(f).
2. When determining the culpability of an accessory in a civil matter, the test for dishonesty was an objective one, it being enough to show that the defendant had not acted as an honest person would have done in the circumstances: see per Lord Nicholls in Royal Brunei Airlines Sdn Bhd v Ming (Philip Tan Kok) [1995] 2 AC 378 at pp389 and 390, and per Potter LJ in Twinsectra Ltd v Yardley unreported 28 April 1999. In criminal cases, on the other hand, the test was subjective; it had to be shown that the accused realised that what he was doing was dishonest by ordinary standards: see per Lord Lane CJ in R v Ghosh [1982] QB 1053.
3. The possible tension between the two tests was much more readily apparent where the alleged dishonesty amounted to a failure to perform a duty or to an instance of “Nelsonian” blindness. The first required a conscious appreciation of the relevant duty: the second required an equally deliberate decision to shut down the normal processes of professional curiosity and analysis. Since SN, no matter how unreasonably, honestly believed that it was proper for her to take a restricted view of her duties, and since she did not in fact come to suspect the perpetration of a mortgage fraud, she could not be guilty of a dishonest or fraudulent omission within the meaning of r 14(f): Abbey National plc v Solicitors’ Indemnity Fund Ltd [1997] PNLR 306 considered.
Edward Davidson QC and Paul Stafford (instructed by Bower & Bailey, of Banbury) appeared on behalf of the defendant/Part 20 claimant; Justin Fenwick QC and Sue Carr (instructed by Ince & Co) appeared for the Part 20 defendant, the Solicitors’ Indemnity Fund.
Alan Cooklin, barrister
