Lenders are embracing breach of trust arguments in what would otherwise be traditional negligence claims with fervour. Does it have something to do with lenders’ fear of their previous risky lending practices coming back to the bite them in the form of hefty findings of contributory negligence? Where the transaction has not completed there are significant advantages for a lender in seeking to reconstitute the trust fund rather than to bring a contractual or tortious claim for damages.

What can the solicitor do when faced with such a challenge? Section 61 enables the court to relieve the trustee, wholly or partly, from personal liability for a breach of trust if he or she “has acted honestly and reasonably, and ought fairly to be excused for the breach of trust.”  

For the solicitor defending a lender claim is the relief available under section 61 real or illusory? After Nationwide v Davisons [2012] EWCA Civ 1626, handed down on 12 December 2012, the answer has now changed to real.

How does a court determine reasonableness? The court will consider whether a prudent man of business would have disposed of the trust property in the manner complained of, had it been his own. An innocent but duped solicitor should be able to satisfy the reasonableness test but this has not been borne out in the cases involving solicitors. In Lloyds TSB Bank plc v Markandan & Uddin (A Firm) [2012] EWCA Civ 65 X masqueraded as a solicitor in practice in the Holland Park branch office of Luton solicitors. M relied on undertakings given by X and paid the mortgage advance to X. The contract was a nullity. The Judge found that M had no authority to release the monies except on “completion” and was guilty of breach of trust. This had caused the whole of the lender’s loss. Rimer LJ went so far as to suggest that an innocent solicitor who released mortgage funds in reliance on forged documents executed by a fraudster would be presumptively in breach of trust. A solicitor who is careful, conscientious and thorough, who conducts the transaction by the book and acts honestly and reasonably in relation to it in all respects but does not discover the fraud may be able to rely on section 61. A high hurdle indeed.

This view was reinforced in Nationwide v Davisons Solicitors (A Firm) Unreported, April 24, 2012, QBD. The Seller’s solicitors, RS, wrote to D from an office address in Small Heath. D checked with the Law Society and SRA websites and the firm, which did exist, apparently had such a branch. However the firm had previously complained about an imposter using its name. It had no branch in Small Heath but the websites had not been amended. The Judge found that RS had given at best a future undertaking to redeem or obtain discharges for existing charges. The monies were paid to RS’s office and the charge on the property was not discharged. The lender has a unilateral notice ranking behind the first charge. The Judge refused relief under section 61 on the basis that RS’s assurance fell far short of giving an undertaking. D had not acted reasonably.

The Court of Appeal reversed this decision. (1) RS had given a sufficient undertaking by providing requisitions to title albeit not on the correct form but nevertheless confirming that they would comply with the Law Society’s Code for Completion by Post. Therefore D had obtained the benefit of an undertaking from someone he reasonably believed to be the seller’s solicitor. A solicitor has to act reasonably that does not necessarily mean that he must have complied with best practice in all respects. Relief was granted to D. (2) The lender argued that there was an absolute obligation on a solicitor to procure on completion redemption of all existing charges and a fully enforceable first charge. It relied on paragraph 5.8 of the CML Handbook which requires a solicitor to obtain this. That would impose the equivalent of a guarantee on D. Paragraph 5.8 imposes an obligation to exercise reasonable skill and care in seeking to procure the outcome it refers to. There was no breach of retainer.

Fortunately the decision has averted the star collapsing further and the Three Wise Men are now following the right star.