Freely Available British and Irish Public Legal Information
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
England and Wales High Court (Technology and Construction Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Technology and Construction Court) Decisions >> Maes Finance Ltd, Mac No.1 Ltd v. Sharp & Partners (a firm) [1999] EWHC Technology 209 (27th July, 1999)
URL: http://www.bailii.org/ew/cases/EWHC/TCC/1999/209.html
Cite as: [1999] EWHC Technology 209, 69 Con LR 46, [1999] EWHC 209 (TCC)
[New search] [Help]
Maes Finance Ltd, Mac No.1 Ltd v. Sharp & Partners (a firm) [1999] EWHC Technology 209 (27th July, 1999)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
BEFORE: HIS HONOUR JUDGE BOWSHER Q.C.
BETWEEN:
(1)MAES FINANCE LIMITED
(2)MAC NO.1 LIMITED
Claimants
and
SHARP & PARTNERS (A FIRM
Defendants
Case number: 1995 ORB 984
Dates of Trial: 6, 7, 8 July, 1999
Date of Judgment: 27 July, 1999
Roger Smith for the claimants (Salma Sacranie, Solicitor ) Patrick Lawrence for the defendant (Browne Jacobson, Solicitors )JUDGMENT
I direct that no further note or transcript be made of this judgment.
Solicitor's negligence
Duties of solicitor instructed by lender.
The text of the Judgment of His Honour Judge Bowsher Q.C. is as follows:
JUDGMENT
Introduction
1. As a result of certain assignments, rights of action vested in the first claimants against the defendants have become vested in the second claimants. It is agreed that in the event of my giving judgment against the defendants judgment should be in favour of the second claimants, but the rights to be considered are the rights of the first claimants.
2. On 4 December, 1989, the first claimants (Maes) lent £57,500 to a Mr. and Mrs. Kemp on the security of a re-mortgage of a house at 379, Valley Road, Sherwood, Nottingham (the property). The defendants acted as solicitors to both the lenders and the borrowers in that transaction. The claimants claim damages for negligence, breach of contract, and breach of fiduciary duty against the defendants in respect of that transaction. The claim, including interest, amounts to about £43,000. The defendants deny liability, causation and damage, and in the alternative allege contributory negligence on the part of the first claimants and their agents, Eagle Star Insurance Company Limited (Eagle Star).
History
3. The writ in this action was issued on 7 August, 1995.
4. In early 1988, Mr. and Mrs. Kemp were living in a house in Cliftonville, Kent, and Mr Kemp was carrying on a business at Canterbury Road, Birchington, Kent. Both Cliftonville and Birchington are close to Margate at the easternmost tip of Kent. Mr. Kemp was carrying on a business in Birchington as a bicycle and moped repairer, apparently in partnership with a Mr. Souter. The house in Cliftonville was subject to a first mortgage and was also subject to a second charge in favour of NatWest to secure indebtedness of the business. Mr. Kemp's business failed, and he and Mrs. Kemp moved to Nottingham. Mr. Kemp sold his house in Cliftonville and had hopes of selling the business premises, but there were difficulties about the latter. Mr. Kemp apparently had an option to purchase the freehold of those premises but there were conflicting claims and problems with planning permission.
5. On 1 July, 1988, Mr. and Mrs. Kemp bought the property with the aid of a loan from Barclays Bank. The property was subjected to a first charge in favour of Barclays Bank and the existing second charge in favour of NatWest was transferred to the property. The defendants, acting by Mr. Carlin, a partner, acted for the Kemps on that transaction.
6. There was a dispute between Mr. Kemp and Mr. Souter about partnership property and Mr. Souter issued a Bankruptcy Petition against Mr. Kemp. A note of that petition was entered in the Registry. The dispute was settled and in March, 1989 the petition was withdrawn by order of the Court with no order as to costs.
7. In August, 1989, Mr. Kemp approached P.T.L. Associates, insurance brokers of Nottingham, to obtain further finance. P.T.L. acted as introduction agents for Eagle Star. In the loan transaction the subject of this action, Eagle Star acted as agents for the first claimants.
8. On 17 August, 1989, Eagle Star obtained a valuation of the property from a local surveyor. The freehold property was valued at £87,000. The parties to this action are agreed that at the time the true value of the property was not more than £70,000. Later, with the general collapse of the property market, the value of the property fell further.
9. Through P.T.L., on 25 August, 1989, Mr. and Mrs. Kemp applied to Eagle Star for a loan supported by a re-mortgage and a mortgage of an endowment life insurance policy which he applied for at the same time.
10. The application was made under Eagle Star's "Self Certification Plan" which was stated to be for loans up to 75% of the valuation. The loan applied for, and made, was for less than 75% of the surveyor's valuation but for more than 75% of the true value.
11. At that time, many lenders of high repute were lending money on re-mortgages under self-certification schemes. Unlike a "status loan" where the means of the borrower were checked by taking up references, under the self-certification scheme, the borrower was allowed to certify his own means. I heard evidence from Mr. Davis, who retired in 1992, and was at the time employed by Eagle Star as manager with responsibility for the underwriting of residential mortgages. Mr.Davis said that it was the practice of Eagle Star to audit 10% of the self certified applications. However, since there were no written procedures, I am in some doubt whether even that proportion was in fact audited. In their desire to keep up with their competitors in lending money and selling insurance linked to loans, the first claimants and Eagle Star seem to have relied principally on the sufficiency of the security obtained rather than on the value of the personal covenant of the borrower. Mr. Davis accepted that under the self certification scheme there was a greater likelihood of the borrower telling falsehoods in the application.
12. Attention has been given at the trial to some of the entries on the application form.
a) Mr. Kemp gave his address as the property. In response to a request, "If you have lived at this address for less than 3 years please state previous address" the response was "N/A". Since Mr. Kemp gave the date of purchase of the property as 22/6/88, Eagle Star might have raised a question about that but did not do so.
b) Mr. and Mrs. Kemp stated that the purpose of the loan was to pay off the first charge and the rest was for home improvements. As it turned out, though they may not have realised it at the time, there would be nothing left over to pay for home improvements after other pressing debts were paid. The reference to the first charge contains at least a hint that there was a second charge, but Eagle Star raised no question about that.
c) Mr. and Mrs. Kemp correctly stated that the only other person living at the property was their 15 year old daughter.
d) Under "Employment details", Mr. Kemp crossed through that section and Mrs. Kemp gave her employment as an auxiliary nurse. At the date of the application, Mr. Kemp was probably in fairly low paid employment.
e) Mr. Kemp gave the Nottingham Branch of NatWest as his bankers for reference purposes, but Eagle Star, in accordance with their policy for self certification, did not take up a reference.
f) Mr. Kemp correctly disclosed his mortgage to Barclays Bank but did not refer to the second charge to NatWest in response to the question, "Have you any commitment under an existing loan, mortgage, hire purchase, or other current financial agreement?".
g) In response to the question, "Have you ever been adjudged bankrupt or made an arrangement with your creditors?", Mr. Kemp answered "No". The honesty of that answer has been questioned, but Mr. Souter's petition did not lead to Mr. Kemp being adjudged bankrupt and there is no evidence of his having made any arrangement with his creditors. There is no evidence that the answer was a dishonest answer to the question framed in the way that it was. The claimants did not ask the borrowers, "Has a Bankruptcy Petition ever been filed against you? If so, please give details". The claimants chose not to ask the borrower for the information which they now complain should have been provided to them by the defendants.
h) In response to the question, "Have any County Court judgments or Bills of Sale been registered against you?", the answer was "No". I will return to that later.
i) Under the section, "Self employed", Mr. Kemp stated that his occupation was "Motor Proprietor", established as owner at Birchington, Kent, for 4 years with an income before tax of £30,000. That was not true. The business in Birchington, had already failed. No one at Eagle Star questioned how it came about that a man living in Nottingham could carry on a small business in the most remote part of Kent.
j) The borrowers named Mr. Carlin of Sharp & Partners as their solicitors.
13. On the same day that the application was sent to Eagle Star, PTL Associates informed Mr. Carlin that Mr. and Mrs. Kemp wanted him to act for them in connection with the transaction. Mr. Carlin immediately wrote to borrowers stating:
"I understand from PTL Associates that you would like me to act for you in connection with your re-mortgage of the above property. I shall be obliged if you will telephone me to discuss the matter further.
I shall be away on holiday until 4 September, and perhaps you would telephone me after that date."
There is no record of written instructions from the borrowers to the defendants but the borrowers plainly did instruct the defendants, presumably orally, to act generally in accordance with the re-mortgage of the property.
14. On 25 August, 1989, the defendants wrote to Barclays Bank asking for the title deeds to the property.
15. Eagle Star made an Infolink credit search against the occupiers of the property on 13 September, 1989. That search showed that the voters roll listed three names for the property, John L. Kemp, John Kemp, and Shirley A. Kemp. A County Court judgment for £507 dated 5 May, 1989 was listed against Mr. J. Kemp. There is no record that Eagle Star ever made any enquiry following up that credit search. Mr. Davis in cross-examination accepted that probably no action was taken to follow up that credit search. Mr. Davis said that the normal practice would have been to obtain an explanation. As a reason for not obtaining an explanation he said, "I consider that the entry was treated as being referable to a person other than the borrower". That was the best excuse he could think of after the event and it is entirely fanciful as well as being based on conjecture as to the thought process (if there was any thought) of the person who obtained the credit search. Mr. John Bridge, called as an expert witness for the claimants also sought to support that excuse in terms which cast doubt on the independence and impartiality of his testimony.
16. On 18 September, 1989, Eagle Star made a written offer addressed to "Mr. J.L. and Mrs. S.A. Kemp". The offer was for a loan to be made by Maes Finance Limited (the first claimants) of £57,500 secured on a first mortgage of the property and on a 20 year endowment life policy on the lives of the borrowers to be taken out with Eagle Star. The offer included the following:
"The Mortgage deed to be prepared by our solicitors in such form as they consider desirable and the loan to be conditional upon their being satisfied in all respects as to Title, including Town Planning; their charges and disbursements to be paid by the Borrower(s) whether or not the mortgage is completed.
We reserve the right to withdraw or modify these terms if for any reason the mortgage should not be accepted within one month, or completed within four months of the date of this letter, or if the proposals in connection with the Assurances referred to overleaf are not found acceptable by our Life Department.
If you will kindly confirm that you wish to proceed along these lines, I will instruct the following solicitors to act on our behalf:
Sharp & Partners"
17. On 19 September, 1989, Eagle Star sent to the defendants instructions to act on behalf of themselves and the first claimants. The letter of instructions was signed by Mr. Richard Davis, the only witness of fact called on behalf of the claimants and was in the following terms:
"We understand that you are acting for the above named borrower in connection with the proposed mortgage to MAES Finance Limited.
We are acting as agents for MAES Finance Limited and would be grateful if you could also act for MAES Finance Limited and Eagle Star Insurance Company Limited in this matter.
We enclose:-
1. A copy of our "Instructions to Solicitors" for your guidance.
2. A copy of our Letter of Offer.
3. The Borrower's Application Form.
4. Our Valuer's Report.
5. Two prints of the Mortgage Form.
6. Two prints of the Mortgage Conditions (one for the Borrower's retention).
7. Two prints of the mortgage life policy.
8. Form of notice in duplicate of assignment of Life Policy.
9. Certificate of Title and Funds Transfer Request.
10. Completion advice Form.
11. Four copies of our Deeds Schedule.
You are requested to read carefully the "Instructions to Solicitors" document and ensure that you comply with all its requirements.
All enquiries and correspondence in this matter should be addressed to Eagle Star Insurance Company Limited quoting the above reference."
18. Mr. Carlin denies having received the Borrowers' Application Form. He does not deny receipt of the other documents listed in that letter. In particular, the Instructions to Solicitors and the copy of the Letter of Offer are on his file.
19. On 21 September, 1989, the borrowers accepted the offer of the loan.
20. A file note on the file of Eagle Star refers to the preparation of the offer letter. Mr. Davis said in evidence that the note was in the handwriting of Mr. Andrew Osborne, one of the Eagle Star underwriters working under him. Mr. Osborne was not called as a witness although he was apparently responsible for the underwriting of this transaction. It was not said that he could not be called. His identity was only disclosed during cross-examination of Mr. Davis.
21. On 4 October, 1989, the solicitors to Barclays Bank wrote to Mr. Carlin telling him that they were unable to part with the deeds owing to arrears on the mortgage account. Those solicitors told Mr. Carlin the title number and gave him a copy of the Charge Certificate.
22. In October, 1989, Mr. Carlin searched the Register and saw that there was a note of the Bankruptcy Petition issued by Mr.Souter and also a note of its withdrawal. In conveyancing terms, that was not an adverse entry and Mr. Carlin did not report it to claimants.
23. There is a file note on the Eagle Star file from their Leicester Branch Office dated 23 October, 1989, requesting that the offer of 18 September, 1989 be re-issued with an amended amount of loan of £45,000. The following day that request was cancelled. Mr. Davis could give no explanation of this. The offer was not amended. I ask myself whether perhaps someone in the Leicester Branch Office had a passing doubt about the true value of the property. We do not know.
24. On 30 October, 1989, Mr. Carlin sent the mortgage deeds to the borrowers for execution.
25. On 13 November, 1989, the solicitors for Barclays Bank told Mr. Carlin that they had commenced proceedings for the arrears owing to Barclays Bank, indicating that if the mortgage were redeemed before the hearing of the proceedings, they would be withdrawn. The following day, Mr. Carlin replied saying that he hoped to complete by the end of the month and asking for a redemption statement. Mr. Carlin was later told that the date for hearing of the proceedings was set for 3 January, 1990.
26. On 14 November, 1989, Mr. Carlin wrote to NatWest concerning their charge:
"We are acting for Mr and Mrs Kemp in connection with their re-mortgage of the above property and understand that you will agree to have your second mortgage dated 1 July 1988 postponed in favour of the new mortgagees.
Please confirm that this is correct when we will let you have Deed of Postponement for execution."
Mr. Carlin added a postscript:
"P.S. Please advise us of the amount outstanding under your second charge as this will be required by the first mortgagees."
27. On 15 November, 1989, Mr. Carlin sent to Eagle Star a Certificate of Title and request for transfer of funds on the Eagle Star form (received with the letter of instructions) under cover of a letter including the following:
"We refer to paragraph 11 on the instructions to solicitors and would inform you that our client has a Second Mortgage in favour of National Westminster Bank which it is not intended to discharge but to have postponed in favour of yourselves. Please let us have your consent to this."
At the time he sent that letter, Mr. Carlin did not know the amount claimed by NatWest to be due to them. In evidence, Mr. Carlin said that he could not remember how he came to learn that NatWest was willing to have its second charge postponed, but he assumed that the borrowers told him.
28. The Certificate of Title upon Eagle Star's form sent with that letter included the following:
"1. We certify that we have investigated title to the security property in accordance with your Instructions, making all appropriate and usual enquiries and Searches, and that good marketable title and full vacant possession will be obtained on completion.
2. The property is not subject to any covenants encumbrances or other matters revealed by our investigation of title or the Searches and Enquiries which might adversely affect the value of the property save as already reported to you in writing in our letter(s) dated-----''
The claimants make no complaint about that Certificate.
29. The Certificate of Title form did not provide for any assurance or certificate from the solicitor regarding any matter other than title and no other assurance was given. In particular, nothing was said about the borrowers' circumstances. The Bankruptcy Petition, having been withdrawn, did not prevent good title to the property being obtained and did not "adversely affect the value of the property" and so did not need to be mentioned as a qualification to that certificate, and Mr. Carlin did not report it to Eagle Star. The certificate was accurate.
30. The letter of 15 November, 1989 did not reach Eagle Star. Somehow that became known to Mr. Carlin and on 23 November, 1989, the letter and its enclosure was sent again by Fax to Eagle Star for the attention of "Julia". Eagle Star accept that they received that Fax.
31. Mr. Carlin says that, at about the date of that Fax, he had a conversation with Julia in which she gave oral consent to the second charge on the property in favour of NatWest. Eagle Star deny that oral consent was given. I shall return later to the evidence about that conversation.
32. Meanwhile, Mr. Carlin had been told by NatWest on 22 November, 1989 what was the amount outstanding owed to them secured by the second charge. Mr. Carlin does not claim that he told Julia or anyone else at Eagle Star of that amount, nor was he asked for that information other than by way of the original Solicitors Instruction to which I shall later refer.
33. Mr. Carlin had also been told on 16 November, 1989 the amount required by Barclays Bank to redeem their mortgage.
34. Mr. Carlin also received a letter dated 20 November, 1989 from Mr. McGovern of Sinclairs, solicitors of Canterbury. Sinclairs had acted for Mr. Kemp regarding Mr. Souter's claim. Mr. McGovern confirmed that Mr. Souter's Bankruptcy Petition had been withdrawn "after protracted negotiations". Mr. McGovern said that he was owed £1,004.99 by Mr. Kemp, and Mr. McGovern threatened to issue a bankruptcy notice if he was not paid out of the proceeds of the re-mortgage of the property. On 27 November, 1989, Sinclairs sent to Mr. Carlin an office copy of an order of 30 March 1989 that the notice of the Bankruptcy Petition of Mr. Souter be vacated from the register. Mr. Carlin said that he was not concerned that there had been a dispute between Mr. Kemp and a former partner. He regarded the Bankruptcy Petition as simply a weapon used in the dispute. He saw nothing out of the way in the delay in paying a solicitor's bill.
35. There is a note on Mr. Carlin's file dated 28 November, 1989, noting a message from Eagle Star to the effect that the money would be transferred by Eagle Star on 29 November, 1989, and they were just waiting for the endowment policy to be put on risk.
36. On 1 December, 1989, Mr. Carlin chased Julia for the money again, and on 4 December, 1989, the funds were transferred to the defendants Bank account. On that day, Mr. Carlin redeemed the Barclays Bank mortgage by paying the sums claimed by them, and he also paid £1,004.99 to Sinclairs. He also paid to NatWest the balance of the loan (after deducting his fee and expenses) namely £23,958.96 to satisfy their condition for their charge being transferred to the property and postponed to the mortgage in favour of the first claimants. A draft deed of postponement was later sent to NatWest and executed by them and lodged with the Lands Registry.
37. The payment of the funds to Mr. Carlin was authorised within Eagle Star by an internal Payment Instruction signed by Mr. Davis and another senior officer of the company and dated 4 December, 1989.
38. On 4 December, 1989, Mr. Carlin sent to NatWest notice of completion together with a certified copy of the completed mortgage deed.
39. Mr. Kemp did not pay the sums due to Eagle Star in January and March, 1990 and further arrears followed. By 3 December, 1990, the arrears amounted to £3,596 and Eagle Star threatened to instruct solicitors. On 30 August, 1990, financial advisers wrote on behalf of Mr. Kemp indicating at length and in considerable detail that he no longer had any employment and his financial position was quite hopeless.
40. In February, 1992, proceedings were started for possession. Possession was obtained in June, 1992. Although the property was placed on the market in June, 1992, it was not sold until 29 October, 1993 for a price of £48,000.
41. It is very helpfully agreed between counsel that the property ought reasonably to have been sold by 1 February, 1993 and should have realised £50,000 gross. That agreement saved substantial costs in the conduct of this trial.
42. There is no direct evidence before me, but it is reasonably to be inferred from all the evidence before me (including the letter dated 30 August, 1990 from the financial advisers) that Mr. and Mrs. Kemp are not worth powder and shot.
The defendants' duties
43. The claimants' allegations about the defendants' duties are set out in paragraphs 6 to 9 of the Amended Statement of Claim (the amendment having been made on 20 January, 1998):
" 6) In or about early September 1989 the Defendant accepted instructions from the Borrowers to act for them in connection with the said proposed loan. By a letter to the Defendant of 19th September 1989 the First Plaintiff by ESICO [Eagle Star] retained the Defendant to act on its behalf in the said transaction. The said transaction was conducted for the Defendant firm on behalf of both the Borrowers and the First Plaintiff by Mr Carlin.
7) The said letter of 19th September 1989 enclosed copies of the said application form and valuation and a copy of ESICO's and the First Plaintiff s standard 'Instructions to Solicitors' which provided, inter alia:
(3) STANDARD OF CARE - These notes are intended to assist you but do not in any way reduce the normal responsibilities applicable where a solicitor acts for a mortgagee'.
(6) SEARCHES ....Clear and current bankruptcy searches against all borrowers are required on completion.
(11)SECOND CHARGES - Written consent is required to second charges. Details of the amount and purpose of the loan must be submitted when requesting such consent'.
8) By implication the Defendant was not to have the First Plaintiff's or ESICO's consent to part with any advance monies received from the First Plaintiff unless and until the Defendant had complied with the express terms of the 'Instructions to Solicitors' including the said provision as to Second Charges.
9) Mr Carlin and the Defendant (in addition to their duties under the express terms of the 'Instructions to Solicitors') owed duties to the first plaintiff (by implied terms of the defendants retainer or under the general law) to:
(A) read (in their entirety or alternatively to the extent necessary to acquaint themselves with the facts material to the transaction and perform their duties to the first plaintiff) the documents listed in the said letter of 19 September 1989;
(B) inform the first plaintiff or ESICO if any of the said documents did not accompany the said letter;
(C) to communicate to the First Plaintiff or ESICO any information acquired by the Defendant before completion of the said loan, including information as to the financial standing of the Borrowers or the truthfulness of their statements on the said form, which might affect the First Plaintiffs or ESICO's willingness to proceed with the said loan;
(D) if for any reason the defendant could not satisfy any of the requirements of the Instructions to Solicitors to explain the said state of affairs to the first plaintiff or ESICO before completion;
(E) act in good faith in the borrowers intersts anad not so to act as to further the borrowers' interests to the prejudice of the first plaintiffs' interests;
(F) Conduct the said transaction on behalf of the first plaintiff with the skill and diligence of a reasonably competent solicitor.
Mr Carlin and the Defendant, having been supplied with copies of the said application form and valuation, knew or should have known of the statements made on the said form and the supposed value of the Property."
44. Those allegations as to the duties owed can best be understood in the light of further allegations made in the Amended Statement of Claim. It was alleged that, before completion of the loan, the defendants in the course of acting as the plaintiffs' solicitors or as their agents received information then unknown to the first claimants relating to the financial standing of the borrowers and the truthfulness of their statements on the application form:
A. on 5th October 1989 they received a letter from the then first mortgagee of the Property Barclays Bank refusing to release the title deeds to them 'owing to arrears on your clients' mortgage account';
B. on 14th and 15th November 1989 they received letters from Barclays Bank's solicitors informing them that the bank had commenced proceedings against the Borrowers for possession of the Property on 9th November 1989 and the said proceedings were due to be heard on 3rd January 1990;
C. they were informed that the redemption figure for the said first mortgage was £32,117.20 at 30th November 1989;
D. at a date unknown to the First Plaintiff they were informed that the Property was subject to a second charge to National Westminster Bank;
E. on or about 21st November 1989 they received a letter from the National Westminster Bank informing them that Mr Kemp currently owed the bank sums of £8,362.92, £22,819.05 and £58,432.76 (totalling £89,614.73) under accounts at branches in Nottingham and Canterbury and that the said bank would consent to postpone its charge in favour of the First Plaintiff if it received £24,000 from the re-mortgage monies;
F. on or about 21st November 1989 they received a letter from Sinclairs, solicitors, who stated that they had previously acted for Mr Kemp in connection with a bankruptcy petition served on him by a Mr. Souter (which had been withdrawn "following protracted negotiations") that Mr Kemp had not paid their bill of costs for £1,004.89 rendered on l9th September 1989, that they had served a statutory demand on him on 16th November 1989 and would petition for bankruptcy unless they received the Defendant's undertaking to pay their bill with the proceeds of the re-mortgage;
G. in or about November, 1989 by making bankruptcy searches against the borrowers or otherwise they discovered that Mr. Souter's said petition was still registered as a pending action in the Land Charges Department.
45. The claimants further alleged that it was or should have been known to Mr. Carlin on receipt of that information that the answers given by the borrowers on their application form were or were likely to be untruthful, that the borrowers financial position was precarious and that the borrowers were unlikely to be able to service the proposed loan from the first claimants.
46. In considering the duties owed by the defendants the starting point is to consider what were the defendants instructed to do in the instructions which they accepted.
47. It is first necessary to resolve the issue of fact whether the Borrowers Application Form was sent to the defendants with the letter of 19 September, 1989. Mr. Carlin's denial of receipt of that document is based solely on the fact that the document is not on his file. In view of his understandable lack of recollection of details so long after the event, his failure to recall reading it is not very significant. The claimants case that it was sent is based on the absence of the original document from their files. Mr. Davis said that in days long past, when they had customarily instructed their own solicitors, Simmons & Simmons, to act for them in such transactions, they had a practice of sending the original Borrowers Application to the solicitors and that practice had been continued when they changed to instructing solicitors selected by the borrower, and in accordance with that practice, the original would have been sent to the defendants. Mr. Davis said that there were no written procedure manuals and people in his department kept their own personal notes of procedure as he himself did also. There was no evidence of who was responsible for menial but important tasks of filing or marshalling and sending out documents nor of any procedure for seeing that it was done properly. The file of Eagle Star does not show the care in keeping a careful filed record shown by many other lenders. There are many possible reasons why the original Borrowers Application Form is not to be found on the file of Eagle Star. One does not expect a very high degree of proof in showing that a document was sent out in the ordinary course of business nearly 10 years ago, but Eagle Star has not provided it. I find that the Borrowers Application Form was not sent to the defendants.
48. The claimants contend that if the Borrowers Application Form was not sent to the defendants, they should have asked for it. Whether they should have asked for it or not depends on whether they needed it to perform their duties. I find, for reasons which I shall explain, that they did not need the Borrowers Application Form for the discharge of their duties and they were therefore under no duty to ask for it.
49. The letter of 19 September, 1989 requested particular attention to the "Instructions to Solicitors" document. I was told by Mr. Davis that that document had been drafted for Eagle Star by their solicitors, Simmonds and Simmonds.
50. The "Instructions to Solicitors" document begins:
"1) ACTING FOR MAES FINANCE LIMITED AND EAGLE STAR INSURANCE COMPANY LIMITED
You are instructed by Eagle Star Insurance Company Ltd to act for MAES Finance Limited and Eagle Star Insurance Company Limited on the strict understanding that you are a qualified Solicitors, engaged in private pratice, and holding a current practising certificate. If for any reason your firm is unwilling or unable to accept these Instructions to act on behalf of the above companies kindly telephone Eagle Star Mortgage Department in order that alternative arrangements can be made.
2) COST & DISBURSEMENTS
Your Costs and Disbursements are recoverable solely from the Borrower
3) STANDARD OF CARE
These notes are intended to assist you but do not in any way reduce the normal responsibility applicable where a solicitor acts for a Mortgagee."
51. Paragraph 1 of the Instructions simply instruct the defendants to act as solicitors, and do not define what they are to do. Paragraph 3 concerns the standard of care and does not relate to the extent of the duties in the discharge of which that standard is to be exercised. I regard that paragraph as entirely neutral in the consideration of the extent of the duties.
52. Paragraph 4 of the Instructions states:
"4) SPECIAL CONDITIONS
All special and general conditions of the Mortgage Offer must be fully complied with prior to completion."
Accordingly, the solicitor here is given an express duty to look at the Mortgage Offer and ensure that all its conditions are complied with. Mr. Carlin was sent the Mortgage Offer. That offer made a condition as to insurance of the property with Eagle Star which is not in issue. There was also a condition as to title which I have already quoted:
"The Mortgage deed to be prepared by our solicitors in such form as they consider desirable and the loan to be conditional upon their being satisfied in all respects as to Title, including Town Planning; their charges and disbursements to be paid by the Borrower(s) whether or not the mortgage is completed."
The defendants plainly had a duty to satisfy themselves as to title, and no complaint is made about their work in that regard. There was no other condition in the Mortgage Offer.
53. The remainder of the Instructions to Solicitors falls under the following headings:
TITLE
SEARCHES
".... clear and current bankruptcy searches against all borrowers are required on completion"
LEASEHOLDS
VACANT POSSESSION
JOINT BORROWERS
NON OWNING OCCUPIERS
SECOND CHARGES
NHBC
UNDERTAKING
(referring to undertakings by the borrower to repair).
RETENTIONS
INSURANCES
REPORT ON TITLE (AND FUNDS TRANSFER REQUEST)
COMPLETION
DELAYED COMPLETION
POST COMPLETION
STAMPING
HM LAND REGISTRY
DEEDS.
54. The paragraph regarding second charges is important and is quoted and relied on by the claimants in paragraph 7 of the Statement of Claim (see paragraph 43 above). There was a specific contractual requirement that written consent should be obtained for second charges, and that details of the amount and purpose of the loan secured by the second charge should be submitted when requesting consent. It is argued on behalf of the claimants that the requirement that details of the amount and purpose of the loan must be submitted when asking for consent to a second charge shows a concern that the claimants should be informed of information as to the financial standing of the borrowers. It is more likely that this information was required because the lenders wanted to be informed of the extent of any possible difficulty in selling with a clear title in the event of a repossession. In any event, even if the claimants are right in that submission, I do not accept that it follows from a requirement for provision of a specific piece of information that the defendants were required by their instructions generally to provide information as to the financial standing of the borrowers or the truthfulness of the statements on the Borrowers Application Form. There is nothing under any of the other headings in this lengthy document suggesting a requirement of such a general duty.
55. I turn to consider some of the authorities cited to me. In considering those authorities, it must be borne in mind that in each case the Court was considering instructions to solicitors in differing terms.
56. The claimants rely on a passage in the judgment of Sir Thomas Bingham M.R. in Mortgage Express v. Bowerman & Partners [1996] 2 All ER 836. At page 841 Sir Thomas Bingham said:
"That leads on to the question which, in my view, lies at the heart of this cross-appeal. What duty did the solicitors, by Mr Gilroy, owe to Mortgage Express? Before the judge it was argued for the solicitors that the duty was to do what was necessary to report to Mortgage Express on title - no more and no less. There were problems about this contention. In the first place, it did not seem to accord with the standing instructions issued by Mortgage Express to solicitors acting for it. These referred to the 'normal duties of a solicitor when acting for a mortgagee' and did not suggest that the solicitor's duty began and ended with the report on title. Secondly, as Mr Gilroy's evidence made clear, this strict and rather legalistic approach did not accord with the realities of practice. Mr Gilroy acknowledged that matters might come to the notice of a solicitor in his position which he would be under a professional duty to report to the lender. For example, such a solicitor was not retained to second-guess the valuation on which the lender was relying, but if he received information of previous transactions so apparently inconsistent with that valuation as to give possible reasons for doubting its reliability, that might be something which he should report. Thus, Mr. Gilroy accepted that questions of fact and degree would affect the solicitor's duty.
Thirdly, this strict approach does not, in my view, lie comfortably alongside the general guidance given to solicitors on professional conduct. In December 1990 guidance was given on mortgage fraud in, Annex 24L of the
'Solicitors must not withhold information relevant to a transaction from any client and for a lender this includes not only straightforward price reductions but may also include other allowances (e.g. for repairs, payment of costs, the inclusion of chattels in the price and incentives of the kind offered by builders such as free holidays and part-subsidisation or mortgage payments) which amount to a price reduction and which would affect the lender's decision to make the advance.'
This guidance is not something which Mr Gilroy, in all probability, saw before completion of these transactions and he is not to be criticised for that. But guidance of this kind is not the product of parthenogenesis. It represents a distillation, or codification, of existing good practice and it represents, as it seems to me, sound practical common sense. A client cannot expect a solicitor to undertake work he has not asked him to do, and will not wish to pay him for such work. But if in the course of doing the work he is instructed to do the solicitor comes into possession of information which is not confidential and which is clearly of potential significance to the client, I think that the client would reasonably expect the solicitor to pass it on and feel understandably aggrieved if he did not.
I would accordingly reject the submission originally made on behalf of the solicitors as to the narrow ambit of the duty, as the judge did, and accept, as I understand her to have done, the submission of Mortgage Express. This was that if, in the course of investigating title, a solicitor discovers facts which a reasonably competent solicitor would realise might have a material bearing on the valuation of the lender's security or some other ingredient of the lending decision, then it is his duty to point this out."
57. Counsel for the claimants relies on the words in the penultimate paragraph of that passage from Sir Thomas Bingham's judgment, "if in the course of doing the work ..." to the end of that citation. If one takes the words out of context in that way and reads them like a statute, they are saying, on the claimants' case, that the defendants in the present case had a duty to disclose information acquired by them before the completion of the loan as to the financial standing of the borrowers because that information would comprise, in the words of Sir Thomas Bingham, "facts which a reasonably competent solicitor would realise might have a material bearing on ........some other ingredient of the lending decision". That way of putting the case on the part of the claimants does, of course, presuppose that the financial standing of the borrowers was an ingredient of the lending decision, which is not to be assumed, particularly here where there was self certification. If one were to construe those words like a statute, it would be perfectly possible to construe them as being confined to some other ingredient of the lending decision relating to the value of the security. But in any event, the words were not meant to be read like a statute. Moreover, the context of the case as a whole, like the context of the citation from the Guide to the Professional Conduct of Solicitors, is the consideration of information relevant to the value of the security rather than information as to the value of the borrower's covenant to pay. The claimants also ignore the important words in that passage, "A client cannot expect a solicitor to undertake work he has not asked him to do, and will not wish to pay him for such work", though here the claimants were not paying the defendants anything: all their charges were to be recovered from the borrowers.
58. Mortgage Express v. Bowerman & Partners was a case in which the solicitor was acting for both purchaser and lender. In the course of his work for them both, he learnt that his client purchaser was proposing, in a declining property market, to buy the property at £20,000 above the professional valuation. He also learned that this was a sub-sale by a vendor who was simultaneously buying the property at £70,000 below what his purchaser client was agreeing to pay and £50,000 below the valuation figure on which his lender clients were relying. The solicitor thought he had a duty to draw those facts to the attention of his purchaser client because he thought that client might be paying too much. Arden J. and the Court of Appeal held that the solicitor ought also to have drawn the facts to the attention of his lender clients. Sir Thomas Bingham said, at page 843:
"He was aware that Mortgage Express had obtained its own valuation and regarded valuation as no concern of his. Up to a point he was right. But he rightly accepted a duty to report the facts to Mortgage Express if he had reason to doubt the valuation and, on the facts here, I find it impossible to escape the conclusion that if he had applied his mind to these facts he would have appreciated that they might have caused Mortgage Express to doubt the valuation. The contemporary sale at a much lower value was itself evidence of value for Mortgage Express to assess."
The solicitor "rightly accepted a duty to report the facts to Mortgage Express if he had reason to doubt the valuation" and the question was whether he had reason to doubt the valuation: that was, as both Sir Thomas Bingham and Millett L.J. said, "a question of fact and degree". What was under consideration was the value of the security.
59. Millett L.J. at page 845 stated the duty of the solicitor in more narrow terms confined to the questions of investigation of title and the value of the security:
"It is the duty of a solicitor acting for a purchaser to investigate the vendor's title on his behalf and to deduce it to the mortgagee's solicitor. He has the implied authority of his client to communicate all documents of title to the mortgagee's solicitor. In the present case, the information in question appeared on the face of the vendor's title, which consisted of his agreement, subject to contract, to purchase the flat for £150,000. Had the plaintiffs instructed other solicitors, Mr Gilroy would have had to provide them with a copy of that agreement. It would then have been for those solicitors to consider whether they ought to inform their client of the price which Mr Arrach was paying for the flat. In the present case Mr Gilroy was instructed to act both for the buyer and the mortgagee and it was his duty to investigate the vendor's title on behalf of each of his clients. He must, therefore, be taken to have been in possession of the documents of title, including, Mr Arrach's purchase agreement, not only as solicitor for Mr Hadi but also, with Mr Hadi's implied authority, as solicitor for the plaintiff. He then came under a duty to the plaintiffs to consider whether he ought to disclose the information which that documentation contained to them."
60. As Sir Thomas Bingham said at page 841 of the report, Mortgage Express v. Bowerman & Partners was a case where the solicitor was instructed to perform "the normal duties of a solicitor when acting for a mortgagee". That instruction was given in the first of the Mortgage Express "Standing Instructions" to solicitors in the following words:
"These instructions are not intended to be exhaustive and do not in any way limit the normal duties of a solicitor when acting for a mortgagee.'"
Unlike the similar words in the instructions in the present case, those words related to the duties, not to the standard of care. The Court decided that those normal duties went beyond a duty to do what was necessary to report on title and included a duty to report facts coming to the attention of the solicitor in the course of his work if those facts gave reason to doubt the valuation of the security. The Court did not consider any duty to report facts relevant to the value of the borrower's covenant or the truthfulness of his application because those were not matters in issue in that case. Sir Thomas Bingham said at page 843 that the decision was one closely dependent on the facts of the case and did not extend the duties to which solicitors are subject.
61. The defendants relied on the decision of the Court of Appeal in National Home Loans Corporation v. Giffen Couch & Archer [1997] 3 All ER 808. That also was a case in which the defendant solicitors acted for both lender and borrowers in respect of a re-mortgage under a self certification scheme. The borrowers gave incorrect information as to their means on the application form. A credit search by the lender revealed an undisclosed County Court judgment, but no action was taken. The defendants were instructed to "act for the [lender] in the preparation of a mortgage with any other appropriate documents in accordance with the notes for guidance and the documents provided". The documents included a printed form of instructions. Those instructions instructed the defendants to investigate the title to the property and to advise if any condition of the offer of loan or any condition of the instructions had not been complied with. The solicitors were required to use the lender's form of report on title. That form required the defendants to certify, among other things, "6) We are not aware of any material change in the applicant's circumstances subsequent to the date of the offer of loan". The instruction also required a clear bankruptcy search to be obtained. There was no requirement to report on the state of the account on any existing mortgage. Before submitting the report on title with the certificate that there had been no material change in the applicants circumstances, the defendants became aware that there were arrears on the existing mortgage and the existing mortgagees were threatening proceedings, but the defendants did not report that to the lender because they did not consider that they were under any duty to do so, there having been no change in circumstances.
62. In a judgment with which Hobhouse and Leggatt LJJ agreed, Gibson LJ in National Home Loans Corporation v. Giffen Couch & Archer at page 813 said:
"As Oliver J said in Midland Bank Trust Co Ltd v Hett Stubbs & Kemp (a firm) [1978] 3 All ER 571 at 583, [1979] Ch 384 at 402, in relation to the duties of a solicitor to a client by whom he has been retained:
'The extent of his duties depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do.'
Donaldson LJ stated in Carradine Properties Ltd v DJ Freeman & Co (a firm) (1982) 126 SJ 157 in relation to the solicitor's duty of care to his client that:
'The precise scope of that duty will depend inter alia upon the extent to which the client appears to need advice. An inexperienced client will need and be entitled to expect a solicitor to take a much broader view of the scope of his retainer and his duties than will be the case with an experienced client.'
That statement was cited with approval by this court in Virgin Management Limited v. De Morgan Group plc [1996] CA Transcript 82."
63. At a later point in his judgment, Gibson LJ cited a passage from the judgment of Sir John Vinelott in Birmingham Midshires Mortgage Services Limited v. David Parry & Co (1996) 51 ConLR 1 at 14:
"However a solicitor is not required to investigate the borrower's financial position and is entitled to assume that the mortgagee has himself made such inquiries as he thinks necessary ..."
Gibson LJ commented that that was also the view of Mr. Recorder Seymour Q.C. sitting as a Deputy Official Referee in Halifax Mortgage Services Limited v. Key Surveyors Nationwide Limited (4 March, 1996, unreported).
64. Gibson LJ then continued his judgment by referring to a number of factors relevant to the case before him. Those factors bear considerable similarity to the facts of the case before me.
"The factors which seem to me to be relevant to determining the extent of the defendants' duty in the present case are as follows.
(1) The instructions from the plaintiff required the defendants to act for the plaintiff 'in the preparation of a mortgage ... in accordance with the Notes for Guidance and the documents provided'. Any solicitor of ordinary competence and experience would realise that the defendants' primary function was to make sure that the plaintiff received a valid and effective first mortgage on the property, and that required in particular that the plaintiff should receive a good and marketable title. The approval of the title by the defendants was an express condition of the loan.
(2) The plaintiff, an experienced commercial lender, provided its own detailed printed instructions to the solicitors. Those instructions specified the particular matters on which the plaintiff required to be advised. This made clear, for example, that the investigation of title should go beyond ordinary conveyancing matters, but extended to matters which might affect the valuation put upon the property. To give another example, they were required to advise if any information suggested that the property was not to be the principal residence of Mr and Mrs Choudhry for the sole continuing occupation of them and their family. The plaintiff provided its own form of a report on title which stated precisely what the solicitor was required to certify. In these circumstances, whatever the position in other cases with differing circumstances, there is limited room here for treating the scope of the duty of care as extending to require the solicitor to take action which has not been expressly required by the plaintiff in its instructions.
(3) Subject to para 6 of the report on title, the only action which the defendants were instructed to take relating to the financial circumstances of Mr and Mrs Choudhry, was twofold: to do a bankruptcy search and to report on any matter revealed by the search.
(4) The plaintiff did not send a copy of the application by Mr and Mrs Choudhry to the defendants, and there is no evidence that they knew of any of its contents.
(5) Further, the report on title, in requiring the defendants to certify that they were not aware of any material change in the circumstances of Mr and Mrs Choudhry subsequent to the date of the offer of loan, would naturally lead the defendants to believe that, subject only to a clear bankruptcy search being obtained, the plaintiff was satisfied that the circumstances of Mr and Mrs Choudhry at that date, were such that they were appropriate borrowers. The defendants did not know what inquiries, if any, had been made by the plaintiff. Mrs Butler, a legal executive who was employed by the defendants and who, acting under Mr Taylor, dealt with the matter for them, presumed that the plaintiff would have sought a reference from Western Trust."
65. Gibson LJ also, at page 815, stressed the difference between matters going to the value of the security and matters going to the worth of the personal covenant:
"Mr Davidson QC for the defendants submitted that the judge had failed to see distinction between points going to security in the event of default on a borrower's personal covenant, and points going to the worth of the personal covenant. Mr Scrota contended that there was no such distinction because the personal covenant was part of the security. I do not agree. As Mr Davidson said, security is taken by the lender for the performance by the borrower of the personal covenant. In the Mortgage Express case [1996] 2 All ER 836, the relevant information cast doubt on the correctness of the valuation on the basis of which the intended mortgagee was to lend a sum amounting to 90% of the valuation. That affected the security in relation to which the solicitors had been instructed. The relevant information in the present case had little to do with the security to be taken by the plaintiff, but was of some materiality to the value of the personal covenant, in that it showed that in the past Mr and Mrs Choudhry had been unable or unwilling to meet their financial obligations to Western Trust. But the transaction in the present case was a re-mortgage, as the plaintiff knew, and on the completion of the transaction, the existing mortgage debt would be cleared.
.............
I therefore conclude, in acceptance of Mr Davidson's submissions, that the defendants were not in breach of duty when they did not pass on to the plaintiff the information as to the arrears and as to the implied threat of proceedings. Douglas Brown J, in one of the many other first instance decisions in this area, Omega Trust Co Ltd v Wright Son & Pepper (a firm) (14 February 1997, unreported), said that the decision of the judge was 'plainly wrong'. I agree."
66. The facts of National Home Loans Corporation v. Giffen Couch & Archer are strikingly similar to the facts of the present case though naturally there are differences. The matters expressly required of the defendants in this case were less extensive than those required in Giffen Couch & Archer. For example, the defendants in GCA were instructed to make a bankruptcy search and report on any matter revealed by the search, whereas in the present case, the solicitors were told that "clear and current bankruptcy searches are required on completion". There was no duty to report matters of history short of existing bankruptcy. If the borrowers were in fact bankrupt, that would go to the question whether a good title could be given, and that would have to be reported. Matters short of existing bankruptcy were not required to be reported. Further, the defendants were not required to report any change in the circumstances of the borrowers. It would be wrong to try to apply one case to another on the facts, but plainly similar principles apply.
67. The decision of the Court of Appeal in National Home Loans Corporation v. Giffen Couch & Archer was cited to the Court of Appeal a few months later in Birmingham Midshires Mortgage Services Limited v. David Parry & Co (Court of Appeal, 5 November, 1997: only reported at [1997] EGCS 150) on appeal from Sir John Vinelott, upholding his judgment. That was a case of an impecunious borrower, an over-stretched property developer who borrowed money from the plaintiffs on a re-mortgage of one of his several properties. The defendants were solicitors instructed by both the borrower and the lender. The instructions from the lender included "Standing Instructions" which included the following:
"1. Solicitors Instructions
These instructions are intended to be a guide and not in any way to reduce the normal responsibility of a solicitor acting for a mortgagee.....
3. Solicitors must ensure that the general and special conditions specified in the offer are complied with and brought to the applicant's attention on or before completion.
8. Generally
Any matters which may affect the security or the offer of advance must be reported immediately.
17. Report on Title
This should be forwarded at least 7 working days prior to completion or 10 working days if a re-inspection is required.
Plaintiffs' General Conditions
8. Existing mortgages
The applicant's existing mortgage(s), if any, must be redeemed on or before completion of this advance.
Special Conditions: (Contained in the offer of advance)
Condition 14
The applicant's existing mortgage(s), must be redeemed on or before completion of this advance."
68. Mummery LJ (with whose judgment Ward and Staughton LJJ agreed) said:
"The extent of the contractual obligation of Mr Bacon depends on the wording of General Condition 8 and Special Condition 14, construed in the context in which the contract was made. The Plaintiffs were taking a charge only on The Mill, not on the Welsh properties: they were subject to mortgages to other lenders. The Plaintiffs' concern was only with the price paid for and the value of the property on which their loan was to be secured i.e. The Mill. It was a "non-status" mortgage granted without any inquiry by them about Mr Bacon's occupation, his gross annual income or his other properties: those details were only requested by the Plaintiffs if the proposed advance was more than 80% of the price, which this was not. On this point I find the reasoning of the judge compelling. A reasonably competent solicitor would not have informed the Plaintiffs about mortgages over other properties which Mr Bacon was not obliged, by the Conditions of the Offer of Advance, to redeem. The investigation of the financial position of Mr Bacon was a matter for the Plaintiffs. Mr Parry's principal duty to the Plaintiffs was to investigate and report on matters of title to the property to be charged and to ensure that the Plaintiffs obtained a valid first charge on that property. He was entitled, in the absence of information to the contrary, to assume that Mr Bacon had given full and accurate answers to the Plaintiffs about his assets and liabilities; that the Plaintiffs had made such requirements as they considered appropriate in the Conditions of the Offer of Advance; and that they were content to make the advance on the security offered and on the basis of the responses by Mr Bacon to their inquiries. It was not part of Mr Parry's duty to make a report or to supply information to the Plaintiffs about Mr Bacon's financial position: National Home Loans v Giffen Couch & Archer (Court of Appeal 18 June 1997, Unreported)."
69. It is interesting that the opening words of the Standing Instructions in that case were similar in effect to the Standing Instructions in Mortgage Express v. Bowerman & Partners.
70. In Nationwide Building Society v. Balmer Radmore [1999] Ll LR PN 241, at page 256, it was submitted on behalf of solicitors that a solicitor acting for a mortgagee was under no duty to report matters of commercial interest to the lender and that the "Bowerman duty" was narrow. Blackburne J. having considered authorities including Mortgage Express v. Bowerman & Partners and National Home Loans Corporation v. Giffen Couch & Archer said at a page 257:
"I accept Mr.Davidson's submission based on his analysis of Bowerman and GCA, that the duty to report, as expounded in the Bowerman case, is confined to matters which are within the scope of the client's interest which the solicitor is engaged to serve. I also accept his submission that whether or not the solicitor is subject to such a duty depends on the terms and limits of his retainer.
I also accept his submission that, in considering whether a solicitor acting for a lender is subject to a Bowerman type duty, the correct approach is to examine the terms of the retainer and then consider what implied obligations, if any, there are to accompany the expressed ones. Having said that, however, I am inclined to think that the Bowerman duty is a species of obligation which the Court will ordinarily imply, or find present, where a solicitor acts for a lender in a mortgage transaction except to the extent that where to do so would be inconsistent with the express terms of the engagement or with the surrounding circumstances of the relationship. I do not accept his submission that the Society's written instructions set out the entirety of what it required its solicitor to do and. that, to use Mr Davidson's expression, there was no "spare breadth" to them. The matter is very much one of impression. Thus the instructions require the solicitor to "investigate the title and prepare the necessary deed". Apart from stipulating that the title should be "good and sufficient for the Society's purposes" (see general condition 2), that leaseholds should contain (or, as the case may be, should not contain) certain provisions as set out in general condition 20, and that the mortgage document hould be in the Society's standard form (see general condition 17) the instructions do not suggest any limitation on those duties. They do not, for example, state how the solicitor is to investigate title. General condition 19 states that the Society would normally expect a formal local search and form of standard enquiries to be obtained but leaves it to the solicitor to decide whether to undertake local searches and enquiries and if so the nature of them. Plainly much which the solicitor is to do depends on the observance by him of ordinary good practice and the application of common sense. Nor do I consider, any more than Chadwick J did in Bristol and West Building Society v May, May & Merrimans [1996] 2 All ER 801 (at pages 813 to 814) (May, May & Mertimans) where a similar point arose, that any of the defendant solicitors before me can take any comfort from the absence of any express provision in their instructions disclaiming any intention to limit a solicitor's normal duties when acting for a mortgagee. Given their terms it would be perverse to construe the instructions to solicitors as excluding a duty to which a solicitor, instructed to investigate title, would be subject under the general law as appearing from the statement of principle set out in the Master of the Rolls' judgment in Bowerman.
The GCA decision, on which Mr Davidson placed considerable reliance, is clearly distinguishable. The question in that case was whether the solicitor should have reported certain information which cast doubt on the borrowers' ability to pay. The information was of a kind which it would be reasonable to suppose the plaintiff would have obtained from other sources. The instructions were held, where matters of creditworthiness were concerned, to be of very limited scope. The decision does not seek to limit the scope of the duty to report where, as here, the information relates to matters going to the value of the property and therefore to the adequacy of the security or where, as here, the information derives from an investigation of title and therefore from matters which it is the business of the solicitor to investigate and not that of the Society or of others on its behalf.
On the contrary, I take the view that general condition 19 provides a clear indication in support of the existence of the general duty to report articulated in Bowerman, at any rate so far as it relates to matters having a bearing on the valuation of the Society's security. Whilst I am inclined to think that, as Mr Davidson submitted, general condition 19 is concerned with attributes of the property affecting, or which might be thought to affect, its value as disclosed by standard local searches and enquiries (as distinct from evidence of the price paid, or to be paid, for the property under a recent, or contemporaneous, sale of it) the very presence of the condition shows that, despite having made an offer of advance and despite having obtained a valuation of the property, the Society wished to he informed of matters relevant to the value or worth of the property. This wish could only be on the footing that the information might cast doubt on the valuation it had received. Faced with such a provision, what solicitor of reasonable competence, if told that the self-same property was in the course of being sold to the vendor at, say, two-thirds of the amount which the Society was proposing to lend to the purchaser from the vendor, would say to himself "this information, although it may cast doubt on the value of the properly as reported in the Society's valuation, does not concern an attribute of the property but merely the valuer's opinion of its value. I shall not therefore report it ?
..........
In my view, therefore, a solicitor retained by the Society on the terms of its standard printed conditions was obliged to report to it information obtained by him in the course of investigating title or preparing for completion which was not confidential and which a solicitor of ordinary competence would have regarded as information which might cause the Society to doubt either the correctness of the valuation which, as the solicitor would know, it had obtained or the bona fides of the borrower. It is not necessary for me to express any view on whether the duty extended to a requirement to report information discovered by him which might affect some other ingredient of the Society's lending decision."
71. Blackburne J. found that there was, in some cases, a duty which could be labelled a "Bowerman duty" extending beyond the express terms of the retainer. As he said, there could be no such duty conflicting with the express terms of the retainer. I would add that it must be "a matter of fact and degree" (to echo the words of Sir Thomas Bingham and Millett LJ) whether the express terms give rise to a "Bowerman duty". Blackburne J. did not define the outermost limits of the "Bowerman duty". In the cases before him, he held that it extended to a duty to report matters relevant to the value or worth of the property. Blackburne J. recognised that the decision of the Court of Appeal in National Home Loans Corporation v. Giffen Couch & Archer marked one of the boundaries of the "Bowerman duty" though the limit there set is dependent on the terms of the instructions in the retainer. As Blackburne J. said:
"The question in that case was whether the solicitor should have reported certain information which cast doubt on the borrowers' ability to pay. The information was of a kind which it would be reasonable to suppose the plaintiff would have obtained from other sources. The instructions were held, where matters of creditworthiness were concerned, to be of very limited scope."
72. It was on that basis that the Court of Appeal held in National Home Loans Corporation v. Giffen Couch & Archer that in that case (though not in every case) the general duty to report to the mortgagee, the "Bowerman duty", did not extend to report facts relevant to the worth of the borrowers' covenant. In the present case now before me, the instructions where creditworthiness were concerned were even more exiguous than the instructions in National Home Loans Corporation v. Giffen Couch & Archer.
73. Where a solicitor is under a duty to report matters to the lender, he is under no duty to disclose information obtained in previous transactions: Bristol & West Building Society v. Baden Barnes Groves (1996, Unreported, Chadwick J.). Chadwick J. said:
"
A solicitor is obliged to disclose information which comes into his possession in the course of doing the work which the lender has instructed him to do; but he is not obliged to disclose information which has come into his possession independently of any work which the lender has instructed him to do-including for example information which has come into his possession as a result of earlier transactions in which he has been retained by the borrower. To impose on a solicitor the obligation to inform the Building Society of everything that he knows-including matters which he knows as a result of acting for the borrower in the past which might affect the lending decision which the society has to make would in my view be oppressive and unrealistic. Such an obligation would in most circumstances require a solicitor who had acted for the borrower in earlier transactions to decline instructions from the lender on the ground that the obligation would put him in a position which he could not fulfil his duties of confidentiality to the borrower client. But if limited to information which the solicitor as acquired in the course of doing what he was instructed to do the obligation is not oppressive or unrealistic."That statement was approved and applied by Douglas Brown J. in Omega Trust v. Wright Son & Pepper [1998] PNLR 337 at 348.
74. For the sake of completeness, I add that the claimants rely on a decision of His Honour Judge Humphrey Lloyd Q.C. in Halifax Mortgage Services v. S&S [1998] PNLR 616. That was a decision on an application to strike out a claim by a lender against a solicitor. In that case, Mr. Patrick Lawrence, who appears for the defendants in the case before me, submitted on behalf of the defendants that a solicitor acting for a lender and for a borrower did not owe the lender a duty to report matters material to the borrower's creditworthiness, and in support of that submission he relied on National Home Loans Corporation v. Giffen Couch & Archer. Having considered that decision together with the decision in Mortgage Express v. Bowerman & Partners, Judge Lloyd said at page 632:
"A reconciliation of these judgments can, in my judgment, only be achieved on the grounds that each case has to be considered on its own merits and circumstances and that there therefore is no universal rule of the kind for which Mr. Lawrence contended. In other words, the scope of a solicitor's duty is very much a matter of fact and degree: who was the plaintiff; what were the plaintiff's instructions and requirements; what was the position of the defendant; would the information that was withheld have been of potential significance to the plaintiff? It is in my judgment clear from both Bowerman and Giffen that the scope of the dutv (whether narrow or wide) is indeed a matter of fact and degree; see Bowerman at page 843 and Peter Gibson L.J.'s emphasis on "the particular circumstances of that case" e.g at page 813j."
Thus far I agree with Judge Lloyd, and I do not differ from him in his decision not to strike out that action, but Judge Lloyd continued with a passage which included words upon which the claimants rely:
"Furthermore if in Giffen Millett L.J. thought that it fell within the scope of a solicitor's duty to report on title to bring to the attention of the lender a matter of valuation then I find it difficult to see why such a duty should not also, in an appropriate case, extend to reporting upon doubts and serious concerns about the financial status of the borrower of which the solicitor believes that the lender must have been unaware when making the offer. It seems to me to be strange if a solicitor is liable because the relevant significant information could be found in a document of title, but is not liable if the same information came to his knowledge at the same time from another source even if it was not given in confidence. Such oddities would be avoided by a broader approach. If this conclusion is correct, which I believe it to be, it would clearly not be right to strike out the plaintiff's claim in this case under either paragraph 14.2 or to disallow the amendment under paragraph 14.4, for the matter ought to go to trial for the facts to be established and the correct conclusions to be drawn. If on the other hand I am wrong and there is some general rule then in my judgment the scope and ambit of the duty is uncertain and accordingly until the Court of Appeal or the House of Lords clarifies the position it would be wrong for a plaintiff to be deprived of the opportunity of establishing the facts pending a decision by an appellate court."
It seems to me that Judge Lloyd was there, in the sentence, "It seems to me to be strange if a solicitor is liable because the relevant significant information could be found in a document of title, but is not liable if the same information came to his knowledge at the same time from another source even if it was not given in confidence" failing to distinguish between information relating to the value of the security and information relating to the worth of the personal covenant and the possibility of different duties (or the absence of such duties) in relation to different categories of information, and I disagree with those comments, made as they were on a summary application.
75. I have been shown a copy of the transcript of the clear and concise extempore judgment of His Honour Judge Havery Q.C. given on Friday 9 May, 1997 refusing to strike out this present action. Having reviewed Mortgage Express v. Bowerman & Partners and National Home Loans Corporation v. Giffen Couch & Archer and Birmingham Midshires Mortgage Services Limited v. David Parry and Co. and anr Judge Havery concluded:
"I do not accept that the subsequent decisions of the Court of Appeal depart from what the Master of the Rolls said in Bowerman. Whether the solicitor is liable to his mortgagee client for failure to pass on information to the client depends on his instructions and on the other facts of each case. I reject Mr. Bacon's submission that the existing cause of action, as pleaded in paragraph 9 of the Statement of Claim, or the allegations in the proposed amendments relating to the bankruptcy search is bound to fail."
I agree. There is nothing in Judge Havery's judgment inconsistent with my judgment. In declining to find that the claim was bound to fail, Judge Havery did not express any view as to the likelihood of its success.
76. I turn to consider the application of those authorities to the facts of this case. Did the solicitor owe the duties alleged by the claimants? The lender in this case is a sophisticated commercial lender acting through a sophisticated agent, Eagle Star. The solicitor's remuneration for working for the lender was to be paid by the borrower. The lender's prime concern was with the adequacy of the security rather than with the value of the borrowers' personal covenant. The defendants were not told what enquiries, if any, the claimants made about the means of the borrowers. The borrowers were not sophisticated people and did not give any other than the most general instruction to their solicitor, and probably would have been incapable of giving any more specific instructions because they would not know what they needed their solicitor to do. The Instructions to Solicitors from the lenders were not disclosed to the borrowers. Those terms were drafted by a distinguished firm of solicitors, Simmons & Simmons. The only express instruction arguably having any bearing on the financial means of the borrowers was the requirement that the amount owing on any second charge should be made known to the lender, and even that requirement was more probably related to a concern about the saleable value of the property on a repossession. If the lenders had wanted the solicitors to sail on the deep waters of distinguishing confidential from non-confidential matters and distinguishing between matters discovered while working for the borrower and matters discovered while working for the lender, they could have said so. The duties would then have been clearly laid before the solicitor for him to decide whether they were inconsistent with his instructions from the borrowers and whether on that or other grounds he wished to accept or reject the instructions.
77. In considering what duties are imposed on a solicitor by law in relation to one of two clients for whom he is acting in the same transaction, the court should consider at the same time the duties imposed on that solicitor by law in favour of the other client. A solicitor may find that he or his firm has accepted instructions from two clients which by their express terms give rise to a conflict of duties, and having made that discovery take appropriate action. But apart from the express terms of the retainer, the court should not be astute to impose on a solicitor duties in favour of one client which conflict with duties owed to another. The ordinary layman giving general instructions to a solicitor would be horrified to be told at a later date that his solicitor was under a duty to report to someone else matters relating to his creditworthiness and even more horrified to be told that his solicitor was under a duty to report that he may have made inaccurate statements. Given that the solicitor will not reveal information confidential to the borrower, and given that there is no confidence in iniquity, and given that the solicitor must not allow himself to be made an instrument of fraud, does a solicitor not owe a duty to his client not to denigrate him, even if the client behaves badly or is in a precarious financial position? I believe that the ordinary layman would think so and that general instructions are given to solicitors on that understanding. The court should be slow to impose on a solicitor duties the performance of which, if revealed to the borrower, would be calculated to destroy the borrower's faith in him. That consideration applies with particular force where a borrower has little option but to accept that his solicitor will receive instructions from the lender in terms dictated by the lender.
78. I hold that on the facts of this case, and having regard to the terms of the instructions in this case, the defendants were under no duty to the proposed mortgagee to report facts relevant to the worth of the borrowers' covenant nor to advise the claimants of any inaccuracy in the borrowers' application form. I also add that the defendants were under no duty to ask to be supplied with a copy of the borrowers' application form. Such a form is very often not sent to the lender's solicitor, and it would not contain any information needed by the solicitor for the purpose of obtaining good title which the solicitor could not reasonably be expected to get from the borrower direct. Mr. Carlin said that he thought that Mr. Kemp was self employed in his own business. Mr. Carlin would only have had had cause to doubt the bona fides of the borrowers if he had received the application form, read it carefully, committed it to memory, and compared its contents with other information received by him in previous transactions as well as with information obtained some weeks later.
Fiduciary duty
79. The defendants strenuously deny breach of fiduciary duty. To prove breach of fiduciary duty, the claimants must prove disloyalty or infidelity on the part of Mr. Carlin. For this purpose, the disloyalty or infidelity need not be dishonest but it must be intentional. The claimants expressly disavow any suggestion of dishonesty on the part of Mr. Carlin, but they do say that Mr. Carlin deliberately preferred the interest of Mr. and Mrs. Kemp to the interest of the claimants.
80. The nature of the fiduciary duty was discussed by Millett L.J. in Bristol and West Building Society v. Mothew [1998] Ch 1, at 18:
"This leaves those duties which are special to fiduciaries and which attract those remedies which are peculiar to the equitable jurisdiction and are primarily restitutionary or restorative rather than compensatory. A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr. Finn pointed out in his classic work Fiduciary Obligations (1977), p. 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary."
And at page 19 Millett L.J. said:
"Even if a fiduciary is properly acting for two principals with potentially conflicting interests he must act in good faith in the interests of each and must not act with the intention of furthering the interests of one principal to the prejudice of those of the other: see Finn, p. 48. 1 shall call this "the duty of good faith." But it goes further than this. He must not allow the performance of his obligations to one principal to be influenced by his relationship with the other. He must serve each as faithfully and loyally as if he were his only principal.
Conduct which is in breach of this duty need not be dishonest but it must be intentional. An unconscious omission which happens to benefit one principal at the expense of the other does not constitute a breach of fiduciary duty, though it may constitute a breach of the duty of skill and care. This is because the principle which is in play is that the fiduciary must not be inhibited by the existence of his other employment from serving the interests of his principal as faithfully and effectively as if he were the only employer. I shall call this "the no inhibition principle". Unless the fiduciary is inhibited or believes (whether rightly or wrongly) that he is inhibited in the performance of his duties to one principal by reason of his employment by the other his failure to act is not attributable to the double employment.
Finally, the fiduciary must take care not to find himself in a position where there is an actual conflict of duty so that he cannot fulfil his obligations to one principal without failing in his obligations to the other: see Woody v. Cox and Hatt [19171 2 Ch. 71; Commonwealth Bank of Australia v. Smith (1991) 102 A.L.R. 453. If he does, he may have no alternative but to cease to act for at least one and preferably both. The fact that he cannot fulfil his obligations to one principal without being in breach of his obligations to the other will not absolve him from liability. I shall call this 'the actual conflict rule.' "
As Millett L.J. stressed, the fiduciary duty is a duty owed to both clients.
Breach of duty
81. The only live issues remaining on the question whether Mr. Carlin was in breach of duty are whether he was in breach of the express contractual duties imposed by Conditions 6 and 11 of the "Instructions to Solicitors" to obtain clear and current bankruptcy searches against all borrowers on completion and to obtain written consent to any second charge and whether, if he was in breach of that instruction, he was also in breach of fiduciary duty.
82. Mr. Carlin did obtain a clear bankruptcy search. The note of Mr. Souter's petition, which was withdrawn, was ordered to be removed from the register. That was all that was required by the retainer.
83. As I have already indicated, Mr. Carlin knew of the second charge existing on the property in favour of NatWest. By letter of 15 November, 1989 he told Eagle Star of that second charge and asked for consent that it should remain and be postponed to the mortgage in favour of Eagle Star. That letter was sent again by Fax on 23 November, 1989 marked for the attention of "Julia". I infer that the letter actually came to the attention of Julia and was read by her. Mr. Davis said in a supplemental written statement dated 12 September, 1997, that there was no one working in his department at the time named Julia but there was a lady working in the completions department of that name and he was sure that that was the person referred to. Her job was to liaise with solicitors on the release of funds and completion of the advance. She was lent to Eagle Star by Canadian Imperial Bank of Commerce. (Canadian Imperial Bank of Commerce was one of a consortium financing the dealings by the first claimants). He said that approval of this nature could only be given by someone in the underwriting department. In cross-examination he said that the work of the underwriting department finished with the sending out of the letter of offer and the matter was then handed to the completions department. The sole responsibility of the completions department was sending the money out, and if there was anything else they should refer it to an underwriter. It appeared that Mr. Davis felt that as Julia was an experienced person, she might have thought that she had the authority to give consent. There is no evidence that she did refer the matter to an underwriter and it seems unlikely that she would have just ignored the matter. Mr. Davis said, "From my knowledge of Julia, I am surprised she agreed so readily. She came from CIBC. I would have thought she would have queried it further. But I am unable to say what happened". In re-examination, Mr. Davis said, "She might have made the decision herself if she were told of the amount". There is no evidence that Julia had any written instructions telling her what were her responsibilities or telling her what to do on receipt of such information. Julia left Eagle Star in March, 1990. Mr.Davis said, "I understand her whereabouts are unknown". No evidence was given of what, if any, steps had been taken to find her, and she did not, of course, give evidence. 11 days after Eagle Star received the fax containing notice of the second charge, when the fax was on top of the file or very close to the top of the file, Mr. Davis and another officer of Eagle Star authorised the advance of the money. Mr. Davis does not recall the circumstances in which he signed the document. The expert witness called on behalf of the claimants said, not surprisingly, that it was a very serious matter to authorise the advance of money. It was serious to refuse the advance, and it was even more serious to authorise it when it should not be authorised.
84. Mr. Carlin gave evidence. He appeared to be unnaturally phlegmatic and his answer to most questions was that he could not remember. Most of his evidence was a reconstruction from the documents, which is hardly surprising in view of the lapse of time since the events took place and the lapse of time before a writ was issued. He had about 200 conveyancing files active at any one time. However, he said that he did recall a conversation with Julia in which she gave consent to the second charge. It has been pointed out that he did not keep a note of the conversation but that is not inconsistent with the manner in which his file was kept. Julia did not keep a note of any conversation and she must have been involved in some way. Mr. Carlin did not put the amount owed to NatWest in the letter of 15 November because he did not know it at the time. He knew the amount when he spoke to Julia. He does not claim that he told Julia of the amount and there is no evidence that she or anyone else asked him for the amount. Mr. Carlin did not attempt to conceal the second charge, and he must have realised that the transaction could not proceed without the consent of Eagle Star once the charge had been drawn to their attention as it was. The fact is that the transaction did proceed and Mr. Davis, a responsible man, did give authority for the funds to be released. Mr. Carlin was certainly honest in his evidence, though his recollection was absent on many points. I accept his evidence that Julia did give oral consent to the second charge, corroborated as it was by the events that followed. The failure of Eagle Star to call any evidence to show why Julia could not be called is also something to which due weight should be given.
85. The claimants say that even if there was oral consent, Mr. Carlin was still in breach because he did not obtain written consent and he did not tell Eagle Star of the amount owed to NatWest. The need for written consent and for notification of the amount of the indebtedness was plainly waived by the release of funds in the knowledge of the existence of the second charge and without knowledge of the amount of the sum owed to NatWest. The claimants cannot say that they would not have released the funds if they had known of those breaches, the absence of written consent and the failure to notify them of the amount of the indebtedness, because they did know of the absence of written consent and of the absence of details of the indebtedness at the time of the release of funds.
86. I therefore find that the defendants were not in breach of their duty as solicitors to the claimants. It follows that there was no breach of fiduciary duty. I should add that, having seen Mr. Carlin give evidence, I reject any suggestion that he was even inclined to favour the interest of one client against the interest of another. Counsel for the claimants placed great weight in this connection on the failure to pass on to Eagle Star the information obtained at a late stage from NatWest regarding the amount claimed by Eagle Star. Mr. Carlin knew that he was required to pass on that information because he had read condition 11, and he told NatWest that he needed the information to give it to Eagle Star. I think it likely that having got the consent from Julia, he did not think it necessary to do more. If he had not received that consent, he would no doubt have passed on the information when pressing for the consent.
87. While it is not necessary for me to deal with the plea of contributory negligence, I should say that the first claimants and their agents Eagle Star were the authors of their own misfortunes. Like almost everyone else at the time, they assumed that the property market would go on rising. They thought that they had adequate security. They were wrong on two counts. Firstly, the property, for reasons of which I am unaware, was over valued. Secondly, the property market did fall. Putting their trust primarily in the value of the security of the property, they advanced money under their self certification scheme. There were points in the borrowers' application form and in the credit search suggesting the need for further enquiries on their part which were not made. If there had been any breach of duty on the part of the defendants, there would have been a finding of contributory negligence on the part of the claimants assessed at a very high level.
Conclusion
88. There being no breach of duty on the part of the defendants, I dismiss this action.
© 1999 Crown Copyright