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Solicitors’ sigh of relief (from negligence)

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15/10/2013

A recent High Court decision has confirmed that relief is potentially available for professional mistakes that amount to a minor departure from the ordinary and proper standards expected of the profession. The decision reinforces the fact that the onus is on the claimant to show a connection between the professional’s breach and the loss suffered by the claimant.

Facts and issues

In Santander UK Plc v R A Legal Solicitors (a firm) [1], the lender commenced proceedings for breach of trust against the firm of solicitors (S1) instructed to act on its behalf (and on behalf of the borrower/purchaser) in respect of a mortgage (the Mortgage). S1 had been the victim of a fraud instigated by a second firm of solicitors (S2), who were purportedly acting on behalf of the seller. In fact, the owner of the property in question had not instructed S2 on the sale and had in fact never agreed to a sale of the property.

Oblivious to the live fraud, S1 transferred over to S2, prior to exchange of contracts, the Mortgage advance with the intention to effect completion of the sale. Completion, however, was never realised and sums paid over to S2 were dissipated. The lender attempted to recover its losses from S1.

The issues in the case were: whether the actions of S1 in releasing the monies amounted to a breach of trust that created a loss for the lender; and, if so, whether S1 would be able to rely on section 61 of the Trustee Act 1925 (the Act) to obtain relief.

S1 was retained on terms that required a fully enforceable first charge over the property for the benefit of the lender. The terms also specified that prior to completion, all monies advanced to S1 would be held on trust for the lender.

A welcome relief

The court clearly established that the monies were held on trust by S1 for the purposes of completion and that S1’s belief that the released monies would be directly applied towards completion did not preclude the breach, since S1 had been wrong in that belief. As such, the court decided that a breach of trust had occurred. The key question became whether relief would be granted under section 61 of the Act.

The court indicated that professionals were only under a duty to act reasonably, which did not require perfection. S1 was held to have acted reasonably within the meaning of section 61 of the Act in that the solicitors had not been guilty of any fault that was: “sufficiently serious or involved such a departure from ordinary and proper standards as to cut them off from the court’s discretion to relieve them of liability” [2]. The court recognised that even if S1 had insisted on answers to requisitions and on separate written undertakings regarding completion, the fraud would, in all probability have proceeded, such that it was the fraud, and not S1’s lapse in best practice, that caused the lenders’ loss. Consequently, relief was granted.

Conclusion

The case is a reminder that professionals are subject to a duty to take reasonable care and skill – they are not under an obligation of perfection – and that the court will be willing to exercise their discretion where mistakes are made that amount to a minor departure only from the ordinary and proper standards expected of professionals. The decision also confirms that, for a lender to recover monies from its solicitors in such cases, there must be clear causation between the solicitor’s breach and the loss suffered by the lender.

Full details of the case can be found here.

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[1] [2013] EWHC 1380 (QB)
[2] per Andrew Smith J, para. 70