Summary

A firm of solicitors were found liable to a claimant bank, successor to a mortgage lending business, for breach of trust caused by advancing loan monies to fraudsters who had impersonated a London branch of a regional firm of solicitors, in connection with the sale of property.

Facts

In August 2007, Markandan & Uddin (“M&U”) were retained by Cheltenham & Gloucester Plc (“C&G”) to act for it on a proposed loan of £742,500 to someone calling himself Victor Davies (“VD”). The loan was to enable VD to buy a freehold property.

In September 2007, on what they believed to be completion of the purchase, M&U remitted the loan money to a bank account they believed to belong to the firm of solicitors acting for the vendor. This firm held itself out to be Deen Solicitors – there is a genuine and reputable firm of solicitors with this name with offices in Luton which knew nothing of the fraud being carried on.

One or more individuals pretended to be carrying on a branch office of Deen Solicitors at an office in London, for which they printed out bogus notepaper which they then used to dupe M&U into believing they were a genuine firm. In fact Deen Solicitors had no such office.

M&U paid loan moneys to the fraudsters who then made off with this money. The payment was advanced not in exchange for any documents but on the basis of an undertaking from the purported solicitors to provide the documentation necessary to complete the transaction. Once the funds were received the fraudsters made off with the money and no documents were ever received, meaning C&G was left with no legal charge over the property and suffered a total loss in respect of the transaction.

Judgment

C&G commenced proceedings and at first instance it was held that M&U had been in breach of trust, despite the fact that they did not act dishonestly in the transaction and were essentially unwittingly taken in by the fraud. It was further held C&G were not relieved from liability under the potential defence of s61 of the Trustee Act 1925 as they did not act reasonably in the transaction by, amongst other things, failing to check that the branch office of Deen Solicitors was genuine. Importantly, it was also confirmed that the potential defence of contributory negligence, relied upon in so many claims brought by lenders, did not apply to a claim for breach of trust, meaning C&G were able to recover their full loan advance, plus interest and costs.

M&U appealed to the Court of Appeal and the decision was handed down in February 2012. The Court of Appeal dismissed M&U’s appeal on the basis that M&U had parted with the money in exchange for undertakings that were not of the nature that they thought they were and it followed that they had paid it away in breach of trust, for which they were accountable. Further, M&U had not acted reasonably in relation to the transaction and therefore were not deserving of the exercise of the court’s discretion under s61. In failing to establish the vendors’ ‘solicitors’ did not have a London branch, their conduct fell short of the standard that merited the Court’s mercy.

This case establishes that a careful, conscientious and thorough solicitor, who conducts a transaction by the book and acts honestly and reasonably in relation to it in all respects but still did not discover fraud might still be held in breach of trust for innocently parting with loan money to a fraudster. Further, in the event of such a breach of trust, the solicitor is not entitled to raised any potential defences of contributory negligence or failure to mitigate but will be liable to compensate the wronged lender for their entire loan advance plus interest and costs.

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