The Court of Appeal decision in Santander UK Plc v RA Legal Solicitors  EWCA Civ 183 provides important clarification regarding the circumstances in which a trustee (in this case, a solicitor) may be able to persuade the court to grant relief from liability for breach of trust under Section 61 of the Trustee Act 1925. In future, a solicitor will be less likely to escape liability for breach of trust where he fails to follow best practice, even if his failure does not directly cause the loss suffered by the claimant.
In recent years there has been an upsurge in breach of trust claims against solicitors by mortgage lenders who have been victims of fraud. The attraction of breach of trust claims, as opposed to claims for negligence and breach of contract (which are usually pursued as alternative claims), is that the lender does not have to show that the solicitor breached his duty of care, which may be difficult where there were no obvious signs that should have alerted him to the fraud. Moreover, the remedy for breach of trust is reconstitution of the trust fund, with no deduction for contributory negligence.
A solicitor’s liability for breach of trust is not fault based, but strict. Where funds are released without the lender's solicitor obtaining a completed legal charge, and the solicitor holds money on trust pending completion of the purchase, he will be in breach of trust if he parts with the advance otherwise than on completion. However, the solicitor may seek relief under section 61 of the Trustee Act 1925 which gives the court power to relieve from liability a trustee who has committed a breach of trust, if he: (i) acted honestly and reasonably; and (ii) ought fairly to be excused for the breach.
In May 2009 Santander (then Abbey National) agreed to lend £150,000 plus fees to a Mr Vadika for his purchase of a residential property in London. RA Legal was instructed to act for Santander and Mr Vadika on the transaction. On receipt of the certificate of title, Santander transferred the mortgage monies to RA Legal, who in turn transferred them to the vendor’s solicitors, Sovereign Chambers LLP. The transaction purportedly completed by telephone the following day. However, the transaction was a fraud in which Sovereign was involved. The advance monies were not recovered and Santander was left with no security. It therefore sued RA Legal for breach of trust (as well as alternatively for negligence and breach of contract).
First instance decision
RA Legal’s denial that it had acted in breach of trust was rejected, but its alternative application for relief under section 61 was granted. Mr Justice Andrew Smith held that although RA Legal had departed from best practice, none of its failings was directly causative of Santander’s loss and those failings were thus irrelevant to whether RA Legal had acted reasonably, which the Judge found it had. Nothing RA Legal could have done would have prevented the loss, which was caused in substance by the fraud of Sovereign, an unconnected third party.
Court of Appeal decision
The Court of Appeal, allowing Santander’s appeal, clarified that for the purposes of section 61, a trustee's departure from best practice may be said to be sufficiently connected with a beneficiary's loss if there is "some element of causative connection".
Giving the lead judgment, Lord Justice Briggs held that a strict causation test is too restrictive, because in most mortgage fraud cases the effective cause of the loss is the third party’s fraud rather than the conduct of the solicitor. Rather, he was of the view that it would not be appropriate to exclude, as irrelevant, conduct which consisted of a departure from best practice which increased the risk of fraud, even if the fraudster would have achieved his goal in any event. What was required was something in the trustee's conduct which materially contributes to the beneficiary's loss in a wider sense.
The Court of Appeal found that the Judge at first instance had taken too lenient a view of RA Legal’s failures. Its departures from best practice (including inadequate requisitions on title, providing an unqualified certificate of title while investigations were still outstanding, transferring completion money without adopting the completion code and failing to deal with the absence of a prior mortgage discharge) were serious and clearly connected with Santander's loss. Those failings formed part of a larger picture of shoddy performance which meant that it would not be fair to excuse the firm from liability.
This judgment marks a turning in the tide of recent decisions in which the courts have generally been more willing to grant relief under section 61. In broadening the scope of unreasonable conduct for the purposes of section 61, the Santander case once again confirms that pursuing a breach of trust claim against solicitors can be an effective means of recovery for lenders and the decision will no doubt be welcomed by them. However, it will be less popular with solicitors and their professional indemnity insurers who provide the most likely source of recovery for lenders and who, in future, are likely to find that the courts take a stricter approach where there have been departures from best practice.