Solicitor – Duty – Breach of trust
 EWCA Civ 183
24 February 2014
Court of Appeal, Civil Division
Sir Terence Etherton, Lord Justice Briggs and Mrs Justice Proudman
Thomas Grant QC (instructed by Matthew Arnold & Baldwin) for the claimant.
Michael Pooles QC and Imran Benson (instructed by DAC Beachcroft LLP) for the defendant.
Solicitor – Duty. The claimant’s predecessor, Abbey, and a borrower instructed the defendant solicitors’ firm to act in connection with the purchase of a property. The purchase price was paid to another solicitors’ firm and was lost. Abbey issued proceedings against the defendant for breach of trust. The judge concluded that the defendant should be wholly relieved from liability, under s 61 of the Trustee Act 1925. Abbey appealed. The Court of Appeal, Civil Division, in allowing the appeal, held that the defendant’s failures had been unreasonable and sufficiently connected with Abbey’s loss such that it would not be fair to excuse the defendant from liability.
The judgment is available at:  EWCA Civ 183
In May 2009, the claimant’s predecessor (Abbey) agreed to lend a sum to a borrower, V, for the ostensible purpose of assisting him in the purchase of a residential property. Abbey and V instructed the defendant solicitors’ firm to act for them in connection with the purchase and the obtaining of first mortgage security. The defendant was advised that the owner and vendor of the property was E, and that her solicitors were Sovereign. In July, having been put in funds by Abbey and V, the defendant transferred that sum to Sovereign’s client account. The transaction apparently completed on the following day, simultaneous exchange of contracts and completion being confirmed by telephone conversation between the two firms.
However, the transaction did not complete. Although E was the registered proprietor of the property and apparently seeking to sell it, she had never retained Sovereign for that purpose, had never agreed to sell it to V and was, until November, entirely unaware that it had been purportedly sold on her behalf by Sovereign. No part of the purchase money was used either to pay E or to discharge the mortgage which she had granted over the property. It had disappeared from Sovereign’s client account and had not been traced or recovered. Abbey issued proceedings against the defendant for breach of trust. The judge found that the defendant had been in breach of trust in releasing Abbey’s money, but concluded that the defendant should be wholly relieved from liability, under s 61 of the Trustee Act 1925 (the 1925 Act) (see  All ER (D) 25 (Jun)). That was on the basis that none of the conduct criticised was sufficiently connected with Abbey’s loss and that, even if it had been, it had not amounted to fault on the part of the defendant that was sufficiently serious or involved such a departure from ordinary and proper standards as to cut it off from the court’s discretion to relieve it from liability.
Abbey appealed on the grounds that: (i) the judge had failed to recognise the defendant’s transfer of the purchase money to Sovereign’s client account on the day before exchange and completion as a separate and distinct breach of trust; and (ii) all or at least some of the respects in which the defendant had departed from the standard of best practice were sufficiently connected with its loss and that the judge’s conclusion that the defaults were insufficiently serious arose from an inappropriate attempt to construe s 61 of the 1925 Act by reference to the jurisprudence about the similarly worded relieving provision in s 727(1) of the Companies Act 1985 (the 1985 Act). The defendant contended that the judge had been wrong to find that there had been any breach of trust.
It fell to be determined: (i) whether there had been a breach of trust; and (ii) whether s 61 of the 1925 Act applied.
The appeal would be allowed.
(1) A purchaser’s solicitor did not have the lender’s implied authority to transfer the trust money, pending completion, to the client account of any other solicitor than the firm which was, in fact, acting for the owner and intending vendor of the property upon which the lender was to obtain a charge on completion (see  of the judgment).
In the instant case, Sovereign had not been acting for the owner of the property, had had no instructions either to contract for or complete its sale to V and had not had the slightest intention of using any part of the money that had been transferred to its client account for the purpose of discharging the existing first mortgage on the property. For that simple reason, the transfer of the money to Sovereign’s client account on the day before the purported completion had been a breach of trust (see  of the judgment).
(2) Invocation of s 61 of the 1925 Act involved at least two main stages. First, the trustee had to show (the onus being on him) that he had acted both honestly and reasonably. The second main stage of the analysis under s 61 of the 1925 Act, usually described as discretionary, consisted of deciding whether the trustee ought fairly to be excused for the breach of trust. The question whether a trustee had acted reasonably in respect of matters connected with the beneficiary’s loss was not to be resolved purely by considering each specific complaint separately. The question was whether the trustee’s relevant conduct had been reasonable, taken as a whole (see , , ,  of the judgment).
On the facts, the judge had been wrong to equate the two relieving provisions in s 61 of the 1925 Act and s 727 of the 1985 Act. The test of reasonableness, rather than perfection, was amply sufficient for comparable cases under s 61 of the 1925 Act and called for no further elaboration. The judge had taken an altogether too lenient view of the seriousness of the defendant’s numerous departures from best practice during the whole of the period from its request for the funds from Abbey, until they had been misappropriated from Sovereign’s client account. The defendant’s particular failures had been unreasonable and sufficiently connected with Abbey’s loss. In any event, those failings of the defendant had formed part of a larger picture of the shoddy performance of a conveyancing transaction from start to finish, which left no doubt that it would not be fair to excuse the defendant from liability, in whole or in part. Since the defendant had not shown that it had acted reasonably in all respects connected with Abbey’s loss, the discretion did not strictly arise. However, even if it had done and fell to be undertaken afresh by the court, it would not have been regarded as fair to grant the defendant any relief from liability for breach of trust (see , , - of the judgment).
Nationwide Building Society v Davisons Solicitors  All ER (D) 114 (Dec) applied.
Decision of Andrew Smith J  All ER (D) 25 (Jun) reversed.