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Santander UK Plc v RA Legal Solicitors: A shift in balance in favour of lenders?

Section 61 of the Trustee Act 1925 gives the court power to relieve from liability a trustee who has committed a breach of trust, if he: (i) acted honestly and reasonably; and (ii) ought fairly to be excused for the breach.

It is an important provision. As made clear in Lloyds TSB Plc v Markandan & Uddin [2012] EWCA Civ 65, a solicitor’s liability for breach of trust is not fault based, but strict. Relief under section 61 is, as Briggs LJ said in Santander UK Plc v RA Legal Solicitors [2014] EWCA Civ 183, “The principal mechanism by which the law tempers [this] rigour…”

A question of causation?

In Davisons Solicitors v Nationwide Building Society [2012] EWCA Civ 1626 Sir Andrew Morritt C said that section 61:

“… only requires [the trustee] to have acted reasonably. That does not, in my view, predicate that he has necessarily complied with best practice in all respects. The relevant action must at least be connected with the loss for which relief is sought and the requisite standard is that of reasonableness not of perfection.”

In RA Legal the Court of Appeal has given important guidance about the nature of the "connection" that must exist between the conduct of the trustee under criticism and the loss for which relief is sought.

The facts can be stated briefly. Santander agreed to lend £150,000 to a Mr Vadika for his purchase of a property. On receipt of the certificate of title, it transferred this sum to their joint solicitors, RA Legal, who in turn transferred it to the vendor’s solicitors, Sovereign Chambers LLP. Sovereign was, however, a fraudster, and made off with the money. Santander therefore sued RA Legal for breach of trust, since (as per the Markandan case):

  • It was a requirement of the CML Handbook that it hold the loan "until completion"; but
  • Completion had not occurred since Sovereign was not acting for the true vendor.

RA Legal did not dispute that it had acted in breach of trust, but applied for, and at first instance obtained, relief under section 61.

On Santander’s appeal against the granting of relief the Court of Appeal had to consider the "connection" test under Davisons because the judge at first instance, Andrew Smith J, placed considerable reliance on the fact that the fraud was bound to succeed regardless of R. A. Legal’s conduct.

The competing arguments were as follows. On behalf of RA Legal it was said that unless the departure from best practice caused the loss, it should not be treated as a basis for refusing relief. Therefore, since the fraud would have succeeded even if the solicitor had done its job perfectly, it cannot be said that their misconduct was "connected" to Santander’s loss. Conversely, on behalf of Santander a much looser connection was argued for.

Briggs LJ, who gave the leading judgment, rejected the strict causation test, holding that it would not be:

“…appropriate to exclude as irrelevant conduct which consisted of a departure from best or reasonable practice which increased the risk of loss caused by fraud, even if the court concludes that the fraudster would nonetheless have achieved this goal if the solicitor had acted reasonably.”

He went on to say, however, that it would “extend the net too wide” if the test accommodated “every aspect and detail”.

The Judge therefore adopted something of a middle ground, holding that “some element of causative connection” is required, and that conduct that is “completely irrelevant or immaterial” will usually fall outside the court’s purview.
At this point, one may think that this provides a sufficiently clear test to enable practitioners to predict the court’s decision. Briggs LJ was keen, however, to stress that the Court must not consider its discretion fettered by an:

“over-mechanistic application of the requirement to show the necessary connection between the conduct complained of and the lender’s loss.  There may be highly unreasonable conduct which lies at the fringe of materiality in terms of causation, and only slightly unreasonable conduct which goes to the heart of a causation analysis.”

In a similar vein, Sir Terence Etherton C, in a concurring judgment, said thatsection 61:

“…must be interpreted consistently with equity’s high expectation of a trustee discharging fiduciary obligations,”

and went on to say that it is not:

“a statutory gloss intended to introduce familiar causation concepts, such as a ‘but for test’ or an ‘effective cause’ test.”

Application to the facts

At first instance Andrew Smith J granted RA Legal relief because he did not consider that its conduct was a sufficient departure from best practice to justify relief being refused; and as set out above, he considered that the fraud in question would have succeeded regardless. The Court of Appeal said that the Judge got it wrong on both counts.

First, he failed to appreciate the seriousness of the defendant’s failure to comply with proper conveyancing practice.  As summarised by the Chancellor in his concurring judgment, RA Legal parted with the advance when:

  • They did not have an express undertaking from the recipient as to how the money would be applied;
  • They (probably) did not have an undertaking as to how the existing mortgagee’s charge would be dealt with at completion; and
  • They had not received any indication as to whether the vendor’s solicitor would comply with the Law Society’s Code for completion by post.

Secondly, the Judge was wrong to apply a strict "but for" test of causation. Had he looked for a looser connection, he would have found that RA Legal’s failures were sufficiently connected with the Santander’s loss to justify relief being refused.

Comment

Professional indemnity insurers will see this case as something of a blow. To some Davisons and RA Legal at first instance gave the collective impression that if, on the facts, the lender’s loss is caused by a determined and sophisticated fraud that does not depend for its success on incompetence by the lender’s solicitor, then a claim for breach of trust will, by virtue of section 61, likely fail on grounds of causation. The Court of Appeal in RA Legal have made it clear, however, that the threshold for professional trustees to obtain section 61 relief is a high one, and negligent solicitors should not expect the court’s mercy.

By way of postscript, it is worth noting the following two points made by Briggs LJ in the course of his judgment.

First, it is wrong to seek to derive assistance about the test under section 61 from jurisprudence about section 727(1) of the Companies Act 1985, which provides the court with a similar power to excuse negligent directors from liability. The test of “reasonableness rather than perfection” identified in Davisons is, according to Briggs LJ, “amply sufficient”.

Secondly, in considering the second stage of the section 61 test, namely whether the trustee ought fairly to be excused for the breach, regard must be had to the effect of the grant of relief on beneficiaries.  Accordingly, and perhaps controversially:

“An institutional lender may well be insured (or effectively self-insured) for the consequences of third party fraud. But an innocent purchaser may have contributed his life's savings to the purchase and have no recourse at all other than against his insured solicitor, where for example the fraudster is a pure interloper, rather than a dishonest solicitor in respect of whose fraud the losers may have recourse against the Solicitors' Compensation Fund.”