Davisons Solicitors (a firm) v Nationwide Building Society

A solicitor holding mortgage advance money under the Council of Mortgage Lenders Handbook releases it in breach of trust if there is no completion. Compliance with prescribed identity checks does not confer separate authority to release the money.

Relief under section 61 of the Trustee Act 1925 requires honesty, reasonableness and a favourable exercise of discretion. Reasonableness does not require perfection or compliance with every aspect of best practice. The relevant failing must be connected with the loss.

A requirement in a professional retainer to obtain a first legal charge does not, without sufficiently clear language, guarantee that result. It ordinarily requires reasonable skill and care where performance depends on professional judgment and third parties.

Nationwide advanced mortgage money to Davisons, which acted for both the lender and purchaser. An impostor purported to practise from a branch office of the seller’s genuine solicitor. Davisons verified the solicitor and branch against the Law Society and Solicitors Regulation Authority websites, accepted completion undertakings arising from the Code for Completion by Post, and remitted the purchase money. The prior charge was not discharged and Nationwide’s charge was not registered.

A deputy High Court judge held Davisons liable for breach of trust and breach of retainer. She refused relief under section 61 of the Trustee Act 1925. Davisons appealed on whether it had committed a breach of trust, whether it should receive statutory relief and whether its retainer imposed an absolute obligation to obtain a first legal charge.

1. Appeal allowed unanimously. Davisons committed a breach of trust when it released the advance before completion. Under paragraph 10.3.4 of the Council of Mortgage Lenders Handbook, the trust could be discharged only by completion of the purchase or return of the money to Nationwide. Compliance with the prescribed verification safeguards did not imply separate authority to pay an impostor. Such an implication was unnecessary for commercial efficacy and would undermine the purpose of protecting the lender’s money. Lloyds TSB Bank plc v Markandan & Uddin was binding on the meaning of completion: paras [38]–[40].

2. Davisons was relieved from all personal liability under section 61 of the Trustee Act 1925. The statutory requirements were honesty, reasonableness and a favourable exercise of discretion. Mr Wilkes had acted honestly. He had also acted reasonably because the seller’s purported solicitors had accepted the Code for Completion by Post, paragraph 9(ii) of which supplied an undertaking to redeem the existing charge. The use of a different requisitions form and the absence of a further undertaking to provide evidence of discharge did not make his conduct unreasonable: paras [41]–[48].

   Reasonableness does not require perfection or universal adherence to best practice. The relevant conduct must at least be connected with the loss. Any lapse from best practice did not cause the loss because the impostor would probably have provided any further requested undertaking. Since the loss resulted from an unconnected third party’s fraud, there was no reason to deny complete relief: paras [48]–[50].

3. Davisons was not in breach of its retainer. Whether a professional assumes an absolute obligation is a question of construction. Paragraph 5.8 of the Handbook required reasonable skill and care in seeking redemption of existing charges and a fully enforceable first legal charge; it did not guarantee those outcomes. The work involved professional judgment, questions of title and reliance on the seller’s solicitor. Construing the paragraph as a guarantee would also make much of the Handbook redundant: paras [51]–[57]. Nationwide had pleaded only breach of an absolute obligation and no alternative failure to exercise reasonable skill and care: para [58].

4. The High Court’s order was set aside. The Law Society’s late application to intervene was refused because construction of the relevant documents was a question of law and evidence of its subjective intention was irrelevant and inadmissible: paras [59]–[62].

1. Court of Appeal (Civil Division): The appeal was allowed unanimously and the order below was set aside. Davisons remained in breach of trust but received complete relief under section 61 of the Trustee Act 1925; the contractual claim also failed. [2012] EWCA Civ 1626

2. High Court, Queen’s Bench Division: Ms Catherine Newman QC, sitting as a deputy High Court judge, gave judgment for Nationwide for £213,490 and costs on 24 April 2012. She found breach of trust and breach of retainer and refused section 61 relief. She refused permission to appeal, which was subsequently granted by Sir Scott Baker.