Conveyancing solicitors’ breach of trust

5 December, 2014

The Court of Appeal held, in Santander UK v RA Legal Solicitors [2014] EWCA Civ 183, that a solicitor transferring money to another firm fraudulently purporting to act for the seller of a property the day before completion was a breach of trust, and the firm was not entitled to relief under s.61 Trustee Act 1925.

 

The claimant bank agreed to lend £150,000 to an individual for the purchase of a property. As is common practice, the defendant firm of solicitors acted for both the individual and the bank. A second firm of solicitors fraudulently purported to act for the seller. However, the owner, who was not involved in the fraud, had not in fact agreed to sell the property.

 

The solicitors released money to the fraudulent firm the day before completion was due in the belief that it was completing the sale. However, completion did not take place, the bank did not obtain a charge on the property and the money was lost.

 

The bank commenced a claim against the solicitors for breach of trust as it had released the advance without completion taking place. Whilst the High Court held that the firm had acted in breach of trust, it had done so in the genuine belief that completion was taking place. It found that the firm should be wholly relieved of liability under s.61 Trustee Act 1925 (where a trustee acting honestly and reasonably may be relieved of liability for breach of trust) because the bank’s loss had been caused by the fraud of the other firm of solicitors and the defendant firm could not fairly be treated as responsible.

 

The bank appealed the decision. The Court of Appeal, allowing the appeal, held that the solicitors only had implied authority to transfer trust money pending completion to the client account of the firm which was in fact acting for the seller of the property on which the lender was to obtain a charge on completion. The fraudulent firm was not acting for the owner and had no intention of using any part of the money transferred for the purpose of discharging the existing mortgage. The transfer of the money on the day prior to completion was therefore a breach of trust.

 

Turning to the question of whether there would be relief from liability under s.61 Trustee Act 1925, the court thought that the trial judge had been too lenient and held there had also been numerous departures from best practice which were wholly unreasonable and sufficiently connected with the banks’ loss. These included inadequate requisitions, receiving inadequate replies, failing to obtain a written commitment to follow the completion code before transferring the completion moneys, and failing to appreciate that completion had gone seriously wrong when no confirmation that the previous mortgage had been discharged was received.

 

Where solicitors failed to play their part and at the same time were swindled into transferring trust money to a fraudster without authority, they could not expect to persuade the court that it was fair to excuse them from liability on the basis that they had demonstrated that they had in all respects connected with that loss, acted reasonably. The conduct of the firm left the court in no doubt that it would be unfair to excuse the firm from liability.

 

The banks’ successful appeal serves as a reminder to firms acting in a trustee capacity of the importance of adopting best practice and robust systems, as these will both reduce the chance of becoming the subject of fraud and leave open the possibility of relief under s.61 Trustee Act 1925 in appropriate circumstances.