L Morgan & Co v Jenkins O'Dowd & Barth

This is an application by the defendant firm of solicitors, Jenkins O'Dowd and Barth, under an application notice dated 5 November arising out of the consequences of an order made in this court by Blackburne J on 2 October in proceedings for the enforcement of solicitor's undertakings given by Mr Barth of the defendant firm in the context of some conveyancing transactions in 2006. The undertakings which had been given were in standard form and were to ensure the discharge of existing mortgages in favour of the Royal Bank of Scotland and the provision of certificates of discharge in the Land Registry form DS1 in relation to three particular conveyancing transactions in which the defendant firm acted for the vendor and the claimant firm, L Morgan and Co, acted for the purchasers.

By his order Blackburne J made orders, as I understand it, in the same form against the three then partners in the defendant firm ordering them, and I will quote from the order in the bundle relating to Mr Barth himself, that:

Then particulars are given of four transactions, although I am now only concerned with the first three of them, where the charge holder was the Royal Bank of Scotland. The properties concerned were a ground floor flat at 20 Lorry Park Road, London SE26, a first floor flat at 46 Rosenthorpe Road, London SE15, and a first floor flat at 1 St James' Park, Croydon. As is apparent, the order provided that the undertaking should be honoured by 4pm on 13 November. However, there was also liberty to apply expressly granted.

The general nature of the application before me is set out in the evidence of the solicitors acting for the defendants and for the Royal Bank of Scotland, who have been served with notice of the application. The application itself seeks orders that there should be the trial of an issue as to what sum is to be paid to the Royal Bank of Scotland in order to achieve the discharge of the three charges which I have mentioned, and permission is also sought to join the Royal Bank of Scotland as a party to the action, either pursuant to CPR 19.8(a) or pursuant to the other provision in the White Book which provides for the addition of parties where there is a matter in dispute between them and an existing party which it is convenient to resolve in the context of the existing proceedings. The application also seeks permission to serve a witness summons on the bank, requiring them to provide certain information with the aim of establishing what would have been the terms upon which the charges could have been, or could reasonably have been expected to be, discharged by the bank in 2006.

The background as set out in the evidence, shortly, is that the defendant firm acted for the vendor in each of the purchases, and in respect of each of the purchases the defendant gave an undertaking, as I have said, in the usual form, the form of that undertaking being to redeem or discharge a charge in favour of the Royal Bank of Scotland on completion and to provide the form DS1 as soon as it had been received. It is common ground that those undertakings were never complied with, and in fact it appears that there was never any request at the time for redemption figures from the bank. Indeed the evidence is that the bank was wholly unaware of the sales of the properties. The sales were to purchasers who themselves received loans from banks or other lenders and, unsurprisingly, they have been unable to complete these transactions, and pressure has been applied to the claimant firm to secure compliance with the relevant undertakings.

It is a matter of some surprise that the matter took so long to come before the court, but in any event in August of this year the claimant brought the present proceedings to enforce these undertakings. At that stage no notice was given to the Royal Bank of Scotland and the matter proceeded on affidavit evidence between the claimant firm and the defendant firm. There was a contested hearing before Blackburne J which resulted in the order which I have already mentioned.

Following that hearing the defendant firm approached the Royal Bank of Scotland for the first time and requested redemption figures for the properties. It seems to be the case that the defendant did not then realise that the charges in question were all monies charges, and were not simply charges to secure the individual loans which had been made for the purchase of each of the properties. However, if that was indeed their impression they were quickly disabused by the Royal Bank of Scotland, who provided them with at least one copy of the relevant documents, and there is no dispute that the charges were indeed all monies charges. The specimen referred to in the skeleton argument of Miss Shelley White, who has appeared today for the Royal Bank of Scotland, shows that the covenant was to discharge on demand the mortgagor's obligations, which were defined as all the mortgagor's liabilities to the bank of any kind and in any currency, whether present or future, actual or contingent, and whether incurred alone or jointly with others, together with the bank's charges and commission interest and expenses.

In those circumstances the Royal Bank of Scotland unsurprisingly took the view that they were entitled to rely on the terms of their all monies charges, and were not prepared to discharge the three mortgages in question simply upon being paid the sums lent for the acquisition of the properties, together with interest and associated costs.

The position of the bank was then crystallised in two alternative offers which were put forward in open letters on 22 and 24 October 2008 respectively. The first offer in the letter of 22 October referred to the charges and the conveyancing history and pointed out that the vendor company, Waterhouse Properties, had in fact sold a total of six properties, in relation to each of which it had given an all monies charge to the bank. The letter went on to say that it followed that the bank would be entitled to insist on the payment of all sums due to it as a condition of releasing any of its security. This amount exceeded the value of the subject matter property, and the bank said, no doubt correctly, that the court may not have been aware of these issues when it made the order at the beginning of October.

However, the bank went on in the letter to recognise that, despite its strong legal position, it was right to take account of the position of the purchasers of the property, who appeared to be innocent victims of the negligence of the defendant firm, and they suggested that, all things being equal, it would be preferable to ensure that their purchases should not be disturbed and the bank should, if necessary, be compensated by a monetary payment. The offer that was then made (and this is still the bank's preferred solution to the problem) is that the six properties should be dealt with together, and they should all be released upon payment of a sum of £852,162.47, that figure being said to include a sum of £15,000 plus VAT as a reasonable contribution towards the bank's legal costs.

The second offer, made two days later in the letter of 24 October, recognised that the defendant might in the time available be in some difficulties in dealing with all six of the properties, and therefore confined itself to the three properties which I have already mentioned. It was there proposed that upon payment of £635,000 in cleared funds by 13 November the bank would then release the properties from their charges. That sum represented the gross proceeds of sale of the properties as disclosed in the contracts which had been supplied to the bank. It was also made clear that no additional claim for costs would be made by the bank.

Faced with those two offers, the defendants and their advisers appear to have taken the view that the bank was in an opportunistic manner trying to achieve more than it could have hoped to achieve in 2006 had the conveyancing been dealt with as it should have been at the time of the original transactions. It is against that background that the current application comes before me seeking joinder of the bank and the giving of directions for the determination of an issue in order to ascertain, as the defendants would have it, the correct amount that the bank should be required to accept in return for releasing the three charges.

The difficulty with that approach, it seems to me, is that the bank is an entirely innocent third party which had no knowledge or notice of the sales in 2006. The bank is in the position of an existing charge holder, and no approach has been made to it to release that charge until 2008. Accordingly, the bank is entitled to deal with the matter as it thinks fit in the light of the situation as it now is. I cannot see as a matter of general principle that there is any possible basis for arguing that the bank should be required to accept the sum which it would have accepted had the appropriate request been made in 2006. That is an inquiry into a hypothetical past situation which never happened, and in the absence of any cause of action between the defendant firm and the Royal Bank of Scotland I can see no proper basis for imposing an inquiry of that nature upon the bank, or requiring them to accept now terms which they consider to be contrary to their best interests.

The basis upon which Mr Parker, appearing for the defendants, submitted to me that this would nevertheless be the correct approach to follow derives from two decisions of the Court of Appeal in 1987, to which he took me, and from the proposition that the court will do all it can to ensure that a defendant against whom enforcement of an undertaking is sought is not treated unfairly. However, before I go to those authorities, it seems to me again as a matter of principle that that simply cannot be right where the order in question is sought against an innocent third party against whom no cause of action exists. It would be very strange if the court's jurisdiction to enforce undertakings against solicitors could by a side wind require some form of prejudice to be inflicted upon an innocent third party. I can see nothing equitable or sensible in that sort of approach, and it seems to me that on a proper analysis neither of the authorities to which I was taken requires or encourages any such approach.

I begin with the case of Udall v Capri Lighting [1988] QB 907. That was a case where the facts were very different from those with which I am now concerned, but there is a valuable review of the general nature of the jurisdiction relating to the enforcement of undertakings in the judgment of Balcombe LJ, and in particular it seems to me relevant to note what he says at the foot of page 917. He says:

The authority cited for that is the case of In re A Solicitor [1966] 1 WLR 1604. Pausing there, there is no evidence before me at the moment that it is in any way impossible for the defendant firm to perform the relevant undertakings. They have been given by the Royal Bank of Scotland two alternative methods of obtaining discharge of the relevant mortgages upon payment of two alternative sums of money. The defendant firm is no doubt backed by its indemnity insurers and all that is required is a cheque to be written for the sums in question. There is no impossibility there. The only problem from their point of view is that it now costs rather more to perform the undertakings than they think it would have cost had they dealt with them, as they should have done, two years ago. However, that is their misfortune and is not a surprising result of the breach of undertaking in the first place.

Balcombe LJ went on to say that:

In that situation the court will inquire into the loss which has been caused by the failure to implement the undertaking. That was the type of situation which the court was concerned with in the other case to which I was taken of John Fox v Bannister, King v Rigbeys reported as a note to the Udall v Capri Lighting case at [1988] QB 925. The court held that an undertaking had been given by the defendant solicitor to retain a sum of £18,000 in his hands or to the credit of his client, a Mr Watts, until various matters had been sorted out. In breach of that undertaking, the solicitor subsequently paid the £18,000 over to Mr Watts and Mr Watts subsequently went bankrupt. That was the position at the date when the enforcement of the undertaking came before the court. In those circumstances the Court of Appeal held, clearly correctly, that it was no longer possible in any meaningful sense to require the defendant to honour the undertaking, because the result of doing that would only be to make the sum of £18,000 available to Mr Watts' trustee in bankruptcy. It would not in itself achieve payment of any sum to the claimant, who at no stage had more than the security offered by the undertaking to retain the £18,000 until matters had been sorted out. The important point to note is that there was never an unconditional undertaking to pay £18,000 to the claimant.

Against that background, the court took the view that it was not possible to enforce the undertaking in its original form and instead the appropriate course was to direct an inquiry as to what loss, if any, the claimant had suffered by reason of the breach of the undertaking. That is indeed the course which was followed and was endorsed by the Court of Appeal -- perhaps that is not quite the right word -- it was anyway binding upon them, but was accepted as appropriate by the Court of Appeal in the subsequent case of Udall v Capri Lighting.

However, that is not the situation, it seems to me, which has been reached in the present case. The starting point here is the order made by Blackburne J in October requiring performance of the undertaking. That order required "all acts and things necessary to be done to procure discharge of the existing charges." The defendant can now be in no doubt what it is that the Royal Bank of Scotland requires to be done and there is no impossibility, as I have said, about doing those acts. Accordingly, so long as the Royal Bank of Scotland maintains its present stance, I can see no reason why that order should not stand and why it should not be complied with within a very short timeframe. I would be prepared to extend the time for that purpose by a relatively short period, but not for any long time because, as counsel for the claimant has made clear, the claimant is itself under very severe pressure to get the matter sorted out as soon as possible and, given the time which has elapsed since the undertakings were given, I see a lot of force in that point and do not wish to see this matter being bogged down any more than it has to be.

The only rider I would add is that there is a liberty to apply in the order, and if the bank were now to change its stance and to require terms which appear wholly unreasonable or to go beyond the scope of anything which could possibly have been contemplated when the undertaking was originally given, there may then, and I say no more than that, there may be a case for applying to the court to discharge the existing order and replace it with an inquiry as to damages suffered by the purchasers. But that in itself would be an unsatisfactory solution because it would delay matters and the damages suffered would no doubt be very difficult to assess until the Royal Bank of Scotland had made its position clear and taken such action, if any, as it was advised and the purchasers had discovered whether or not the properties they thought that they had bought were still in their hands or whether they had been deprived of them.

However, it seems to me as a matter of theory those are now the two alternatives open to the defendants. Either they can, and indeed must pursuant to the existing order, procure release of the charges by paying over the sums required by the Royal Bank of Scotland or else they must make an application to the court, supported by such evidence as they think fit, seeking release from that order and its replacement with something different. I do not think it is appropriate for me at this stage to express any view as to what the Royal Bank of Scotland should or should not do in the light of my judgment. It is a matter for their commercial judgment as to how to react.

One matter which may be relevant, and which has been briefly canvassed in argument before me, is whether the bank could properly claim payment of a sum amounting to more than the proceeds of sale of the three properties in question. That is not a problem in relation to the second offer, but I was told that it might be withdrawn if, as is the case, I am not prepared to order the inquiry sought by the defendants. In that situation a question could arise as to whether it is open to the bank, consistently with the original arrangements between the parties, to claim a sum amounting to more than the proceeds of sale of the securities which they actually had and in respect of which one would assume at first blush that the vendor company was free to sell them without having to discharge all of its indebtedness to the bank. That might involve a detailed examination of the contractual arrangements between the parties, and it may be that the bank will take the view that the more prudent course is to leave their second offer on the table for a short period for acceptance. I say no more than that. I do not think it is something in respect of which I can give any form of definitive ruling today because it is not a matter which is dealt with in the evidence before me, nor is it a matter that the parties have come prepared to argue in any detail.

But for present purposes my decision is that the application before me is, for the reasons which I have tried to give, misconceived and must therefore be dismissed, with the exception of the application for an extension of time.

MR JUSTICE HENDERSON: The next point I need to decide is how much longer I should allow for performance of the order made by Blackburne J, because of course that order remains binding unless and until an application is made to be released from it. My initial thought was that two weeks would be amply sufficient for that purpose, given the length of time which has already elapsed and the generous period of some six weeks which was initially allowed by the learned judge. However, counsel for the defendants has asked for four weeks. He says that a period of that length would be needed to enable negotiations with the bank to be hopefully concluded in the light of my judgment. He says there is also an insurance issue behind the scenes as to who is to provide cover to the defendants in relation to one of the three properties, I think the property in Croydon, which has caused difficulties in the past, and he also says that there are practical difficulties in obtaining cheques from insurers at the best of times because authorisation is needed at a number of levels.

I have to say I am not very impressed by any of those arguments. It seems to me that the defendants have had ample time since the order was made in October to consider their position, and indeed there have already been discussions with the bank. If those discussions have not gone as far or as deep as they should have done, I think that really is the defendants' responsibility, and I take the view that two weeks should be sufficient to enable the necessary steps to be taken to ensure compliance or alternatively for a decision to be taken to apply under the liberty to apply to be released from the existing order. So I will say 14 days.