Santander UK v RA Legal Solicitors

The Court of Appeal held that R.A. Legal committed breaches of trust on 28 and 29 July 2009 by transferring and then releasing a lender's advance in circumstances where the recipient firm (Sovereign) was not acting for the vendor and no adequate written undertakings (including an adoption of the Completion Code) were obtained. The court analysed section 61 of the Trustee Act 1925 and emphasised that relief under s.61 requires the trustee to show that it acted honestly and reasonably in respect of matters connected with the beneficiary's loss.

The court found the trial judge erred by applying an over-lenient standard derived from the Companies Act relieving jurisprudence and by failing to treat R.A. Legal's departures from accepted conveyancing practice (inadequate requisitions, premature unqualified certificate of title, failure to secure written undertakings to hold funds to order and to secure discharge arrangements) as sufficiently connected and serious to preclude relief under s.61. For those reasons the appeal was allowed.

Background and nature of the claim:

• The claimant (Santander/Abbey) advanced £150,000 as part of a £200,000 purchase of property for its borrower. R.A. Legal acted for the borrower and was instructed to hold the lender’s advance on trust until completion. Funds were transferred to a firm styled Sovereign Chambers LLP, which was in fact fraudulent, and the completion money was misappropriated. Abbey sued R.A. Legal for breach of trust (negligence was pleaded but not pursued at trial).

Procedural posture:

• The trial judge (Smith J) found R.A. Legal in breach of trust but wholly relieved them under section 61 of the Trustee Act 1925. Abbey appealed to the Court of Appeal.

Issues framed:

• Whether there was a breach of trust on transfer to Sovereign's client account on 28 July as well as on release on 29 July;
• Whether R.A. Legal's departures from standard conveyancing practice (including premature unqualified certificate of title, inadequate requisitions on title, failure to obtain written undertakings or adoption of the Completion Code, and delay in notifying the lender) were sufficiently connected to Abbey's loss to defeat relief under s.61;
• What standard and connection test applies under s.61 and whether the trial judge erred in applying Companies Act jurisprudence.

Court’s reasoning and outcome:

• The court accepted that strict causation is too narrow but held that some material causal or risk-enhancing connection is required between the trustee’s unreasonable conduct and the loss.
• The transfer on 28 July to a firm that was not acting for the vendor was a breach of trust; the absence of written undertakings and failure to secure adoption of the Completion Code before transferring funds were serious departures from best practice which materially impaired any summary enforcement remedy and increased the risk of loss.
• The trial judge erred in construing s.61 by analogy with the Companies Act relieving provisions and in taking an over-lenient view of the seriousness and relevance of the solicitors’ defaults. R.A. Legal failed to discharge the burden of proving they acted honestly and reasonably in all respects connected with the loss, so relief under s.61 was inappropriate.

Consequences:

• The Court of Appeal allowed the appeal and restored Abbey's claim against R.A. Legal for the amount of the misapplied advance (subject to the court’s usual equitable adjustments and any defences pleaded below).

This was an appeal from Smith J in the Queen's Bench Division. The Court of Appeal held that R.A. Legal committed breaches of trust on 28 and 29 July 2009 and that the trial judge erred in granting relief under section 61 of the Trustee Act 1925. The court found R.A. Legal’s failures (inadequate requisitions, premature unqualified certificate, failure to secure written undertakings or adoption of the Completion Code and failure to react to post-completion warnings) were serious and sufficiently connected with Abbey’s loss to preclude relief; the appeal was allowed.

Appeal from the High Court, Queen's Bench Division (Smith J, case HQ12X01827). Judgment of the Court of Appeal delivered by Briggs LJ (with whom Mrs Justice Proudman and the Chancellor agreed) allowing the appeal [2014] EWCA Civ 183.