Relief for conveyancers in mortgage fraud case - but expect a backlash

In the decision in Santander UK Plc v R.A. Legal Solicitors (a firm) [2013] EWHC 1380 (QB) Andrew Smith followed the appeal court’s decision in December 2012 in Nationwide Building Society v Davisons Solicitors that a law firm can be relieved of consequential liability for a breach of trust if it acts honestly and reasonably

In this case Santander agreed to provide a mortgage to the purchaser of a residential property in London. RA Legal were instructed to act for the purchaser and the lender on the matter. The mortgage advance in 2009 was paid by RA Legal to the vendor's solicitor in reliance on documents provided in the usual way. In transpired that the vendor's solicitor was a fraudster who stole the mortgage monies.

In case you were wondering....the vendor's solicitors was a regulated firm. RA Legal even phoned the Law Society to check. There were no obvious signs that the vendor's solicitors were about to perpetrate a fraud. The vendor firm established in 2006 had two partners both on the solicitors roll. Both partners had worked in previous firms.

Santander alleged that RA Legal had released the mortgage monies in breach of trust. RA Legal sought relief under section 61 of the Trustee Act 1925.

The decision that the court handed down was that RA Legal had acted in breach of trust in paying away the advance. The question then was whether the law firm was entitled to relief under section 61. The fact that RA Legal had acted honestly was not in dispute with Santander.

Clarifying the meaning of Davison, Andrew Smith said that in order to benefit from relief under section 61 of the Trustee Act 1925, RA Legal need only to show that it had acted reasonably, not with exemplary care.  Given that the court found that RA Legal had acted reasonably the court dismissed Santander’s damages claim as well as the claims in contract and tort.

The barrister appearing for RA Legal commented that the decision was "likely to be welcomed more by defendants than claimants", because the court had "now provided a clear statement that, if a lender is to obtain compensation from solicitors for breach of trust in an identity fraud case, it is necessary to show a connection between the lender's loss and the solicitors' failings" This decision follows an increasing line of authorities for conveyancers and their PI insurers starting with Target Holdings Ltd v Redferns [1996] and more  recently AIB Group (UK) plc v Redler [2013] which restricts a  lenders' reliance on breach of trust claims against solicitors.

Whilst there may be a collective sigh of relief amongst conveyancing lawyers as a result of this decision it might be prudent to consider the lender here. Santander has suffered a significant loss as a result of a fraud. Ultimately they have carried the can. Is it reasonable for the legal industry to think that Santander should take this on the chin? When as lawyers we next hear lenders talking about how they suffer from fraud and why consolidation of their panel is an option, we should consider this case.

The most difficult question resulting this case is how the fraud could have been picked up. After all,  the sellers’ lawyers had been registered with the SRA for 3 years and RA Legal appeared to be a more than competent firm. If you are a lawyer reading this blog would you have done anything different to RA Legal?  This is perhaps a question that Santander will be looking at with their lawyers. There are clues in the full judgment and there are dots that if connected (via technologies such as COMPLETIONmonitor) could have resulted in the fraud being captured.  Please look out for my future article on how this fraud might have been prevented.