the professional negligence blog

A collaboration between Rebmark Legal Solutions and 1 Chancery Lane

Property fraud - liability of seller's solicitor to innocent buyer

Purrunsing v A’Court & Co and House Owners Conveyancers [2016] EWHC 789 (Ch) is the latest case concerning conveyancing solicitors’ liabilities towards innocent victims of property fraud. It considers the question of the purported seller’s potential liability to an innocent purchaser and how the nature and extent of the test for relief under Section 61 of the Trustee Act 1925 interacts with the fact that the seller’s solicitor does not ordinarily owe the buyer a duty of care.     C attempted to buy a property in Wimbledon. He instructed D2. The purported seller instructed D1. Contracts were exchanged, and C duly paid the purchase price (£470,000) to his solicitors, D2, who passed the monies on to D1. D1 paid the monies into a bank account abroad, on the purported seller’s instructions.   Before C was registered as proprietor, the fraud was discovered. The purported seller could not be found and none of the purchase monies have been recovered.   All parties accepted that there had been no genuine completion of the transaction. This meant that both solicitors were liable to C for breach of trust for paying away the purchase monies without completion. However, D1 and D2 both sought relief under Section 61 of the Trustee Act 1925, contending they acted honestly and reasonably and ought fairly be excused for the breach of trust. C also sued D2 for breach of contract and negligence, which D2 denied.   D1 argued that, because it acted for the purported seller and not for C, and did not owe C a duty of care, the “reasonableness” test should be applied more favourably to D1, as D1’s liability in equity should not exceed its liability in common law.   Judge Pelling rejected this argument, on the basis that D1 was as much a trustee of the purchase monies as D2, questions of duties of care were not relevant, and there was no justification for treating D1 more favourably than D2 in this regard. However, what D1 and D2 had to do to meet the reasonableness test might be different, given their different roles.   The criticism of C’s solicitor, D2, was that it had raised Additional Enquiries of the seller to establish whether there was a link between the seller and the property. These had not been answered satisfactorily. However, D2 had failed to inform C either that these questions had been asked, or that the answers were not satisfactory. Accordingly, C was unaware of the risk of proceeding with the purchase.     The judge held that this was a breach of duty and that, by reason of it, D2 should not be granted relief under Section 61.   D1 also failed to establish entitlement to relief under Section 61:-   D1, on the judge’s findings, had not complied with the Money Laundering Regulations. D1 ought to have undertaken enhanced due diligence. It was irrelevant that these regulations did not form part of a duty owed by D1 to C. D1 knew a number of factors which ought to have caused D1 to question whether the seller was the true owner of the property. These included:     The property was unoccupied The property was unencumbered The property was of comparatively high value The Office Copy Entries contained an address for service in Cambridge which was not the address the seller provided The seller had not provided any documents linking him to the property There was an unexplained inconsistency between the seller’s responses in the Home Use Form about building works and information coming to light on a local authority search A previous sale was brought to an end by the seller when he was asked questions about his employer in circumstances when these could have been expected to be easy and quick to answer and should not cause any delay on completion. If D1 was to avoid liability, it would have to show that any departure from best or reasonable practice did not increase the risk of loss by fraud. D1 failed to carry out its money laundering obligations in accordance with reasonable practice and this contributed to the fraud. It was irrelevant that this was not a case of money laundering. D1 was required to undertake the money laundering checks. It did not comply with reasonable practice in this regard and this increased the risk of the fraud which took place.   The judge found that D1 and D2 should bear equal liability for the loss.       

Equitable Compensation: AIB v Mark Redler in the Supreme Court

On 5 June 2014 the Supreme Court heard the appeal in AIB v Mark Redler. (Lord Neuberger, Lady Hale, Lord Wilson, Lord Reed, Lord Toulson) AIB v Mark Redler [2013] EWCA Civ 45 is often wrongly categorised as one of the recent spate of section 61 relief cases. It was a breach of trust case and although section 61 was pleaded in the defence it was not pursued. The solicitors accepted that they had been both negligent and unreasonable. No fraud was involved.  The solicitors acted for the borrowers and the bank in connection with a remortgage transaction of £3.3m. The bank required that the existing mortgage in favour of Barclays be discharged from the advance. The Barclays’ charge secured borrowings on two accounts. The solicitors obtained a figure to discharge the mortgage but failed to notice that it only related to one account. They paid £1.23 million to Barclays and the rest of the advance was paid to the borrowers. A further £300,000 should have been paid to Barclays. They borrowers defaulted. AIB’s charge was only registered two years later and as a second charge behind that of Barclays. HHJ Cooke determined two preliminary issues at trial: did the solicitors act in breach of trust by releasing the advance monies before obtaining a first charge; and if so, what remedy was the bank entitled to? He found that there was a breach of trust and that the proper measure of equitable compensation was the amount paid by the bank to discharge the Barclays mortgage when the property was sold, £300,000 and interest. AIB argued in the Court of Appeal that they were entitled to have the entire trust fund reconstituted less recoveries, i.e. the position it was in immediately before the breach occurred. LJ Patten considered that then equitable principles of compensation “have the capacity to recognise what loss the beneficiary has actually suffered from the breach of trust and to base the compensation recoverable on a proper casual connection between the breach and the eventual loss.” The Judge’s order in relation to the amount of compensation was affirmed. The Supreme Court has been asked to determine whether AIB is entitled to equitable compensation for the whole loan or whether the Court of Appeal’s analysis limiting the remedy to the amount of the bank’s actual loss was correct. We await the judgment with interest.

Mortgage fraud - section 61 Trustee Act 1925 revisited

  The case of Santander UK Plc v R A Legal Solicitors (a firm) [2013] EWHC 1380 (QB) contains a timely review of “mortgage fraud” cases and of the circumstances in which a solicitor might successfully obtain relief under section 61 Trustee Act 1925 (see further Karen Shuman’s posting “Section 61 Trustee Act 1925 and the Three Wise Men”). The brief facts were as follows: the defendant solicitors (“RA”) acted for V, the purchaser and V’s lender (“Abbey”), which provided V with a loan of £150,000. RA dealt with Sovereign Chambers LLP (“Sovereign”), which fraudulently presented itself as acting for S, the registered owner of the property. S had no intention of selling the property and was ignorant of Sovereign’s fraud. As a result of Sovereign’s deception, RA paid over the purchase monies (including £150,000 loan) to Sovereign in the belief that it was completing the sale. Completion did not take place and Abbey did not receive a valid charge over the property. The monies were never recovered. As part of its claim, Abbey sued RA for breach of trust. Applying Lloyds TSB Bank Plc v Markandan & Uddin [2012] EWCA Civ 65, and Nationwide Building Society v Davisons Solicitors [2012] EWCA Civ 1626, the Judge held that RA had no authority to release the trust funds in the circumstances in which it did. Therefore by paying away the trust property (i.e. the advance) without receiving genuine documents to complete the transaction, the solicitors were in breach of trust. In deciding that RA was entitled to relief under section 61 Trustee Act, the Judge decided that the correct approach was similar to that adopted in cases concerning relief under section 727(a) Companies Act 1985, such as Barings Plc v Coopers v Lybrand (No 7) [2003] EWHC 1319. Thus a person may have acted “reasonably” for the purposes of the statutory provision even though he/she acted negligently if their negligence was “technical and minor in character” and not “pervasive and compelling”. The Judge concluded that RA had acted reasonably: none of the criticisms made of the solicitors were 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. The Judge also observed that the law generally (although not invariably) leant towards confining the responsibility of professional people to a duty to take reasonable care and in particular, it did not readily impose on them responsibility for loss resulting from the fraud of others. This case provides further analysis as to how a court might exercise its discretion under section 61 Trustee Act and it illustrates the point that a solicitor guilty of negligence that was “technical and minor in nature” might still obtain relief.