Santander UK Plc v R.A. Legal Solicitors [2014] EWCA Civ 183 (24 February 2014)

Introduction
Whether and to what extent a trustee can be relieved from liability for breach of trust is, excusing a play on words tortuous. This recent case before the Court of Appeal may be seen by some as an exercise of mercy at a price to others.  
Context here is key. Lenders facing loss through mortgage fraud often seek a remedy against solicitors for breach of trust rather than the traditional contractual/tortuous claim and importantly by so doing, seek to avoid any finding of contributory negligence.  
The judgment is lengthy and the reader is referred to the same. This article will focus on the courts discretion to grant trustee’s relief pursuant to section 61 of the 1925 Act.
Historical Background
From at least the late nineteenth century the law has provided in limited terms, a discretionary relief to the strict liability of trustees. That relief was found in section 3 of the Judicial Trustee Act 1896 and now Section 61 of the Trustee Act 1925, a section which has been debated before the courts in a number of key lender cases. 
Section 61 of the 1925 Act provides 
“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.”
From the outset it is vital to grasp and fasten on to the correct test. The trustee bears the burden to prove two key issues. That they have acted honestly and reasonably.
The Court of Appeal noted that in the context of mortgage fraud, the court had interpreted section 61 as requiring the trustee to prove that he acted reasonably only in relation to those aspects of his conduct which are connected with the lender’s loss. Sir Andrew Morritt C. noted in Davisons (Solicitors) v Nationwide [2012] EWCA Civ 1626  at paragraph 48:

"The section only requires Mr. Wilkes (the trustee) 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 must at least be connected with the loss for which relief is sought and the requisite standard is that of reasonableness not of perfection."

This case followed a number of high profile lender claims against solicitors (Lloyds TSB PLC v Markandan & Uddin [2012] EWCA Civ 65 Davisons (Solicitors) v Nationwide [2012] EWCA Civ 1626  and AIB Group (UK) PLC v Mark Redler & Co [2013] EWCA Civ 45) . 

The Solicitor as Trustee
As a general point, solicitors who hold client monies do so on trust for the client. Lord Browne-Wilkinson in Target Holdings v Redfern [1995] UKHL 10 (20 July 1995) observed:
“Thus, the circumstances under which the solicitor can part with money from client account are regulated by the instructions given by the client: they are not part of the trusts on which the property is held. I do not intend to cast any doubt on the fact that moneys held by solicitors on client account are trust moneys”
Lord Justice Patten in AIB Group (UK) Plc v Mark Redler & Co Solicitors [2013] EWCA Civ 45 (08 February 2013)  noted that it was common ground that  a solicitor who parts with client money before completion without authority commits a breach of trust.   As is often the case this was a claim involving two innocent parties.
The Core Facts
The facts of the Santander case were straightforward:
1. The Claimant lender agreed to lend monies to a borrower to assist in the purchase of a property in London. Both parties instructed the defendant to act.
2. The Defendant was informed of the name of the vendor of the Property and of the Vendor’s solicitors. 
3. The defendant sent a Certificate of Title to the claimant requesting funds in time for an anticipated completion. It was an unqualified certificate (without which the claimant would not have provided the funds) but, contrary to what the Certificate stated the defendant had not at that stage completed its investigation of title. There was outstanding its inspection of a transfer of the Property.
4. As was standard the defendant sent requisitions on title to the vendors solicitors. The reader is referred to the judgment for the details. Materially the vendor’s solicitors simply replied “confirmed” in respect of the requisition as to “If an undertaking is proposed, what are the suggested terms on it?" The vendor solicitors also  failed to answer  the standard requisition regarding in whose favour the bankers draft was required and whether the vendor would comply with  the Law Society’s Code for the completion by Post (1998 edition) 
5. Having been put in funds by Abbey and the purchaser the defendant transferred monies to the vendor’s solicitors and the transaction apparently completed the following day, simultaneous exchange of contracts and completion being confirmed by a telephone conversation between the two firms.
6. The defendant received by post from the vendor’s solicitors a contract purportedly signed by the vendor (a forgery), but no other document. No executed discharge of a charge as the reply to Requisition 4 (B) suggested that it should have been.
7. The transaction did not complete. The vendor, who was the registered proprietor of the Property, never instructed solicitors and never agreed to sell it to the purchaser. The vendor was unaware that it had been purportedly sold on their behalf.
8. Although the vendor’s solicitors were a firm of solicitors in good standing with the Law Society, they were fraudsters in this transaction. 
9. No part of the purchase money was used either to pay the vendor or to discharge the mortgage which they had granted over the Property. The purchase monies disappeared from the solicitors client account and was not traced or recovered. 
At first instance and following  Davisons (Solicitors) v Nationwide [2012] EWCA Civ 1626 and AIB Group (UK) PLC v Mark Redler & Co [2013] EWCA Civ 45, the court held that the whilst  the  defendant  had been in breach of trust in releasing monies, albeit in the genuine belief that completion was taking place, nonetheless the defendant  should be wholly relieved from liability under section 61 of the 1925 Act. The claimant appealed.
The Issues
1. Central to the claimant’s appeal was:
i. In releasing the funds to the vendor’s solicitors, the defendant relied solely on the replies to the requisition on title. The replies did not provide where there was no subsequent exchange of contract or completion.
ii. When the defendant released the claimant’s funds to the vendor’s solicitors prior to exchange of contracts, there was no letter notifying the vendor’s solicitors that the money had been released or any requirement that the funds were to be held to the order of the Defendant.
2. The claimant submitted that the defendant had no authority under the terms of the trust to release any monies to the vendor’s solicitors as the other solicitors were not acting for the vendor, and was neither able nor intending to complete the transaction.
3. As to section 61 of the 1925 Act, the Court of Appeal provided some very useful guidance:
i. To invoke section 61 requires two main stages. First, the trustee must show (the burden is on him) that he has acted both honestly and reasonably. The relevant action must at least be connected with the loss for which relief is sought and the requisite standard is that of reasonableness not of perfection.
ii. In the context of mortgage fraud, lenders have tended to focus upon the second requirement, and to dispute it by citing examples, of the handling of the transaction where the solicitor departed from standard or best practice.
iii. There are competing policy issues.  On the one hand, the court should be slow to gloss the words of a statute, especially where it confers a broad discretion. On the other hand, mortgage fraud occurs in a business context  where those advising the lender and the solicitors, and their respective insurers, need to have reasonable clarity as to the application of section 61, so as to avoid every case going to trial, with a full investigation of all potentially relevant circumstances, so as to obtain a discretionary decision.
iv. Some element of causative connection will usually have to be shown, and conduct (even if unreasonable) which is completely irrelevant or immaterial to the loss will usually fall outside the court’s scope under section 61. 
v. There should be caution against an over-mechanistic application of the requirement to show the necessary connection between the conduct complained of and the lender’s loss. 
vi. The second stage of section 61 the discretionary element, consists of deciding whether the trustee ought fairly to be excused for the breach of trust. Regard must  be had to the effect of the grant of relief not only upon the trustee, but also upon the beneficiaries: see Marsden v Regan [1954] 1 WLR 423,
vii. In order to discharge the burden of proving that he acted reasonably under section 61, a solicitor will need to be able to provide a paper-trail demonstrating that the whole of his or his firm’s conduct sufficiently connected with the loss satisfied the reasonableness test.
The Decision
As noted above the transfer of the money to the vendor’s solicitor’s client account was a breach of trust. In broad terms the issue was whether the defendant was entitled to relief under section 61 as found by the judge at first instance. There was no suggestion, at trial or on appeal, that the defendant had acted otherwise than honestly in relation to any aspect of their conduct connected with the claimant’s loss.
The failings of the defendant  (summarised below) formed part of a larger picture of the poor  performance of a conveyancing transaction from start to finish, which left the Court of Appeal in no doubt that it would not be fair to excuse the firm from liability, in whole or in part.
The Court of Appeal noted that at first instance the court had taken too lenient view of the seriousness of the Defendant’s numerous departures from best practice. That arose from its request for the funds from the claimant until they were misappropriated from the vendor’s solicitors client account. 
The Court of Appeal highlighted the following failures: 
1. The Certificate of Title contained a deliberate misrepresentation that investigation of title had been concluded. 
2. There was a failure, before transferring the completion money, to obtain written confirmation (by adoption of the Completion Code or in any other way) of the vendor’s solicitor’s obligation to hold the completion money to the defendant’s order.
3. There was a failure to give proper consideration to the implications of the vendor’s answer to Requisition 4(B), when no executed discharge of the prior mortgage arrived with the post-completion letter. The defendant failed to appreciate that this omission meant that completion had not taken place
4. The correspondence between the defendant and the vendor’s solicitors appears to have demonstrated a lamentable state of muddle. The failure to give the claimant any warning that its money was at risk until late November was wholly unreasonable.
Conclusion
This case follows a number of high profile lender claims where solicitors have sought to invoke section 61 of the 1925 Act. However this case was crucially different to the other cases in that the recipient of the trust fund was a firm of solicitors (even though acting fraudulently) rather than an imposter. 
A very subtle point which may have been overlooked is that Lord Justice Briggs accepted counsel for the claimant’s contention that it is not always the case that a purchaser’s solicitor has a lender’s implied authority to transfer the trust money pending completion 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. The vendor’s solicitors did not fit that description. It was not acting for the owner of the Property, had no instructions either to contract for or complete its sale and had no intention of using any part of the money transferred to its client account for the purpose of discharging the existing first mortgage on the Property. 
The Court of Appeal appears to be re opening the issue of breach of warranty of authority on the basis that a solicitor is representing that they act for a party. 
The final words go to Lord Justice Briggs and a stark warning to lawyers.
“In the context of a routine conveyancing transaction, the incidence of the burden of proof may frequently be crucial to the outcome. This is because such transactions are, in the working life of those involved, so routine and so frequent that a specific recollection of any part of one of them, not precisely recorded in contemporaneous correspondence, documents or attendance notes, will rapidly fade. Thus, if the reasonableness of the solicitor’s conduct depends on anything not so recorded, the solicitor may simply be unable to discharge the burden of proof on that aspect of the matter, due to a perfectly understandable inability to recollect the detail.”
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