Contracts – Fraud – Breach of contract

Lloyds TSB Bank Plc v Markandan & Uddin (a firm): ChD (Roger Wyand QC): 14 October 2010

The court was required to determine preliminary issues in the course of an action for breach of trust, undertaking and contract brought by the claimant bank (L) against the defendant firm of solicitors (M).

L was the successor in title to a building society that had offered a mortgage to the purported buyer of a residential property. M had been instructed to act on behalf of the buyer and L on the transaction. L instructed M in accordance with the Council of Mortgage Lenders’ Handbook for England and Wales. L transferred the mortgage advance to M who proceeded to transfer it to solicitors holding themselves out to be acting for the vendors. Those monies were sent out by M before it had received any documentation that would have enabled them to register title. In the event, the transaction was a fraud; the vendors were unaware of the whole transaction; the vendor’s supposed solicitors did not exist and the monies vanished. There was no allegation that M was involved in the fraud. Nevertheless, L brought a claim against M alleging breach of trust, undertaking or contract. M admitted that it held the money on bare trust for L with its authority to pay it away in connection with the buyer’s purchase of the property. The issues for determination were whether: (a) M had committed a breach of trust; (b) M was, notwithstanding a breach, entitled to relief under section 61 of the Trustee Act 1925; (c) M could rely on the principle that L caused or contributed to the loss it had suffered. L submitted that: (1) M did not have authority to pay away the monies except to achieve completion and completion was never achieved; (2) the circumstances of the loan application were unusual and ought to have put L on enquiry; (3) relying on the ratio in Forsikringsaktieselskapet Vesta v Butcher [1989] AC 852 HL, there was no reason in precedent or principle why, if a trustee who was alleged to be in breach of trust was in a like position as regards his duty of care as a tortfeasor or as a trustee, he should not also be entitled to a defence of contributory negligence.

Held: (1) Any payment away by M which was not within the terms of its authority to pay away was a breach of trust, Bristol & West Building Society v Mothew (t/a Stapley & Co) [1998] Ch 1 CA (Civ Div) applied. In the event and on the proper construction of M’s instructions, the authority entitled M to pay away on receipt of the documents necessary to register title or, if paying away before that stage, on receipt of a solicitor’s undertaking to provide such documents. M paid the money without receiving the requisite documents and without receiving a solicitor’s undertaking. M was in breach of trust by paying the money away, Patel v Daybells [2001] EWCA Civ 1229, [2002] PNLR 6, Edward Wong Finance Co Ltd v Johnson Stokes & Master [1984] AC 296 PC (HK) and Target Holdings Ltd v Redferns [1996] AC 421 HL considered (see paragraphs 22-23 and 30-31 of judgment).

(2) It was for a trustee to establish that it had acted honestly and reasonably before the discretion of the court was engaged. M’s conduct was not reasonable in a number of respects. First, it paid the money to the vendor’s purported solicitors without having received the signed contract transfer or discharge certificates. Second, it failed to establish that the firm acting for the vendors actually existed. M was not entitled to relief under section 61 of the act (paragraphs 34, 36). (3) There was nothing in Vesta which could be relied on to extend the principle of contributory negligence to a case of breach of trust, Vesta applied. Section 61 of the act gave limited relief to trustees where the trustees had acted reasonably and honestly; but that was applicable in the instant case (paragraphs 40, 42). M could not rely on an allegation of contributory fault and L was entitled to the repayment of the mortgage monies.

Preliminary issues determined in favour of claimant.

Nicole Sandells (instructed by DLA Piper Rudnick Gray Cary UK) for the claimant; Christopher Aylwin (instructed by Patricks) for the defendant.