Mortgage Express v Iqbal Hafeez Solicitors – relevance of contributory negligence

Ch D Judge J Randall QC 10 October 2011

Where the defendant firm of solicitors had paid away mortgage monies to the vendors’ purported solicitors who did not exist in breach of the Council of Mortgage Lenders’ (CML) Handbook, they were liable to the lender for breach of trust. They were not entitled to relief under s61 of the Trustee Act 1925 and were liable for all of the advance.

The judgment was extempore and is not yet available (a summary can be found on Lawtel) and the defendant firm appeared in person.

Comment

Although it is obviously unsatisfactory to attempt to draw any conclusions from a case where the judgment is not yet available, the issue as to when a firm of solicitors will be liable for a breach of trust - and the consequences of such a finding – continues to be important. Lenders are regularly making this allegation and those on the receiving end of claims need to know when a breach of trust argument is likely to be successful and whether there are any defences that can be used to reduce the solicitors’ liability.

The approach taken here appears to be similar to that in Lloyds TSB Bank plc v Markandan. There, despite asking for the necessary documentation for completion to be sent to them and giving various reasons for refusing to send the mortgage advance as requested by the vendors’ solicitors, the defendants transferred the funds without receiving any of the documents. The vendors’ solicitors, supposedly the Holland Park branch of a firm based in Luton that was registered with the Law Society, disappeared and the transaction was revealed to be a fraud.

The money was provided to the defendant firm subject to the provisions of the CML Handbook, clause 10.3.4 of which provides:

“You must hold the loan on trust for us until completion. If completion is delayed, you must return it to us when and how we tell you.”  

The court held that any payment away by the defendant which was not within its authority to pay away was a breach of trust. This was in contrast to any failure to make proper enquiries concerning the vendor’s solicitor which could be a breach of contract but not a breach of trust. The defendant firm was entitled to pay away on receipt of documents necessary to register title or, if doing so before that stage, on receipt of a solicitor’s undertaking to provide those documents. Payment with neither the documents nor an undertaking was a breach of trust.

Once a breach of trust is established, it is necessary to determine whether the defendant is entitled to relief under s61 of the Trustee Act 1925. The defendant trustee must establish that it acted honestly and reasonably in order to invoke the court’s discretion to relieve it wholly or partly from liability for the breach of trust. In neither Markandan & Uddin nor the present case was there a finding of dishonesty against the defendant firm but in both their conduct was unreasonable.

An issue of particular interest which arises in such cases is whether the defendant firm can raise contributory negligence on the part of the lender as a defence where the breach of trust is negligent and not intentional (see UCB Home Loans Corporation Ltd v Grace for a recent example of an allegedly knowing and deliberate breach of trust by solicitors in a lender claim). In Markandan & Uddin the judge refused to consider the lender’s conduct. He held that s61 gives trustees limited relief where they have acted honestly and reasonably and ought fairly to be excused for the breach of trust. The Trustee Act could have provided for the conduct of the beneficiary to be taken into account but it did not and it was not open to the court to extend the law in such circumstances.  

The summary of the present case gives the impression that contributory negligence on the part of the lender was fully ventilated before the court, leading to a finding that neither the lender nor the underwriter were found to have been negligent. It may be that this was a factor which the judge took into account when deciding whether the defendant firm was entitled to relief under s61 of the Trustee Act. This approach was rejected in Markandan & Uddin but has points in its favour given the need to be fair in equitable claims and the court’s discretion under s61 to give full or partial relief to the trustee. This is a point which remains open to debate and it will be interesting to see how the issue was approached if and when the judgment in Mortgage Express v Iqbal Hafeez Solicitors becomes available.