Thursday, 20 November 2014

New duty to warn other conveyancers of client's suspected fraud?

Scotland’s supreme civil court’s decision in Frank Houlgate Investment Company Ltd v Biggart Baillie LLP [2014] CSIH 79 has raised some interesting questions about transactional fraud and could have an important impact on conveyancer’s liability when they act for a dishonest client. 

The facts involve an investment company, the plaintiff, which lent money to the client of  the solicitor, the defendant.  The security for the loan was not owned by the client  and was in fact worthless.  During the course of the transaction the solicitor became aware of he client’s attempt to defraud but nonetheless continued to act and as a consequence of the fraud the investment company suffered a loss. Acting on the instruction of the client the solicitor did not warn the representative of the investment company of the fraud.

The three judges of the CSIH all agreed that the client’s solicitor was liable to the investment company for the losses , although they were not unanimous regarding the basis for that liability.

Lord Menzies held that the solicitor was under an obligation immediately to disclose to the investment company’s representative,  the that the client had admitted fraud and that the security was worthless. That obligation flowed from a continuing implied representation to the other party to the transaction that they are not aware of any fundamental dishonesty or fraud which might make the security for the transaction worthless. Notwithstanding the duty of confidentiality the solicitor was incumbent on a solicitor to act honestly at all times.  Not surprisingly Lord Menzies further held on the facts that he would have found the solicitor liable as an accessory to fraud in any event.

Lord Malcolm  relying  instead on Donoghue v Stevenson held that the solicitor was liable in negligence. He held that it was ‘preferable simply to rely upon the broad concept of culpa [fault], in the sense of failure by a professional to use the care and skill required in the circumstances’. He added: ‘In the present case the actionable negligence arises because [the defendant] came to learn of the fraud and knew, or should have foreseen, that further harm to the pursuers could ensue if he did not take care to protect them.’

There remains a question mark about the soundness of Lord Malcolm’s reasoning since there appears to  little authority around to support the existence of a duty of care by a solicitor to a third party, though the more interesting aspect to this decision is the obligation  to override the duty of confidentiality once a solicitor becomes aware of fraud. 

The bearing of a Scottish decision on practice in England may not be direct, but the case does give rise to some interesting questions.  If these circumstances were to happen in England it is clear the  solicitor  once knowing of the fraud should have immediately desisted from undertaking any further work ( without doing anything to ‘tip’ the client off ) and to then report the incident to the Solicitor Regulation Authority and the National Crime Agency   If there was then no intervention by the SRA/NCA the solicitor should have then terminated the retainer.  The question is whether in the light of the case of Frank Houlgate there would also be a duty once the retainer came to an end to bring the matter to the attention of the other parties in the transaction remains unclear.  How far would that duty extend?  Would the solicitor need to alert another solicitor appointed by the client when approached for the release of the file following the termination of the retainer?

The other question of interest which emerges from this case is that if a solicitor comes across  information, if considered properly and in line with SRA and Law Society obligations,  would show that the client could be acting dishonestly, but the solicitor fails to read or to appreciate the importance of that evidence, would that be sufficient for a lender of other third party to rely on the decision of Houlgate and seek redress for loss. Could this now present a lender with an alternative route to the solicitor’s insurers when loss is sustained due to fraud?

Only time will tell though one thing is for certain it is an argument which I am sure a lender will look to run sometime in the very near future. 

Article by David Pett Director/Solicitor - MJP Conveyancing

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