Solicitors negligently failing to reveal to client lender information casting doubt upon reliability of borrower – Measure of damages – Whether lender entitled to recover whole of loss including internal costs or nominal damages only – Lender awarded whole of loss less internal costs – Solicitor’s appeal dismissed – Cross-appeal allowed
On 18 April 1990 Mr and Mrs Goff (the borrowers) applied for a loan in order to purchase Rydon House, Willand, Devon (the property). The loan was to be secured by way of a mortgage over the property. The borrowers’ solicitor, the first defendant (BA), was also acting for the vendor of the property. On 24 April 1990 the claimant building society (the society) offered a loan of £168,700. On the same day, the society wrote to BA requesting it to act on the society’s behalf, with the requirement that the instructions were to be returned if BA was also acting for the vendor. BA failed to comply with the requirement and accepted the instructions.
Subsequently, the borrowers instructed BA that £50,000 of the purchase price was to be secured by a second charge over the property in the vendor’s favour. On 16 July 1990 contracts were exchanged, and, on 24 July 1990, BA signed a copy of the report on title, which did not report that the borrowers proposed to grant the second mortgage. Completion took place on 30 July 1990 and the mortgage advance was sent to BA. Meanwhile, the borrowers executed a deed of charge in favour of the society and, unknown to the society, a deed of second charge in favour of the vendor. On 2 August 1990 BA sent notice of the second charge to the society, which was duly acknowledge by the society’s administration department. The deeds were duly registered at the Land Registry and, on 26 April 1991, BA sent the certificate of first charge and the notice and the acknowledgement of the second charge to the society’s deeds department. Two years after completion the borrowers defaulted. The society obtained an order for possession in August 1993, and the property was sold for £110,000.
The society issued proceedings against BA. BA admitted negligence but disputed the amount of the resulting loss. The judge found that if BA had reported the existence of the second mortgage before completion, the society would not have advanced the money and the transaction would not have occurred. On that basis, he concluded that the society was entitled to recover the whole of its loss, and ordered that BA pay damages in the sum of £74,323.92. BA appealed contending, first, that there was no good reason to depart from the normal rule that damages in a solicitor’s negligence action were to be assessed at the date on which the cause of action arose. Accordingly, since the society had become aware of the facts that constituted the breach immediately after the breach had occurred, BA should have been liable to pay nominal damages only. Second, it was contended that, since it had been conceded that if BA had warranted that the borrowers did not propose a second mortgage only nominal damages would be recoverable, it followed that the society’s loss had not been caused by the BA’s negligent misrepresentation. It was submitted that, alternatively, the loss recoverable for negligently representing that a fact was true could not be greater than the loss recoverable for absolutely warranting it was true. The society cross-appealed in respect of some of the individual heads of damage that the judge had disallowed, namely internal legal costs and estate agents’ fees.
Held: BA’s appeal was dismissed and the society’s cross appeal was allowed.
1. The judge found that the society had known of the existence of the second charge in 1990, but had not known, and could not reasonably have known, that the existence of the charge had occurred through a breach of duty on the part of BA. That finding was unassailable, and led to the inevitable conclusion that there was to be a departure from the normal rule that damages were to be assessed as at the date of the wrong. It would only have been appropriate to assess the damages as at that date if it were to be presupposed that the society ought to have discovered the solicitor’s breach of duty, and the evidence did not support such a finding.
2. The consequence of the incorrect information provided by BA was that: first, the society believed that the transaction was viable, when, if it had been correctly advised, it would have concluded that it was not viable; and, second, the society, thought that it possessed the covenants of honest solvent borrowers, whereas it possessed the covenants of people guilty of fraud. In those circumstances, the judge had rightly held that the society was entitled to recover the whole of the loss. He had been correct to follow the reasoning of Chadwick J in Bristol & West Building Society v Fancy & Jackson [1997] 4 All ER 582 in his application of the principle in Banque Bruxelles Lambert SA v Eagle Star Insurance Co (SAAMCO) [1997] AC 191, which had the effect that where a negligent solicitor failed to provide information that showed that the transaction was not viable or which tended to reveal accurate or potential fraud on the part of the borrowers, the lender was entitled to recover the whole of its loss. In other words, if, as here, the whole of the loss suffered by the lender was within the scope of the solicitor’s duty, the lender was entitled to recover the whole of the loss.
3. The judge had erred in holding that the society was not entitled to recover as damages its internal legal costs, amounting to £1,936. There was clear authority that, in principle, a claimant was entitled not only to recover in respect of particular disbursements made to third parties but also the costs of its in-house lawyers. It could not be accepted that the internal legal costs were not recoverable in the absence of evidence that the society had had to employ extra staff as a result of the case. For the same reasons, the judge was wrong in holding that the society had not been entitled to recover as damages the estate agents’ fee of £1,100 plus VAT: Baker v Black Sea & Baltic General Insurance [1998] 1 WLR 974 distinguished.
Mark Wonnacott (instructed by Bevan Ashford, of Tiverton) appeared for the appellant; Mark West (instructed by Clarke Willmott & Clarke, of Yeovil) appeared for the respondent society.
Thomas Elliott, barrister
