From me to you: The duty of care solicitors owe to third parties

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Ashraf v Lester Dominic Solicitors & Others [2022]: Solicitors’ duty of care to third parties is considered on appeal in alleged fraudulent property transfer claim. The High Court dismisses the claimant’s appeal against an order of 1) summary judgment and 2) an award of costs on the indemnity basis, as the defendants did not owe the claimant a duty of care.

Factual and Procedural History

This judgment concerns a longstanding action brought against seven defendants relating to the purported fraudulent transfer of a property. The claimant (the Seller) died after issuing proceedings, his Estate continued the action.  

The seven defendants will be referred to as follows: D1 = Lester Dominic Solicitors (“LDS”), D2 = Mr Kan, D3 = Mr Attarian (“the Buyer”), D4 = N/A as discontinued, D5 = The Chief Land Registrar, D6 = The Bank of Scotland (“the Bank”) and D7 = Rees Page Solicitors (“The Bank’s Lawyers”).

The Seller agreed to sell his property in 2008. The Buyer was purchasing the property with a loan from the Bank. FLP solicitors, who acted for all parties in the 2008 transaction, misappropriated the mortgage monies. This was subject to a separate action and the rogue solicitor was sent to prison.

Subsequently, the Buyer could not be registered as the legal proprietor because the signatures in the 2008 TR1 transfer form had not been witnessed, so the form was legally ineffective. Despite this, the Buyer was as a matter of fact being charged mortgage payments on the property by the Bank.

The Bank instructed their lawyers to resolve the matter, so that registration could be completed. This required a new TR1, which was executed and dated July 2010. The Seller’s signature was witnessed by Mr Kan, who was a solicitor employed by LDS. The Bank’s Lawyers proceeded to register the transfer and the mortgage charge with the Land Registry. Registration was completed on 23 June 2011. In June 2016, the Seller issued proceedings against the seven defendants. The claim was the signature on the TR1 was forged. A handwriting expert was engaged in support of this accusation and the matter went to trial.

First Instance Judgment

The Sellers’ Estate alleged that the 2010 transfer was not validly executed because the deceased signature was forged. They claimed LDS and Mr Kan were negligent in failing to verify the identity of the Seller when witnessing his signature, and that the Bank’s Lawyers were negligent in registering the transfer and charge. They alleged this caused the Seller loss, for which they were entitled to damages.

In the first instance judgment on 18th December 2019, Deputy Master Lloyd awarded summary judgment and costs on the indemnity basis for LDS, Mr Kan and the Bank’s Lawyers. His rationale was that the Estate had no real prospect of establishing that any of these defendants owed the Seller a duty of care. The Estate appealed this decision on several grounds, including that previous case law had been misapplied and the matters at issue were not appropriate for summary judgment.

The lengthy combined judgment which followed, dealt with three aspects of appeal and a separate application for summary judgment. This article only deals with the appeal for summary judgment in favour of the Bank’s Lawyers, LDS and Mr Kan as set out below.

The Appeal Against the Bank’s Lawyers

The Estate’s case against the Bank’s Lawyers, was that they owed a duty of care to the Seller, which they breached by registering the Buyer’s and the Bank’s interests, without taking reasonable care to establish if the 2010 transfer had as a matter of fact been signed by the Seller.

The pleaded case was but for the negligence the forgery would have come to light. The Seller would have objected to the registration and therefore remained the owner of the property with the benefit of an unpaid vendor’s lien. The negligence of the Bank’s Lawyers caused the Seller to lose the value of the property.

Mr Justice Edwin Johnson considered the first instance judgment and drew on the relevant precedents in his detailed decision on appeal. He highlighted the fact that the Bank’s Lawyers were never instructed to act for the Seller, they acted for the Bank and were under instruction to register the transfer and charge. In a conveyancing transaction a solicitor acting for one party would not normally owe a duty to a third-party, and the decision in Gran Gelato Ltd v Richcliff (Group) Ltd [1992] applied.

Part of the ground of the Estate’s appeal was that the Deputy Master misapplied the rationale in the case of P&P Property Ltd v Owen White, Dreamvar (UK) Ltd v Mishcon De Reya [2018] which did not establish a duty of care between the solicitors and a third party. Whilst the Estate argued the facts in their own claim were distinct from this decision, the Judge disagreed. He considered this argument misconceived. The interests of the Seller and the Bank were in conflict, as one wanted registration and the other did not. Therefore, the Bank’s Lawyers could not have owed a duty of care to the Seller and the case was correctly applied at first instance.

The appeal was dismissed.

The Appeal Against LDS and Mr Kan

The Estate’s case against LDS & Mr Kan was that they owed the Seller a duty of care, which they breached by failing to take reasonable care to verify the identity of the Seller when witnessing the signature on the 2010 transfer.

The pleaded case as already expressed above, was but for the negligence  the TR1 would not have been created, the Seller would have remained the owner of the property, with the benefit of an unpaid vendor’s lien, so the negligence caused the Seller to lose the value of the property.

The decision on appeal highlighted that the Seller was not a client of LDS, the firm simply provided a service where a member of the firm would witness a signature on legal documents in return for a £10 fee. The Judge drew on relevant precedents in his detailed decision, including Shah v Shah [2001], NRAM Ltd v Steel [2018] and Dreamvar. The case law simply did not support establishing a duty of care in this scenario, given the limited involvement of LDS & Mr Kan.

The Judge went further and held the Money Laundering Regulations 2007 did not apply and even if they did, it would not establish a duty of care towards the Seller.

The Judge considered that it was an ambitious proposition by the Estate to argue that a person who, in good faith, witnesses a signature could be held liable to anyone who suffers loss if the signatory is not who they claim to be. Therefore, it was correct of the Deputy Master in the first instance to award summary judgment. It was not necessary to resolve any conflicts of fact, e.g. if the signature was forged, when making this decision.

The appeal was dismissed.

The Appeal Against the Indemnity Costs at First Instance

In the first instance judgment, LDS and Mr Kan were awarded their costs of their application on the indemnity basis. The Bank’s Lawyers were awarded their costs of their application on the standard basis, to 2 July 2018, and thereafter on the indemnity basis.

The primary reason to an award for indemnity costs was for noncompliance with the pre-action protocol, a consequence of which was unnecessary increased costs. More particularly, the Bank’s Lawyers offer to settle was not accepted and the court viewed the claim against LDS and Mr Kan as an “extremely novel action,” both of which prolonged the proceedings.

The Judge was not persuaded by the Estate’s argument to the contrary and reinforced the Deputy Master’s decision.

The appeal was dismissed.

Comment

This case serves as a stern reminder to closely follow the pre-action protocol and not to waste time and costs pursing a claim in the tort of negligence that will fail at the first hurdle of establishing the necessary duty of care let alone its breach.

Mills & Reeve LLP acted for the seventh defendant, Rees Page.

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