Analysis
Abbey National Building Society (now Santander UK PLC) (A) agreed to lend £150,000 to an individual (V) for the purpose of purchasing a property subject to taking a first legal charge. RA Legal Solicitors (R) conducted the conveyancing, acting for both V and A. The vendor’s solicitors (S) were a real firm but acted dishonestly, falsely representing that they acted for the vendor. On 17 July 2009 A transferred £150,000 (plus fees) to RA’s bank account. S notified an account to which the completion monies should be sent and on 28 July 2009 S purported to exchange and complete and RA arranged for the completion monies to be transferred to the account nominated by S (initially to be held to order, but subsequently released). Completion did not take place. S produced forged documents, and A did not obtain a first legal charge. A sued RA for repayment of the advance on the grounds of breach of trust, alternatively damages for professional negligence. The main issues at trial were (1) whether RA acted in breach of trust when they transferred the funds to S’s account, and if so whether it caused A loss, and (2) whether RA could rely on the statutory defence under s61 Trustee Act 1925 on the basis that it acted honestly and reasonably and ought fairly to be excused. A acknowledged that if they did not succeed on the breach of trust claim, they could not expect to succeed on their damages claim. At first instance the judge held that RA acted in breach of trust in releasing the funds advanced by A to S, but were relieved of all liability in respect of their breach as they had released the funds so in the genuine belief that completion was taking place. He found that RA should be wholly relieved of liability under the Trustee Act 1925 s61 because A’s loss had in substance been caused by S’s fraud, an unconnected third party, for which RA could not fairly be treated as responsible. On appeal A submitted that the judge (1) failed to recognise RA’s transfer of the funds to S’s client account on the day before completion as being a separate and distinct breach of trust; and (2) erred in construing s61 by reference to the Companies Act 1985 s727(1).
Held (Briggs LJ, The Chancellor and Proudman J concurring) appeal allowed [102-104]:
1) A strict causation test between an action and the loss cast the net too narrowly for the purpose of identifying relevant conduct. In most mortgage fraud cases, the effective, primary or predominant cause of the loss was the third party’s fraud rather than the conduct of the solicitor trustee [24]. Similarly it was too restrictive to apply a ‘but for’ test which disregarded conduct, however unreasonable, on the basis that even if the solicitor had acted reasonably in that respect, the fraud and loss would still have occurred. It was not appropriate to exclude as irrelevant conduct which consisted of a departure from best or reasonable practice which increased the risk of loss caused by fraud, even if the court concluded that the fraudster would nonetheless have achieved his goal if the solicitor had acted reasonably. However, on the other hand, it would extend the net too wide if it accommodated every aspect and detail of the solicitor trustee’s conduct which occurred, or played any part in, the process which began with the transfer of the loan money by the lender to the solicitor trustee and ended with its theft by the fraudster. Between those extremes some element of causative connection would usually have to be shown, and conduct (even if unreasonable) which was completely irrelevant or immaterial to the loss would usually fall outside the court’s purview under s61 [28].
Discretionary relief under s61 was often described as an exercise of mercy by the court but the requirement was to balance fairness to the trustee with a proper appreciation of the consequences of the exercise of the discretion for the beneficiaries, which meant that this old-fashioned description of the nature of the s61 jurisdiction should be abandoned. In this context mercy did not lie in the free gift of the court. It came at a price [34].
The pretence that the investigation of title had been completed when it had not was a method of dealing with that difficulty which bordered on dishonesty. It was nothing to the point that, if subsequently revealed defects are properly addressed, it causes the lender no loss. On the contrary, RA’s submission that unqualified certificates were frequently given prematurely involved the implicit admission that this was done deliberately, rather than by accident. If so, it simply made the misconduct all the more serious [59]. RA Legal’s failures (the inadequate making of requisitions on title, transferring the completion money without the adoption of the completion code by the vendor’s solicitors, and then failing to deal with the absence of a prior mortgage discharge on the pretended completion) were unreasonable and sufficiently connected with the loss. Those failings formed part of a larger picture of the shoddy performance of a conveyancing transaction from start to finish which left no doubt that it would not be fair to excuse the firm from liability, in whole or in part [101]. This was different from the situation in Davisons v Nationwide Building Society [2013] WTLR 393 where the solicitors had obtained an apparent commitment by the person whom they reasonably believed to be the vendor’s solicitor to adopt the completion code, so that the regime of protective undertakings was, as far as they could tell, in fact put in place. Those departures from best practice were far less serious and of no consequence in achieving for the lender the protection against risks of loss which the completion code is intended to provide.
2) The difficulty with equating s61 of the Trustee Act 1925 with s727(1) of the Companies Act 1985, at least for the purpose of interpreting s61, was that s727(1) appeared to contemplate that a company officer or auditor may have acted honestly and reasonably, even though negligent, whereas s61 contemplated no such thing in relation to trustees. It would be wrong, by any process akin to reverse engineering, to interpret s61 by reference to the historically more recent and undoubtedly more difficult provisions now to be found in s727 of the Companies Act 1985. Generally, negligence requires a finding of unreasonable conduct, in the sense that the defendant must be found to have failed to apply reasonable care and skill to the task in hand. In D’Jan of London [1993] BCC 646, Hoffman LJ said of s727 that: ‘It may seem odd that a person found to have been guilty of negligence, which involves failing to take reasonable care, can ever satisfy a court that he acted reasonably. Nevertheless, the section clearly contemplates that he may do so.’ No such oddity appeared in s61, and the judge was wrong to equate the two relieving provisions. The test of reasonableness rather than perfection identified in the Davisons case amply sufficed for comparable cases under s61, and called for no further elaboration [32].
The judge had required A to produce a written statement of the matters of conduct relied upon as unreasonable for the purposes of s61, before any evidence was heard, and this was duly provided by counsel, in the form of a seven-paragraph critique, adopted by the judge with no significant alteration in substance. While it was plainly a commendable exercise in good case management to require the issue as to the reasonableness of RA’s conduct to be set out it may have obscured the fact that on this issue, the burden of proof lay squarely on RA rather than on A, in sharp contrast with the ordinary burden in a professional negligence action, which lay squarely on the client alleging a breach of the duty of care. In the context of a routine conveyancing transaction, the incidence of the burden of proof might frequently be crucial to the outcome [55].
(The Chancellor): Section 61 had to be interpreted consistently with equity’s high expectation of a trustee discharging fiduciary obligations. It was clear, against that background, that the object of s61 was not to introduce a particular causation test which was distinct from and negated the normal rules for fixing liability for personal liability for breach of trust. It was not a statutory gloss intended to introduce familiar causation concepts, such as a ‘but for test’ or an ‘effective cause’ test. It was an exceptional statutory jurisdiction to relieve a trustee from liability despite equity’s stringent duties imposed on trustees [109]. Where the trustee invoked s61 the onus was on the trustee to place before the court a full account of his or her conduct leading to the breach of trust. It was wrong in principle to cast on the beneficiary the onus of identifying the trustee’s unreasonable conduct and of satisfying the court of its causal connection to the loss suffered. The beneficiary might not be in a position to know all that occurred in the chain of events leading to the breach of trust [111].
JUDGMENT BRIGGS LJ: Introduction [1] In May 2009 Santander UK PLC (formerly Abbey National) (Abbey) agreed to lend £150,000 plus fees to a Mr Srinivas Vadika for the ostensible purpose of assisting him in the purchase of a residential property known as 8 Opal Close, London E16 (the property). Mr Vadika and Abbey instructed R.A. …Continue reading "Santander UK PLC v R.A. Legal Solicitors [2014] EWCA Civ 183"