Pulvers (a firm) v Chan & Ors

A solicitor receiving mortgage advances on terms that they are to be used only to complete a purchase or redeem an existing charge holds the money on trust for the lender. Paying it away without obtaining the promised security is a breach of trust. The solicitor may also be liable in negligence and vicariously liable for an employee’s dishonest conduct.

Third parties who knowingly receive the money, or dishonestly assist the breach of trust, may be liable to the trustee for equitable compensation. A solicitor’s firm may seek contribution from co-wrongdoers under the Civil Liability (Contribution) Act 1978. The court left open whether the alleged injury to the solicitor was actionable in conspiracy where the scheme was directed primarily at the lenders.

Pulvers, a firm of solicitors, acted for lenders and borrowers in numerous residential mortgage transactions. Mortgage advances were paid into Pulvers’ client account after certificates of title had been provided. The transactions were represented as purchases or re-mortgages of whole properties, but lenders frequently received charges over only part of the relevant property, or no effective security.

Pulvers accepted potential liability to the lenders and brought claims against the borrowers, mortgage brokers, associated companies and its former conveyancer, Mary West. The claims included conspiracy, knowing receipt, dishonest assistance, money had and received, and contribution. The issues included the defendants’ knowledge and dishonesty, the trust status of the mortgage advances, and the extent of liability between the parties.

1. Trusts and breach of trust. Mortgage advances paid to solicitors on terms that they are to be used for a specified purchase or redemption, and only after a valid charge is obtained, are held on trust for the lender. Paying the money away without obtaining the promised security is a breach of trust. Pulvers was responsible for the dishonest conduct of its employee, Mary West.
2. Liability of Pulvers. Pulvers was liable to the lenders for breach of trust and in negligence. The firm was also vicariously liable for Mary West’s dishonest acts, applying Lloyd v Grace-Smith & Co [1912] AC 716. Equitable compensation and damages would take account of the lender’s net deterioration after crediting any benefit obtained.
3. Knowing receipt and dishonest assistance. The requirements of knowing receipt were identified as trust property, transfer, breach of trust, receipt for the defendant’s benefit, and knowledge making retention unconscionable. The court applied the approach in Bank of Credit and Commercial International (Overseas) Ltd v Akindele [2001] Ch 437. Companies controlled by Mr Sinclair could, on the facts, be treated as his nominees. The defendants who participated in the transactions were liable for knowing receipt or dishonest assistance as appropriate.
4. Conspiracy. Mr Sinclair and the relevant participants conspired to deceive the lenders and intended to injure them. The court did not decide whether Pulvers had established the necessary intention to injure itself. The issue involved the distinction between the intended ends, the means used, and consequential loss, discussed in Douglas v Hello! Ltd (No 3) [2006] QB 125 and OBG Ltd v Allan [2007] 2 WLR 920.
5. Contribution. Under the Civil Liability (Contribution) Act 1978, responsibility was to be apportioned on a just and equitable basis. Applying Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366, the firm could not avoid contribution merely because the dishonest act was committed by a partner or employee. The court directed equal contribution among Pulvers, Mr Sinclair and other liable participants, subject to credit for receipts retained from the transactions. As between Pulvers and Mary West, she was responsible for the losses.
6. Permission was granted to re-amend the schedule of claims. The claimant was invited to prepare a draft order reflecting liability by transaction and the contribution directions.