Goldsmith Williams Solicitors v E.Surv Limited
Court of Appeal (Civil Division)
11 November 2015
 EWCA Civ 1147
Solicitors – Lender Claims – Construction of CML Handbook – Bowerman Duty – Contribution between solicitor and surveyor – Causation
The Court of Appeal held that the terms of the CML Handbook, in particular clause 5.1.2 thereof, were consistent with (and did not exclude) a Bowerman duty upon the relevant solicitors, which had on the facts required them to report to their lender client a significant disparity between (i) a valuation provided by surveyors, and (ii) the much lower purchase price paid by the mortgagor for the property just a few months earlier.
The solicitors were in breach of that duty, but the surveyors could not claim a contribution from them because the solicitors’ breach had caused no loss. There was no evidence establishing that if the discrepancy had been reported by the solicitors, the lender would not have proceeded with the loan in any event.
In September 2005, Mr David Gayler purchased a property in the Buxton area for £390,000. In November 2005, he was looking to refinance his borrowing on the property. The respondent surveyors were retained by a lender to inspect and value it. Mr Gayler untruthfully told the valuer that he had purchased the property about 6 months earlier for £600,000. The valuer valued the property at £725,000; which, as against the true purchase price, would entail an apparent increase of some £335,000 in just two months.
In December 2005, Mr Gayler applied to a different lender, The Mortgage Business (“TMB”). In his application form he this time said (again untruthfully) that he had purchased the property for £450,000 in October 2005. However, he asserted that the current value of the property was £725,000.
TMB was therefore aware that Mr Gayler was contending for a £275,000 increase in the value of the property in a few months. Despite this, the loan proceeded. TMB obtained the surveyors’ report, providing a valuation consistent with Mr Gayler’s asserted value. On 26 January 2006, an offer was issued for a loan, which Mr Gayler accepted.
TMB and Mr Gayler instructed the appellant solicitors to act for them. TMB’s instructions included the terms of the Council of Mortgage Lenders (“CML’s”) Handbook, and the Lender’s Part 2 instructions (the latter were not material to the case).
The solicitors obtained office copy entries for the property. These showed the true details of the borrower’s purchase: £390,000 paid in September 2005, not £450,000 paid in October 2005. The solicitors did not convey that information to TMB, nor point out the significant disparity with the valuation figure.
On 3 February 2006 the solicitors submitted a signed certificate of title to TMB, containing the usual statement that it gave the certificate set out in the Appendix to Rule 6 (3) of the Solicitors’ Practice Rules 1990 (“SPR”), as if the same were set out in full. On 13 February 2006 completion occurred and the loan was advanced.
Mr Gayler defaulted and TMB suffered loss. It claimed damages against the surveyors. That claim was settled. TMB chose not to sue the solicitors, after being confronted with the contents of the application form (in which Mr Gayler had already represented to the lender that he had purchased the property for just £450,000). However, the surveyors brought proceedings against the solicitors for a contribution under the Civil Liability (Contribution) Act 1978.
At trial, the judge (HHJ Stephen Davies) held that the solicitors had been under a duty to TMB to report the discrepancy and were in breach. He also held that but for that breach, the loan would not have been completed, on the basis that TMB would have referred the discrepancy to the valuer, who would have revised his valuation in light of the new information. He therefore granted the surveyors’ claim for a contribution.
On the solicitors’ appeal there were two issues:
(i) Did the solicitors owe the duty alleged by the surveyors?
(ii) If so, was their failure to fulfil it a cause of TMB’s loss?
The Court of Appeal upheld the decision of the judge on the duty question, but allowed the appeal on causation, thus relieving the solicitors of their liability for a contribution.
The duty issue raised the interplay between the terms of the CML Handbook, the terms of the SPR, and common law authorities (most notably Mortgage Express Limited v Bowerman & Partners), in circumstances where a solicitor is retained by both lender and borrower.
The relevant version of the CML Handbook was the 6 May 2005 edition. The leading judgment from Stanley Burnton LJ noted the express provision at clause 1.3 that:
“The Lenders’ Handbook does not affect any responsibilities you have to us under the general law or any practice rule or guidance issued by your professional body from time to time.”
He further noted that under “Title”, clause 5.1.2 provided:
“If any matter comes to the attention of the fee earner dealing with the transaction which you should reasonably expect us to consider important in deciding whether or not to lend to the borrower (such as whether the borrower has given misleading information to us or the information which you might reasonably expect to have been given to us is no longer true) and you are unable to disclose that information to us because of a conflict of interest, you must cease to act for us and return our Instructions stating that you consider a conflict of interest has arisen.”
Clause 1.5 of the CML Handbook provided that the limitations contained in rule 6 (3) (c) and (e) of the SPR applied to the CML instructions. Rule 6 (3) (c) of the SPR provided that:
“A solicitor acting for both lender and borrower in a standard mortgage may only accept or act upon instructions from the lender which are limited to the following matters:”
It then went on to list in 25 sub-paragraphs the instructions upon which a solicitor could act. They included taking reasonable steps to check the borrower’s identity, checking the vendor’s solicitors were genuine, carrying out searches relating to the property, making enquiries on legal matters as reasonably specified by the lender, and reporting on matters including the purchase price stated in the transfer.
Stanley Burnton LJ noted that none of those sub-paragraphs by themselves expressly required a solicitor to report to a lender any discrepancy between the information provided by the borrower and that identified by the solicitor in the searches carried out by him, or information casting doubt on the value of the property to be charged.
Furthermore, the certificate of title given to the lender stated:
“We confirm that we have complied with your instructions in all other respects to the extent that they do not extend beyond the limitations contained in paragraph (3)(c) of rule 6 of the Solicitors Practice Rules 1990 … Our duties to you are limited to the matters set out in this certificate and we accept no further liability or responsibility whatsoever. The payment by you to us (by whatever means) of the mortgaged advance or any part of it constitutes acceptance of this limitation …”
Turning to the decision in Bowerman, which predated the CML Handbook, the Court of Appeal had held the solicitor to owe the following duty to the lender:
“… if, in the course of investigating title, a solicitor discovers facts which a reasonably competent solicitor would realise might have a material bearing on the valuation of the lender’s security or some other ingredient of the lending decision, then it is his duty to point this out.”
The appellant solicitors accepted that the discrepancy between the purchase price and the valuation (£390,000 / £725,000), and the proximity of the recent purchase (three months), were matters which they would have been obliged to report under a Bowerman duty. However, they argued that that duty was inconsistent with the terms of the CML based retainer, or indeed, was excluded by those terms.
Both Stanley Burnton LJ and Patten LJ (it was a two member panel) rejected this argument.
Firstly, clause 1.3 of the Handbook was inconsistent with its provisions being a comprehensive and exclusive statement of a solicitor’s responsibilities.
Secondly, the wording of clause 5.1.2 of the Handbook was not to be read as being limited only to cases of fraud (which the solicitors argued was the case, in view of the words: “…such as whether the borrower has given misleading information…no longer true”). Instead, clause 5.1.2:
“…recognises in words which echo the judgment of the Master of Rolls in Bowerman that reportable matters which come to the solicitor’s attention when dealing with the transaction and are not confidential to the borrower must be communicated to the lender.”
The Court of Appeal held that that was exactly what had happened in this case: the solicitor became aware of the purchase price issues, as a result of a search of the registry which it was permitted to carry out within SPR 6 (3) (c), and should have reported them.
Thirdly, this conclusion was not negated by the terms of the standard form of certificate of title. That confined the solicitor’s liability to matters which it had been instructed to carry out; but in the Court of Appeal’s view, as those instructions included the Bowerman duty if appropriate facts had come to the solicitor’s attention (as they had here), the limitations in the certificate did not relieve the solicitor of the duty or its breach.
Accordingly the duty was owed, and the judge had been correct to find that the solicitors were in breach.
However, the Court of Appeal unanimously reversed the trial judge’s findings on causation. The issue was essentially one of evidence: had the surveyors, seeking the contribution, discharged the burden of proving that but for the solicitors’ breach, the loan would not have proceeded?
The judge below held that although there was no convincing evidence from the lender about what would have happened if it had been informed of the discrepancies, it would have been open to the solicitors to obtain third party disclosure of documents from the lender or to subpoena witnesses from the lender to assist in its defence, yet it had failed to do so. The Court of Appeal held that this had effectively reversed the burden of proof, and was wrong.
Moreover, on the evidence before the trial judge, there had been no basis to infer that if the discrepancies between the valuation and the price had been reported to TMB, it would have made a difference. This was chiefly rooted in the fact that TMB was already aware, through the application form, of a very significant discrepancy as against the £725,000 valuation figure (albeit the price was inaccurately stated at £450,000 not £390,000), and it was already aware of the recent nature of that purchase. There was no basis to say that a report by the solicitors of information highlighting what was in effect a further £60,000 of discrepancy would have made any difference at all.
Accordingly the appeal was allowed on the second ground.
In reaching the conclusion that it did on the duty question, the Court of Appeal expressly disagreed with the authors of two prominent textbooks: Lender Claims by Tomlinson QC and Grant (which states at paragraph 3-29 that “unless a reasonable solicitor would consider that information gave rise to a significant risk that the borrower was fraudulent or had misled the lender, s 5.1.2 is not engaged”), and Solicitors’ Negligence and Liability (3rd edition) by Flenley QC and Leech QC, at paragraph 10.67 (which argues that the provisions of the CML’s Handbook are inconsistent with the Bowerman duty).
Despite the respected views of those authors, the point must now be regarded as settled. When instructed on the terms of the CML Handbook, a solicitor must pass information casting doubt on the valuation back to the lender.
On causation, the evidential difficulties facing the surveyor as a contribution claimant were for the surveyor to overcome. The party seeking the contribution must prove causation in its claim in the same way that the original lender would have needed to prove it. The fact that the quality of the evidence that is available to the contribution claimant may be weaker is that party’s problem, and if needed, the claimant for contribution will need to seek third party disclosure and/or bring the necessary witnesses to Court. A co-defendant settling a claim against it, but with an eye on a future claim against another co-defendant, would do well to carefully evaluate what evidence the lender actually has before settling, and to establish what assistance the lender can or will voluntarily give in relation to any contribution action.
There is no appeal to the Supreme Court by the surveyors.
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