Solicitors acting for lenders may pay a heavy price for carelessness.
The Court of Appeal has confirmed that lenders who are defrauded may be able to recover all their losses from their solicitors In 2007, the Defendant solicitors acted upon behalf of the Bank in relation to a loan of £742,500 to a Mr Davies to be secured on a property in London. The loan was part of an elaborate fraud as the owners of the property were abroad and had no involvement in any sale and the Bank obtained no security as the fraudsters simply disappeared with its money. The dispute between the Bank and the Defendant centred on who should bear responsibility for the complete loss of the sums advanced by the Bank?
The background to the loan was that a mortgage application was submitted to the Bank on behalf of a Mr Davies with all necessary supporting documentation. A loan of £977,500 was originally sought on the basis of a purchase price of £1,150,000 for the property. Mr Davies was represented to be paying the balance of £172,500.
Valuers were instructed and the fraudsters somehow organised an inspection of the property but the valuers only thought it was worth £825,000. Accordingly, the Bank was only prepared to lend £742,500, being 90%. Extraordinarily, the Bank was content to proceed with the loan on being told the price had been reduced by £325,000 to £825,000. They told the Defendant solicitors nothing about this background.
The fraudsters then held themselves out as being the branch office in London of a genuine firm of solicitors in Luton. They claimed to be acting for the owners of the property and corresponded with the Defendant using forged notepaper and provided a fictitious bank account to which the Defendant eventually remitted the loan monies. They told the Defendant that Mr Davies had paid the balance of the purchase price direct to them.
The Defendant was at fault in many respects in the way it dealt with the transaction. It should have been very suspicious on being told the balance of the price had been paid direct by Mr Davies and it failed to obtain all relevant documentation before completion. However, its case was that the Bank was clearly at fault as well and the Bank should bear some of the responsibility for agreeing to lend in the first place.
The Bank argued that the release of the funds by the Defendant constituted a breach of trust as their terms provided that monies could only be released on a proper completion of the purchase. On this basis, the Defendant would have to bear all the loss as any contributory negligence by the Bank is irrelevant where there was is a breach of trust, rather than just negligence or breach of contract. The Defendant said that the funds were only held on trust for the purpose of the purchase and that, even though there was no genuine transaction and the Bank obtained no security, the funds had only been released for the purported completion of the purchase so there was no breach of trust.
At first instance, the Judge held the Defendant liable for breach of trust as it had released the funds without obtaining all the requisite documentation from the owners’ supposed solicitors in relation to the purchase and transfer of the property. The Court of Appeal, however, considered that the vital issue was whether the completion was genuine or not? The solicitors were only entitled to release the funds for the purpose of completion of a lawful contract. They could not claim there was no breach of trust as they had used the funds to complete a fictional purchase where there had never been any contract to complete in the first place.
The Court said there was nothing unfair in holding solicitors wholly liable for breaches of trust resulting from reliance on fraudulent representations or forged documents as a competent solicitor could always seek to rely on section 61 of the Trustee Act 1925 which gives a Court the discretion to relieve solicitors from such a liability where they have acted with reasonable care. Unfortunately for the Defendant solicitors in this case, they could obtain no such relief as they had been too careless.
Accordingly, notwithstanding the Bank’s failures in proceeding with the loan notwithstanding the lack of any explanation for the sudden and substantial price drop, it was entitled to full repayment of the loan monies and interest thereon.