Claims against conveyancers are made by lenders almost every day. Some of the hardest cases to defend involve situations where a conveyancer acting jointly for the borrower and lender receives the mortgage advance, pays it to the seller, only to find that they have been duped by a fraudster. It’s the eventuality that every conveyancer dreads.
Almost all lenders’ standard instructions require that when the mortgage advance is transferred to the conveyancer, that money is held on trust until completion. If the funds are released but completion does not take place or security is not obtained, then the conveyancer has automatically committed a breach of trust — even if the completion or security fails because of the actions of a separate fraudster. The harshness of this ‘strict liability’ is mitigated by a potential defence, under s.61 of the Trustees Act 1925. Essentially, if the conveyancer can prove that it acted honestly and reasonably, then the Court has a discretion to excuse the conveyancer for the breach of trust.
The Court of Appeal recently considered this defence in RA Legal v Santander plc [2014] EWCA Civ 183. Unfortunately, the result is not good news for conveyancers.
RA Legal was jointly instructed by a borrower and a lender in the purchase of a residential property. The seller was Ms Slater, purportedly represented by Sovereign Chambers LLP. In property frauds the fraudster is often an individual posing as the seller of a property that he or she does not own. But in this case Ms Slater was entirely bona fide. Chillingly, the villain here was Sovereign itself, a firm in good standing with the SRA and Law Society. They had never been instructed by Ms Slater, and were dishonestly posing as her conveyancers!
As the judge and the Court of Appeal were at pains to acknowledge, RA Legal was entirely innocent of the fraud. The Court described the transaction as unremarkable. In due course RA Legal transferred the purchase monies, including the mortgage advance, to Sovereign. However, the sale never completed and the pre existing mortgage was not discharged. By the time RA Legal realised that a fraud had been committed, the purchase moneys had disappeared from Sovereign’s account. They were never traced.
In due course the lender brought proceedings against RA Legal for breach of trust, and RA Legal used the s61 defence. The judge at first instance decided that RA Legal had acted honestly and reasonably despite a few departures from best conveyancing practice, and exercised his discretion to excuse RA Legal so that it would not be liable to compensate the lender.
However, the Court of Appeal reversed that decision, deciding that the judge had been too lenient. The Court of Appeal decided that, because it departed from best conveyancing practice, RA Legal had not acted reasonably in all matters sufficiently ‘connected’ with the bank’s loss. The Court of Appeal reasoned that, since conveyancing best practice has been developed in an effort to minimise, even if not wholly eradicate, the risk of losses, departing from it will usually be ‘connected’ with the loss and will rarely be reasonable. RA Legal’s errors included:
a) Issuing an unqualified certificate of title prior to completing their investigations into the title;
b) Releasing the purchase monies to Sovereign prior to completion without obtaining written confirmation that Sovereign would hold the funds to order;
c) Failing to take the lender’s instructions on a delay in completion which occurred;
d) Failing to act promptly when the problems with completion should have become apparent.
The Court of Appeal expressly acknowledged that if RA Legal had not made those errors, the fraud would probably still have succeeded, as Sovereign could have simply given false assurances or documents. But even though RA Legal’s lapses did not actually cause the loss, the Court of Appeal decided that RA Legal had acted unreasonably in a manner connected with the loss. So RA Legal’s defence failed and it had to compensate the lender for its £150,000 lost advance. Interest and legal costs would have increased the total liability.
By making breach of trust claims even harder to defend, this decision is unwelcome news for conveyancers and their professional indemnity insurers. Despite having established that their conduct did not strictly cause the loss and that they acted honesty, RA Legal were still not protected by s.61. From now on it seems likely that more lenders will frame their claims in breach of duty (rather than negligence), and that more of these claims will now succeed.
So is there any way for conveyancers to protect themselves? Well, RA Legal highlights the importance of strictly complying with best practice, the relevant codes and the standard instructions received from lenders. This may sound like basic advice, but under the pressure of day to day practice it can be hard to ensure perfect compliance. Many of RA Legal’s departures from best practice were explained as time-saving exercises, although the court did specifically comment that one departure, issuing a unqualified certificate of title prior to completion of those investigations was ‘bordering on dishonesty’, despite counsel’s submissions that it was a widespread practice.
The pressures on coveyancing firms to deliver a high quality service at an ever reduced price is well publicised. But have we reached a ‘tipping point’ where low conveyancing fees prevent firms investing in resources to ensure that they can always comply with their duties? It may be that conveyancers who increase their prices in order to pay for better systems and training will reap the benefits in due course, paying less in compensation and insurance premiums. By contrast, conveyancers who cut their margins too hard could find that even just a few claims put them at risk of closure.
