UK: "Mercy Comes At A Price": Court Of Appeal Bucks Trend On Granting Relief From Liability For Breach Of Trust

Last Updated: 19 March 2014
Article by Tom White

The Court of Appeal has recently handed down its judgment in the case of Santander UK plc v R.A. Legal Solicitors (2014).

The court examined the threshold for breach of trust claims and the scope of its discretion to grant relief from liability to a trustee in breach, but who has acted honestly and reasonably, under s.61 of the Trustee Act 1925 ("s.61").

Background

In May 2009 Santander UK plc (formerly Abbey National) ("Abbey") agreed to lend GBP 150,000 for the purchase of a residential property. R.A. Legal were instructed to act for both the purchaser and Abbey in the transaction.

R.A. Legal were advised that Sovereign Chambers LLP ("Sovereign") were the vendor's solicitors. Having been put in funds by Abbey, R.A. Legal transferred the funds to Sovereign's client account on 28 July 2009 and were led to believe that the purchase completed the following day.

It transpired that Sovereign's purported conveyancer was a fraudster and no part of Abbey's or the purchaser's money was transferred to the owner of the property (who had not retained Sovereign nor agreed to sell the property to the purchaser). The money subsequently disappeared from Sovereign's account on 13 August 2009. A claim was brought against R.A. Legal for breach of trust because R.A. Legal released the funds to Sovereign without completion ever taking place.

First instance decision

The High Court concluded that R.A. Legal had acted in breach of trust in releasing Abbey's money to Sovereign without a valid completion taking place.

The judge also found that there had been certain deficiencies in R.A. Legal's work:

  • The Certificate of Title contained a deliberate misrepresentation that investigation of title had been concluded
  • There was a failure to seek Abbey's instructions arising from a delay in completion

However, the judge rejected a complaint that R.A. Legal had paid the funds to Sovereign in circumstances where they had failed to obtain written confirmation (by adoption of the Completion Code or in any other way) of Sovereign's obligation to hold the money to R.A. Legal's order pending exchange and completion, or to return it if this did not properly take place. He found that it was implicit that the money would be held by Sovereign in this way. The judge also declined to criticise R.A. Legal for releasing the funds to Sovereign against an undated legal charge, or for the firm's delay, after they had parted with the funds, in alerting Abbey to the issues which had arisen with completion.

In any event, the trial judge considered that the loss suffered by Abbey had no sufficient connection even with those criticisms of R.A. Legal's conduct which he was prepared to accept (and the judge also did not regard the criticisms of R.A. Legal as sufficiently serious, or as involving such a departure from ordinary and proper standards, as to cut the defendants off from the court's discretion to relieve them of liability under s.61). Abbey's loss was in substance caused by the fraud of Sovereign, for which R.A. Legal could not fairly be treated as responsible. For these reasons the trial judge granted R.A. Legal relief from liability under s.61.

Appeal

Upon Abbey's appeal, the Court of Appeal agreed with the trial judge that there had been a breach of trust. However, the Court of Appeal considered that in order to discharge the burden of proving that he acted reasonably for the purposes of s.61, a solicitor will need to be able to demonstrate that the whole of his or his firm's conduct sufficiently connected with the loss satisfied the reasonableness test. The trial judge had, the Court held, applied too lenient an approach, both as to the reasonableness of R.A. Legal's "numerous departures from best practice" and as to the necessary causal connection between such failures and Abbey's loss. The Court concluded that R.A. Legal could not demonstrate that all of the conduct which was criticised was reasonable and/or sufficiently unconnected to the loss.

In particular (and amongst other deficiencies in R.A. Legal's conduct which the Court regarded as serious but accepted were ultimately irrelevant to Abbey's loss), R.A. Legal had neither an undertaking from Sovereign to discharge the prior mortgage on or after completion, nor written confirmation that, until completion had properly occurred, R.A. Legal could demand the immediate return of the completion money. These failures arose as a consequence of R.A. Legal not identifying defects in Sovereign's responses to requisitions or obtaining Sovereign's commitment to the adoption of the Completion Code. R.A. Legal had also failed to appreciate that completion had gone wrong when no confirmation that the prior mortgage had been discharged was received from Sovereign with its post-completion letter alongside the forged contract.

All that was required in terms of a causal link, for s.61 relief to be declined, was "some element of causative connection" between the unreasonable conduct and the loss. "But for" causation was not required. Conveyancing practice had developed over many years so as to afford reasonable protection against fraud; conduct which departed from this practice should not be excluded as irrelevant simply because a pre-planned fraud such as that which was perpetrated in this case would probably have been successfully achieved even if the defendants had acted reasonably in all respects. A sufficient causal link existed here because, amongst other things, R.A. Legal's failings, departing from established conveyancing practice, had placed Abbey's money into the effective control of a fraudster. In any event, the Court commented, those failings " formed part of a larger picture of the shoddy performance of a conveyancing transaction from start to finish", such that "it would not be fair to excuse the firm from liability, in whole or in part".

The Court of Appeal therefore held that since R.A. Legal had not shown that they had acted reasonably in all respects connected with Abbey's loss, and in any event in view of their deficient performance of the retainer as a whole, the discretion to relieve the firm of liability for breach of trust should not have been exercised.

The Court also emphasised that it is necessary to have regard, in considering the granting of relief under s.61, to the effect of the grant of relief not only upon the trustee, but also upon the beneficiaries. Briggs LJ, giving the leading judgment, noted that relief under s.61 is "often described as an exercise of mercy by the court", but continued:

"In my judgment the requirement to balance fairness to the trustee with a proper appreciation of the consequences of the exercise of the discretion for the beneficiaries means that this old-fashioned description of the nature of the section 61 jurisdiction should be abandoned. In this context mercy lies not in the free gift of the court. It comes at a price."

Comment

This judgment bucks the preceding recent trend of decisions which have been more lenient towards solicitors who have been unwittingly caught up in frauds (including Nationwide v Davisons (2012, Court of Appeal) and Ikbal v Sterling Law (2013, High Court)). The Court of Appeal's comments make it clear that, even if only some deficiencies in the solicitor's work were causally connected to the claimant's loss, and notwithstanding that the absence of these would not have prevented the fraud on a "but for" basis, the s.61 discretion will not be triggered. Further, the judgment demonstrates that, regardless of questions of causal connection, if the solicitor's work as a whole was sub-standard the court may be less willing to exercise its discretion to relieve the solicitor from liability for a breach of trust.

The outcome in this case therefore emphasises all the more the need for appropriate processes and checks, in accordance with established conveyancing practice, to be implemented by conveyancers so as to minimise the risk of such circumstances arising and maximise the likelihood of relief being granted.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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