Update: professional negligence

Professional privilege

When is a privileged document not privileged? It was a matter considered in November, as the High Court in Birmingham heard the case of Mortgage Express v Mehrban Michael Singh Sawali [2010] EWHC B23 (Ch). The judges eventually ordered the delivery up of certain of the defendant borrower's files to the claimant lender despite the fact the files contained documents protected by legal professional privilege.

It was the defendant's position that the solicitors who had previously acted for both Mortgage Express and the borrower on a number of transactions owed a duty of confidence to the borrower. Mortgage Express relied on a declaration given by the defendant at the time of applying for the loan which authorised the solicitor to deliver the entire file relating to the 'whole transaction' to the lender on request.

Brown J found that the relevant clause of the declaration was unambiguous and therefore binding on both the borrower and Mortgage Express. Furthermore, he found that the clause was necessary to enable this type of transaction to work properly as it allows a lender to ensure that its solicitor complies with their duties under the retainer.

This decision is arguably a move from the recent ruling in Quinn v The Law Society [2010] EWCA Civ 805, where a similar application for delivery up was refused as the judge considered it amounted to a waiver of privilege. The current case differed in two respects: (a) the borrower's declaration referred to the 'whole transaction' and not just the loan as in Quinn; and (b) the request for the delivery up was made by the lender (a client of the solicitor under a joint retainer with the borrower) and not by a third party.

The profession '“ and insurers '“ should note that following this ruling lenders can request files which are in principle privileged even in situations where there is no reason to believe that a claim may arise.

Valuers' duties

The decision in Scullion v Bank of Scotland Plc t/a Colleys [2010] EWHC 2253 is the first to award buy-to-let purchaser, Scullion, damages against the valuer, Colleys, retained by a lender, on the basis of a negligent valuation. Applying the principles of Smith v Bush [1990] 1 AC 831, the judge held that Scullion was entitled to rely on the valuation produced by Colleys for the following reasons:

1. The property was a small residential property falling within the type categorised in Smith. It was not a high-value house or commercial property where it could be expected that the purchaser would instruct its own valuer.

2. Colleys was a professional valuer that should have known that it was highly likely that the valuation would have been shown to Scullion and that he would have relied on it.

3. Scullion was not a professional property developer and therefore was no different from a residential purchaser seeking to invest in the property market.

It is clear from the judgment that application of the principle will depend on the value of the property, the sophistication of the purchaser and whether the transaction is commercial in nature. The judge concluded that Colleys had acted negligently in overstating the capital value of the property and the expected rental income. Although

Scullion would have been entitled to recover the difference between the price he paid for the property and the true value of the property, he had suffered no loss in respect of the capital value of the property as the purchase price was less than the true value.

Scullion was awarded £72,234.54 in respect of losses caused by the fact that he was unable to let the property for a rental figure that gave him sufficient income to cover his mortgage payments. He was, however, not entitled to recover damages for loss of anticipated profit based upon the difference between rental value Colleys expected and what was actually achieved.

This case provides helpful guidance on the extent of the duties owed by valuers to purchasers of residential properties. As a general rule, if the subject property is of a modest value (and not commercial in nature) the valuer should proceed on the assumption that it owes a duty of care to the purchaser irrespective of whether the valuer has been instructed on behalf of the lender.

The case also raises the possibility of an increase in claims against valuers as dissatisfied non-professional landlords seek to recover losses incurred as a result of valuers engaged by lenders overstating the rental income expected on properties purchased at a time when the buy-to-let market was at its peak.

The borrowers

In Lloyds TSB Bank Plc v Markandan & Uddin (A Firm) [2010] EWHC 251 7 (ch), Lloyds was the successor in title to a building society that had offered a mortgage for a residential property. The defendant firm was instructed to act on behalf of the lender and the purchaser of the property.

The lender advanced the mortgage monies to the defendant, who then sent the monies to solicitors purporting to act for the seller. The defendant paid the money without having obtained any documentation that would have enabled them to register title. The registered owners of the property, which was let at the time, denied all knowledge of the transaction and the money disappeared. The whole transaction was a fraud. Lloyds brought a claim against the defendant alleging breach of trust, contract or undertaking.

The preliminary issues for the court to determine were whether:

1. the defendant had committed a breach of trust;

2. the defendant was entitled to relief under the Trustee Act 1925; and

3. the defendant could rely on the principle that the lender caused or contributed to its own loss.

The judge held that the defendant was in breach of trust by paying the monies to the seller's solicitors without receipt of the necessary documents to register title, or on receipt of a solicitor's undertaking to provide such documents.

The defendant was not entitled to relief under the Trustee Act. A trustee has to establish that it had acted honestly and reasonably before the court will exercise its discretion and the defendant had not acted reasonably by paying away money without receiving the documents.

Further, the defendant could not rely on the allegation that any loss or damage suffered had been the caused or contributed to by the lender's own fault and it was irrelevant that the defendant was innocent and unaware of the fraud.

The case is important for solicitors and for mortgage lenders who have been the victims of fraud. If the lender can prove breach of trust then they may be entitled to recover their losses suffered as a consequence of the fraud, without the need to show negligence or fraud on the part of the buyer's solicitors. Further, the case is a good example of why it is essential for solicitors to ascertain the legitimacy of parties to a transaction.

Damage dating

The Court of Appeal has again considered limitation periods in professional negligence claims brought against solicitors. In Nouri v Marvi [2010] EWCA Civ 1107, it ruled that the claimant's loss crystallised not on the registration of a fraudulent conveyance, but at the earlier date of the transfer itself.

Nouri owned a property and agreed that Marvi could occupy the premises provided that he met Nouri's mortgage repayments. After the existing mortgage had fallen into arrears, Marvi fraudulently remortgaged the property, using the advance to redeem the old mortgage. Six months after Nouri had found out about the fraudulent remortgage, Marvi effected a fictitious sale of the property to himself.

In April 2001, some four months after the fraudulent transfer, the property was registered in Marvi's name. In 2003 Marvi sold the property to Razuk. After failing in his attempt to rectify the register, Nouri issued proceedings against the solicitor instructed by Marvi to carry out the sale.

The solicitors argued that the claim was time barred on the basis that Nouri's loss was the diminution in value of the property following the fraudulent transfer and not the diminution following the registration. The issue for the court to decide was, therefore, the date at which the damage accrued.

Rejecting Nouri's contention that the solicitors owed a continuing duty, the Court of Appeal found that it was the transfer which constituted an actual loss (such loss being the 'blot on his title') and accordingly the claim was statute barred under section 2 of the Limitation Act 1980. Nouri's loss on registration was the same, albeit the cost of rectification greater.

The importance of the decision lies in the manner in which the Court of Appeal reviewed existing authorities on the date a loss accrues. Notably, the court refused to accept Nouri's argument that the loss on transfer was merely contingent, the actual damage being incurred on the registration. Such a contention has successfully been advanced in the past (Law Society v Sephton & Co [2006] UKHL 22) although it is suggested that, following Nouri, Sephton and the contingent liability argument is of significantly narrower application.

The decision in Nouri will be welcomed by the profession. It represents another instance in which the courts have been prepared to find actual damage early on in a sequence of events, thus frustrating claims against professionals.

Insurance renewal

As part of their annual review of the minimum terms and conditions, the SRA has recently commenced a major evaluation of solicitors' professional indemnity insurance and is expected to make significant changes for the next renewal season (October 2011). The review will see changes to the assigned risk pool, a requirement for an additional conveyancing premium and a general move towards clients contributing towards insurance costs.

The SRA's proposed changes will ultimately have a profound effect on professional negligence claims and claims handling. The changes to the ARP should result in lower premiums for some firms; however, the counter balance will be the impact on conveyancing firms. It is importance that members of the profession ensure they have measures in place to deal with this shift.