In this recent decision, the Court of Appeal has again considered the scope of breach of trust for paying away mortgage monies otherwise than on completion and the application of relief potentially available under s.61 Trustee Act 1925.

The Facts

The Defendant firm of solicitors acted for both the Claimant and the borrower in relation to a proposed purchase of a property. Although a genuine firm of solicitors, the vendor’s solicitors were fraudsters and fraudulently purported to act for the vendor to sell the property. In the event, the Defendant released the Claimant’s advance and the monies disappeared. Consequently, the Claimant did not obtain a first charge as security for the advance and suffered a loss in the sum of the loan.

At first instance, following the previous decisions of Davisons v Nationwide [2012] EWCA Civ 1626 and AIB Group (UK) Plc v Mark Redler & Co [2013] EWCA Civ 45, the Court found that the Defendant had acted in breach of trust by releasing the advance prior to completion. However, the Court also held that the Defendant should be relieved of liability by virtue of s.61 Trustee Act 1925 (“s.61”) in that it had acted honestly and reasonably and ought to fairly to be excused from liability. The Claimant appealed.

The Appeal

Considering the previous authorities, the Court of Appeal confirmed that the Defendant had acted in breach of trust: the Defendant held loan monies on trust for the Claimant, but released them otherwise than on completion. The more difficult question however was the application of s.61.

The Court of Appeal held that for s.61 to apply a trustee must act honestly and reasonably only in relation to those aspects of conduct which are sufficiently connected with the beneficiary’s loss. In particular, a trustee does not necessarily have to comply with best practice in all respects. In deciding what type of connection there must be between the action and the loss, Lord Justice Briggs explained that a strict causation test was too narrow because in most mortgage fraud cases the primary cause of the loss is the third party’s fraud, rather than the solicitor’s conduct. Equally, Lord Justice Briggs opined that the test would be too wide if it looked at every aspect and detail of the solicitor’s conduct. As a result, it was held that some element of causative connection will usually have to be shown and that conduct (even if unreasonable) which is completely irrelevant or immaterial to the loss will usually fall outside the Court’s consideration when considering s.61. A case should be looked at in the round, looking at the matter as a whole. In considering the standard to be applied in relation to conduct connected with the loss, the Court held the test was one of reasonableness, not perfection.

When considering whether a solicitor ought fairly to be excused for the breach, the Court held that it was relevant to consider the effect of s.61 relief not only on the solicitor trustee, but also the beneficiary. On the facts of this case, the Court found that there was no suggestion that the Defendant acted otherwise than honestly, but held that the Defendant’s conduct was unreasonable and did not merit relief under s.61. Interestingly, it was said that the burden was on the Defendant to show that he acted reasonably and in order to discharge this burden, a solicitor will need to provide a paper-trail demonstrating that the whole of his or his firm’s conduct sufficiently connected with the loss satisfied the reasonableness test.

Commentary

This case is just another example of a solicitor’s strict liability in relation to breach of trust cases where a lender fails to obtain security due to a fraud. The case provides a good analysis of the application of s.61, but again makes clear that it is a difficult fact specific defence to run. In particular, although the standard to be applied in relation to conduct is reasonableness and not perfection, this case makes clear that if a solicitor departs from best practice, it will be increasingly difficult to invoke s.61.

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