Santander UK –v- RA Legal Solicitors
Court of Appeal
24 February 2014
[2014] EWCA Civ 183; [2014] P.N.L.R. 20
Subject:
Breach of Trust – Causation – Forgery – Mortgage Fraud – Solicitors’ powers and duties – Strict Liability
Summary:
Where a trustee applies for relief from liability for his breach of trust, he must prove that there was no sufficiently material connection between his conduct and the beneficiary’s loss, failing which the trustee will not normally be entitled to relief.
Abstract:
In May 2009, the Claimant (“Santander”) advanced £150,000 plus fees to a borrower, Mr Vadika, in connection with his purported purchase of a property owned by Ms Emma Slater. The Defendant (“RA Legal”) acted for Mr Vadika. Solicitors called Sovereign Chambers LLP (“Sovereign”) represented to RA Legal that they were instructed by Ms Slater upon the sale.
Santander’s advance was added to a £50,000 contribution from Mr Vadika, and the total purchase monies of £200,000 were transferred to Sovereign’s client account on 28th July 2009, to be held to RA Legal’s order. On 29th July 2009, RA Legal released the funds to Sovereign’s use, and Sovereign purported to complete the sale that day.
The purported sale was in fact fraudulent. Although Ms Slater was the true owner, she had not instructed Sovereign and was unaware of the purported sale. Sovereign was a genuine firm of solicitors with apparently good standing on the SRA website, but it did not apply the purchase monies for the purpose of completion and instead the funds disappeared from its client account.
Santander brought a claim against RA Legal for breach of trust. At first instance, Andrew Smith J followed the decisions of the Court of Appeal in Davisons (Solicitors) v Nationwide [2012] EWCA Civ 1626 and AIB Group (UK) PLC v Mark Redler & Co [2013] EWCA Civ 45, and held that RA Legal had indeed been in breach of trust when it released Santander’s advance on 29th July 2009, even though it did so innocently. However, he went on to grant RA Legal relief from liability for that breach of trust under section 61 of the Trustee Act 1925. The Judge’s central conclusions in so holding was that no act or omission by RA Legal had been sufficiently causally connected with Santander’s loss, because the real cause of the loss had been Sovereign’s fraud; and that, even if it had been connected to the loss, the conduct did not amount to fault on RA Legal’s part that was sufficiently serious, or involved such a departure from ordinary and proper standards, as to cut them off from the court’s discretion to relieve them of liability.
Santander appealed on the basis that the findings of breach of trust were too narrow, and against the grant of relief under section 61. RA Legal cross appealed against the finding that there had been a breach of trust, contending that there had been no breach of trust at all.
The leading judgment was that of Briggs LJ; the Chancellor agreed with Briggs LJ’s judgment before adding a few passages of his own, and Proudman J agreed with both judgments.
Faced with Davisons and the earlier Court of Appeal decision in Lloyds TSB PLC v Markandan & Uddin [2012] EWCA Civ 65, RA Legal could do little more than preserve for argument in the Supreme Court its submission that there had been no breach of trust at all. It is understood that Santander has now applied for permission to appeal to the Supreme Court, but no decision on that application has yet been published.
Turning to the first part of Santander’s appeal, the question was whether RA Legal had committed a breach of trust on 28th July 2009, when it transferred the advance to Sovereign’s account pending completion, on terms that Sovereign was to hold the advance to RA Legal’s order. The Court of Appeal held that the purchaser’s solicitor has no implied authority to transfer the advance to the client account of any other solicitor than the firm which is in fact acting for the owner and intending vendor of the Property upon which the lender is to obtain a charge on completion. Accordingly, the earlier transfer on 28th July 2009 had been a breach of trust.
The second part of Santander’s appeal was centrally concerned with the type of connection which must exist between the solicitor trustee’s conduct and the loss of the trust property (the advance), before the solicitor trustee will be disentitled from claiming relief under section 61. Briggs LJ held that the test was clearly not one of strict causation or even “but for” causation, yet there had to be a connection of relevance:
“28… it seems to me that some element of causative connection will usually have to be shown, and that conduct (even if unreasonable) which is completely irrelevant or immaterial to the loss will usually fall outside the court’s purview under section 61…”
In his short supplemental judgment, the Chancellor agreed with Briggs LJ that the test of connection was certainly not a “but for” causation test, and formulated the trustee’s burden under section 61 as being to satisfy the Court:
“…that despite his or her unreasonable conduct, none of that conduct played any
material part in the occasioning of the loss… that his or her unreasonable conduct did not materially contribute to the opportunity for the loss or did not materially increase the risk of such loss”
It therefore appears that there must exist a connection of materiality between the conduct complained of and the loss of the trust property, which may fall short of satisfying the “but for” test, but which must have at least materially increased the opportunity or risk for the loss to occur.
The Court of Appeal went on to allow Santander’s appeal against the grant of relief to RA Legal on the facts. Firstly, Briggs LJ stated that, rather than considering each specific complaint about the trustee’s conduct individually, the question was whether the trustee’s relevant conduct was reasonable, taken as a whole. Briggs LJ commented that he felt the Judge had taken “an altogether too lenient view of the seriousness of R.A. Legal’s numerous departures from best practice…”
Secondly, when applying the material connection test, the Court of Appeal held that various failings by RA Legal did have a sufficient connection with the loss to justify withholding relief. The Court was particularly struck by the fact that RA Legal did not obtain a written or any other undertaking from Sovereign to obtain a discharge of the relevant existing charge, nor any written evidence of an obligation upon Sovereign to return the advance upon demand if completion did not occur.
Thirdly, there is a sense from the Court of Appeal’s decision of a desire to encourage (or perhaps enforce) best practice in conveyancing transactions. Briggs LJ stated:
“99. A conclusion that, but for those aspects where R.A. Legal’s conduct fell seriously and unreasonably short of best practice, the fraud would probably have succeeded by no means leads to the result that those parts of R.A. Legal’s conduct are unconnected with the loss. They all represent departures from a sophisticated regime, worked out over many years, whereby risks of loss to lenders and lay clients are minimised, even if not wholly eradicated. Where solicitors fail, in serious respects, to play their part in that structure, and at the same time are swindled into transferring and then releasing trust money to a fraudster without authority, they cannot expect to persuade the court that it is fair to excuse them from liability, upon the basis that they have demonstrated that they have in all respects connected with that loss, acted reasonably.”
Comment:
Pending further consideration of the issues raised in this authority by the Supreme Court, the present position is that a careless solicitor can no longer expect to secure relief in a fraud case where his acts or omissions were not the direct cause of the loss. If the carelessness had a material bearing upon facilitating the risk of the fraud succeeding, the Court will be unlikely to grant the lifeline.
Simon Hale
4 New Square