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Court of Appeal holds law firm accountable for lender’s loss

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12/03/2014

The Court of Appeal has handed down its decision in Santander UK PLC v R.A. Legal Solicitors[1].  The decision will be much welcomed by lenders, following a string of breach of trust claims by lenders in which the courts have granted the completing conveyancers relief under section 61 of the Trustee Act 1925.

Background

Section 61 of the Trustee Act 1925 (Section 61) absolves a trustee from personal liability for breach of trust if he has acted “honestly and reasonably” and “ought fairly to be excused” for breach of trust.

R.A. Legal (RA) were instructed to act for both the Borrower and Santander (UK) PLC (Santander) in relation to the purchase of a London property.  The vendor’s solicitors, Sovereign Chambers LLP (Sovereign) did not pay any money to the vendor or discharge the mortgage registered against the property.  Santander therefore received no charge over the property and the Borrower was not registered as proprietor.  Santander brought a claim for breach of trust against RA.  Although RA had acted honestly throughout, the Court at first instance held that RA had acted in breach of trust in releasing the funds without having obtained a legal charge over the property.  However the judge used his discretion under Section 61 to relieve RA from liability for the breach of trust because he did not consider that RA’s conduct was sufficiently connected with Santander’s loss.  While RA had departed from best practice, nothing it could have done would have prevented the fraud.

Santander appealed on the basis, amongst other things, that the behaviour of RA was connected with its loss and that Section 61 had been inappropriately construed by the judge.

Court of Appeal

In his leading judgment for the Court of Appeal, Lord Justice Briggs considered the strict liability imposed by breach of trust, tempered by the ability to claim relief under Section 61.  He reiterated that the burden of proof for the purposes of Section 61 rests upon the defendant, which has to show that it acted honestly and reasonably throughout and ought reasonably excused from liability.

When considering whether a trustee’s conduct caused a beneficiary’s loss, the court should observe the general words of Section 61.  A strict causation test would cast the net too narrowly for the purpose of identifying relevant conduct; “in most mortgage fraud cases, the effective, primary or predominant cause for the loss is the third party’s fraud rather than the conduct of the solicitor trustee.”  Briggs LJ also found it too restrictive to apply the “but for” test which disregards conduct.  Even if the solicitor had acted reasonably, the fraud, and therefore the loss, would still have occurred.

From a closer analysis of what occurred at purported completion and the fortnight following before the completion money was misappropriated from Sovereign’s client account, the Court of Appeal found that RA’s failures were both serious and consequential.  RA’s departures from best practice, including inadequate requisitions on title, providing an unqualified certificate of title while investigations were still outstanding, the transfer of completion money without adopting the completion code and failing to deal with the absence of a prior mortgage discharge, were serious and clearly connected with Santander’s loss.

The Court of Appeal concluded that, although it had acted “honestly”, RA had not acted “reasonably” in order to obtain relief under Section 61.

The question, whether a trustee has acted reasonably in connection with the beneficiary’s loss, is not to be resolved purely by considering each specific complaint separately.  The question is whether the trustee’s relevant conduct was reasonable, taken as a whole.  The trial judge took an all too lenient view of the seriousness of RA’s numerous departures from best practice, during the whole of the period from its request for the funds from Santander until they were misappropriated from Sovereign’s client account.  The court assumed that the fraud would probably have been successfully achieved even if RA had acted reasonably, but that by no means leads to the result that RA’s conduct was unconnected with the loss.

Briggs LJ also looked at the second requirement of Section 61, that the trustee “ought fairly to be excused”.

RA’s conduct departed from a sophisticated conveyancing regime, developed over many years, to minimise the risk of loss to lenders and lay clients (even if not wholly eradicated).  Where solicitors fail, in serious respects, to play their part in that structure, and at the same time are swindled into transferring and then releasing trust money to a fraudster without authority, they cannot expect to persuade the court that they ought fairly to be excused from liability, on the basis that they have demonstrated that they have, in all respects connected with that loss, acted reasonably.  The failings of RA formed part of a larger picture of the shoddy performance of a conveyancing transaction from start to finish, which left Briggs LJ in no doubt that it would not be fair to excuse the firm from liability, in whole or in part.

WM Comment

For the purposes of Section 61 a trustee’s departure from best practice can be said to be connected with the beneficiary’s loss if there is “some element of causative connection”.  It is not strict liability causation or “but for” causation, but something about the trustee’s behaviour which has materially contributed to the beneficiary’s loss.

The exercise of discretion under Section 61 should have regard to the effect of the grant of relief not only upon the trustee but also the beneficiaries.  Even if the trustee has acted honestly and reasonably under Section 61 the court might not exercise its discretion because to do so would not be fair on the beneficiary.  In the context of relief sought by solicitor trustees much will depend upon the consequences for the beneficiary.

Lenders will welcome the Court of Appeal’s decision, which underscores residential conveyancing solicitors responsibility to their clients in respect of the risk of fraud by third parties.

For more advice, contact Louise Power.

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[1] Santander UK PLC v R.A. Legal Solicitors [2014] EWCA Civ 183

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