Breach of the terms?
David Bailey, partner and head of services to lenders group at SGH Martineau LLP, discusses whether the CML Lenders’ Handbook should be used as guidelines or absolute contractual obligations
The issue of whether a solicitor’s retainer consists of obligations, which are not dependant on the exercise of skill and care and therefore not subject to contributory negligence, has been recently revived. It has become a hot topic of professional negligence claims against solicitors.
The advantage for lenders pursuing claims against solicitors where the defence of contributory negligence is not available to the defendant is obvious.
Throughout the life of professional negligence claims, lenders have sought ways to avoid having to take account of any allegations of contributory negligence as to whether the product was imprudent or there was failure to apply lending criteria.
For this reason, identifying an intentional breach on the part of the solicitor giving rise to a breach of trust, or a breach of fiduciary duty claim, or a non-fault based claim such as breach of warranty, where the defence of contributory negligence is not available, has an obvious attractiveness.
But can the same be applied to a breach of the terms of the CML Lenders’ Handbook?
The issue of whether the defence of contributory negligence is available in breach of contract claims was finally concluded in Forsikringsaktieselskapbt Vesta v Butcher and Others  3WLR 565, which identified three categories of cases where the defendant’s liability arises from:
1. A contractual obligation which does not require care and skill on the part of the defendant - in which case there is no defence of contributory negligence.
2. A contractual obligation which “is expressed in terms of taking care (or its equivalent) but does not correspond to a common law duty to take care which would exist in the given case independently of contract” – in which case it is unclear whether there is a defence of contributory negligence.
3. A contractual obligation which does require care and skill on the part of the defendant – in which case there is a defence of contributory negligence.
Back in the 1990s the case of Bristol & West Building Society v A Kramer & Co (a firm)  NPC 14 first floated the idea that the terms of the solicitor’s retainer are a set of freestanding obligations which are not dependant on the exercise of care and skill and therefore not subject to contributory negligence.
In this pre CML Lenders’ Handbook case in the first instance the judge took the view that if necessary, he would hold that the breach of obligation was a category 1 liability because the solicitor was in breach of failing to notify the society of matters of which he had knowledge (i.e. a purported direct deposit), which did not require a degree of skill or care.
But this case was not applied in Mortgage Express v Newman  PNLR 603 because of a difference in wording of the instructions, where there was no such express provision to report “any matter which might prejudice the society’s security” and further doubted as being inconsistent with the Court of Appeal decision in Mortgage Express v Bowerman  2 All ER 769.
The judge held that this was a category 3 case and therefore the defence of contributory negligence was available to the defendant.
Since then and following the introduction of the CML Lenders’ Handbook in 1999, lenders have generally accepted that their contract claims fall within category 3.
Until, that is, the decision in Mortgage Express v Iqbal Hafeez  EWHC 3037 (Ch). Perhaps unwittingly, the judge re-opened the issue that the terms of the CML Lenders’ Handbook (or at least some of them) may give rise to a liability which is not co-extensive with a liability in tort and therefore a defence of contributory negligence is not available.
In Iqbal Hafeez the solicitors were liable in negligence and breach of contract but there was to be no deduction for contributory negligence because:
(a) the mortgage packaging system did not constitute imprudent lending; and
importantly for lenders, as for the claim in contract some of the provisions of the CML Handbook impose absolute contractual obligations and fall within category 1; i.e. not obligations of reasonable care and skill.
Unfortunately in this case:
1. the judge was possibly not familiar with this particular issue and accepted the society’s submissions without them being fully aired ;
2. there was a junior counsel and the authorities mentioned above were not apparently put before the judge;
3. the defendant appeared in person and therefore the issues were not fully aired in court.
It is also notable that in the recent decision of Nationwide Building Society v Davisons (24 April), a claim for failure to obtain a registered charge, the society did not bring a claim in negligence and the defendant did not pursue allegations of contributory negligence at trial.
The judgment reveals that the society began by raising the question of whether the duty to obtain a discharge of the pre-existing charge and a registered charge was an unqualified duty or one which merely depended on the exercise of reasonable care and skill on the part of the solicitors.
However, during the trial, this narrowed down to whether the solicitors had obtained an appropriate undertaking to discharge the pre-existing charge when they released the money.
Whether the CML Handbook’s standardised terms are free standing obligations which are not dependant on the exercise of care and skill, and therefore not subject to contributory negligence, is a matter open to interpretation.
Vigilance is the order of the day and close attention should be paid to the abundant litigation that is currently being pursued; one of these cases is likely to contain the answer and put an end to the present uncertainty.