An injustice appears to have righted in Davisons Solicitors (a firm) v Nationwide Building Society [2012] EWCA Civ 1626. This was a case in which the appellant law firm had found itself unwittingly embroiled in a property fraud and ended up releasing mortgage advance moneys to complete a transaction that simply did not exist. The seller’s “solicitors”, although appearing to exist on Law Society and SRA databases of law firms, were fraudsters. The appellants were necessarily held to have committed a breach of trust since they had parted with the mortgage advance on terms that were not permitted. (See Lloyds TSB Bank plc v Markandan & Uddin [2012] 2 AER 884). However, the High Court did not allow the firm to avail itself of the protection of section 61 Trustee Act 1925 which enables a court to exonerate a trustee from a breach of trust if he/she has acted honestly and reasonably, and ought fairly to be excused for the breach of trust. In the High Court’s opinion, the law firm had not acted reasonably because it had failed to extract a formal written undertaking for the discharge of the “seller’s” charge. Mere adoption of the Law Society’s Code for Completion did not amount to extracting an undertaking. This was a surprising conclusion given that (in the version applicable at the time) the Code says: “When completing, the seller’s solicitor undertakes… to redeem or obtain discharges for every mortgage or charge so far as it relates to the property specified [in writing to the buyer’s solicitor before completion] which has not already been redeemed or discharged.”
The Court of Appeal has, however, overturned the High Court’s decision. It concludes that the terms of the Code for Completion, when coupled with an agreement to adopt the Code, did amount to the reasonable extraction of an undertaking to discharge. In its view, the law firm had obtained the benefit of an undertaking to redeem the seller’s charge from a person they reasonably believed to be the seller’s solicitor. Relief was therefore granted under section 61 Trustee Act 1925. Further, there was no breach of the firm’s retainer with the Building Society in failing to obtain a fully enforceable first legal charge (CML Handbook paragraph 5.8 at the time – now paragraph 5.12) since the relevant terms of the CML Handbook did not impose an absolute obligation on conveyancers, but a duty to act with reasonable skill and care.