Update: Professional negligence

The credit squeeze? An uncertain housing market? Falling consumer confidence? Whatever the cause, there is a perception that lenders' claims, that is claims by mortgage lenders against the professionals who acted for them on their secured lending, are on the rise. It therefore seems opportune to look at two recent decisions in this field, Nationwide v Dunlop Haywards [2007] EWHC 1374 and Pulvers v Chan [2007] EWHC 2406, and to consider some of the changes since the last round of such litigation following the property crash of the early 1990s.

Mortgage fraud, it seems, is a fact of life. In a rising property market, however, price hikes often mean that lenders suffer no loss. The borrower may abscond, immediately defaulting on his mortgage, but if the property has risen significantly in value by the time it is sold the lender will frequently be repaid even if the property was originally over valued.

In a falling market, by contrast, any over valuation will not be covered and the lender will end up out of pocket. It is then that lenders cast around for recovery options and the professionals who acted for them are often seen as targets. Reported case examples are numerous and, in terms of the early 1990s property crash, include the Bristol & West and Nationwide managed litigation.

What's new?

What, then, has changed? Will any future claims simply be reruns of past litigation or have the battle lines altered? Unsurprisingly, things have moved on. For example:

• the Council for Mortgage Lenders ML Lenders' Handbook and Solicitors' Practice Rule 6(3) have sought to codify and to an extent limit the obligations owed by a solicitor acting on a residential mortgage;
• equitable claims are likely to be more difficult and, where possible, to have fewer advantages following the decisions in Target Holdings v Redferns [1996] AC 421, Bristol & West v Motthew [1997] 2 WLR 436, Paragon Finance v Thakrar [1999] 1 All ER 400 and Swindle v Harrison [1997] 4 All ER 705 ;
• findings of contributory negligence may well be increased following the precedent set in Nationwide, where findings of up to 90 per cent were made;
• there may be real issues as to the cost of funding mortgage loans following recent disclosures as to the extent to which lenders fund loans from deposits as well as the money markets; and
• Sempra Metals v IRC [2007] UKHL 34 may impact on the recoverability of compound interest.

Nationwide v Dunlop Haywards

This was a valuer's case in which Nationwide claimed about £27m as damages for deceit in relation to three valuation reports in 2005/6. It dealt with two issues: the availability of summary judgment in claims for fraud; and the relevance of allegations against the lender's employees. Summary judgment was opposed on four grounds: there were real issues as to whether those for whom the defendant was liable were parties to the frauds; summary judgment was inappropriate where the person said to have made the fraudulent misrepresentations was unwilling to assist the defence; general uncertainty as to the facts meant that the case should go to trial; and particular features of the case made it inappropriate for summary judgment.

At first blush, those objections might well seem valid. A finding of fraud is a serious one and not one which one would expect to be made summarily. Nonetheless, the court pointed out that the fact that a claim may involve allegations of bad faith or dishonesty is not by itself a compelling reason for trial, found that the relevant person had made statements reckless as to whether they were true and (but for a settlement agreed following circulation of the draft judgment) would have entered summary judgment in the claimant's favour.

It is therefore clear that in an appropriate case summary judgment can be granted even if fraud is alleged. Appropriate cases are, however, almost certain to be rare, if not exceptional.

Of probably wider relevance, the court also considered the effect of a submission by the defendant that one of the claimant's employees was either 'a complete fool' or 'a knave', it being suggested, for example, that that meant that the claimant would be unable to prove inducement. The submission failed on the facts '“ the relevant person was not the decision maker and was thought by the judge to have been careless, rather than a participant in the fraud '“ and also on the law: even fraud by a lender's employee, it seems, will not prevent the lender from pursuing a claim in fraud against, in effect, that employee's co-conspirators.

By contrast, fraud by a lender's employee, especially where he is the decision maker for the relevant loan, ought at least in general to assist a merely negligent professional. This situation is not dealt with in Dunlop Haywards and cases are likely to be fact specific, but as a matter of causation it is difficult to see how, for example, the report of a sub-sale to someone intent on defrauding his employer would have made any difference.

(Tangentially, an attempt to rely on fraud on the claimant's side of the transaction, albeit in very different circumstances, also failed in Stone & Rolls v Moore Stephens [2007] EWHC 1826 (Comm), an auditor's negligence claim.)

Pulvers v Chan

This was a recovery action by a firm of solicitors liable to a number of lenders as a result of the acts of one of its employees. In a very full judgment the judge concluded that that employee had been guilty of knowingly assisting in the deception of the lenders and had thereby rendered the firm liable for breach of trust and negligence.

The firm sought to recover its losses from various parties and the judgment is interesting for its consideration of the various claims open to it in that regard. In particular:

• the judge found a number of parties liable to the relevant lender(s) for conspiracy to injure, but left open the question of whether, following OBG v Allan [2007] UKHL 21, those parties had the requisite intention to injure the firm such that the firm could bring a claim in conspiracy;
• the firm was permitted, as trustee, to bring claims for knowing receipt even though the beneficiaries of the relevant trusts, the lenders, were not parties to the action;
• the firm also succeeded on claims for knowing assistance in breaches of trust and for money had and received; and
• following Dubai Aluminium v Salaam [2002] UKHL 48, in the firm's claims under the Civil Liability (Contribution) Act 1978: (i) as against third parties the acts of the employee were attributed to the firm, with the result that losses were shared equally by the firm and the others liable; (ii) as between the firm and the employee, the firm was granted a complete indemnity; and (iii) the third parties were required to contribute the amount of their receipts even if that lead them to making a greater contribution than would otherwise have been the case.