Protecting diligent lawyers

The Court of Appeal in Nationwide Building Society v Davisons Solicitors [2012] EWCA Civ 1626 allowed an appeal by the defendant solicitors against the High Court's finding of breach of trust and refusal to grant relief under section 61 of the Trustee Act 1925. The case was one in a series of recent lender claims.

It was followed in May 2013 by Santander UK Plc v RA Legal Solicitors (a firm) [2013] EWHC 1380 (QB), which confirmed the Court of Appeal's approach.

Davisons relates to the advance of mortgage monies from Nationwide to be secured against a property which was subject to an existing charge. Davisons was instructed to act on behalf of Nationwide on the basis of the Council of Mortgage Lenders' Handbook (the CML Handbook), which required the advance to be held on trust for Nationwide until completion.

An entity which appeared to be the seller's solicitors, Rothschild, wrote to Davisons from an office address in Small Heath. In accordance with the guidance given in the CML Handbook and the Law Society's Green Card, Davisons checked the existence of the practice on the Law Society and SRA websites which confirmed the location of a branch in Small Heath.

In the Requisitions on Title, Rothschild confirmed that the existing charge would be discharged and agreed to comply with the Law Society's Code for Completion by Post. This provides that, when completing, the seller's solicitor undertakes to redeem or obtain a discharge for any existing charges.

Nationwide released the advance to ?Davisons and, following exchange of contracts, it paid the monies to Rothschild. The borrower was registered as proprietor but the existing charge was not discharged and Nationwide's charge was not registered. It subsequently transpired that the Small Heath branch did not exist and an imposter had notified the address to the Law Society and SRA. Despite the true firm having previously notified the Law Society and the SRA of this, the websites had not been amended.

The Court of Appeal held:

1. The advance was held by Davisons on trust and it could only be discharged on completion or on return of the monies to Nationwide. Following Lloyds TSB Bank plc v Markandan & Uddin (A Firm) [2012] EWCA Civ 65, "completion" of the transaction did not occur because the bogus firm was not in a position to complete. As the monies were not returned to Nationwide, Davisons was in principle liable for breach of trust.

2. Rothschild had given a sufficient undertaking (albeit not in the correct form). Although this undertaking had not been given by a true solicitor, Davisons reasonably believed it had been, having taken steps to check. As to relief under section 61, a solicitor has to act reasonably and must not necessarily have complied with best practice in all respects. Consequently, Davisons' lapse from best practice, if any, did not cause the loss to Nationwide. In the circumstances, relief under section 61 was granted.

3. The CML Handbook imposes an ?obligation on solicitors to exercise reasonable skill and care rather than a strict obligation to redeem all existing charges and obtain a first legal charge on completion. Davisons was not, therefore, liable for breach of retainer.

Acted reasonably

The RA Legal Solicitors decision provided further clarification. The case arose from a conveyancing transaction in which the purchaser's solicitors were deceived by fraudulent solicitors purporting to act on behalf of the vendor, but did not so act. The purchase monies were released to the fraudulent solicitors who released the monies from their client account for matters other than the property purchase, and the transaction could not complete.

The court found that none of the failings alleged against RA Legal by Santander were connected with the loss suffered by Santander. The court also held that RA Legal were in breach of trust, but the trial judge granted relief under section 61. The court found that RA Legal had acted reasonably within the meaning of section 61 and furthermore clarified that findings in earlier case law should not be taken to mean that any higher "exemplary" standard was required of solicitors to meet this test.

Safety net

In the context of the current number of lenders' claims for breach of trust, these are important decisions for solicitors and their insurers, given the difficulties under current case law in arguing contributory negligence where there has been a finding of breach of trust. Although there had always been a "safety net" for solicitors under section 61, previous case law had shown that this was an extremely high hurdle.

At first blush Davisons appears to have been a further victory for lenders, in that it makes it more difficult for defending solicitors to avoid a finding of breach of trust. However, there is good news for solicitors in these judgments:

1. the bar for obtaining relief under section 61 would appear to have been lowered, which is confirmed by the manner in which Davisons was followed in RA Legal;

2. the finding that the requirements under the CML handbook do not impose a strict obligation is an additional blow for lenders in their attempts to avoid a reduction for contributory negligence; and

3. the clarification given in RA Legal, concerning the threshold a solicitor must reach to have acted "reasonably" for the purposes of section 61, makes it clear that it means just that, not a higher "exemplary care" standard, and that causal connection is required.

?These decisions will be welcomed by solicitors and their insurers. Taken with the decision in AIB v Mark Redler & Co [2013] EWCA Civ 45 (where issues of causation and compensation were applied to a breach of trust case as they are in cases of breach of contract and negligence) there is a feeling that the climate in relation to lenders' attempts to formulate claims in equity to achieve a larger recovery is more favourable to solicitors and their insurers.