Update | Professional negligence: winners and losers from the latest lender litigation

It was thought that the decisions made in the previous round of lender litigation in the 1990s would provide a firm foundation and reference point for practitioners both bringing and defending claims and that there would be relatively few developments in the law in this area. This has largely proved to be the case in relation to the scope of duties owed by professionals to lenders and to the measure of loss for breach of duty. The courts have however become involved in the area of lenders' contributory negligence and claims brought for breach of trust.

In broad terms lenders are likely to draw most comfort from the recent decisions on contributory negligence, particularly those not operating in the prime market and whose lending guidelines were less strict. However, there has also been better news for solicitors faced with breach of trust claims. Previously an almost strict liability was imposed upon them where they had unwittingly become involved in a fraudulent transaction and the advance had been paid away to the fraudster.

Contributory negligence

When faced with a claim brought by a lender, valuers and solicitors always scrutinise carefully the conduct of the claimant in order to evaluate whether a successful defence of contributory negligence can be run. Practitioners will be familiar with the types of criticisms levelled at lenders. These include allegations that the lender lent too high a proportion of the value of the property, failed to consider properly whether the borrower could service the loan, failed to take proper account of the borrower's existing debts and poor credit history, failed to check the borrower's income, and failed to pick up on discrepancies in the application or warning signs about the borrower generally.

There have been a number of recent decisions which have reduced the scope for obtaining a significant reduction on this basis, including the decisions in Webb Resolutions v E.Surv [2012] EWHC 3653 (TCC) and Blemain Finance Ltd v E.Surv [2012] EWHC 3654 (TCC). The main reason for this is a shift in these cases away from an analysis as to whether the underwriting of the loan was objectively illogical or unreasonable. Instead the judges in these cases have looked at whether the lender acted in accordance with the practice of other lenders within its market. If it did, and if it complied with its own lending guidelines, then contributory negligence will be difficult to show.

This is a departure from the approach previously taken by the courts, which were prepared to find contributory negligence notwithstanding that a number of other lenders had taken a similar approach. For example Mr Justice Vinelott in Birmingham Midshires v Parry [1996] PNLR 494 reduced the award by 75 per cent for contributory negligence on the basis that the lender had made a self-certified loan in excess of 75 per cent of the valuation, even though this was within its lending criteria. He stated that "evidence of the way in which other businesses are conducted is not a reliable guide to the question whether a business was conducted prudently-that is whether those conducting the business took reasonable care to protect themselves against the risk of injury or loss. There may be good commercial reasons which lead those engaged in a business enterprise to take risks... That is what happened in ?this case."

By contrast Mr Justice Coulson in the Webb decision held that: "The appropriate standard by which contributory negligence is to be judged was that of the reasonably competent centralised lender… when considering and applying that test, I should be wary of concluding that practices which were logical to centralised lenders at the time or were common amongst them were in fact illogical or irrational."

The reasoning in these judgments ?was followed in Mortgage Title Resolutions Ltd v J & E Shepherd Chartered Surveyors (2013, unreported). A similar approach was also apparently employed in Redstone Mortgages v Countrywide Surveyors Ltd ?(2013, unreported).

The consequence of this from a defendant's point of view is that it may be in a better position when defending a claim from a high street lender with stricter guidelines, than when faced with a claim from a centralised or sub-prime lender who made riskier loans. This may strike many as an odd result. After all, non-high street lenders generally charge higher interest to offset the risks of lending to those who cannot get loans elsewhere.

Such lenders may now appear to be in a better position to claim against their advisers when those risks materialise, without being vulnerable to a larger reduction for contributory negligence. It may well be that the Court of Appeal will have cause to revisit this trend in some of the case law in due course.

Even if the approach in Webb and the other cases mentioned above finds continuing favour, there remain good bases on which a successful defence of contributory negligence may be run by defendant professionals.

Defendant professionals should ?scrutinise very carefully the lending guidelines to see whether the claimant has followed these. Consideration should also be given as to whether the decision to lend was negligent, despite the fact that the loan complied with the guidelines and was at a loan-to-value ratio at which others in the same market were lending, an argument could be raised that, in the context of this particular transaction.

For example, it could be argued that it was imprudent to lend 85 per cent, or even a lower percentage, of the valuation, as on the facts this gave an insufficient cushion. Lenders should take into account that valuation is an art rather than a science and (particularly where they have no evidence of the borrower's ability to service the loan, as where income is self-certified) the costs of selling as mortgagee in possession, such that a cushion of 15 per cent or even more may not be adequate. This type of analysis of the cushion does not appear to have been carried out in the cases discussed above.

Further, disclosure should be reviewed carefully to see if there is any evidence that the lender considered the particular loan and/or a particular class of loan to be risky and went ahead in any event. This aspect was highly persuasive in the Parry case.

Breach of trust

The Council of Mortgage Lenders' ?(CML) Handbook contains instructions to the effect that a solicitor must hold the advance on trust for the lender until completion. As a result, lenders frequently consider whether a claim against a solicitor can be brought for breach of trust on the grounds that the advance has been released before completion.

Three recent cases have concerned the position where a lender's solicitor becomes inadvertently involved in a fraud, such that no legal interest passes to the buyer but the advance has been released to what turns out to be a fraudster.

In Lloyds v Markandan & Uddin [2012] EWCA Civ 65, Nationwide v Davisons [2012] EWCA Civ 1626 and Santander v R.A. Legal Solicitors [2013] EWHC 1380 (QB) the courts had in effect to determine who should bear the loss resulting from the fraud: the lender or the solicitor. In order to do so the courts have focussed on the meaning of "completion" and the circumstances in which a solicitor should be relieved from liability pursuant to section 61 of the Trustee Act 1925. Such relief is based on the premise that the trustee has acted honestly and reasonably and ought fairly to be excused for any breach of trust.

In the first two cases the solicitor acting for the lender paid the completion monies including the mortgage advance to the "solicitor" acting for the purported vendor on the basis of an undertaking that he would provide the documents necessary for completion. In both cases the purported vendor's "solicitor" turned out to be an imposter; the undertakings were not honoured and title did not pass. In the third case the purported vendor's solicitors were themselves fraudulent. Although the court rejected the submission that actual registration was required for completion, it found in all cases that completion had not occurred. The solicitors had therefore committed a breach of trust.

In Nationwide and Santander, the solicitor was relieved from liability as he was found to have acted honestly and reasonably. In the former case, this conclusion was reached on the basis that he had checked the vendor's solicitor's existence on the Law Society and SRA websites. He had also checked that the individual named on the correspondence was a qualified solicitor and that the firm had a branch office from where the correspondence had been sent.

Following these decisions, a lender will not simply be able to fix the solicitor with liability where the advance has been paid away in circumstances where completion has not taken place. Instead, it will be necessary to scrutinise the solicitor's conduct to consider whether he has taken all reasonable steps.

It should also be noted that the solicitor has only to act honestly and reasonably and the fact that he has not complied with best practice in all respects will not be a bar to relief under section 61. Further, any failures on the part of the solicitor which are unconnected with the loss are irrelevant when deciding whether the solicitor has acted reasonably.

Finally, the Court of Appeal has in AIB Group v Mark & Redler & Co Solicitors [2013] EWCA Civ 45 rejected the contention that in all cases of breach of trust the defendant is required to reconstitute the trust fund. Rather, the loss the beneficiary has actually suffered as a result of the breach of trust should be determined. Any award should be based on a proper causal connection between the breach and that loss, as to which the court should take a common sense approach.

It can be seen therefore that despite the seeming familiarity of lender claims there is still scope for developments in this area and still plenty of areas for negotiation when seeking to resolve such claims.