When can a solicitor, who has acted for both a borrower and a lender, disclose a copy of their file to their lender client?
We were recently involved in an application for delivery up of solicitors’ files to a lender (an increasingly common application). Our client provided copies of the parts of the file that related to their retainer with the lender, and a redacted ledger card. That was in accordance with Solicitors’ Practice Rule 4 and specifically guidance note 8(c) to that rule, which states:
“Where a lender asks for a Conveyancing file and you have kept a joint file for both borrower and lender clients, you cannot, without the consent of the borrower, send the whole file to the lender, unless the lender can show to your satisfaction that there is a prima facie case of fraud. If the client does not consent, you should only send those parts of the file which relate to the work done for the lender.”
The lender considered that they were entitled to the entire file and brought an application. The application had two aspects. First, an application for pre-action disclosure under CPR rule 31.16. Second, an application for an order under section 4 Torts (Interference with Goods) Act 1977 (the Act). How should such an application be treated?
Confidentiality is key. Guidance Note 8(c) makes clear that there are only two ways of circumventing it.
The first is “a prima facie case of fraud”: that is a high threshold. Lenders face a problem here: often they request the solicitor’s file to obtain evidence to substantiate their suspicions. Mere suspicion, however, does not meet this requirement: the solicitor needs to be convinced that, on the face of it, a fraud has occurred.
The alternative is to obtain the consent of the borrower. A borrower may be reluctant to do so: after all, the lender might use the information to sue them. Lenders often seek to rely on clauses in the mortgage application, signed by the borrower. A typical clause might read:
“You consent to your solicitor disclosing to us any documents or information that we ask for about this transaction and you agree to waive any confidentiality or privilege that might exist in relation to this transaction.”
At first glance that seems airtight, and the solicitor should start packing the file (remembering to remove any documents that belong to them, rather than their clients). The case of Winterthur v AG (Manchester) Ltd (in liquidation) explains why the solicitor should think twice.
This case was part of the TAG litigation. An insurer considered bringing claims against panel solicitors who had handled PI claims, and sought documents from the solicitors’ files. They relied on authorities in the solicitors’ client care letters signed by the client to release the solicitors from their duty of confidentiality. The wording of the authorities was similar to that found in mortgage applications.
It was held that the signed authorities were ineffective. Even though each authority was framed widely, in context it applied only for the purpose of pursuing the original PI claims: it could not be used after the claims were concluded.
By analogy with Winterthur, it can be argued that “consents” given by borrowers to lenders are ineffective after the conveyancing transaction has concluded. Whether or not that is true will depend on the correct construction of the relevant document, not just the specific clause.
What then of the two strands to the application? For pre-action disclosure, there is a three-part test. The applicant must show that:
- the parties are likely to be parties to subsequent proceedings;
- if proceedings started, the documents requested would be disclosed; and
- disclosure is desirable for one of the three reasons set out in CPR rule 31.
Two points are important. First, courts are reluctant to allow “fishing expeditions”. There should be some reason why the documents are needed now, rather than later. It was said in Black v Sumitomo that:
“…the court should be slow to allow a merely prospective litigant to conduct a review of the documents of another party, replacing focused allegation by a roving inquisition.”
Second, pre-action disclosure is not the same as pre-action inspection. Even if pre-action disclosure is ordered, a solicitor is not released from their duty of confidentiality. The documents can only be disclosed as documents within the solicitor’s possession which they object to providing copies of, because of confidentiality. Therefore a successful applicant may be no further forward.
Torts (Interference with Goods) Act 1977
Section 4(2) of the Act states that the court may:
“…make an order providing for the delivery up of any goods which are or may become the subject matter of subsequent proceedings in the court, or as to which any question may arise in proceedings.”
Questions abound. Can parts of a solicitor’s file really be described as “goods” within the ambit of the Act? What about the relationship between the goods and the “subsequent proceedings”: must the proceedings directly concern the goods, or can the Act be used to obtain evidence for other litigation? Must the goods belong to the applicant, or is a mere right to them sufficient for an application?
None of these points is clear, and therefore it is far from certain that the Act is a legitimate means of obtaining disclosure by the back door.
Solicitors need to be very careful before they assume that their duty of confidentiality has been circumvented by a “consent” in a mortgage application. This issue is still being tested before the court. The lender’s application referred to in this article was successful at first instance on the second ground (based on the Act), but not the first. Neither we nor counsel consider the decision was correct, and are appealing it, so watch this space.