Broker House Insurance Services Ltd v OJS Law

The main question raised by this preliminary issue is this. For what loss is a solicitor liable if he fails to carry out his instructions when acting for a lender whose loan is to be secured by mortgage? In the present case, it is assumed for the purposes of the issue that the solicitor was bound to obtain the consent of the first mortgagee to the creation of a second charge, but failed to do so. No consent was obtained. It is also assumed that the solicitor was bound to arrange for the registration of the second charge as a registered charge at Her Majesty’s Land Registry. Instead of doing that, the second charge was protected by an agreed notice on the register. There is a subsidiary question raised on the form of the solicitor’s instructions from the lender. I can take the facts from the agreed statement of facts, emphasising that these facts are assumed for the purposes of the preliminary issues only.

Broker House Insurance Services Limited is a provider of mortgage finance which it in turn borrows from other lenders. OJS Law is a firm of solicitors. Jeff Manstone Limited is a property development company of Mr and Mrs Twim-Barrimer. By 5February 2007 Jeff Manstone Limited was registered as the owner of land described as land on the southwest side of Near Birches Parade, Oldham, which it intended to develop by building flats. Initially it borrowed money from the National Westminster Bank pursuant to an agreement dated 1 December 2006 and secured by a first legal charge dated 10 January 2007 over the land in question. By clause 11.3 of the agreement, Jeff Manstone Limited agreed not to grant any security to a third party or enter into any borrowing or other obligation without the National Westminster Bank’s prior consent. The terms of that clause were reflected in a restriction entered on the register of the Land Registry in the following terms:

“No disposition of the registered estate by the proprietor of the registered estate, or by the proprietor of any future registered charge, is to be registered without a written consent signed by the proprietor for the time being of the Charge dated 10 January 2007 in favour of National Westminster Bank plc referred to in the Charges Register.”

Jeff Manstone Limited did seek further borrowing, and by a facility letter dated 21 November 2007 Broker House Insurance Services Limited offered to lend £145,935 to Jeff Manstone Limited for a term of six months with interest at 8% per month. Page 2 of the facility letter asks the borrower to return the documentation with identification documents to OJS Law at Bell Street in London. Page 3 of the facility letter refers to notes for solicitors to be contained in special conditions. The special conditions attached to the facility letter read as follows:

“Special Conditions:

(1)

Conveyancer to ensure all documents witnessed by an Independent Solicitor, and Lodged correctly.

(2)

Conveyancer to ensure our charge ranks second to the first charge, with appropriate permissions granted by 1^st Mortgagor [sic], to our charge prior to release of funds.

(3)

Conveyancer to ensure will be acting in relation to the proposed New Build Project known as ‘Land at The Birches’ Near Birches Parade Oldham OL4 9PZ.”

The relevant documents reached OJS Law on 28November 2007. On 4 December 2007 Broker House Insurance Services remitted the advance to OJS Law, and on the following day, 5 December 2007, Jeff Manstone Limited executed the charge in respect of the land. The agreed statement does not say precisely when the money was released to Jeff Manstone Limited, save that it was after 4 December; but I infer that it must have been on or about 5 December that the money was released.

OJS Law did not seek or obtain the consent of Nat West. They did not register a second legal charge against the land, but they did protect Broker House Insurance Services’ charge by the entry of an agreed notice which was entered in the charges register at the Land Registry.

Under the Land Registration Act 2002, the effect of the agreed notice is to protect the priority of the interest which is noted. However, unlike a substantive registration of the interest in question, it does not guarantee the validity of the noted interest. It is common ground for the purposes of the issues that OJS Law were in breach of duty in failing to seek or obtain the consent of Nat West to the creation of a charge and in failing to register the charge substantively at the Land Registry.

Mr Innes, appearing on behalf of OJS Law, accepts that, if the measure of priority and protection given to Broker House Insurance Services’ second charge by means of the agreed notice was any less effective than it would have been if the charge had been substantively registered as a registered charge, then Broker House Insurance Services are entitled to damages to reflect the difference in the value of the security. He also accepts that, if any adverse consequences have been caused by the lack of consent from Nat West, then, equally, Broker House Insurance Services are entitled to damages to reflect those adverse consequences. However, Mr Halliwell, appearing on behalf of Broker House Insurance Services, argues that, if Broker House had known the true position, it would not have entered into the transaction. The inactions of OJS Law were tantamount to advising Broker House to enter into the transaction and, in consequence, they are liable for all the consequences of Broker House having parted with its money.

The starting point for questions of this kind is now the speech of Lord Hoffmann in South Australia Asset Management Corporation v York Montague Limited [1997] AC 191 (usually abbreviated to SAAMCO). At page 213 Lord Hoffmann said this:

“Rules which make the wrongdoer liable for all the consequences of his wrongful conduct are exceptional and need to be justified by some special policy. Normally the law limits liability to those consequences which are attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate.”

Lord Hoffmann then illustrated his point with a now famous example of the mountaineer’s knee. Following the illustration he said at page 214:

“I think that one can to some extent generalise the principle upon which this response depends. It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them.

The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong.”

That generalisation of the principle must, of course, be read against the even more general principle which Lord Hoffmann had previously stated (and which I have quoted), i.e. that normally the law limits liability to those consequences which are attributable to that which made the act wrongful.

In the present case, Mr Halliwell argues that, on the assumed facts of this case, the solicitors knew that the transaction was time-sensitive and that the mortgage advance would not have been made but for the relevant breaches of duty. Thus, Broker House Insurance Services would not have parted with its money if it had known of the breaches.

In my judgment, the mere fact that, but for the breaches, Broker House Insurance Services would not have parted with its money, is not enough to make the solicitors liable for all the consequences of entering into the transaction. After all, that was the very point that the House of Lords decided in SAAMCO. Mr Halliwell says that the solicitors implicitly advised Broker House that it was appropriate to proceed with the transaction; and that that was tantamount to advice that the transaction itself was an appropriate transaction. That, he says, falls within Lord Hoffmann’s category of cases where a person has a duty to advise someone as to what course of action he should take.

Whether this argument is right depends, in my judgment, on what you mean by “the course of action”. Is the course of action to lend or not to lend; or is the course of action to lend on the basis of protection by agreed notice rather than protection by registered charge? Only if the former is the true choice will the solicitors be liable for all the consequences of lending. If the latter is the true choice, then the solicitors will be liable for the consequences of having protected the charge by an agreed notice rather than by registering it with the first chargee’s consent.

In Portman Building Society v Bevan Ashford [2000] 1 EGLR 81, the Court of Appeal considered SAAMCO. Having quoted from Lord Hoffmann, Otton LJ said:

“Thus, in summary, the measure of damage is the loss attributable to the inaccuracy of the information which the plaintiff has suffered by reason of having entered into the transaction on the assumption that the information was correct. Thus one must compare the loss actually suffered with what the position would have been if he had not entered into the transaction and asked what element was attributable to the inaccuracy of the information.”

He also quoted the following passage from the speech of Lord Nicholls in Nykredit plc v Edward Erdmann Ltd [1997] 1 WLR 1627. I will not read the whole of the quotation, but the relevant part is as follows:

“However, for the reasons spelled out by my noble and learned friend, Lord Hoffmann, in the substantive judgments in this case [1997] AC 191, a defendant valuer is not liable for all the consequences which flow from the lender entering into the transaction. He is not even liable for all the foreseeable consequences. He is not liable for consequences which would have arisen even if the advice had been correct. He is not liable for these because they are the consequences of risks the lender would have taken upon himself if the valuation advice had been sound. As such they are not within the scope of the duty owed to the lender by the valuer.

For what, then, is the valuer liable? The valuer is liable for the adverse consequences, flowing from entering into the transaction, which are attributable to the deficiency in the valuation.”

Similarly, in Bristol & West Building Society v Mothew [1998] Ch 1 Millett LJ said:

“Where a plaintiff claims that he has suffered loss by entering into a transaction as a result of negligent advice or information provided by the defendant, the first question is whether the plaintiff can establish that the defendant's negligence caused him to enter into the transaction. If he cannot his claim must fail. But even if he can, it is not sufficient for him to establish that the transaction caused him loss. He must still show what (if any) part of his loss is attributable to the defendant's negligence. This is usually treated as a question of the measure of damages rather than causation, and for convenience I shall so treat it in this judgment, but it must be acknowledged that it involves questions of causation.”

As we now know from the Nykredit case, a lender who parts with his money in consequence of negligent advice does not necessarily suffer an immediate loss. He has both the security and the borrower’s covenant to repay to fall back on. It is only where the combination of the value of the property and the value of the borrower’s covenant falls short of the amount of the loan that he will suffer a loss. Even if the security is worthless, the lender still has the borrower’s covenant. So in most cases the cause of the loss is the borrower’s inability to repay. That, in my judgment, is why in some cases, including both the Steggles Palmer case considered in Bristol & West Building Society v Fancy and Jackson [1997] 4 All 1997] 4 All ER 582 and in Portman Building Society v Bevan Ashford itself, the solicitor’s failure to pass on information about the borrower’s ability to repay the loan resulted in their liability for the whole of the loss. In the Bevan Ashford case Schiemann LJ said:

“These solicitors were under an obligation to draw to the attention of the lender a matter which cast doubt upon the reliability of the borrowers. The reason why this duty is imposed upon them is to protect the lender against greater exposure to risk of damage occasioned by the failure of the borrowers to honour their covenants to repay than it would willingly have assumed, in any event at the rate at which it lent. Any lender is exposed to a risk that the borrower will default. Its willingness to expose itself to that risk in return for a particular consideration depends on its assessment of the chance of the borrower defaulting. In part, that assessment depends on the borrower's financial situation and honesty. In the present case the financial situation and honesty of the borrowers were misrepresented to the lender due to the negligence of the solicitors. The lender clearly would not have lent had the borrowers' true situation been made clear to it. It is right that in those circumstances the solicitors should pay for the damage resulting from the fact that the lender made a loan which otherwise it would not have made.”

That is not the kind of failure of which the solicitors are accused in the present case. Their failure was a failure to deal correctly with the conveyancing mechanics, which appears to have had no impact on the extent of the claimed loss. The claimed loss would have arisen even if the solicitors had done everything they had been asked to do. Having said that, it is, of course, open to Broker House Insurance Services to show at trial that they have suffered a loss attributable to the failure to deal correctly with the conveyancing mechanics.

Accordingly, I hold that the solicitors are liable only for the consequences of failure to obtain the consent of Nat West and for having protected the charge by agreed notice rather than by substantive registration. They are not liable for losses caused by the borrower’s inability to repay or by losses attributable to falls in the value of the security.

The second issue raises a question of construction of the instructions themselves. The argument here is that without compliance with special condition 2, the solicitors had no authority to complete. Special condition 2 reads:

“Conveyancer to ensure our charge ranks second to the first charge, with appropriate permissions granted by 1^st Mortgagor, to our charge prior to release of funds.”

The question of a solicitor’s authority to complete was one of the arguments raised in Bristol & West Building Society v Mothew. Millett LJ said:

“Before us the society put forward a more sophisticated argument. The defendant's instructions, it pointed out, expressly required him to report the arrangements in question "to the society prior to completion." This, it was submitted, made it a condition of the defendant's authority to complete that he had complied with his obligation. Whether he knew it or not, he had no authority to complete. It was not necessary for the society to revoke his authority or withdraw from the transaction. I do not accept this. The society's standing instructions did not clearly make the defendant's authority to complete conditional on having complied with his instructions. Whether they did so or not is, of course, a question of construction, and it is possible that the society could adopt instructions which would have this effect. But it would in my judgment require very clear wording to produce so inconvenient and impractical a result. No solicitor could safely accept such instructions, for he could never be certain that he was entitled to complete.”

Founding on the statement that it is possible for a lender to give instructions that impose conditions on a solicitor’s authority to complete, Mr Halliwell argues that the instructions in this case did so. He pointed out that (1) special condition 2 did not simply require the solicitors to prepare a report prior to completion. It specifically provided, in terms, that the solicitor was to ensure that the condition was satisfied. (2) It was expressly provided in special condition 2 that the condition “must be satisfied prior to our release of funds”. Thus, satisfaction of the condition was directly linked to the release of funds. (3) Special condition 2 is limited to two specific matters, namely ensuring that the relevant charge ranked second to the first charge and that the first mortgagee granted its permission.

By contrast, it is plain from the report of the decision of the Court of Appeal in Mothew that the solicitors in that case were required to report on a large range of matters prior to completion, and the range of matters was relatively vaguely defined in the standing instructions to solicitors. On the other hand, special condition 2 says nothing in terms about authority, so that questions of authority would have to be a matter of inference from the language of the condition. Nor does it refer to obtaining the consent of the first mortgagee. In fact it refers to obtaining consent of the first mortgagor. Accepting that that must be an error for “mortgagee”, it nevertheless, in my judgment, detracts from the proposition that the language of the condition is, to use Millett LJ’s phrase, very clear. If the condition is concerned with the registration of the mortgage substantively as a registered charge, that could not in fact be done before the funds were released and the transaction completed. Even if the entry of an agreed notice on the register would satisfy the condition, that could not be done either before the release of funds. So as a limitation on the solicitor’s authority to complete, the condition is difficult to work.

Mr Halliwell seeks to overcome this difficulty by arguing that, in context, the condition must be understood as requiring the solicitors to conduct a priority search and then to register the charge within the priority period. That may well be so, but again it detracts from the proposition that the language of the condition is very clear. Although Mr Halliwell is right to say that the condition is linked to the release of funds, the condition in Mothew was linked to completion of the transaction. In my judgment, that is a distinction without a difference. In addition, I accept Mr Innes’ submission that the necessary clarity is not so much what the solicitors had to do, but the consequences of their not having done it.

In those circumstances, I do not consider that special condition 2 passes Millett LJ’s stringent test.