In what has been hailed as a ‘return to common sense’ by solicitors, the Court of Appeal has ruled that a solicitor is not liable for a building society’s losses after paying more than £180,000 of mortgage monies over to an imposter. Lenders may disagree.
In Davisons Solicitors v Nationwide Building Society (2012), the Court of Appeal considered whether a firm of solicitors who innocently paid over mortgage monies in anticipation of completion to an imposter were guilty of breach of trust and, if so, whether they should be relieved of liability under section 61 of the Trustee Act 1925.
Davisons, acting for the purchaser and Nationwide, released mortgage advance monies to fake solicitors without having received a clear undertaking from them to discharge the existing first legal charge. The imposter disappeared with the mortgage monies and, although the intended purchaser became registered as proprietor, Nationwide was left without a charge.
The Council of Mortgages Lenders’ Handbook requires a party who is acting for the lender in relation to a loan to hold any money released to that party on trust for the lender until completion. The Handbook asserts that where a trustee is in breach of trust, the trustee has a personal liability to reconstitute the trust fund. However, Section 61 of the Trustee Act 1925 gives the court discretionary power, if the trustee has acted honestly and reasonably, to relieve them wholly or partly of liability.
It was held by the High Court that Davisons was in breach of trust and contract, and that although they had acted honestly, they had not acted reasonably. Davisons was therefore not entitled to relief under section 61 of the Trustee Act 1925 and was liable for Nationwide’s losses.
Davisons appealed this judgment, and the Court of Appeal has ruled that Davisons is not liable for Nationwide’s loss. The appeal judges upheld the High Court’s decision that Davisons was in breach of trust. This was said to be unavoidable since the only ways in which Davisons could discharge the trust imposed on the loan money in their hands was by completion of the purchase or the return of the money to Nationwide. In a fraudulent transaction, there is no "completion", and the monies were not returned: hence the finding of breach of trust.
However, at appeal it was held that Davisons had acted both honestly and reasonably, and they were therefore relieved of liability. The Court came to this decision as the requirement for Davisons to act reasonably did not require perfection. The solicitor honestly believed he had obtained a valid undertaking, even though it turned out to be defective. The court also made the point that, had the solicitor insisted on a valid undertaking then the imposter in all likelihood would have complied, and the result been the same: “The lapse from best practice, if any, did not cause the loss to Nationwide.” The fraud was the cause of loss rather than the solicitor’s failure.
The appeal turned on an interpretation of what was reasonable conduct by a solicitor and lenders will be disappointed that, where a solicitor has been found wanting in failing to carry out best practice, no remedy is available. However, perhaps the appeal turned on the practical implications of how the solicitor could have avoided the loss, faced with a fraudster probably prepared to forge any document requested. Often in these cases there are other warning flags on the file to which a competent solicitor ought to have reacted - but not, it seems, in this case.