In the recent case Chief Land Registrar v Caffrey & Co[1] the High Court, whilst hearing a default judgment application, considered what duties the solicitors of fraudulent borrowers might owe to the Land Registry.

Facts

Caffrey & Co (the Solicitors) acted for a couple (the Borrowers) who wanted to discharge the mortgage over their property. The Borrowers informed the Solicitors that the bank had its own solicitors. The Borrowers provided the Solicitors with the relevant documents, purportedly signed by the bank. The Solicitors did not take any steps to verify the information provided by the Borrowers or contact the bank directly. The Solicitors submitted the documents to the Land Registry. The Land Registry raised a requisition regarding authority to sign the documents on behalf of the bank and the Borrowers provided a power of attorney to satisfy the Land Registry’s query. The Land Registry removed the bank’s charge from the title to the Borrowers’ property.

It was later revealed that the Borrowers had been fraudulent and the bank had not consented to the removal of the charge. By then, the property was burdened with a mortgage from another lender who took priority over the bank. The bank applied for an indemnity from the Land Registry and was successful. The Land Registry, in turn, issued a claim for negligence and misrepresentation against the Solicitors.

The Solicitors did not file an acknowledgment of service on time and the Land Registry applied for default judgment. The case was considered by Master Matthews in the High Court.

Basis of the claim

The Land Registry did not have a contractual relationship with the Solicitors, however, the Land Registry’s indemnity to the bank gave it the right to be subrogated to the bank’s rights against the Solicitors. The Land Registry argued that it had a claim in both negligence and negligent misrepresentation.

Negligence

The Land Registry argued that the Solicitors had assumed a duty of care the bank to take reasonable steps to verify the documents provided by the Borrowers and ensure that the power of attorney was, in fact, genuine. The duty was breached and this caused the bank to suffer loss.

Negligent misrepresentation

Alternatively, the Land Registry argued that the Solicitors impliedly or expressly represented to the Land Registry that sufficient steps had been taken to verify the information provided to the Land Registry to discharge the mortgage and that the documents had been properly executed by the bank. The Solicitors owed the Land Registry a duty to take reasonable care that the representations were true. The Land Registry relied on those representations, which turned out to be false, to discharge the charge and has suffered loss.

Judgment

Master Matthews rejected the Land Registry’s argument that the causes of action as set out in the pleadings gave it an automatic right to default judgment, without any legal analysis or argument. He did not agree that the CPR gave the Land Registry a right to demand judgment without consideration of the issues: the court must decide what relief, if any, is appropriate on the facts of the case. Although Master Matthews assumed the facts as set out by the Land Registry to be true (as the Solicitors did not attend the hearing), he did not assume that they gave rise to a specific legal outcome (unless there was no doubt as to the legal principles to be applied).

Negligence

The issue for Master Matthews was how the law should allocate the risk of fraud as between the Solicitors and the bank. It was not about the Land Registry passing the risk to professionals and conveyancers (or other persons filing documents with the Land Registry) because the Land Registry’s claim in negligence arose solely out of its right of subrogation. The issue was whether the Solicitors owed a duty to the bank.

Master Matthews concluded that it was not fair, just, or reasonable to make the Solicitors responsible to the bank for the risks of fraud within a system which was inherently risky. Accordingly, the Land Registry’s application based on negligence was denied.

In reaching his decision, Master Matthews considered the following factors:

  • the Solicitors were under a contractual duty to the Borrowers to send the documents to the Land Registry;
  • the Solicitors had no duty to check the documents, even though it may have been easy to do, because it would have meant not acting for their clients or making their client incur more costs;
  • the bank had a remedy against the Land Registry;
  • the Solicitors had been told that the bank had its own solicitors and, therefore, did not have any reason to suppose that the bank was relying on them, particularly where the bank’s interests and the Borrowers’ interests were opposed;
  • the Solicitors had a duty to take reasonable care to ensure that information is accurately recorded but their duty did not extend to verifying information supplied by a third party;
  • if any party owed a duty to the bank, it should be the Land Registry: the bank could do no more than register its charge and the Land Registry was arguably under a duty to avoid harm to the bank by removing its charge as a result of fraud;
  • it was the Land Registry’s act of removing the charge that caused the loss rather than the Solicitors supplying the information to the Land Registry.

Negligent misrepresentation

The Solicitors did not attend the hearing so Master Matthews assumed that the Solicitors made the representations alleged and knew that the Land Registry would rely on them. It is clear that he was reluctant to do this but had little choice as the facts relied on by the Land Registry had not been disputed.

The Land Registry accepted that the Solicitors would be liable for a tortious misrepresentation only if they owed a duty of care to the Land Registry in making the representations. Unlike in negligence, the issue here was whether the Solicitors owed a duty of care to the Land Registry. In order to establish a duty of care in this instance, there must have been a special relationship between the parties.

Master Matthews found that the Solicitors volunteered information which they knew, or ought to have known, the Land Registry would rely upon. However, he considered that if solicitors owed a duty of care in relation to the information provided to the Land Registry then so does any other person who provides such information. Master Matthews also noted that the Land Registry did not blindly accept the representations made by the Solicitors because the Land Registry raised a requisition regarding the authority purportedly from the bank.

Despite his obvious reservations, Master Matthews concluded that the Solicitors had assumed a duty of care in relation to the representations made to the Land Registry. Default judgment was granted on this basis (with damages to be assessed).

There is little by way of legal rationale for his decision in the judgment. However, Master Matthews stated that his decision was based on the specific facts of this case which, of course, were not challenged by the Solicitors. If the Solicitors had disputed the Land Registry’s assertions of what amounted to a representation the case may have been decided differently.

Points to note

Although the Land Registry was ultimately successful in its claim against the Solicitors and the burden of the Borrowers’ fraud was effectively passed to the solicitors, there are a few interesting points to note from this judgment:

  • there are circumstances in which a professional exercising a skill in a manner which may cause loss to others may assume a duty of care towards those persons. However, even though solicitors may exercise their skill of conveyancing, that in itself does not impose any further skill, such as to investigate or ascertain the truth of the statements made to third parties;
  • A solicitor’s job is to act on the client’s instructions as it believes to be proper and lawful: just because a solicitor is instructed to do something for his client against the interests of another person which may cause harm to that person does not mean that the solicitor owes them a duty of care;
  • It may have been prudent in this case to check that the bank was, in fact, legally represented. A belt and braces approach to situations that are at a high risk of fraud can be helpful to protect firms from claims.