· Web viewLloyds TSB Bank Plc v Markandan & Uddin [2012] EWCA Civ 65 Nationwide Building Society v Davisons [2012] EWCA Civ 1626 Santander UK Plc v R A Legal Solicitors [2014] EWCA

Kings 2014 Conference SeriesProfessional Negligence

Breach of Trust Claims against Conveyancers

Nigel Clayton

1


Introduction

A conveyancer who parts with the purchase price/mortgage advance without securing good title (which will often require a first registered charge) can usually expect to be sued for professional negligence and/or breach of trust.

These claims may involve an element of fraud – either the vendor or his solicitor turns out to be fictitious, or the vendor’s solicitor is dishonest. But they may also involve straightforward professional negligence – simply failing to secure good title.

Claimants have traditionally preferred to sue for breach of trust in order to have the trust fund reconstituted in full by repayment of the purchase price/mortgage advance, and to try to avoid some of the difficult issues at common law on remoteness and causation.

At common law a bare trust will readily be impressed upon the purchase price in the hands of the conveyancer, and in the case of a mortgage advance, this is usually stipulated as a matter of contract in accordance with the CML Handbook.

Where a breach of trust has been established, and there is a causal connection between the breach and the loss, the conveyancer’s last line of defence is usually to rely upon the statutory defence in s 61 Trustee Act 1925.

In a recent run of appeal court decisions, the court has had to grapple with these issues, and has not always come up with a consistent response.

When does a trust arise? When will a conveyancer be in breach? What is the measure of loss or damage? When will a conveyancer be entitled to a s 61 defence?

This is a useful practitioner’s update and will be of importance to conveyancers, litigators and lenders.

2


The cases

Lloyds TSB Bank Plc v Markandan & Uddin [2012] EWCA Civ 65

Nationwide Building Society v Davisons [2012] EWCA Civ 1626

Santander UK Plc v R A Legal Solicitors [2014] EWCA Civ 183

AIB Group (UK) Plc v Mark Redler & Co [2014] UKSC 58

3


Lloyds TSB Bank Plc v Markandan & Uddin [2012] EWCA Civ 65

Legal points Solicitors – professional negligence – mortgage fraud – CML Handbook - breach of trust – release of mortgage advance – s 61 Trustee Act 1925

Summary The trust imposed on a mortgage advance in the hands of a completing solicitor could only be discharged by completion in the conventional sense which required the completion of a genuine contract by way of an exchange of real money in payment of the balance of the purchase price for real documents that will give the purchaser the means of registering the transfer of title.

Facts Bank instructed MU solicitors to act for it on the completion of a mortgage of £742,500 to VD on the purchase of property. The instructions were in accordance with the CML Handbook and included at 5.4 that title to the property must be good and marketable; 5.8 that on completion the bank would obtain a fully enforceable first legal charge; 10.4 that pending completion the loan advance is held on trust for the bank; and 14 that after completion the first legal charge would be registered.

On completion of the purchase, MU remitted the advance to fictitious solicitors who purported to act for the vendor. The vendor was unaware of the sale. The fictitious solicitors made off with the advance and the bank was left without security.

The bank sued MU for breach of trust, claiming the full amount if its loss by way of restitution of the trust fund. It also claimed damages for breach of undertaking or alternatively damages for professional negligence/breach of contract.

MU admitted that it held the advance on trust. The main issues were whether it had acted in breach of trust; whether it would be relieved from liability under s 61 Trustee Act 1925; and the measure of loss.

The trial judge held that MU had acted in breach of trust and that MU was not entitled to a s 61 defence. He entered judgment for £742,500 with interest.

MU appealed against the first finding, arguing that in paying away the advance, MU did not commit a breach of trust. There was no appeal on the s 61 point.

Held There was no dispute that MU held the advance on trust pending ‘completion’ (a) in accordance with the express terms of 10.3.4 of the CML Handbook, and (b) because money held in a solicitor’s client account is held on trust (Target Holdings Ltd v Redferns (a firm) [1996] 1 AC 421 at 436A).

Whether MU was entitled to remit the advance depended on whether there had been a ‘completion’. For the purposes of 10.3.4 completion meant a conventional completion – the exchange of money for delivery up of a transfer and the means to discharge prior charges.

Here, the purported contract was a nullity and the exchange of purchase money for forged documents could not amount to completion. Completion required the completion of a genuine contract by way of an exchange of real

4


money in payment of the balance of the purchase price for real documents that will give the purchaser the means of registering the transfer of title to the property that he has agreed to buy and charge.

It is the discretionary power under s 61 that provides the key to the claimed unfairness of holding a solicitor liable for breach of trust in circumstances such as the present. The careful, conscientious and thorough solicitor who conducts the transaction by the book and acts honestly and reasonably in relation to it in all respects but still does not discover the fraud, may still be held to be in breach of trust for innocently parting with the loan money to a fraudster but he is likely to be treated mercifully by the court on his s 61 application. On the facts, MU’s conduct fell short (and there was no appeal against the judge’s findings on this).

Appeal dismissed

Comment This is the first in a recent series of cases which explores the extent of liability for breach of trust in releasing a mortgage advance in a fraudulent conveyancing transaction. It was accepted that the solicitor held the advance on trust and it was held that he could only be discharged from the trust upon completion of a genuine sale and purchase. Unfortunately, since the firm had failed to act reasonably (failing to carry out proper ID checks and failing to verify the terms of an undertaking), it wouldn’t be relieved of liability. Although the court suggested that a solicitor who conducts the transaction by the book will have a defence, subsequent cases suggest this may be placing the bar too high. Incidentally, there appears to have been no issue in this case that the quantum of the claim was the full amount of the advance.

5


Nationwide Building Society v Davisons [2012] EWCA Civ 1626

Legal points Solicitors – professional negligence – mortgage fraud – CML Handbook - breach of trust – release of mortgage advance – s 61 Trustee Act 1925 – breach of contract of retainer

Summary The trust imposed on a mortgage advance in the hands of a completing

solicitor the defendant could only be discharged by completion of the purchase or the return of the money to the lender. Since no such completion had taken place, and the money was not returned, the solicitors were therefore in breach of trust. However, they would be relieved from liability under s 61 Trustee Act 1925. They had acted honestly and reasonably, even if they had not complied with best practice, and ought fairly to be excused. As for breach of contract, the obligation contained in the CML Handbook to obtain a first legal charge was not absolute but merely imposed a requirement of reasonableness.

Facts The case involves a mortgage fraud involving a fictitious firm of solicitors, Rothschilds of Small Heath, Birmingham, purportedly established by a genuine firm, Rothschilds of Corporation Street, Birmingham, and registered with the Law Society and Solicitors Regulation Authority.

A purchaser obtained an offer of loan of £187,000 from the claimant Building Society to assist in the purchase of a property for £249,995. They both instructed the defendant firm of solicitors to act for them. The claimant’s instructions were in accordance with the Council of Mortgage Lenders’ Handbook. On completion it required a fully enforceable first legal charge and that all existing charges be redeemed. Pending completion, the solicitors were to hold the advance on trust for the lender.

The defendant solicitors received communications from the fictitious Rothschilds who purported to act for the vendor saying that they had received a deposit from the purchaser and that the vendor was gifting the stamp duty. Since the defendant firm had not dealt with Rothschilds before, in accordance with the Law Society Green Card warning on mortgage fraud, they checked with the genuine firm and also the Law Society and SRA. The gift of stamp duty was notified to the claimant and a report was made to SOCA. The claimant also confirmed that it was content for the deposit to be held by the vendor’s solicitors.

The fictitious Rothschilds offered to give the defendant an undertaking to discharge a pre-existing charge in favour of GE Money Home Lending on completion.

The defendant provided a Certificate of Title and proceeded to exchange and complete, transferring the claimant’s mortgage advance by CHAPS to the fictitious firm. Nothing more was heard from the fictitious firm.

The purchaser was registered as proprietor, but subject to the GE Money mortgage which had not been discharged. The claimant’s charge was not registered. It could only be protected by a unilateral notice. The claimant sued the defendant for damages for breach of contract and breach of trust. It was common ground that the mortgage advance was held by the defendant on trust. The main issue at trial was the basis on which it could

6


properly release the advance, and whether it acted in breach of trust. In particular (a) whether the defendant had an appropriate undertaking to discharge the existing charge when it released the money, and if not, (b) whether it should be relieved of liability under s 61 Trustee Act 1925.

At first instance, it was held that the claimant did not get the first legal charge it bargained for and the defendant was therefore in breach of its contract of retainer. As for breach of trust, the issue was whether the defendant had the claimant’s authority to part with the mortgage advance. This depended on whether there had been completion. In order to achieve this, the defendant needed an undertaking from a solicitor to redeem the GE Money Charge, which, given that the vendor’s solicitors were fictitious, the defendant did not have. The defendant was therefore in breach of trust. Bristol & West Building Society v Mothew [1998] Ch 1; Lloyds TSB Bank Plc v Markandan and Uddin [2012] EWCA Civ 65; Barclays Bank Plc v Weeks Legg & Dean [1999] QB 309; Midland Bank Plc v Cox McQueen [1999] Lloyd’s Rep PN 223 and UCB Corporate Services Ltd v Clyde & Co [2000] PNLR considered.

As for s 61, it was common ground that the defendant solicitor behaved honestly throughout. However, a careful and diligent solicitor would expect to be clear in his own mind that he had an express, not an implied, undertaking, still less a mere promise to give an undertaking in the future, on a matter so important. He was too ready to act as if he had the necessary authority to part with the advance. The court therefore refused to grant relief under s 61 and gave judgment for the claimant in the sum of £213,490 plus costs.

The defendant solicitors appealed. The issues for determination were (1) whether the defendant acted in breach of trust; (2) whether the defendant should be relieved of liability under s 61 Trustee Act 1925; and (3) whether the defendant was liable for breach of contract.

Held (1) Compliance with para A3.2 of the CML Handbook (requirement to verify

unfamiliar firms) did not confer on the defendant the authority of the claimant to pay the purchase money to the fictitious firm so as to discharge them from the trusts imposed by para 10.3.4 of the CML Handbook. The trust imposed on the loan moneys in the hands of the defendant could only be discharged by completion of the purchase or the return of the money to the claimant. No such completion ever took place (Lloyds TSB Bank Plc v Markandan and Uddin [2012] EWCA Civ 65 applied) and the money was not returned. The defendant was therefore in breach of trust.

(2) s 61 Trustee Act 1925 imposed three conditions: honesty, reasonableness and the exercise of the court’s discretion. It was common ground that the defendant acted honestly. The requirement of reasonableness does not predicate that [the solicitor] has necessarily complied with best practice in all respects. The relevant action must at least be connected with the loss for which relief is sought and the requisite standard is reasonableness not perfection. In all the circumstances, the solicitor acted reasonably. There was little argument on the exercise of discretion. The loss sustained by the claimant was caused by the fraud of an unconnected third party. Even if the defendant had insisted on answers to its requisitions and on separate written undertakings, it is probably that the imposter would have complied and the matter would have proceeded as it did. The lapse from best practice did not cause the loss to the claimant. Given that the solicitor acted honestly and

7


reasonably, there was no ground on which the defendant should be denied relief from all liability.

(3) As to whether the defendant was liable for breach of contract depended on the construction of para 5.8 of the CML Handbook (requirement to obtain first legal charge) and the overall retained of the defendant by the claimant. A “fully enforceable first charge by way of legal mortgage” was not comparable to a pre-packed commodity to be supplied to a customer’s order. It involved issues of title and the exercise of professional skill. Similarly the requirement that all existing charges “must be redeemed” necessarily involved reliance on the acts and omissions of the vendor’s solicitors. Each of those ingredients is inconsistent with an absolute obligation – per Barclays Bank Plc v Weeks Legg & Dean [1999] QB 309 and Patel v Daybells [2001] EWCA Civ 1229. If it was the intention to impose absolute obligations, the rest of the CML Handbook would be redundant. Accordingly, the obligation in para 5.8 goes no further than an obligation to exercise reasonable skill and care in seeking to procure the outcome it refers, namely the redemption of all existing charges and obtaining a fully enforceable first charge by way of legal mortgage. The judge was wrong to have so held.

Appeal allowed.

Comment Conveyancing solicitors will probably breathe a sigh of relief after this decision. Whilst the solicitors acted in breach of trust in parting with the loan advance when completion had not taken place, they were relieved from liability for breach of trust under s 61. They did not have to comply with best practice, but simply act reasonably. Their conduct also had to be gauged against the loss that occurred. Here it would have occurred anyway. As for breach of contract of retainer, the obligation contained in the CML Handbook to obtain a first legal charge was not absolute but merely imposed a requirement of reasonableness.

8


Santander UK Plc v R A Legal Solicitors [2014] EWCA Civ 183

Legal points Conveyancing – solicitors – breach of trust – s 61 Trustee Act 1925 - causation

Summary A firm of solicitors had acted in breach of trust by parting with the mortgage advance without completion taking place. On the facts their conduct whilst honest, was not reasonable, and they would not be relieved of liability under s 61 Trustee Act 1925. The burden of proof was on the solicitors.

Facts In 2009 R A Legal were instructed to act for Santander and a purchaser client on the purchase of a residential property at a purchase price of £200,000 with a mortgage from Santander of £150,000 and £50, 000 from the client out of his own resources. R A Legal dealt with the vendor’s solicitors, Sovereign. In fact, the vendor had no knowledge of the sale and Sovereign were acting fraudulently. R A Legal transferred the £200,000 to Sovereign’s client account with simultaneous exchange and completion the following day. Nothing happened. The funds were subsequently withdrawn from Sovereign’s client account. The property wasn’t transferred and Santander didn’t obtain any security.

It was common ground that R A Legal held Santander’s advance on trust until completion. Since R A Legal released the advance without completion taking place, Santander sued R A Legal for breach of trust.

At trial [2013] EWHC 1380 (QB) the judge held that R A Legal had acted honestly and reasonably and ought fairly to be excused under s 61 Trustee Act 1925, so they were not liable. In doing so, he required Santander to particularise its allegations of breach of trust and required them to prove their case, but concluded that in respect of each allegation, there was no causal connection between the breach of duty and the loss, which had been caused by the fraud of a third party. Santander appealed, contending (amongst other things) that the judge’s approach on causation when considering s 61 was wrong.

Held The judge was wrong to require Santander to list and prove its allegations of breach of duty. Under s 61, the burden of proof lay squarely on the trustee to satisfy the court that it acted honestly and reasonably. This does not predicate that the trustee complied with best practice in all respects: the requisite standard is reasonableness, not perfection (per Nationwide Building Society v Davisons [2012] EWCA Civ 1626). If the trustee discharges the burden of proof, it is for the court to decide if the trustee ought fairly to be excused.

S 61 does not introduce a particular causation test. It is not a statutory gloss intended to introduce familiar causation concepts such as the “but for test” or an “effective cause” test. It is an exceptional statutory jurisdiction to relieve a trustee from liability despite equity’s stringent duties imposed on trustees. On the other hand, the court’s jurisdiction to grant relief under s 61 is not precluded by conduct of the trustee which, although unreasonable, played absolutely no part in the occasioning of loss. Overall, whether a trustee’s conduct is reasonable is to be taken in the round, looking at the matter as a whole.

9


On the facts, R A Legal cannot successfully invoke s 61. They parted with funds before completion without having an express undertaking from Sovereign as to how the money would be applied. They did not have an express undertaking from Sovereign as to how discharge of the existing mortgage on the property would be dealt with on completion. And they had not received any indication as to whether or not Sovereign would comply with the Law Society’s code for completion by post. Their conduct was not reasonable.

Comment This is another in recent line of Court of Appeal decisions on breach of trust and s 61. See also Lloyds TSB Bank Plc v Markandan [2012] EWCA Civ 65; Nationwide Building Society v Davisons [2012] EWCA Civ 1626 and AIB Group (UK) Plc v Mark Redler & Co [2013] EWCA Civ 45. The significance of this decision is that it now clarifies the court’s approach on s 61. The burden of proof is on the trustee, and the reasonableness of his conduct will be measured in the round. The court does not apply a strict causation test. Although the court emphasised that the test was one of reasonableness, not best practice, the reality is (as here) that if a solicitor departs from standard conveyancing practice, he faces an uphill struggle.

10


AIB Group (UK) Plc v Mark Redler & Co [2014] UKSC 58

Legal points Solicitors – negligence – breach of trust – equitable compensation

Summary A solicitor acted in breach of trust in parting with a mortgage advance on the basis he would obtain a first legal charge without obtaining (a) a redemption statement, or (b) an undertaking from the first chargee to discharge its charge on completion. However, where the solicitor obtained some security, equitable principles of compensation still required the court to have regard to causation and remoteness. Here compensation would be assessed as the loss in value of the lender’s security, not the whole amount of the advance.

Facts In 2006, S arranged to re-mortgage her property, then valued at £4.25m with AIB for £3.3m. A firm of solicitors, MR acted on behalf of both S and AIB.

AIB required that an existing charge to Barclays was discharged on completion. The Barclays charge secured borrowings of about £1.5m on two accounts.

On completion MR telephoned Barclays and was given a redemption figure of £1.23m, which they paid to Barclays and paid the balance of AIB’s net advance to S.

MR failed to notice that the redemption figure only related to one of the two accounts and so was insufficient by £273,777.42 to redeem Barclays’ charge. They admitted negligence. AIB’s charge was not registered until almost two years later following agreement with Barclays that it should be registered as a second charge.

S defaulted in repayment of AIB’s charge (and was subsequently made bankrupt). AIB repossessed the property and sold it in March 2011 for £1.2m. After redeeming Barclays’ first charge, it left AIB with £867,697.00.

AIB sued MR for damages/equitable compensation alleging that MR acted in breach of trust by paying the net advance without obtaining a first charge and that in consequence they were liable to reconstitute the trust fund of £3.3m with interest, credit being given for the £867,697.00 actually recovered (ie. a total of about £2.4m).

MR argued that payment was not a breach of trust, or if it was, their liability was limited to the loss in value of AIB’s security caused by their failure to pay off the whole of the Barclays charge, being £273,777.42.

Trial judge The judge ordered two preliminary issues (1) Did MR act in breach of trust in releasing the advance, if so (2) to what remedy is AIB entitled?

The first instance decision is reported at [2012] EWHC 35 (Ch)

On the first issue, the judge held the terms on which a solicitor is authorised to pay monies held in his client account are to be determined by construction of his contract of retainer, but a payment out in breach of those terms would

11


amount to a breach of trust (Target Holdings Ltd v Redferns [1996] AC 421 applied).

In construing the terms of the retainer, it requires the court not only to construe any express terms but also to take account of any implications that may properly be made as to the authority which the solicitor is being given, arising from the circumstances of the instruction, the nature of the transaction involved and the way in which such transactions are ordinarily dealt with. The court would lean against a construction which would mean that the solicitor could not know at the time he is required to pay money out whether he was authorized to do so or not (Bristol & West Building Society v Mothew [1998] Ch 1 per Millett LJ).

In the present case, the written terms of the retainer did not deal explicitly with the precise circumstances in which the solicitor could pay out the money. On the facts, MR was plainly authorized to pay monies to Barclays. If it had received a statement from Barclays that the amount required to redeem the charge, which amounted to an undertaking to redeem on receipt of that amount, it was within its authority from AIB to make that payment. The payment would not amount to a breach of trust, even though it did not result in immediately obtaining a first legal charge. The position is not that the solicitor is in breach of trust unless and until the undertaking he has accepted is performed; he is never in breach of trust because it was within his authority to accept the undertaking and make the payment in the first place.

However, MR’s instructions were to pay to Barclays the amount required to procure a release of its charge and pay the balance to S. Had they complied with their instructions they would have paid £1.5m to Barclays and £1.8m to S. In the event they paid £1.2m to Barclays and £2.1m to S (a difference to S of £273,777.42). In so doing they committed a breach of trust insofar as payment was made contrary to the authority they received.

It did not follow that the whole of the payment out of £3.3m was made in breach of trust. The difference between what MR did and what it ought to have done if it had complied with its instructions was the £300,000.00 that should have been paid to Barclays but was instead paid to S. Accordingly that sum plus interest was the extent of their breach of trust (£323,501.38 incl interest).

On the second issue, AIB was entitled to reconstitution of the trust fund by repayment of the amount wrongly paid away.

But where the breach consists of failure to discharge a prior mortgage, with the result that AIB’s interest has been postponed to Barclays to the extent of the capital left outstanding plus interest and charges, AIB is entitled to equitable compensation for the additional amounts accruing due to Barclays which have increased the amount secured in priority to AIB (but subject to giving credit for the amount paid by S to Barclays in reduction of that amount).

Court of Appeal AIB appealed to the Court of Appeal, contending that MR had no authority to

pay away any of the mortgage advance pending completion and that it was therefore entitled to equitable compensation in an amount (after giving credit for recoveries) which will restore it to the position it was in immediately before the breach occurred. The issues were therefore as follows:

12


(1) Was there a breach of trust, and if so was it limited to the release of the additional £273,777.42 paid to S;

(2) If the release of the entire £3.3M mortgage advance was in breach of trust, what remedy was AIB entitled to;

(3) Ought MR to be relieved of liability under s 61 Trustee Act 1925.

The Court of Appeal’s decision is reported at [2013] EWCA Civ 45. The Court of Appeal held as follows:

(1) Whilst a solicitor who parts with client money before completion without authority commits a breach of trust, such claims made in a commercial context have the potential to transform the measure of recovery available to a lender. This has led to the court adopting a conservative approach to the construction of the terms of the solicitor’s retainer (Bristol & West Building Society v Mothew [1998] Ch 1).

Whilst MR had investigated the borrower’s title; had in their possession an effective form of charge over the property executed by the borrower; and had sufficient funds in the form of the mortgage advance to be able to redeem the entirety of Barclays’ loan, what they did not have was a redemption statement from Barclays or any undertaking to discharge the Barclays charge on completion. There is guidance on this in the Law Society’s Conveyancing Handbook (13th Edition) para 4.2.13 etc, and the requirements were referred to in Lloyds TSB Plc v Markandan [2012] EWCA Civ 65 and Davisons Solicitors v Nationwide Building Society [2012] EWCA Civ 1626 as an essential part of the process of completion. It followed that MR was not authorised to release the advance. Where the existing lender has instructed a solicitor to act on its behalf in the remortgage transaction, the obtaining of a redemption statement from the bank, coupled with an undertaking from that solicitor that the advance will be applied by the bank in redemption of its charge, guarantees that the bank will use the money for that purpose. Without this the new lender has no assurance that the monies will not be used to discharge other unsecured liabilities of the borrower. It is artificial to regard completion as having taken place before the lender’s solicitor takes any steps to utilise the mortgage advance in the redemption of the existing charge.

The judge was therefore wrong to treat the breach of trust as limited to that part of the mortgage advance which was paid to S instead of Barclays (£273,777.42).

(2) As to causation and remedy, the case was fundamentally different from Markandan and Davisons. In a case such as the present one Target Holdings Ltd v Redferns [1996] AC 421 establishes that equitable principles of compensation, although not employing precisely the same rules of causation and remoteness as the common law, do 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 causal connection between the breach and the eventual loss. Here AIB’s loss was that it enjoyed less security for its loan than would have been the case had there been no breach of trust. It was not open to AIB to contend that but for the breach of trust it simply would have asked for its money back. The fact that AIB did not obtain a first charge is irrelevant to the question what loss AIB suffered as a result of the breach.

13


The judge’s order which calculated equitable compensation in the total sum of £323,501.38 was affirmed.

(3) MR did not pursue the question of relief under s 61 Trustee Act 1925. They accepted that their conduct was both negligent and unreasonable.

Supreme Court AIB appealed to the Supreme Court, again contending that they should be entitled to full restitution of the advance, less the amount recovered. There was no issue that MR held the advance on trust or that they acted in breach of trust when they parted with the advance without redeeming in full the Barclays’ charge (para 48).

Lord Toulson The argument centred around the fundamental principles stated by Lord Browne-Wilkinson in Target Holdings Ltd v Redferns [1996] AC 421 in which he said (at p 436):

“I do not intend to cast any doubt on the fact that monies held by solicitors on client account are trust monies or that the basic equitable principles apply to any breach of such trust by solicitors. But the basic equitable principle applicable to breach of trust is that the beneficiary is entitled to be compensated for any loss he would not have suffered but for the breach. I have no doubt that, until the underlying commercial transaction has been completed, the solicitor can be required to restore to client account monies wrongly paid away. But to import into such trust an obligation to restore the trust fund once the transaction has been completed would be entirely artificial.

In summary, compensation is an equitable monetary remedy which is available when the equitable remedies of restitution and account are not appropriate. By analogy with restitution, it attempts to restore to the plaintiff what has been lost as a result of the breach ie. the plaintiff’s loss of opportunity. The plaintiff’s actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight. Forseeability is not a concern in assessing compensation, but it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach.

In my view this is good law. Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach.”

The main issue was whether these fundamental principles should be affirmed, qualified or reinterpreted. As to the academic arguments (the court was faced with nearly 900 pages of academic writing), it is said that Lord Browne-Wilkinson treated equitable compensation in too broad-brush a fashion, muddling claims for restitutive compensation with claims for reparative compensation.

The court should affirm the principles. Absent fraud, it would not be right to impose or maintain a rule that gives redress to a beneficiary for loss which would have been suffered if the trustee had properly performed its duties.

14


AIB’s primary argument was that having regard to the italicised part of Lord Browne-Wilkinson’s speech, the “underlying commercial transaction” was never completed because the shortfall in the payment needed to redeem the Barclays charge was never paid in full. Consequently MR should restore the monies wrongly paid away. However, when Lord Browne-Wilkinson spoke of ‘completion’ he was talking about a commercial transaction. The solicitors did not ‘complete’ the transaction in compliance with the requirements of the CML Handbook. As a commercial matter the transaction was executed or ‘completed’ when the loan monies were released to the borrowers. At that moment the relationship between the borrowers and the bank became one of contractual borrower and lender, and that was a fait accompli. The Court of Appeal had been right to understand and apply the reasoning of Target Holdings. Accordingly the appeal would be dismissed.

Lord Reed Having reviewed the authorities prior to Target Holdings, there were three important points (1) There is as distinction between liability and remedy; (2) the loss resulting from a breach of duty has to be measured according to legal rules different rules apply to the breach of different obligations; (3) equitable compensation for breach of trust aims to provide the pecuniary equivalent of the performance of the trust.

In Target Holdings Lord Browne-Wilkinson developed a number of ideas including that where a solicitor holds money on trust as an incident of a commercial transaction, he can be required to restore moneys paid away until the commercial transaction has been completed, but not afterwards. The appropriate remedy where the trust is no longer in subsistence is the payment of compensation directly to the beneficiary. To require a trustee to reconstitute the trust fund in order to enable the client to recover more than he has in act lost ‘flies in the face and is in direct conflict with the basic principles of equitable compensation’.

Thus, where trust property has been misapplied, equitable compensation requires the trustee to restore the trust fund to the position it would have been in if the trustee had performed his obligation. If the trust has come to an end, the trustee can be ordered to compensate the beneficiary directly. The measure of compensation should normally be assessed at the date of trial, with the benefit of hindsight. The foreseeability of the loss is generally irrelevant, but the loss must be caused by the breach of trust in the sense that it must flow directly from it.

In the present case AIB received £273,777.42 less than they would have done if MR had fulfilled their instructions. This was the extent of the loss to the trust estate (plus interest).

Lord Neuberger Agreed with both Lord Toulson and Lord ReedLady HaleLord Wilson

Appeal dismissed

15


Comment AIB weren’t suing for common law damages for professional negligence (in fact the result would probably have been the same). They were suing for equitable compensation for breach of trust to reconstitute the entirety of the trust fund (the mortgage advance).

It was accepted that the mortgage advance had been held on trust, and that it had been paid in breach of trust. In the Supreme Court, the sole issue was quantum. The s 61 defence was not pursued.

Whilst the case involved various interpretations of Lord Browne-Wilkinson’s ‘fundamental principles’ in Target Holdings, the trial judge, the Court of Appeal and the Supreme Court were ultimately agreed that in the present case the solicitor’s liability for paying away the mortgage advance in breach of trust could not exceed the loss which AIB would have sustained even if the solicitors had acted properly. The difference was the amount which should have been paid to Barclays £273,777.42 plus interest. Had that been paid, AIB would still have suffered exactly the same shortfall.

One slight complication to bear in mind is that the Supreme Court talked of ‘completion’ in a different way to that referred to by the Court of Appeal in the context of when a conveyancer will be in breach (see below).

As a general observation this case reiterates the rather fundamental need for conveyancing solicitors to ensure they obtain reliable redemption information and put in place sufficient arrangements (usually by way of undertaking) to ensure that an existing charge is discharged on completion. Fortunately, the consequence for failing to do so (certainly in a case not involving fraud in which the conveyancing solicitor obtains some security) is not absolute.

16


When does a trust arise?

At common law, the court readily accepts that the purchase price or mortgage advance is client money which, from the time of its receipt by the solicitor, is held in client account on trust to apply it in completion of the transaction for which the solicitor is instructed. See for eg. the analysis in Target Holdings Ltd v Redferns [1996] 1 AC 421 per Lord Browne Wilkinson at p 436A and Bristol & West Building Society v Mothew [1998] Ch 1 per Millett LJ at p 22D.

In addition, the terms of a solicitor’s retainer by a lender is usually governed by standard form instructions in the Council of Mortgage Lenders’ Handbook, which is approved for use in the SRA Code of Conduct 2011.

The CML Lenders' Handbook provides comprehensive instructions for conveyancers acting on behalf of certain member lenders in residential conveyancing transactions. It is divided into two or three parts, depending on the jurisdiction. Part 1 sets out the main instructions. Part 2 details each lender's specific requirements. There is a Lenders' Handbook part 1 and part 2 for each legal jurisdiction in the UK. On 2 July 2012 the CML published Part 3 of the Lenders’ Handbook for England & Wales. Part 3 sets out the standard instructions in the event that a conveyancer is representing the lender separately from the borrower in a residential conveyancing transaction in England and Wales only. These instructions consist of a new part 3 to the Handbook for England & Wales which should be read in conjunction with parts 1 & 2 where it applies.

The CML Lenders’ Handbook is available online at http://www.cml.org.uk/cml/handbook.

Part 1, paragraph 10 deals with the loan and certificate of title. Sub-para 10.7 provides “You must hold the loan on trust for us until completion. If completion is delayed, you must return it to us when and how we tell you.”

For the Court of Appeal’s analysis of these provisions and an acknowledgement that the funds are held in trust, see:

Lloyds TSB Bank Plc v Markandan [2012] EWCA Civ 65 at paras 13 and 37 Nationwide Building Society v Davisons [2012] EWCA Civ 1626 at para 8 etc AIB Group (UK) Plc v Mark Redler & Co [2013] EWCA 45 at para 6 (the Supreme

Court simply accepted that the funds were held on trust: [2014] UKSC 58 at para 38) Santander UK Plc v RA Legal Solicitors [2014] EWCA Civ 183 at para 10

17


When will a conveyancer be in breach?

Breach – a word of warning

It is important to bear in mind that we are concerned here with a breach of trust arising out of the handling of the purchase price/mortgage advance. A conveyancer may also be exposed to various other causes of action arising out of the same, or other, breaches of duty:

Breach of common law duty of care Breach of contract of retainer Breach of fiduciary duty Breach of undertaking Breach of warranty of authority

In the recent Court of Appeal decisions it was common ground that the trust on which the conveyancer held the purchase price/mortgage advance could only be discharged by completion or the return of the money. The key issue was to determine when ‘completion’ actually takes place. Note that this was not the way in which the Supreme Court used the expression in AIB Group (UK) Plc v Mark Redler & Co [2014] UKSC 58 (see para 74)

What is meant by a genuine completion with ‘real documents’?

In Lloyds TSB Bank Plc v Markandan the bogus solicitors gave an undertaking to hand over on completion the transfer, certificate of discharge of the current mortgage, the charge certificate and the vendor’s part contract. They confirmed they wished to complete by post and undertook to adopt the Law Society’s Code for Completion by Post. Since the undertakings were given by bogus solicitors they turned out to be worthless could not be characterised as the completion of the purchase or charge. It follows that Markandan had no authority to release the loan money (per Rimer LJ at para 43).

This was followed in Nationwide Building Society v Davisons. The trial judge held that Davisons needed clear information about which pre-existing charge was to be redeemed on completion and an undertaking from a solicitor authorised to receive the sum intended to repay it. Given that the solicitors they were dealing with were bogus, they clearly didn’t receive a valid undertaking. This was affirmed by the Court of Appeal (who rejected an alternative argument that

18

In a fictitious transaction in which there is no genuine vendor and only forged documents “Nothing, said Lear, will come of nothing, and so it was here. Completion in the present context must mean the completion of a genuine contract by way of an exchange of real money in payment of the balance of the purchase price for real documents that will give the purchaser the means of registering the transfer of title to the property that he has agreed to buy and to charge. An exchange of real money for worthless forgeries in purported performance of a purported contract that was a nullity is not completion at all. Had that happened in this case, the parting with the loan money would have been a breach of trust” Lloyds TSB Bank Plc v Markandan [2012] EWCA Civ 65 per Rimer LJ at para 50.


Davisons were still authorised to pay the purchase price over prior to completion) (per Morritt C at paras 22, 38-40).

In AIB Group (UK) Plc v Mark Redler & Co (not a fraud case), Mark Redler had an effective form of charge executed by the borrowers and had sufficient funds to redeem the existing charge to Barclays. What it didn’t have was a redemption statement from Barclays or an undertaking from the vendor’s solicitors to discharge the same. The Court of Appeal referred to guidance in the Law Society’s Conveyancing Handbook and held that Mark Redler was not authorised to complete the transaction and release the monies until it had such documents in its hand (per Patten LJ at paras 39-40, 43). This point was unaffected on appeal.

In Santander UK Plc v RA Legal Solicitors the Court of Appeal held that RA Legal did not have AIB’s authority to transfer the mortgage advance pending completion to the client account of any other than the vendor’s genuine solicitors. Here that didn’t happen because Sovereign did not have authority to act (per Briggs LJ at para 16). In addition, it is clear that the Court of Appeal also accepted the submission that RA Legal did not obtain an enforceable undertaking that the money, when transferred, would be held to its order pending completion or a commitment to adopt the Law Society’s Code for Completion by Post (paras 17-18, 94).

19


What is the measure of loss or damage?

In a common law claim for damages for professional negligence (contract or tort) the court has to determine whether the solicitor’s breach of duty caused the damage, with the result that if the damage would have occurred anyway, the breach of duty will not be the cause (Jackson & Powell on Professional Liability, 7th Edition, para 11-247 etc).

Target Holdings Ltd v Redferns [1996] 1 AC 421 acknowledged that in claims for equitable compensation for breach of trust the common law rules of remoteness and causation do not apply. The basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. However, there does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable viz. the fact that the loss would not have occurred but for the breach (per Lord Browne-Wilkinson at p 434C-F).

The role of causation in breach of trust claims has caused some problems. In most cases involving fraud, the fraud would have happened whether or not the solicitors complied with best practice, so are they liable? And what happens if the lender obtains some security or makes some recovery?

In a clear case, there is no problem.

In Lloyds TSB Bank Plc v Markandan, Markandan parted with the mortgage advance of £742,500 in breach of trust and did not obtain any security. The money was irrecoverable. The trial judge held, and the Court of Appeal affirmed, that Markandan should repay £742,500 plus interest. There was no real analysis of causation issues.

In Nationwide Building Society v Davisons, Davisons’ parted with the mortgage advance of £185,620 in breach of trust and did not obtain a first legal charge (or the discharge of the existing legal charge). The trial judge gave judgment for £185,620 plus interest. The Court of Appeal acknowledged that the lapse from best practice did not cause the loss to Nationwide - the loss was caused by the fraud of an unconnected third party (para 50) but the issue was not considered in detail because the Court allowed Davisons’ appeal and relieved them of liability under s 61.

Santander UK Plc v RA Legal Solicitors was similar in many respects to Markandan and Davisons. RA Legal parted with the mortgage advance of £150,000 to bogus solicitors without obtaining any security. Santander sued for breach of trust to recover its advance plus interest. The trial judge [2013] EWHC 1380 (QB) accepted that RA were in breach of trust but relieved them of liability under s 61. He said that the law leans against finding professional people liable for loss resulting from the fraud of others (para 72) and that such criticisms as were properly

20

“Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach” Target Holdings Ltd v Redferns [1996] 1 AC 421 per Lord Browne-Wilkinson at p 439B


made of RA were not an effective cause of Santander’s loss (para 73). It is clear from the judgment that he had required Santander to list and prove each allegation of breach and tested them by whether they were causative of the loss claimed (paras 37 etc).

The Court of Appeal didn’t like this (para 35 etc). Briggs LJ confined his analysis of causation to s 61 (para 21 etc) and said that it was no answer that if RA Legal had complied with best practice the fraud would still have occurred (para 65). He felt that a strict causation test cast the net too narrowly (para 24) and that it was too restrictive to apply a ‘but for’ test (25). He said that some element of causative connection had to be shown between the breach of duty and the lender’s loss and that conduct which is completely irrelevant or immaterial to the loss will usually fall outside the court’s purview under s 61 (para 28). On the facts RA Legal was not entitled to rely on s 61. The transcript does not contain any finding on loss or damage, but it is reasonable to assume that Santander’s claim for breach of trust in the sum of £150,000 was allowed.

So, each of these cases involved full recovery in principle. This reflects the loss to the trust estate is not particularly objectionable.

But what happens in a case in which the solicitor applies the mortgage advance in breach of trust but obtains some security and makes a partial recovery? In AIB Group (UK) Plc v Mark Redler & Co AIB made a loan of £3.3M out of which approx £1.3M was used to partially discharge a first charge to Barclays, leaving a balance outstanding to Barclays on the security of its first legal charge of £273,777.42. AIB obtained a second charge. Following default, AIB obtained judgment against the borrowers for over £3.5M, repossessed the property and sold it for £1.2M out of which they had to pay the £273,777.42 plus interest to Barclays with a net balance due to AIB of £867,697.78, leaving a substantial shortfall debt.

The trial judge held that Mark Redler were only partially liable for breach of trust to the extent of the undisclosed £273,774.42. The Court of Appeal tackled the causation issues. They acknowledged that a breach of trust claim, if successful, had the potential to transform the measure of recovery available to the lender. AIB was looking to recover the entire amount of its advance, less recoveries, but the Court recognised that had the mortgage been properly completed and Barclays’ charge fully redeemed, AIB would still have been exposed to the losses caused by the borrowers’ default, albeit they would have had security for the £273,777.42 they had to pay out to Barclays. On this basis that the Court of Appeal said the case was fundamentally different to Markandan and Davisons where had the solicitors not released the monies in advance of completion there could have been no transaction and no loss would have been suffered at all (para 46). The Court of Appeal adopted the common sense approach advocated by Lord Browne-Wilkinson in Target which required the court to take account of the beneficial effect of what security AIB was eventually able to obtain” (para 50). The Court of Appeal therefore affirmed the trial judge’s order for equitable compensation and this as upheld on appeal by the Supreme Court.

Equitable compensation for breach of trust was designed to make good a loss in fact suffered and could not exceed the amount which the lender would have suffered in any event had the solicitors properly performed their duties. The assessment was to be made at trial, with the benefit of hindsight.

When will a conveyancer be entitled to a s 61 defence?

21


Section 61 is usually the main battleground. It often provides the only means of avoiding liability for the frauds of others. The most detailed analysis is in Santander UK Plc v RA Legal Solicitors. There are three stages. The trustee [solicitor] must show:

(1) That he has acted honestly;

(2) That he has acted reasonably; and

(3) That he ought fairly to be excused.

In the context of mortgage fraud, institutional lenders have tended to focus on (2) and have relied on numerous particulars of breach of duty. (3) imports a discretion (Nationwide Building Society v Davisons para 41; Santander UK Plc v RA Legal Solicitors para 33).

In Lloyds TSB Bank Plc v Markandan, the trial judge rejected Markandan’s s 61 defence, finding that although they had acted honestly, they had not acted reasonably (para 36). The material failings were failing to take proper steps to confirm the identity of the solicitors they were dealing with in breach of the Safeguards section of the CML Handbook (section 3) and parting with money when they knew the solicitors were in breach of their earlier undertakings (para 60). There was no appeal against these findings. Nonetheless, Rimer LJ said “It is, therefore, the discretionary power under section 61 that provides the key to the claimed unfairness of holding a solicitor liable for breach of trust in circumstances such as the present. The careful, conscientious and thorough solicitor, who conducts the transaction by the book and acts honestly and reasonably in relation to it in all respects but still does not discover the fraud, may still be held to have been in breach of trust for innocently parting with the loan money to a fraudster. He is, however, likely to be treated mercifully by the court on his section 61 application” (para 61).

In Nationwide Building Society v Davisons, the trial judge rejected Davisons s 61 defence also finding that the solicitor had acted honestly but not reasonably, rejecting 10 grounds of complaint, but upholding the 11th – that effectively Davisons did not obtain a [valid] undertaking to discharge the existing first charge on completion and provide evidence of discharge after completion (para 42). Morritt C disagreed. The solicitor had the benefit of an undertaking to redeem the prior charge from the person he reasonably believed to be the seller’s solicitor.

22

Trustee Act 192561 Power to relieve trustee from personal liability

If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same.

“The section only requires [the solicitor] to have acted reasonably. That does not. In my view, predicate that he has necessarily complied with best practice in all respects. The relevant action must at least be connected with the loss for which relief is sought and the requisite standard is that of reasonableness not of perfection. It is seldom helpful to compare conduct found to be reasonable or not in one case with that of another…” Nationwide Building Society v Davisons per Morritt C (para 48)


The difficulty with this approach is that it rolls causation arguments into s 61 and it seems to have led the trial judge astray in Santander UK Plc v RA Legal Solicitors. Andrew Smith J required Santander to plead and prove the conduct relied on as unreasonable for the purposes of s 61. Having considered these, the judge concluded that the loss suffered had no connection with any of the criticisms of how RA Legal conducted the transaction (para 53).

Briggs LJ expressed “slight reservations” about this. He held that the burden of proof lay squarely with RA Legal. This wasn’t a professional negligence action (para 54).

Briggs LJ then went on to consider each of Santander’s pleaded complaints. He said it was no answer to say that if RA Legal’s conduct had been in every respect in accordance with best practice, the fraud would still have occurred. The connection test is not that restrictive (para 65).

Briggs LJ was particularly critical of RA Legal’s failure to follow up Requisitions on Title which omitted to deal with the arrangements on completion and the discharge of prior charges (para 66

23

“The section only requires [the solicitor] to have acted reasonably. That does not. In my view, predicate that he has necessarily complied with best practice in all respects. The relevant action must at least be connected with the loss for which relief is sought and the requisite standard is that of reasonableness not of perfection. It is seldom helpful to compare conduct found to be reasonable or not in one case with that of another…” Nationwide Building Society v Davisons per Morritt C (para 48)

“In the context of a routine conveyancing transaction, the incidence of the burden of proof may frequently be crucial to the outcome. This is because transactions are, in the working life of those involved, so routine and so frequent that a specific recollection of any part of one of them, not precisely recorded in contemporaneous correspondence, documents or attendance notes, will rapidly fade. Thus if the reasonableness of the solicitor’s conduct depends on anything not so recorded, the solicitor may simply be unable to discharge the burden of proof on that aspect of the matter, due to a perfectly understandable inability to recollect the detail. In such circumstances, the benefit of the doubt (or the burden of proof) is not to be given to the solicitor if the relevant question is as to the reasonableness, rather than the honesty of, his conduct. It is therefore likely that, in order to discharge the burden of proving that he acted reasonably under section 61, the solicitor will need to be able to provide a paper trail demonstrating that the whole of his or his firm’s conduct sufficiently connected with the loss satisfied the reasonableness test” Santander UK Plc v RA Legal Solicitors per Briggs LJ at para 55


etc) and left RA Legal without an undertaking to obtain the discharge of the prior mortgage or any arrangement for the return of the completion monies (para 82). He thought that this was seriously detrimental to the prospects of summary enforcement of the obligation to return the completion monies (para 86).

The Chancellor added some further, helpful comments about the court’s approach on s 61. He said the object of s 61 was not to introduce a particular causation test. It is not a ‘but for’ test. It is an exceptional statutory jurisdiction to relieve a trustee from liability despite equity’s stringent duties imposed on trustees (para 109). He also agreed that where a trustee invokes s 61, the onus is upon him to place before the court a full account of his conduct leading to the breach of trust (para 111).

In AIB Group (UK) Plc v Mark Redler & Co, Mark Redler relied on a s 61 defence, but the trial judge made no findings. On appeal they did not seek s 61 relief. They accepted that their conduct was unreasonable.

24

“The question whether a trustee has acted reasonably in respect of matters connected with the beneficiary’s loss is not in my judgment to be resolved purely by considering each specific complaint separately. The question is whether the trustee’s relevant conduct was reasonable, taken as a whole. Looking at the matter in the round, I have come to the conclusion that that the judge took an altogether too lenient view of the seriousness of RA Legal’s numerous departures from best practice, during the whole of the period from its request for the funds from [Santander], until they were misappropriated from Sovereign’s client account” Santander UK Plc v RA Legal Solicitors per Briggs LJ at para 96

“A conclusion that, but for those aspects where RA Legal’s conduct fell seriously and unreasonably short of best practice, the fraud would probably have succeeded by no means leads to the result that those parts of RA Legal’s conduct are unconnected with the loss. They all represent departures from a sophisticated regime, worked out over many years, whereby risks of loss to lenders and lay clients are minimised, even if not wholly eradicated. Where solicitors fail, in serious respects, to play their part in that structure, and at the same time are swindled into transferring and then releasing trust money to a fraudster without authority, they cannot expect to persuade the court that it is fair to excuse them from liability…”Santander UK Plc v RA Legal Solicitors per Briggs LJ at para 99


Conclusions: 6 points to remember!

1 Be clear on your cause(s) of action. Different principles apply!

2 Establishing that a mortgage advance is held on trust will in most cases be straightforward but always check:

whether/to what extent the CML Lender’s Handbook applies any special terms/conditions

3 The trust is only discharged by completion or the return of the money. Completion in this context means a proper completion – the exchange of real money for real documents. In each of the cases, this meant (amongst other things) undertakings in proper form from genuine solicitors.

4 A claim in breach of trust requires some causal connection between the breach and the loss. Equitable compensation will not necessarily involve full restitution of the trust fund. A lender will have to give credit for whatever security or recoveries it obtains. Bear in mind AIB in the Supreme Court

5 Causation will also be relevant on s 61

6 The burden of proof on a s 61 defence is on the trustee [solicitor] and it is onerous! The court will review the solicitor’s conduct in the round. Departing from standard conveyancing practice may be critical. The court will expect substantial compliance with ‘Safeguards’

For caselaw updates

See www.legalmortgage.co.uk

25

Documents

· Web viewLloyds TSB Bank Plc v Markandan & Uddin [2012] EWCA Civ 65 Nationwide Building Society v Davisons [2012] EWCA Civ 1626 Santander UK Plc v R A Legal Solicitors [2014] EWCA