Claims against solicitors are sometimes framed in equity to sidestep common law rules that restrict the damages payable for breach of contract and negligence, especially where it could be argued that the claimant has failed to protect its own interests.
The litigation in Lloyds TSB Bank plc v Markandan & Uddin (2012) EWCA Civ 65 was triggered by a mortgage fraud perpetrated by fraudsters who assumed the identity of a law firm. They subsequently duped the bank’s solicitors into paying them a mortgage advance and disappeared with the money. The bank’s solicitors received nothing in exchange. Consequently, they were unable to register either a transfer or a charge.
The bank relied on their mortgage instructions, which required the solicitors to hold the mortgage advance on trust for them “until completion”. They claimed that the solicitors had parted with the funds in breach of trust and were liable to replace the money. The Court of Appeal agreed. The bank’s solicitors had parted with the advance without receiving the requisite documents or a solicitor’s undertaking to provide them. The court rejected the solicitors’ arguments that the bank had authorised them to use the money in connection with the purchase that they were attempting to complete and that, although the bank might have claims against them on other grounds, they had not acted in breach of trust.
Their Lordships held that the bank had authorised the solicitors to release the mortgage advance to enable completion to take place and, on the facts of this case, there had been no completion at all. They defined “completion” for the purposes of the lender’s mortgage instructions as meaning completion of a genuine contract by way of an exchange of real money for real documents that would give the buyer the means of registering the transfer of the property that he had agreed to buy and charge. The proprietors of the land in this case had not agreed to sell their property, or authorised anyone else to do so, and the contract was a nullity. Nothing comes from nothing – and completion had not occurred.
It might be considered hard on solicitors who are duped that they should be answerable to the lender as trustees, especially in circumstances where a lender has been contributorily negligent and ought, perhaps, to have realised that something was amiss. However, a careful, conscientious and thorough solicitor, who conducts a transaction by the book and acts honestly and reasonably in relation to it in all respects, but still does not discover the fraud, may be entitled to relief under s61 of the Trustee Act 1925.
Unfortunately, the solicitors’ conduct fell short of the standard that merited such mercy. They had failed to check the authenticity of the branch office of the law firm with whom they thought they were dealing in breach of the lender’s requirements and had parted with the mortgage advance despite the fraudsters’ failure to comply with an undertaking earlier in the transaction.
Law Society’s advice on how to guard against being used to commit a mortgage fraud >>
Allyson Colby, property law consultant