The Court of Appeal in The Law Society of England and Wales v Schubert Murphy has confirmed that the question of whether the Law Society owes a duty of care to solicitors and others who use its online "Find a Solicitor" facility should go to trial, rejecting the Law Society's appeal against the dismissal of its application for strike out/summary judgment. Although the Court took the view that the claimant would face hurdles in establishing that a regulatory or professional body owes a duty of care to its members or to the public, the determination of whether a duty arose in this case was fact sensitive and warranted further enquiry.

Solicitors' firm Schubert Murphy had settled a claim for negligence and breach of trust brought by its client in relation to Schubert Murphy having unknowingly transferred the purchase price for a property to a fraudster. In doing so, Schubert Murphy had used the Law Society's "Find a Solicitor" facility before making the transfer to check the status of the firm and individual solicitor, a "Mr Dobbs", who was purportedly acting for the seller. It transpired to be a sham firm set up by a fraudster. However, the firm and the individual solicitor were on the Roll of Solicitors and therefore came up on Schubert Murphy's "Find a Solicitor" check.

The Law Society did not compensate the firm or its client under the Solicitors' Compensation Fund on the basis that as the fraudster was not a solicitor the case fell outside its remit. Schubert Murphy therefore sought damages for negligence and a contribution under the Civil Liability (Contribution) Act 1978 from the Law Society.

The Law Society applied for summary judgment and/or to strike out the claim for negligence and/or contribution under the Civil Liability (Contribution) Act 1978. The application was refused and the Law Society was granted permission to appeal.

On appeal, the Law Society argued that the judge had made a number of errors.

Firstly, it argued that the judge failed to start his analysis on the basis that the direct and immediate cause of loss was the fraud of the third party, the supposed "Mr Dobbs", and not the Law Society, and, therefore, following Smith v Littlewoods Organisation Ltd (1987), special circumstances were required to impose liability on the Law Society. In Smith, Lord Goff stated that when the claimant is seeking to hold the defendant responsible for having failed to prevent a third party from causing damage to the claimant by the third party's own deliberate wrongdoing, "it was not possible to invoke a general duty of care; for it is well recognised that there is no general duty of care to prevent third parties from causing such damage." The Court in Smith recognised, however, that there are special circumstances in which a defendant may be held liable for such damage, for example, where there had been an assumption of responsibility or where a duty arose under contract. The Law Society submitted that there were no such special circumstances in this case so it could not be held liable for the damage caused by the third party.

The Court of Appeal rejected this and held that although a regulator does not generally owe a duty of care in relation to the way in which it carries out its regulatory functions, making information available through the "Find a Solicitor" facility was arguably an additional and voluntary service going beyond what the Law Society was required to do under the applicable statutory regulations. Given the Law Society's encouragement of the use of the facility to find solicitors and the absence of recommendations of other checks, its actions created a risk that the facility would be relied upon, as well as an opportunity for fraud. This went beyond the Law Society's statutory regulatory obligations. It was therefore arguable that this case might fall into one of the special circumstances envisaged in Smith, where a defendant may be held responsible even where the direct and immediate cause of the claimant's loss was the fraud of a third party. Moreover, it could not be said that there was no prospect of finding that the Law Society had assumed responsibility in relation to the information provided by using the facility.

Secondly, the Law Society argued that the judge had wrongly distinguished Yuen Kun Yeu v Attorney General of Hong Kong (1998). In that case the financial regulator was held to owe no duty of care to see that members of the public who deposited money with a regulated deposit-taking company did not suffer loss through the company acting fraudulently or otherwise poorly. The judge at first instance in Schubert Murphy held that Yuen was "of limited assistance to the defendant on the facts of this case. It does not establish that in no circumstance can a regulator be responsible for economic loss caused by a regulated person or company. All that it decides is that on the facts, which are likely to be replicated in the Financial Services Industry in many cases, the Commissioner owed no duty to see that members of the public minded to deposit money with a regulated deposit taking company did not suffer loss through the affairs of such companies being conducted in a fraudulent or imprudent fashion." On appeal, the Law Society argued that the judge should have followed Yuen and held that as the information the Law Society provided was limited to that which was mandatory under its statutory duties, the provision did not give rise to a duty of care.

The Court of Appeal held that Yuen could be distinguished from the present case because the regulatory function in question in that case involved an exercise of discretion as to the fitness of the regulated person or entity which did not give rise to a statutory duty to potential depositors, and it was in that context that the court was steered away from the imposition of a tortious duty of care, whereas there was no discretion involved in the question of whether someone was or was not a solicitor.

Thirdly, the Law Society argued that the judge had misapplied the threefold test in Caparo v Dickman (harm must be reasonably foreseeable, the parties must be in a relationship of proximity, and it must be fair, just and reasonable to impose liability). On the material before the court, the Court held that a factual enquiry was necessary to determine the purpose of the online search facility and the way it was presented, and whether the facility went beyond the exercise of the Law Society's regulatory functions before it could be said that there was no prospect of a finding that a relationship of sufficient proximity existed between the parties. Allied to this was the need to identify exactly how the facility worked and the extent to which it identified the individual user, or was akin to the provision of information to the world at large. On the question of whether it was fair, just and reasonable to impose a duty of care, the Court concluded that further factual enquiry was necessary to determine the consequences of the imposition of the duty, and the security of conveyancing transactions in particular.

There were also important policy considerations which required a full exploration at trial:

  1. If a distinction was drawn between the provision of information by telephone (it being accepted by the Law Society that a duty of care might be imposed if Schubert Murphy had telephoned the Law Society to ask whether the solicitor was genuine) and an automatic response from a website, then there was a real risk that the policy objective of digitalisation would be impaired or defeated.
  2. Who should bear the irrecoverable loss caused to the innocent purchaser in circumstances where either the solicitor's insurance does not cover the full extent of the loss or he is granted relief under s61 of the Trustee Act 1925?

The profession and its insurers must now await the trial to determine whether and in what circumstances completion monies paid to a fraudster in reliance on information provided by the Law Society can be recovered from the Law Society. Given the prevalence of property frauds and the frequency with which solicitors can be caught up in them, whichever way the final decision goes it will likely be an important one.

The approach of the court is also of wider interest, particularly in relation to the question of whether professional and regulatory bodies can be held to account for inaccurate statements made by them in relation to who is or is not authorised by them. Although the weight of the case law suggests that a duty of care in tort, in addition to the regulator's statutory duties, may not be imposed, it remains to be seen whether a trend may develop of authorities being held more accountable following the 2015 decision in Sebry v Companies House in which Companies House was held liable for the effects of posting a notice of winding up against the wrong company.