The Law Society of England and Wales v Schubert Murphy (a Firm) [2017] EWCA Civ 1295 (25 August 2017)

The risk of fraud in conveyancing is widely known and publicised. Specifically, fraudsters posing as solicitors acting for a party in a transaction. A recent case raises a key point.

The Law Society has issued various practice notes including “Mortgage Fraud” 31 July 2014.  Paragraph 4.3 notes:

Fraudsters may pose as a solicitor or a conveyancer acting for either party to add greater legitimacy to the transaction. If you do not know them, you should check the recognised directory of their professional body.

The practice note has a link to Find a Solicitor (FAS) and the Directory of Licensed Conveyancers. Practitioners will also be familiar with the Council of Mortgage Lenders (CML) handbook which requires solicitors who are not familiar with the seller’s regulated legal representatives to verify that they are currently on record with the Solicitors Regulation Authority (SRA), Council for Licensed Conveyancers (CLC) or other legal regulatory body.

Carrying out a search using the FAS is commonplace. However recently the Courts have had to consider the key issue as to whether the Law Society has any liability if the result of the search is incorrect.

This article will examine the key facts, the issues and the Courts decision. In simple terms does the Law Society owe any duty of care to a party who uses the FAS facility?

At the outset, it is important to note that the issue of whether any duty of care if any is owed by the Law Society is yet to be determined. The Law Society was unsuccessful in striking out the clam at this stage as it was unable to show under the court rules that the claim disclosed no reasonable grounds for bringing the claim.

The Facts

Solicitors were instructed by a client to act in relation to a purchase of a property in Hertfordshire (the Purchaser’s Solicitor). The Purchaser’s Solicitor carried out a search of the Vendor’s Solicitor using the FAS facility on the Law Society’s website. The search result confirmed the existence of the Vendor’s Solicitor and the firm. Accordingly, the Purchaser’s Solicitor relied upon the information contained in the search on the basis the Vendor Solicitor was genuine.

The Vendor’s Solicitor purportedly gave an undertaking to discharge an existing mortgage over the property. The Purchaser’s Solicitor transferred the deposit and completion monies to a bank account nominated by the Vendor’s Solicitors. However, the mortgage was not discharged and it later transpired that the monies had been transferred to a fraudster.

An investigation by the SRA established that the fraudster had stolen the identity of a retired solicitor.

The Purchaser’s Solicitor claimed damages for negligence and for a contribution under the Civil Liability (Contribution) Act 1978 in respect of losses suffered by them and their client as a result of the FAS facility. It is worth noting that the Law Society refused to compensate the Purchaser’s Solicitor and their client from the Solicitors’ Compensation Fund on the basis the purported ‘solicitor’ was not in fact a solicitor.

At first instance, the Law Society were unsuccessful in striking out the claim by the Purchaser’s Solicitor and appealed to the Court of Appeal.

Regulations

It is important to briefly examine the statutory and regulatory requirements which govern the Law Society’s responsibility for registering solicitors.

A number of key points arise:

  1. The Law Society regulatory responsibilities in the Solicitors Act 1974 are delegated to the SRA.
  1. Section 10A of the 1974 Act requires the Law Society to keep a register of all solicitors who hold practising certificates.
  1. At the material time, the Solicitors (Keeping of the Roll) Regulations 1999 and the SRA Practising Regulations 2009 were in force. Regulation 2B of the 1999 Regulations requires the Roll to be kept in electronic form.
  1. Regulation 2D of the 1999 Regulations provided that certain entries on the Roll (name, registration number, date of admission, principal place of business, suspension or striking off) must be available for inspection by any member of the public during office hours without charge, except that the SRA may in exceptional circumstances, and if it considers that to do so would be in the public interest, withhold the address of a solicitor’s principal place of business.

The first instant decision

The Judge refused the Law Society’s application to strike out the claim by the Purchaser’s Solicitor on a number of grounds:

  1. The decision of the Privy Council in Yuen Kun Yeu v Attorney-General of Hong Kong [1988] AC 175 did not hold that in no circumstances can a regulator be responsible for economic loss caused by a regulated person or company. Rather a financial regulator owed no duty to see that members of the public minded to deposit money with a regulated deposit taking company did not suffer loss through the affairs of such companies being conducted in a fraudulent or imprudent fashion.
  1. It was not alleged in this case that the Law Society failed to exercise due care in an assessment of the honesty or competence of the alleged Vendor’s Solicitors or to have made any representation to anyone about their honesty or competence. Rather the Law Society entered the Vendor’s Solicitors name on the Roll and Register of Solicitors as entitled to practise when, if they had exercised proper care, they would not have done so and, having done so, told the Purchaser’s Solicitor and their client that the Vendor’s Solicitor was so entered.
  1. The Law Society accepted the first part of the three-part test in Caparo Industries plc v Dickman [1990] 2 AC 605, reasonable foresight of loss to the claimant, was satisfied because the loss was foreseeable. However a factual enquiry would be necessary to ascertain whether the third part of the test – fairness, justice and reasonableness was established.

The Court of Appeal’s Decision

In dealing with the key issue of the Law Society’s alleged duty, the Court noted:

  1. A regulator such as the Law Society does not generally owe a duty of care in relation to the way it carries out its regulatory functions. However, in making information available through the FAS facility, this is arguably an additional step going beyond what it was required to do, and thus providing an additional but voluntary service.
  1. The Law Society specifically encouraged the use of the facility to find solicitors rather than licensed conveyancers or other professionals and did not recommend any other checks. By choosing to provide the facility and in the light of the nature of the facility, it is arguable that the actions of the Law Society, which has control over the registration of solicitors, created the risk that it would be relied on and the opportunity for fraud. It did so in a way going beyond scope of its statutory and regulatory obligations under the 1974 Act.
  1. The case may fall within one of the situations recognised by Lord Goff in Smith v Littlewoods Organisation Ltd. [1987] AC 241 where a defendant may be held responsible where the direct and immediate cause of the claimant’s loss was the fraud of a third party. That depended on a fuller consideration of the facts.
  1. The circumstances surrounding provision by the Law Society of the FAS facility are, such that it cannot be said that there is no prospect of it being found at trial that it did assume responsibility in relation to the information provided by using the facility.
  1. As to the threefold test in Caparo, the Court of Appeal had to consider whether it can be said that there was a need for a trial as to whether:

I. There was sufficient nexus between the Law Society and the Purchaser’s Solicitors,

II. The online request for information established a relationship of sufficient proximity between them,

III. It was fair, just and reasonable to impose a duty of care in the circumstances.

  1. In the absence of findings of fact, it was hard to say that in no conceivable circumstances could there be a relationship of proximity between the Law Society and the Purchaser’s Solicitor. The answer to this question demands consideration of the purpose of the FAS facility and the way it is presented to individuals

Conclusion

It is important that the context of this case is understood. The Law Society was seeking to strike out at an early stage the claim for alleged negligence by the Purchaser’s Solicitor as a result of the FAS search. The Court of Appeal were not prepared to do so for the reasons set out above.

The Court held it was necessary to undertake a full factual inquiry into the consequences of the imposition or not of a duty on the Law Society’s use of the FAS and, in particular, the implications for the security of current conveyancing practice.

There is clearly a policy issue here. The Court of Appeal noted that, where a party checks the FAS and believes a person is backed by insurance or the Solicitors’ Compensation Fund but in fact is not a solicitor, the victim would unknowingly have assumed a higher risk in going ahead with the transaction, and, in the event of fraud, would suffer loss. The issue of breach of trust and any relief that a solicitor may be entitled to pursuant to the Trustee Act 1925 section 61 was noted by the Court as part of the policy issue as to who bears the loss.

The profession no doubt awaits the outcome of this decision with great interest. The wider implications are of course key to other online service providers.

Anis Waiz has over 18 years of experience in Commercial, Banking and Finance Litigation, and he specialises in claims for the alteration of Register before the Land Registry arising from mortgage and conveyancing fraud. Having previously acted as a Group Legal Director for a substantial secondary lender, Anis has direct experience of the demands of a business as a client and adding value. Spratt Endicott Solicitors is a nationally recognised law firm with offices in Banbury, Brackley, Bicester and Buckingham providing a full range of legal services to commercial and private clients.

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