In the recent case of The Connaught Income Fund (Series 1) (in liquidation) v Hewetts Solicitors  EWHC 2286 (Ch), the High Court considered the nature of a solicitor's duty of care when giving a Certificate of Title addressed to a lender who did not instruct the firm.
The claimant, Connaught, was an unregulated collective investment scheme which pooled investors' money for the purpose of onward lending. The unusual issue here was that Connaught advanced a loan to another company - Tiuta International Limited (TIL) – which then advanced funds to the borrower. It was TIL, and not Connaught, who instructed the defendant solicitors, Hewetts (the solicitors) to produce the Certificate of Title (COT) in respect of the borrower's purchase of the property. But it was acknowledged that the solicitors also owed a duty of care to Connaught.
Although the COT was addressed to both TIL and Connaught, the solicitors were not asked to communicate with Connaught directly, and had no means of doing so. Further, Connaught had given TIL discretion to resolve any issues raised by the solicitors. The loans completed in September 2008.
Subsequently, the borrower failed to repay the loan and the immediate lender, TIL (and its group companies), entered administration. Following the sale of the property by receivers, Connaught faced a loss of approximately £800,000.
The solicitors had not been instructed directly by Connaught, but the COT was addressed to them, so the parties agreed that the solicitors only owed a tortious duty of care to Connaught. However, the parties disagreed about the extent of that duty. The court was asked to consider the Bowerman duty (from Mortgage Express Ltd v Bowerman & Partners  P.N.L.R. 62), which requires a solicitor to report any facts which might have a material bearing on the valuation of the lender's security or some other ingredient of the lending decision.
The solicitors, however, argued that their duty was more limited. They argued that their duty was limited to exercising reasonable care and skill in completing the COT. They said that they had no duty "to speak" beyond this. As long as the COT was completed with reasonable skill and care, the Solicitors argued that they could not be held to be negligent.
The court agreed with the solicitors. In particular, the court found that:
Although a breach of duty was only established in one of the nine allegations raised, the judge went on to assess reliance and causation in relation to all nine allegations. He found that any breach(es) caused no loss as the transaction would have proceeded in any event.
The judge commented that it would have been open to Connaught to have expressly required more of the solicitors and to have designed documentation that made it clear that the solicitors were assuming a greater responsibility. Had this occurred, the solicitors would have been likely to have been susceptible to the wider Bowerman duty.
When instructing solicitors in a secured lending transaction, it is important that the scope of their duties is clearly set out. This becomes even more important when the lending arrangements are more complex and, for example, where there is a two stage loan process involving immediate and wholesale lenders.
Firms within the alternative lending space should take care to make sure that their instructions to professionals are appropriate.
In circumstances similar to the Connaught case, it would be preferable for the ultimate lender to either directly retain the solicitors or, alternatively, to ensure that the solicitors assume a wider responsibility to them akin to the Bowerman duty.
In these circumstances, it is more likely that the solicitors will consider themselves under a duty to report relevant information and provide advice in accordance with the Bowerman duty. If they fail to do so, the lender will be in a better position to pursue a successful professional negligence recovery action.
TLT have a team of experts who successfully make professional negligence recoveries which involve complex lending arrangements. We would be happy to discuss the issues arising out of this case. We are also well placed to assist in the drafting of instructions to professionals to ensure that lenders' interests are protected.
Contributors: Lynsey Robinson and Sam McCollum
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.