Lender wins claim against solicitors : LAW REPORT

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Bristol & West Building Society v A Kramer & Co.

Chancery Division (Mr Justice Blackburne).

16 December 1994.

Solicitors who were in breach of their instructions from a building society to notify it of any matters which might prejudice the society's security or which were at variance with the society's offer of advance were liable contractually to repay the advance which was also held on trust to apply in accordance with the society's instructions.

Mr Justice Blackburne, in a chambers judgment which was released for reporting on 16 January 1995, gave judgment for the building society against the defendant solicitors.

In November 1990 the building society instructed the solicitors in connection with an offer of advance of £251,456 for the purchase of a flat in Knightsbridge for £320,000 by Edick Moradians Khachatouri. The solicitors were instructed to advise the society of any matters which might prejudice the society's advance and security or which were at variance with the offer.

The solicitors became aware the flat was being sold for £210,000 to an Isle of Man company, owned by Ghazar Moradians Khachatouri, which would immediately transfer the flat for £320,000 to Edick Khachatouri but disclosed none of those matters to the society.

On 6 December 1990, the solicitors received the same instructions from the society for an offer of an advance of £890,485 for the purchase of a house in Wimbledon for £1.27m by Ghazar Khachatouri. On 7 January 1991 the Knightsbridge transaction was completed.

On 9 January 1991, before the solicitors received the society's advance for the Wimbledon transaction, they discovered that £419,515 had been paid to the vendor of the Wimbledon property from Ghazar Khachatouri's account in Germany. The solicitors did not notify the society and the advance was paid to Ghazar Khachatouri. The Khachatouris made no payments in respect of the advances.

The society claimed damages against the solicitors alleging, among other things, breach of contract and breach of trust in respect of the Knightsbridge flat. The claim was compromised by a payment to the society representing the whole of the advance lessthe proceeds of sale of the flat. The society claimed summary judgment under Order 14 for the advance in respect of the Wimbledon property which had been sold for £355,000.

Brian Doctor (Veale Wasbrough, Bristol) for the society; Mervyn Roberts (Barlow Lyde & Gilbert) for the solicitors.

MR JUSTICE BLACKBURNE said that the solicitors' instructions required them to disclose to the society the matters in relation to the Knightsbridge transaction as they were plainly relevant to the society's security, not just in the Knightsbridge transaction but also in the Wimbledon transaction. The instructions obliged the solicitors to notify the society that £479,515 had been paid. If the society had been informed of those matters, it would not have made the advances.

Any negligence of the valuer of the Wimbledon property might provide the solicitors with a right of contribution but provided no defence in law. The solicitors' liability arose from a contractual provision which was not dependent on negligence and therefore contributory negligence was not capable of providing a defence. As to whether the society obtained the best price for the Wimbledon property, there was no evidential foundation to suggest otherwise.

The point that the damages should be reduced to reflect a drop in property value between the time of the solicitors' breach and the sale was not a good one. There was no reason why the consequences of a falling market should be excluded from the computation of damages to which the society was entitled.

The society was therefore entitled to damages of £860.222.40 from the solicitors for breach of contract, having given credit for the proceeds of sale.

Alternatively, the society claimed compensation for breach of trust. A solicitor held an advance on trust to apply it in accordance with the lender's instructions. The solicitors, by paying the society's advance before notifying it of any matters and obtaining the society's consent, applied the advance in breach of trust and were liable to restore the amount, giving credit for the proceeds of sale. The society's claim for breach of trust was well founded. Questions of causation and contributory

negligence did not arise.

Ying Hui Tan, Barrister