Innocent solicitors commit a breach of trust and have to repay to the lender a mortgage advance paid away to fraudsters.
This was the finding in Lloyds TSB Bank Plc v Markandan & Uddin (a firm). Lloyds' predecessor in title had retained the defendant firm to act for it in relation to a loan to purchase a property. The money was transferred to the defendant who transferred it to the solicitors purporting to act for the vendor before it received any of the documents required to register the title and the lender's interest. The transaction was a fraud. There was no sale and the solicitors for the bogus vendor did not exist.
The lender brought a claim for the return of the advance. The judge held that there had been no completion and the defendant was in breach of trust for releasing the money without receiving the requisite documents. The defendant had acted unreasonably in failing to obtain the documents and in failing to confirm that the firm of solicitors it sent the advance to actually existed. The defendant appealed to the Court of Appeal. That court confirmed there had been no completion as the purported contract for sale was a nullity as the owners of the property had not agreed to sell it. As no completion had taken place, the defendant had no authority from the lender to release the loan monies. The solicitors were therefore in breach of trust and had to account for the monies.
The defendant could not obtain relief under s61 of the Trustee Act 1925, whereby a party in breach of trust can be relieved from the consequences of the breach if they have acted reasonably and honestly. Although there was no suggestion that the solicitors were involved in the fraud, they had not acted reasonably in the transaction and had brought the misfortune upon themselves. They had to repay the advance to the lender.
Things to consider
Once again, the court had to decide which of two innocent parties was to bear the cost of a fraud perpetrated upon them.
In this instance, the solicitors could have acted to a higher professional standard in carrying out the transaction to protect themselves and the lender than they did. Failure to obtain the relevant documentation or to ascertain who they were dealing with was crucial to the court's decision not to grant relief. The solicitors were in a better position to protect themselves than the lender, and had failed to do so.