The Court of Appeal has held in E Surv Ltd v Goldsmith Williams Solicitors that the Bowerman duty (a solicitor’s implied duty to notify its lender-client of facts which he discovers “in the course of investigating title… which a reasonably competent solicitor would realise might have a material bearing on the valuation of the lender’s security or some other ingredient of the lending decision”) will generally apply even where the lender and solicitor’s contract is governed by the terms of the Council of Mortgage Lenders (CML) Handbook, and the solicitor gives a Certificate of Title in the form appended to Rule 6(3) of the Solicitors Practice Rules 1990.
The decision also has relevance to professional liability and banking dispute resolution in general; it demonstrates the evidential pitfalls which may be encountered by a party seeking contribution under the Civil Liability (Contribution) Act 1978, and indicates the importance, when acting for or against institutional lenders, of identifying the most relevant employees of the lender in question.
Background facts
In September 2005, a borrower purchased a property for £390,000.
In December 2005, the borrower applied to the lender for a re-mortgage loan of £580,000. In his application, the borrower estimated the value of the property to be £850,000. The borrower also stated, wrongly, that he had purchased the property for £450,000 in October 2005.
In January 2006, the lender instructed the surveyor to provide a valuation report. The surveyor valued the property at £725,000. In reaching this figure, the valuer took into account the borrower’s false statement to him that he had purchased the property for £600,000 (as opposed to £390,000).
A number of underwriters within the lender’s underwriting team in Chester considered the application. The lender approved the application.
The lender instructed solicitors in February 2006. The retainer incorporated the terms of the then current edition of the CML Handbook. The lender did not provide the solicitors with the borrower’s application form.
The solicitors obtained Land Registry office copy entries for the property, which showed the true purchase details, that is £390,000 in September 2005. However, the solicitors did not report those details (or, consequently, the disparity between this purchase price and the £725,000 valuation) to the lender. Instead, the solicitors completed a certificate of title in the form of the Appendix to Rule 6(3) of the Solicitors Practice Rules 1990.
The lender advanced loan monies, and the borrower subsequently defaulted the loan. The lender repossessed and sold the property, but was left with a shortfall.
The lender intimated a claim against the surveyor, alleging that it had overvalued the property. This claim was settled for £200,000. The terms of the settlement agreement recorded that the lender “expressly declined any obligation to provide any assistance to [the surveyor] in relation to any contribution claim it might bring”.
The surveyor sued the solicitors, seeking a contribution under the Civil Liability (Contribution) Act 1978 and contending that that the solicitors had breached their duties to the lender inter alia by failing to report:
- The original purchase price.
- The disparity between that price and the surveyor’s valuation.
The surveyor contended that the duty to report the disparity arose either expressly, or as a result of the duty found to exist in Mortgage Express Ltd v Bowerman & Partners.
As to causation, the surveyor contended that had the solicitors so advised the lender, the lender would have relayed the true purchase details to the surveyor, which would have reviewed and revised its valuation downwards, such that the transaction would not have proceeded.
The first instance decision
HHJ Stephen Davies held that the solicitors did owe a duty to the lenders to report the disparity. While he found no express duty to do so, the judge agreed that the Bowerman duty was implied into the solicitors’ retainer. In doing so, the judge rejected the solicitors’ argument that the Bowerman duty should not be implied because it was inconsistent with the terms of the CML Handbook and Certificate of Title.
The judge also accepted the surveyors’ case on causation, despite:
- Holding that the witness tendered by the surveyor (a national account manager employed by the lender at the relevant time) had “insufficient knowledge or experience… to provide me with very much assistance as to how they would have dealt with the application had the solicitors provided the actual purchase details”.
- Noting that the underwriting team had not expressed any concern at the disparity of £400,000 stated in the borrower’s application form.
The Court of Appeal’s decision
As to the existence of the implied Bowerman duty, the Court of Appeal upheld the judge’s decision, holding that:
- Clause 1.3 of the CML Handbook was clear that the “general law” is not affected by the terms of the Handbook.
- Clause 5.1.2 could only be explained on the basis that the Bowerman duty applied.
- The examples of “important matters” given in clause 5.1.2 were mere examples, which did not limit the clause to instances of fraud.
- The terms of the Certificate of Title should not be read as restricting that duty.
However, the Court of Appeal overturned the judge’s decision on causation. Having noted the judge’s comments as to the absence of any evidence from any of the underwriters involved, and the absence of any lending manual, the Court of Appeal asked:
“if a reported price of £450,000 shortly before the date of the mortgage application was not of concern to the underwriters, why should the reported price of £390,000 have concerned them?”
The court found that the judge did not have sufficient evidence to answer that question, and that he had effectively reversed the burden of proof by relying on the solicitors’ omission to adduce evidence of the lender’s practice. Instead, it was for the surveyors to secure the evidence they required, if necessary by issuing a witness summons against a relevant witness.
Significance in relation to lender claims
The Court of Appeal’s decision in respect of the Bowerman duty is of significance to all those involved in lender claims. The decision remains relevant to the current terms of the CML Handbook.
Also noteworthy is the court’s rejection of the “narrow” construction of the Certificate of Title, and in particular the words:
“Our duties to you are limited to the matters set out in this certificate and we accept no further liability or responsibility whatsoever. The payment by you to us (by whatever means) of the mortgaged advance or any part of it constitutes acceptance of this limitation.”
The legal mechanism by which these words might take effect (perhaps variation, waiver or estoppel) has never been clear. The Court of Appeal’s approach, concentrating on the terms of the solicitors’ instructions rather than the parties’ subsequent conduct, sidesteps this potentially thorny issue, and produces a clearer picture overall.
The Bowerman duty
The decision also paves the way for continued jurisprudence on the Bowerman duty and, in particular, the question of when such a disparity will be sufficiently large that a solicitor should disclose it to the lender. In the meantime, prudent conveyancing solicitors will “mind the gap”, and advise lenders of such a disparity, even where it appears modest.
Contribution claims
The case also exemplifies the potential difficulties in bringing claims under the Civil Liability (Contribution) Act 1978. Where a defendant settles the claimant’s claim and then pursues a separate contribution claim, that party undertakes the evidential burden of “proving someone else’s case”. Such a burden can be difficult to discharge.
The alternative available to a defendant in this position is to issue or threaten a Part 20 contribution claim against his potential co-defendant, and to require that any settlement includes all three parties. The additional costs risk of a Part 20 claim must always be borne in mind. In particular, the contribution claimant’s task will be much easier where their causation arguments are open to one or both co-defendants.
The correct approach will always depend on the circumstances of the case, but those advising potential contribution claimants must ensure that their clients are properly appraised of the difficulties of proceeding without the underlying claimant. Those difficulties may be more acute where (as the lender did here) the underlying claimant indicates a reluctance to pursue the contribution-defendant itself, or to assist in the contribution claim. Alternatively, where the underlying claimant may be willing to assist, consideration should be given to obtaining relevant evidence prior to or as part of any settlement.
Witness evidence
The case also illustrates the court’s discerning approach to witness evidence. The national account manager’s evidence was found to be of little assistance, because he lacked knowledge or experience of the practice of the particular mortgage underwriting team in Chester who dealt with this application.
The court’s approach demonstrates the importance of identifying (and, if appropriate, adducing) the most relevant witness evidence, from individuals either involved in the transaction or with experience of the particular divisional and geographical team involved. These lessons should be heeded not just by all professionals advising or acting on disputes involving institutional lenders.
