The High Court has recently considered the scope of a solicitor’s duty for breach of trust and breach of duty of care in circumstances where there is a purported sale of property by someone other than the true owner. The Court has also provided guidance on the application of s.61 Trustee Act 1925 which, in certain circumstances, can provide solicitors with relief against liability for a breach of trust claim if they can show that they acted honestly and reasonably.

The Facts

The claimant engaged the defendant firm of solicitors to act for him in the purchase of a property. The transaction appeared to proceed normally until the vendor’s solicitors, Fernando and Co, failed to produce a signed TR1 following the supposed “completion” of the transaction. In line with the procedure for postal completion, the defendant remitted monies to the vendor’s solicitor but the claimant never received the title documents. It subsequently transpired that the claimant was the victim of property fraud, where there was a purported sale of the property by someone other than the true owner. In this case, it was clear that the parties involved in the fraud included an employee of Fernando and Co. The claimant proceeded to issue a claim against the defendant for full reconstitution of the trust fund in the sum of £315,000 (being the monies wrongly remitted). The defendant argued that, to be entitled to reconstitution, the claimant had to show causation. In any event, the defendant sought relief against the breach of trust claim under s.61 Trustee Act and argued that the claimant was only entitled to equitable compensation at most.

The issues to be decided in respect of the breach of trust claim were: (1) was there a breach of trust; (2) if so, was the claimant entitled to full reconstitution or some lesser amount; and (3) was the defendant entitled to relief under s.61 Trustee Act.

The Decision

Having considered the recent case law in the area (Target Holdings Ltd v Redferns [1996]; Lloyds TSB Bank plc v Markandan & Uddin [2012]; Nationwide Building Society v Davisons [2012]; and AIB Group (UK) plc v Mark Redler & Co [2013]) it was held that there was a breach of trust. At the time the claimant provided the completion monies to the defendant, the defendant only had authority to pay away the monies for the purposes of the claimant’s purchase of the property. As there was no express agreement to complete using the postal code and the funds were released without such agreement, there was a breach of trust. The Court held that prima facie the claimant was entitled to full reconstitution of the trust, as this was a case where the breach of trust arose from the failure to complete, which was a requirement to discharge the trust. Conversely, the Court held that, in a situation where there was a breach of trust but completion nevertheless did occur, then the claimant would only be entitled to equitable compensation for the loss suffered as a result of the breach.

The Court then considered whether the defendant was entitled to relief under s.61 Trustee Act. The onus was on the defendant to show affirmatively that it acted honestly and reasonably and ought fairly to be excused from the breach. In particular, the mere fact that dishonesty has not been pleaded is not sufficient for these purposes. The Court also held that the standard to be applied was one of reasonableness and not perfection. On the facts of the case, it was held that the defendant acted honestly. With regard to reasonableness, the Court found that it was not reasonable to fail to make an express agreement to use the postal code and it was not reasonable to delay in chasing for the TR1. However, in accordance with the decision in Nationwide v Davisons, the Court also considered whether the unreasonable conduct was connected to the loss suffered. In this respect, the Court decided that the unreasonable conduct in failing to agree the use of the postal code did not cause the claimant’s loss. Even if there was an express agreement, the funds would still have been remitted to the vendor’s solicitors and the loss would still have been suffered. The loss had already been suffered before the unreasonable conduct occurred. On this basis, the Court held that the defendant acted reasonably and was entitled to s.61 Trustee Act relief. The Court was, however, keen to stress that this was only because of the lack of casual connection between the defendant’s behaviour and the loss: the loss sustained was caused by the fraud of an unconnected third party.

In respect of the breach of duty of care claim, the claimant focussed on the defendant’s failure to chase for the TR1 and failure to spot and advise on the possibility of fraud. The Court found in favour of some of the breaches. However, the Court found that various mistakes in the documents did not necessarily give rise to a reason to doubt the integrity of the vendor’s solicitor and it did not necessarily provide an indication of fraud that should be investigated (it should be noted that this case was before the Law Society Practice Note relating to property registration and fraud).

Commentary

This case confirms that breach of trust claims and the application of s.61 Trustee Act is a complex, fact specific area of law. In particular, it confirms that a breach of trust will arise when solicitors pay away monies other than as authorised and that prima facie a claimant will be entitled to full reconstitution of the trust fund in circumstances where there is a breach of trust and completion never occurs. This case also confirms the need for there to be a causal connection between the claimant’s loss and the defendant’s breach before s.61 Trustee Act relief will be refused.

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