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The luck of the law

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23/01/2014

Facts and fraud

In the case of Ikbal v Sterling Law [1], the court was asked to decide whether a firm of solicitors acting for the purchaser of a property was liable to its client for a breach of trust and/or breaches of duty of care, after it failed to recognise that a property purchase was a fraudulent transaction, the result of which being that its client did not obtain legal title.

Mr Ikbal instructed Sterling Law (Sterling) to act for him on his purchase of a property in London (the Property). Although at one stage he intended on purchasing the Property with a mortgage, Mr Ikbal eventually purchased the Property free of a mortgage with the assistance of funds from family sources. This was not a case of mortgage fraud.

Completion was believed to have occurred on Monday 26 July 2010, when Sterling transferred the full purchase price of £350,000 to the seller’s solicitors, Fernando & Co (Fernando). Sterling believed that completion had occurred pursuant to the Law Society Code for Completion by Post (the Code), which contains various undertakings that are impliedly accepted by solicitors using the Code relating to completion. These include an undertaking that a seller’s solicitor will forward to a purchaser’s solicitor an executed transfer form (TR1) following receipt of sale funds and completion.

Sterling contended that the transaction had progressed as a normal transaction up until post-completion, when the TR1 was not received from Fernando. In fact, Fernando had not been acting for the genuine owner of the Property (the genuine owner had actually died some years before). The genuine owner’s beneficiaries (the Beneficiaries) had not taken any steps to register the Property in their own names since the owner’s death.

The first point at which it became apparent that there was an issue was when possession proceedings were commenced on 19 October 2010 by the Beneficiaries against “persons unknown”, being Mr Ikbal. At this point, Mr Ikbal had been conducting renovation works at the Property. Mr Ikbal contacted Sterling and informed the firm of the proceedings against him. It was not until 16 November 2010 that Sterling wrote to Fernando, requesting a copy of the TR1 and explaining that possession proceedings had been commenced against its client. This was later established to be the first time that Sterling had chased for the TR1. Unbeknown to Sterling, Fernando had actually been the subject of an SRA intervention on 10 September 2010 and it appeared that a dishonest individual at Fernando had fraudulently progressed a sale of the Property and dishonestly appropriated the sale funds.

A possession order was made in favour of the Beneficiaries in respect of the Property and Mr Ikbal claimed against Sterling for breach of trust and breaches of duty of care. Mr Ikbal claimed reconstitution of trust fund monies which had been paid to Sterling for the purposes of effecting purchase of the Property in the sum of £315,000 (Mr Ikbal admitted that the deposit of £35,000 paid would not have been recoverable). He also claimed equitable compensation and damages for sums expended on renovating the Property.

Claim against conveyancer

Mr Ikbal argued that there had been a breach of trust by Sterling, who should not have forwarded the sale funds to Fernando without first ensuring that use of the Code had been agreed and that on forwarding the sale funds to Fernando he would become the legal owner of the Property. Mr Ikbal also claimed that there had been a breach of common law duties of skill and care.

Mr Ikbal disagreed with Sterling that the sale of the Property had been a “normal transaction”, and argued that there had been several warning signs prior to completion that this was a fraudulent transaction that Sterling had failed to notice. These were:

  • the street name of the Property had been misspelt as “Brook” instead of “Brooke” on a number of documents
  • the genuine owner’s address for the sale had been given by Fernando as that of the Property, whereas the Office Copy Register provided a different address
  • there had been no agreement by Fernando to complete the sale of the Property by way of the Code
  • the TR1 had not been received within a couple of days, as would have been expected from use of the Code. Further, the TR1 had not been chased by Sterling until 16 November 2010 and that was prompted by Mr Ikbal’s notification to Sterling of the proceedings against him. Alarm bells should have been ringing when the TR1 had not been received by Friday 30 July 2010 at the latest.
  • Sterling argued in its defence that even if a TR1 had been chased from Fernanado and subsequently provided, it would still have been fraudulent, Mr Ikbal would not have become the legal owner of the Property and therefore Sterling should be granted relief under section 61 of the Trustee Act 1925 (the TA). Sterling averred that there was no causation and the firm “ought fairly to be excused”.

Lucky escape for the lawyers?

The court found that, although Mr Ikbal was ill served by Sterling, the firm could escape liability for the breach of trust claim for £315,000 on the basis that although the work undertaken following completion was inept, the work prior to that was reasonable. As such, the court was able to grant relief on the basis that Sterling “ought fairly to be excused” under section 61 as “there [was] not a point at which one can say both [Sterling] should have behaved differently and that if it had done so the loss would not have been sustained” [2]. The court did however state that if it were not for the causation point, relief would have been refused.

Mr Ikbal, however, was awarded £35,000 for the loss of chance of obtaining an indemnity from the Land Registry, to which he would have been entitled had the Land Registry been fooled by a forged TR1 and Mr Ikbal registered as owner of the Property before the Beneficiaries. He was also awarded additional damages of £10,879.37 for Sterling’s various breaches of its common law duties of skill and care as a result of its inadequate conduct of the post-completion conveyancing.

WM Comment

The judgement in this case gives a thorough and helpful review of the authorities and issues in play when a solicitor seeks to rely on a section 61 TA defence to a claim for breach of trust. The case is noteworthy and bears review by those contemplating bringing or defending claims against solicitors because, like another recent case on which we have reported [3], it demonstrates that claims against professionals will not be taken lightly by the courts. In addition, whilst they can be stressful and damaging for all concerned, there is no doubt that such claims will turn on the strict letter of the law and this can sometimes give surprising results.

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[1] [2013] EWHC 3291 (Ch); [2013] All ER (D) 31 (Nov)
[2] Paras. 239 – 243.
[3] https://www.walkermorris.co.uk/solicitors-sigh-relief-negligence

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