The recent Court of Appeal decision in Santander v R.A. Legal [2014] provides further clarification on the threshold for obtaining relief under section 61 of the Trustee Act 1925.  Lenders are increasingly seeking to utilise breach of trust allegations in order to try and circumnavigate allegations of contributory negligence and increase levels of recovery.  In this context, section 61 of the Trustee Act 1925 is important as it gives the court a discretionary power to relieve solicitors from all liability for breach of trust and, therefore, potentially limits the situations where lenders can successfully claim for breach of trust (and thereby limiting lenders’ ability to avoid findings of contributory negligence).  The earlier Court of Appeal decision in Nationwide v Davisons (A Firm) [2012] confirmed that relief would only be granted where solicitors have acted honestly and reasonably.  InNationwide, the Court of Appeal, having held that the solicitors had acted honestly and reasonably in that case, went on to note that the lapse from best practice, if any, had not caused the loss to the Claimant (loss had been caused by third party fraud).  The recent decision inSantander, however, highlights to solicitors the importance of acting in accordance with best practice nonetheless.  Courts will no longer be persuaded to disregard a solicitor’s conduct (however unreasonable) on the basis that even if the solicitor had acted reasonably in that respect, the fraud, and therefore the loss, would still have occurred. 

The facts

In May 2009, Santander (formerly Abbey National) (“Santander”) agreed to lend £150,000 to Mr Vadika in order for him to purchase a residential property in London.  Mr Vadika and Santander instructed R.A. Legal Solicitors (“R.A. Legal”) to act for them in connection both with the purchase and the obtaining of first mortgage security for Santander.  The purchase price for the property was £200,000 and Mr Vadika was contributing the balance of £50,000. 

R.A. Legal were advised that the owner and vendor of the property was Ms Emma Slater, and that her solicitors were Sovereign Chambers Limited (“Sovereign”). 

On 29 July 2009, R.A. Legal transferred £200,000 to Sovereign and simultaneous exchange and “completion” took place the next day. 

In November 2009, however, it transpired that Sovereign was, in fact, fraudulent.  Whilst Ms Slater was the registered owner of the property, she had not agreed to sell her property, nor had she instructed Sovereign (or, indeed, any solicitors).  No part of the £200,000 had been used to pay Ms Slater or to discharge her mortgage.  The money had disappeared from Sovereign’s client account on 13 August 2009 and, at the time of the judgment, had not been traced or recovered. 

Santander had instructed R.A. Legal on standard terms, which stipulated that the £150,000 should be held on trust until completion.  Since completion never took place and R.A. Legal had nevertheless transferred the funds to Sovereign, Santander sued R.A. Legal for breach of trust.   

First Instance Decision

At first instance, Andrew Smith J found that whilst R.A. Legal had been in breach of trust in releasing Santander’s money on 29 July, they should be awarded relief under section 61 of the Trustee Act 1925.  Following the decision in Nationwide v Davisons, Smith J clarified that:

  1. in order to show that it had acted “reasonably” within the meaning of section 61, the Defendant firm had to show only that it had acted reasonably, not that it had “necessarily complied with best practice in all respects”; and
  2. shortcomings [on the part of the Defendant firm] that are unconnected with the loss are irrelevant when deciding whether a solicitor has acted reasonably” for the purposes of section 61.

Smith J concluded that R.A. Legal could not fairly be treated as responsible for Santander’s loss when such loss was in substance caused by the fraud of Sovereign, an unconnected third party. 

Santander appealed the decision on two grounds, namely that:

  1. the Judge failed to recognise as a separate and distinct breach of trust R.A. Legal’s transfer of the purchase monies to Sovereign the day before exchange and “completion”; and
  2. R.A Legal’s departures from standard or best practice were sufficiently connected with Santander’s losses. 

Court of Appeal decision

Allowing the appeal, Briggs LJ, giving the lead judgment, held that R.A. Legal committed breaches of trust on 28 and 29 July 2009, thus liability was established.  The burden was then on R.A. Legal to satisfy the court that it acted both honestly and reasonably and should be awarded relief under section 61. 

In order to be awarded relief under section 61, two stages must be satisfied.  The first is that the trustee acted honestly and reasonably.  If the court is so satisfied, the second stage is for the court to decide whether it is fair for the trustee to be granted relief. 

There was no suggestion that R.A. Legal acted otherwise than honestly in relation to any aspect of their conduct connected with Santander’s loss. 

Regarding the requirement for a firm to have acted reasonably, Sir Andrew Morrit C in Nationwide v Davisonshad clarified that the requisite standard under section 61 is reasonableness, not perfection and the relevant action must be at least connected with the loss for which relief is sought. 

After considering R.A Legal’s “numerous departures from best practice”, Briggs LJ concluded that it was not unfair or unjust to find that R.A. Legal had not acted reasonably.  R.A. Legal’s failures included the fact that they had:

  1. certified that they had investigated title and provided an unqualified Certificate of Title, when in fact, the investigation was incomplete (which Briggs LJ considered to be a deliberate misrepresentation);
  2. failed to make adequate requisitions of Sovereign and accepted inadequate replies;
  3. released Santander’s funds to Sovereign prior to exchange of contracts, without any requirement that the funds were to be held to their order (either by adoption of the Completion Code or in any other written form); and
  4. failed to appreciate that completion had “gone seriously wrong” when no confirmation that the prior mortgage had been discharged was received from Sovereign post-completion.  

In previous decisions, such as Nationwide, the Court of Appeal has held that the trustee solicitors need only show that they acted reasonably in relation to those aspects which were connected with the loss. 

In deciding whether or not conduct is connected with the loss, Briggs LJ held that adopting a “but for” test which disregards conduct, however unreasonable, on the basis that even if the solicitor had acted reasonably in that respect, the fraud, and therefore the loss, would still have occurred is “too restrictive”.  On the other hand, this does not mean that the court should consider every aspect of the solicitor’s conduct throughout the whole transaction, with Briggs LJ explaining that “some element of causative connection will usually have to be shown”.   Unreasonable conduct which is “completely irrelevant or immaterial” will not necessarily be considered by the court in respect of section 61. 

On the facts, Briggs LJ held that part of the conduct of R.A. Legal, beginning with failure to make adequate requisitions of Sovereign up to the failure to appreciate completion had gone wrong was sufficiently connected to Santander’s loss.  Whilst Briggs LJ was prepared to assume that the fraud by Sovereign would probably have been successful even if R.A. Legal had acted reasonably, he held that “it would not be appropriate to exclude as irrelevant conduct which consisted of a departure from best or reasonable practice which increased the risk of loss caused by fraud, even if the court concludes that the fraudster would nonetheless have achieved his goal if the solicitor had acted reasonably”. 

Since R.A. Legal was not able to show that they had acted reasonably in all aspects connected with Santander’s loss, the second stage of the test for relief under section 61 did not need to be considered.  However, notwithstanding this, Briggs LJ noted that the “failings of R.A. Legal formed part of a larger picture of the shoddy performance of a conveyancing transaction from start to finish which leaves me in no doubt that it would not be fair to excuse the firm from liability”. 

Comment

This decision highlights to solicitors the importance of acting in accordance with best practice and following the “sophisticated regime, worked out over many years, whereby risks of loss to lenders and lay clients are minimised”.  Where solicitors fail to do so, it will be easier for solicitors’ applications for relief under section 61 to be resisted. 

Briggs LJ warned solicitors that where they “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, upon the basis that they have demonstrated that they have in all respects connected with that loss, acted reasonably”.

The Court of Appeal decision further exposes residential conveyancing solicitors and their insurers to claims arising from third party fraud. 

Further reading: Santander UK Plc v R.A. Legal Solicitors[2014] EWCA Civ 183

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