In Target Holdings Ltd v Redferns  1 AC 421, the House of Lords proceeded on the basis, first, that the money given by the finance company lender to its solicitors was “to be held on a bare trust and transferred to the mortgagor once the property had been purchased and charged to (it)” and, secondly, that the payment away of some of the majority of that money “before the prospective mortgagor had purchased the property” and “without having received any charge on the property” amounted to a breach of trust. This form of liability is not fault-based.
The incidence of mortgage fraud (including identity fraud)
From the Law Society’s practice note on Mortgage Fraud:1
“1.2 What is the issue?
Criminals will exploit weaknesses in lending and conveyancing systems to gain illegitimate financial advantage from the UK property market. This can be either:
- Opportunistic action using misrepresentation of income or property value to obtain greater loans than a person is entitled to organised crime syndicates overvaluing properties, using false identities and failing to make any mortgage repayments.
- A solicitor will be involved in most property transactions undertaken in the UK. You can find yourself criminally liable if your client commits mortgage fraud, because of the extension of the definition of fraud in the Fraud Act 2006 and the anti-money laundering regime in the UK. You can be liable even if you were not aware of the fraud or actively participated in it.
Courts will assume a high level of knowledge and education on your part. They will often be less willing to accept claims that you were unwittingly involved if you have not applied appropriate due diligence.”
From the Council of Mortgage Lenders’ webpage “Fraud: awareness and prevention”:
“Hijacking an individual’s identity and then applying for credit in the victim’s name is a major concern. Mortgage lenders are working alongside other lenders and their trade associations on measures to protect consumers’ identity, both by increasing safeguards within firms, educating customers on prevention, and mitigating the effects when identity theft does occur.”
The route to absolution for the innocent, duped conveyancer
As was observed by Lord Browne-Wilkinson in Target, any liability on the part of the solicitors to repay money wrongly paid out of the client account in breach of trust will be “subject to the court’s discretionary power to relieve a trustee from liability under section 61 of the Trustee Act 1925”. The circumstances in which that power can and should be exercised have been the subject of considerable recent judicial scrutiny.
FOR CONVEYANCERS: THERE IS NO SUBSTITUTE FOR READING THE FACTS OF THE RECENT CASES (ALL BUT ONE OF WHICH INVOLVE IDENTITY FRAUD) AS OBJECT LESSONS IN WHAT CAN GO WRONG
FOR LITIGATORS: THE QUESTION OF WHETHER SECTION 61
CONTAINS A CAUSATION REQUIREMENT HAS PROVED CONTROVERSIAL. THE CORRECT PRINCIPLE IS THAT GOOD CONDUCT RELIED UPON BY THE TRUSTEE (SOLICITOR) SHOULD BE RELEVANT, NOT THAT BAD CONDUCT RELIED UPON BY THE BENEFICIARY (LENDER) SHOULD BE CAUSATIVE
Section 61 provides as follows:
“If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same.”
- 14 Oct 10 – Lloyds TSB Bank Plc v Markandan & Uddin  EWHC 2517 (Ch);  PNLR 6 (Mr Roger Wyand QC sitting as a Deputy High Court Judge)
- 9 Feb 12 – Lloyds TSB Bank Plc v Markandan & Uddin  EWCA Civ 65;  2 All E.R. 884 (Mummery, Rimer* LJJ, Sir Mark Potter)
- 24 Apr 12 – Nationwide Building Society v Davisons Solicitors (Ms Catherine Newman QC, sitting as a Judge of the Queen’s Bench Division)
- 12 Dec 12 – Nationwide Building Society v Davisons Solicitors  EWCA Civ 1626;  PNLR 12 (Sir Andrew Morritt C*, Sullivan, Munby LJJ)
- 8 Feb 13 – AIB Group (UK) Plc v Mark Redler & Co Solicitors  EWCA Civ 45,  PNLR 19 (Arden, Sullivan, Patten* LJJ)
- 23 May 13 – Santander UK Plc v R.A. Legal Solicitors  EWHC 1380 (QB);  PNLR 24 (Andrew Smith J)
- 30 Oct 13 – Ikbal v Sterling Law  EWHC 3291 (Ch);  PNLR 9 Nicholas Davidson QC (sitting as a Deputy Judge of the High Court) (permission to appeal granted re section 61 but DBC in the Court of Appeal)
- 24 Feb 14 – Santander UK Plc v R.A. Legal Solicitors  EWCA Civ 183,  PNLR 20 (Sir Terence Etherton C*, Briggs LJ* and Proudman J)
(1) Markandan & Uddin
“The defendant firm of solicitors were instructed by the claimant mortgage lender to act for it on a proposed mortgage loan for the
purchase of a freehold house property with a registered title. The lender and the solicitors were victims of a fraud; the property owners had not agreed to sell their house and the ‘sellers’ solicitors’ were persons pretending to be carrying on practice at a non-existent Holland Park, London, branch office (HPD) of a genuine firm, D. The lender’s instructions included that the defendants were to act in accordance with the Council of Mortgage Lenders’ Handbook for England and Wales (the handbook). The provisions of the handbook included: ‘You must hold the loan on trust for us until completion.’ The defendants sent requisitions on title, including a requisition as to existing mortgages or charges, headed ‘The reply to this requisition is treated as an undertaking’. HPD’s replies stated that vacant possession would be given as soon as completion had taken place; the documents to be handed over on completion would be the transfer, the certificate of discharge of the current mortgage, the charge certificate and the sellers’ part of the contract. They confirmed that they wished to complete by post and undertook to adopt the current Law Society code. The defendants considered that telephone exchange of contracts and completion took place on 4 September 2007. On that date they remitted the loan moneys from their client account to an HPD account. Under the code the defendants ought to have received on the next day the signed part of the vendors’ contract, the executed transfer, the certificate of discharge and the charge certificate. Those documents were not received. On 11 September the defendants requested the signed contract, the transfer and the discharge certificate ‘as per to your undertaking’. HPD’s reply on 18 September referred to telephone conversations and stated that there had been ‘an issue with the lender which has now been resolved’; the writer said he was ‘sending to you the funds for you to forward to our client Holding Account’. The defendants refused to comply with the request without further clarification and stated they could not understand why HPD could not make the transfer itself. They expressed concern about a possible breach of the money laundering regulations. HPD did not reply, but they returned £702,613·25 (the loan moneys, less £5,000) to the defendants’ client account. Following a further exchange of letters HPD sent a fax on 27 September to the effect that the vendors were away until 10 October, ‘I undertake to forward to you the duly signed [transfer] on their return. Kindly remit the funds so that I may complete this transaction and forward you the [certificate of discharge] soon as I receive it’. On 28 September the defendants remitted £702,613·25 from their client account to another HPD bank account. The defendants received none of the conveyancing documents.”
“In December 2008 the claimant lender NBS offered one P a loan of
£187,500 to buy a property in the West Midlands. At the time the registered owner was one SB and the property was subject to a charge to another lender, GEMHL Ltd. The mortgage offer specified the defendant firm as the solicitors acting for P and the mortgagees, and required them to be instructed on the basis of the then Council of Mortgage Lenders Handbook, para.10.3.4 of which required purchasers’ solicitors to hold any loan money on trust for NBS until completion.
In January 2009 the defendants received a letter apparently from the Small Heath office of R, a firm of solicitors with a head office in central Birmingham, signed by one BKG and claiming to be acting for SB as vendor. The letter said R held a deposit from P of £62,995 and that SB would pay stamp duty by way of gift to P. This information was passed by to NBS which reduced the mortgage offer to £185,620 and £995 for fees. Not having dealt with R or BKG, W, the solicitor dealing with the matter at the defendants, checked their existence and office at Small Heath online with the Law Society and the SRA. Both websites confirmed that BKG was a solicitor, and that R had a branch office at Small Heath.
n March 2009 W sent R a transfer form and asked for replies to the standard protocol requisitions TA13. R replied enclosing a copy of the transfer apparently signed by BS and completed requisitions on title, but on the OYEZ form, not TA13 as requested. In requisition 4(A) R confirmed that the GEMHL charge would be paid off, and in 7(D) R agreed to comply with the Law Society’s code for completion by post, under which the vendor’s solicitor undertook to redeem existing charges. On 9 March NBS released £185,620 to the defendants: shortly afterwards contracts were exchanged, P executed the charge to NBS, the defendants remitted the price by CHAPS to R, and P was registered as proprietor.
The GEMHL charge was never redeemed, and no first charge therefore could be registered in favour of NBS. It then transpired that the supposed vendor remained in possession; that R had no Small Heath office, their supposed Small Heath premises having been registered with the Law Society by an impostor; that BKG, while a solicitor, had no connection with those premises; that NBS had been dealing with fraudsters throughout; and the mortgage monies had disappeared.”
(3) Mark Redler & Co
“H2 In 2006 the defendant solicitors acted for both the claimant bank and its borrowers in connection with a remortgage advance of £3.3m on the security of the borrowers’ home, a substantial property in Surrey valued at the time at £4.25m. Their instructions from the bank included a requirement that an existing mortgage in favour of Barclays Bank, covering borrowings of some £1.5 million on two accounts, be discharged out of the advance. On the day of completion, the defendants telephoned Barclays and were given a redemption figure of approximately £1.23m. They paid that amount to Barclays, and the remainder of the advance to the borrowers’ order, having failed through admitted negligence to notice that the figure given related to only one of the two accounts and so was insufficient to redeem the entire Barclays indebtedness. The claimant’s charge was as a result not registered until April 2008, when by agreement with Barclays it was registered as a second charge.
H3 The borrowers defaulted, and in due course were bankrupted. In March 2011, following a collapse in real estate values, the claimant sold the property for £1.2m, receiving after Barclays had been paid off the sum of £867,697.”
(4) Sterling Law
“H3 In July 2010 the claimant I contracted to buy a property in East London, using funds raised from his family. The defendants SL acted as his solicitors. SL paid the price to the vendor’s solicitors, F & Co, adopting the Law Society Code for Completion by Post. F failed to provide a transfer in form TR1 upon payment of the price. Six weeks after the transaction, the Law Society intervened in F’s practice. In fact, the vendor was an impostor, F’s employee was involved in th e fraud , and the funds had been stolen from F’s client account.
H4 In the meantime, I had commenced building works at the property, which was in a dilapidated state, and spent nearly £82,000 on refurbishments. I’s wo rks to the p rop e rty cam e to th e a tte n tion of th e successors in title to the registered owner, who had died 9 years earlier. They belatedly took steps to register their title in September 2010 and brought possession proceedings in October 2010. The proceedings came to I’s notice in November 2010. He initially instructed SL to deal with them but then instructed new solicitors. In the event, he did not contest the possession proceedings and was ordered to pay the owners’ costs. H5 I was unable to recover the price from the supposed vendor, from For any insurers of F.”
(5) R.A. Legal
“H2 In 2009 AN Plc, the predecessors of the claimants S Plc, agreed to make a mortgage advance to V to assist in funding his intended purchase of a property in East London. The defendant firm RAL acted as AN’s and V’s solicitors in the transaction. AN’s retainer stipulated that before completion all mortgage monies were held on trust for AN and that upon completion AN required a fully enforceable first charge executed by all owners of the property.
H3 A solicitors’ f irm S C L L P purported to act as solicitors for the vendor, but had not in fact been instructed by her and she knew nothing of the purported sale. Instead, the individual solicitor with conduct was in fact perpetrating a fraud upon AN (and, probably, V).
H4 On July 13, 2009, the defendants forwarded an unqualified Certificate of Title to AN and requested the mortgage advance for completion, then due on July 17. At that time, the certificate was not true in that the defendants had not completed their investigation of title, but the defendants wished to ensure that the funds were provided by RA in good time. In due course, the defendants completed their enquiries, and no defect in title was identified.
H5 C provided the mortgage advance on July 15, 2009 but completion did not proceed on July 17. The defendants did not notify AN, as required by the terms of the retainer, but instead chased SC to complete. On July 21, 2009 SC returned a forged transfer in the name of the vendor and replies to Requisitions on Title, which were incompletely and confusingly answered, and left it unclear on what basis SC was to receive the completion monies and what undertaking was given to return them if completion did not proceed.
H6 On July 28, 2009 the defendants forwarded the completion monies to SC and on July 29, SC purported to exchange contracts and to complete the purchase. The defendants posted V ‘s signed contract to SC and received in return a contract purportedly signed by the vendor, but which was in fact forged by SC. The defendants did not receive from SC a discharge of the existing charge over the property, but did not follow this up.
H7 On August 4, V contacted the defendants to complain that he had not received the keys from the vendor. The defendants engaged in correspondence with SC, who prevaricated that they were having problems with their bankers, but on 13 August they stated that the transaction had been completed. In fact, on that day the solicitor within SC removed the purchase monies from SC’s client account and stole them.
H8 On September 2, 2009 the defendants received a requisition from the Land Registry regarding the existing charge over the property. The defendants wrote to SC requesting the discharge on September 4 and 14, without reply. On September 17, 2009 the SRA intervened in SC’s practice, which ceased on October 1, 2009. The defendants informed AN of these difficulties on October 23, 2009, but did not recognise that there might have been a fraud until contacted by another prospective purchaser to remove its priority search. The defendants finally informed AN of the fraud on November 19, 2009.”
The section 61 outcome
(1) Markandan & Uddin
“The defendants had failed to obtain relief under s 61 of the 1925 Act because, although they had acted honestly in relation to the transaction they had not acted reasonably in it.
“Per curiam. In circumstances such as those in the instant case, the careful, conscientious and thorough solicitor, 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 still be held to have been in breach of trust for innocently parting with the loan money to a fraudster, but is likely to be treated mercifully by the court on his s 61 application.”
“(2) … relief should be granted under s.61 of the Trustee Act 1925 . Although the defendants had accepted the answers to requisitions in the OYEZ and not the TA13 form, the OYEZ form made it clear that the statements on it fell to be regarded as an implicit undertaking to discharge existing charges, and the defendants could not be said to have acted unreasonably in accepting the apparently genuine answers in that form. Nor was there any other reason why, in its discretion, the court should refuse relief.”
(3) Mark Redler & Co
“52 Although relied upon in its defence the judge expressed no views as to whether MRC should be relieved of liability for breach of trust under s.61 of the Trustee Act and I have some reluctance to express my own view on this matter without the benefit of any findings of fact by the judge on this issue. But in the event nothing turns on this because MRC do not seek s.61 relief in respect of their failure to pay the additional £273,777.42 in order to redeem the Barclays’ mortgage. They accept that their conduct in that respect was both negligent and unreasonable. Since the result of this appeal is that their liability is limited to that sum, together with the calculation of interest made by the judge, it is unnecessary for us to express any view on whether they acted reasonably and ought to be excused from personal liability for releasing the mortgage advance prior to completion.”
(4) Sterling Law
“(4) SL should, however, be excused for their breach of trust under s.61 of the Trustee Act 1925 : it had had acted honestly in its handling of the transaction, and in so far as it had not acted reasonably, such conduct had not been connected with I’s loss, which had already occurred. In the circumstances the lack of a causal link between S’s poor performance and I’s loss made it appropriate to grant relief.”
(5) R.A. Legal
“(3) Under the Trustee Act 1925, s.61, the trustee bore the burden of proving that relief should be granted, but need not show that their conduct had been perfect, rather than reasonable. The court had then to exercise the discretion having regard to the effect upon the trustee and also upon the beneficiaries. The trial judge had therefore erred in treating the burden as being upon the claimants.
(4) Conduct relevant to Trustee Act 1925, s.61, was wider than that which had been strictly causative of the loss in the question, though it did not include conduct entirely causally irrelevant or immaterial.
(5) The defendants’ misconduct in sending the untrue Certificate of Title in order to avoid delay in obtaining the mortgage advance had been serious and bordering on dishonesty, albeit not causally material to the lenders’ loss in this case.
(6) The failure to follow-up the unclear Replies to Requisitions, and the consequent uncertainties regarding the basis on which SC had held the purchase monies and their obligation to return the funds, had been both serious and connected with the loss suffered..
(7) It followed that, although it was likely that the fraud would have succeeded even if the defendants had acted reasonably, their conduct and its connection with the loss suffered had been such that it was not fair to excuse them from liability under Trustee Act 1925, s.61.”
Causation: the high water mark
The “high water mark” of the (incorrect) notion that bad conduct on the part of the trustee (solicitor) must be causative in order for the trustee to be denied relief is to be found in 3 paragraphs of the judgment in Sterling Law. It had been held that the solicitor’s conduct was, at different times either unreasonable or “very unreasonable indeed”:
“234 It is then necessary to consider whether the unreasonable conduct is “connected with the loss for which relief is sought” (taking into account the entire section of the judgment in Nationwide v Davisons dealing with s.61 , and in particular the reference in para. to the unreasonable conduct not causing the loss there). 235 The unreasonable conduct in failing to agree the use of the Postal Code, and the loss, are part of the same history: it was the use of the Postal Code and the remittance of the funds by bank transfer that enabled the fraudsters to access the funds. But that would have happened in any event: if the defendant had expressly agreed the use of the Postal Code the outcome would have been the same. So although the events are part of the same history, there is not the connection between them which I understand to be envisaged by Nationwide v Davisons , 236 The unreasonable conduct on and after 30 July was not connected with the loss, which in my judgment had already occurred.”
Why there is (and should be) no causation requirement
Target is authority for the proposition that, in relation to the equitable rules of compensation for breach of trust, the common law rules of remoteness and damage do not apply. There does, though, have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable: see at 434F per Lord Browne-Wilkinson: As he continued, at 439A-B:
“Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach.”
Section 61 concerns acts which are honest and reasonable rather than those which are dishonest and unreasonable. As a working assumption, an act which amounts to a breach of trust must also be, in a sense, unreasonable. If that unreasonable act (i.e. the breach of trust) has not caused the loss on the basis of the test described in Target, there will be no need for relief as there will be no liability for breach of trust in the first place.
It seems fair to assume that, despite the fact that it does not expressly say so, section 61 should be construed as containing some sort of requirement that any honest and reasonable act relied upon should be in some way connected with the liability in respect of which relief is sought. Plainly, relief should not be granted on the basis that the trustee had acted honestly and reasonably at a wholly different time or in relation to wholly unconnected matters.
That, though, is the obverse of the reasoning in Sterling Law which was based not on the existence of honest and reasonable acts (whether connected or otherwise) but on the unconnectedness of acts or omissions which were either unreasonable or “very unreasonable indeed”: In contrast, in Davisons, Sir Andrew Morritt C observed at  that it was not disputed that section 61:
“imposes three [i.e. and only three] (words inserted) conditions, honesty, reasonableness and the exercise of the Court’s discretion”.
The practical effect of the reasoning in Sterling Law is erroneously to introduce into section 61 by the back door something akin to a common law causation test. There are two objections to this. First, and most importantly, there is no need or basis in logic for such a test. If the loss suffered by the beneficiary fails the causation test described in Target, there will be no liability to be relieved. Secondly, even if there is a need for a test, a common law causation test would be the wrong test: again, see Target.
As has been already observed, the basis for the assumption of a causation requirement was described in Sterling Law at  as:
“the connection between (the relevant action and the loss) which I understand to be envisaged by Nationwide v. Davisons”.
This is a reference to a dictum to be found in Davisons at . There was also a reference to a passage to be found in Davisons at . Neither of these passages justifies the implied insertion in section 61 of a causation requirement.
As for the passage at , it is clear that the act which must be “connected with the loss” is an act which is reasonable (not the unreasonable act which amounts to a breach of trust). This is apparent when the third sentence of  is read in conjunction with the first two sentences:
“The section only requires Mr Wilkes to have acted reasonably. That does not, in my view, predicate that he has necessarily complied with best practice in all respects. The relevant action [i.e. the reasonable action] (words inserted) must at least be connected with the loss for which relief is sought and the requisitestandardisthatof reasonableness not of perfection.”
As to the passage at  the reference to “the unreasonable conduct not causing the loss there” (as it was put in Sterling Law at ) is (i) of no greater significance than as a broad general observation in the context not of any argument about causation but the overall exercise of the discretion and (ii) in any event obiter.
The word “connected” was also used by Andrew Smith J in R.A. Legal at first instance at . He said:
“I conclude that RA Legal acted reasonably for the purposes of s.61 of the Trustee Act 1925. It is sufficient for this conclusion that, as I have found, none of the criticisms made of the RA Legal were connected with Abbey’s loss, but I also conclude that they do not amount to fault on the part of RA Legal 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.”
The reference to “the criticisms of RA Legal” is plainly a reference to five specific complaints which Andrew Smith J had held did not amount to breaches of trust at all. There was, though, also a “technical” breach of trust resulting from the release of funds against the forged transfer. That breach must have been “connected with Abbey’s loss”, first, on the basis of the Markandan & Uddin line of authorities and, secondly, because, if it had not been, there could have been no liability for breach of trust for the court to relieve.
In the Court of Appeal, Briggs LJ:
- made clear, at , that, for the purposes of a decision under section 61, it is the reasonable conduct prayed in aid by the trustee which must be “connected” with the loss (and not the unreasonable conduct prayed in aid by the beneficiary as constituting a breach of trust);
- held, at , that “a strict causation test casts the net too narrowly for the purpose of identifying relevant conduct”;
- held, at , that it is “too restrictive to apply a “but for” test which disregards conduct, however unreasonable, on the basis that even if the solicitor had acted reasonably in that respect, the fraud, and therefore the loss, would still have occurred”.
At , Briggs LJ concluded 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 usual fall outside the court’s purview under s.61.”
At , he cautioned “against an over-mechanistic application to show the necessary connection between the conduct complained of and the lender’s loss”.
In Sterling Law, there could be no question of the unreasonable conduct being properly regarded as “completely irrelevant or immaterial to the loss”. It was conduct which, at the very least, to use the expression employed by Briggs LJ at , “increased the risk that the fraudster would succeed in his plan”.
The conclusion expressed by Briggs LJ at  could perfectly well have been applied almost verbatim to the facts of Sterling Law:
“A conclusion that, but for those aspects where RA 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 RA 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.”