DMC/PI/05/01
Dean v. Allin & Watts
English Court of Appeal: Leading Judgment from Lightman J
TLR 28 June 2001: May 2001
LOAN SECURED BY DEPOSIT OF DEEDS ON PROPERTY: NO WRITTEN MEMORANDUM SIGNED BY PARTIES AS REQUIRED BY S.2 OF LAW REFORM (MISCELLANEOUS PROVISIONS) ACT 1989: BORROWERS DEFAULT: SECURITY DEFECTIVE: LENDER REQUIRED TO SURRENDER DEEDS: LENDER LOSES AMOUNT OF LOAN: CLAIM AGAINST BORROWERS’ SOLICITORS: DUTY OF CARE: RELIANCE ON SOLICITORS TO PROVIDE EFFECTIVE SECURITY: EFFECTIVE SECURITY FUNDAMENTAL TO TRANSACTION: ASSUMPTION OF RESPONSIBILITY: NEGLIGENCE

Facts
In March 1993 Mr. Dean, who carried on business as a car mechanic, agreed to lend £20,000 to a Mr. Beasley and a Mrs. Young for investment in a firm called Citizen Homes (‘CH’), which specialised in buying run-down or re-possessed houses and refurbishing them for re-sale. The loan was to be secured on a property owned by third parties, who were also involved in CH. Mrs. Young instructed Allin & Watts (‘A&W’), solicitors to the firm, to handle the transaction on behalf of CH. A&W accepted the instructions, but pointed out to Mrs. Young that they could not act for both parties, but only for CH. The loan was structured in the form of a promissory note, signed by Mr. Beasley and Mrs. Young and the security was effected by depositing the deeds of the property with A&W, who undertook to hold them to Mr. Dean’s order. A&W were aware that Mr. Dean was an unsophisticated investor who would not be taking independent legal advice. The solicitor handling the matter at A&W did not advise the parties to enter into a signed written agreement regarding the form of the security.

Section 2 of the Law Reform (Miscellaneous Provisions) Act of 1989 provides that a contract for the sale or other disposition of an interest in land can only be made in writing and that the writing must incorporate all the terms which the parties have expressly agreed and be signed by or on behalf of each party to the contract. In the case of United Bank of Kuwait Plc v. Sahib [1997] Ch 107, it was held in a judgment given in June 1994, that Section 2 governed the validity of all dispositions of interests in land, including the creation of equitable charges by way of deposit of title documents. Accordingly, an attempt to create such a charge without the preparation of, and signature of the parties to, a memorandum in writing setting out the express terms had no legal effect.

A&W accepted that both Mr. Dean and CH wanted the security to be effective and relied on them to achieve this. Had A&W advised that a legal charge was necessary, it would have been effected.

In August of 1993, Mr. Dean increased the amount of the loan to £50,000.and this loan was subsequently extended into 1995. On each occasion, a new promissory note was drawn up by A&W and signed by Mr. Beasley and Mrs. Young. The security arrangements remained as before. In all these transactions, the judge at first instance held that Mr. Dean was relying on A&W to ensure that he had effective security. In April 1995, Mrs. Young was declared bankrupt. Mr. Beasley had no funds. In March 1996, the third party owners of the property brought an action against Mr. Dean for recovery of their deeds, on the grounds that the ‘equitable charge’ represented by the deposit of the deeds was invalid under the Act of 1989. In October of that year, Mr. Dean settled the action by agreeing to surrender the deeds. As a result, Mr. Dean sustained a loss of £50,000, with interest from 1 January 1997.

Mr. Dean claimed this money from A&W on the grounds that they owed him a duty of care to put in place an effective security for his loan, which they had breached.

Judgment
The leading judgment was given by Lightman J. with whom the other members of the court, Sedley and Walker LJJ agreed. The court held that the relevant facts were the following:
1     A&W were instructed by CH to take the necessary steps to provide Mr. Dean with effective security for the loans he was to make to the borrowers;
2     neither CH nor Mr. Dean were willing to proceed with any transactions unless and until effective security was in place, and A&W knew that this was the case;
3     A&W advised on the basis that Mr. Dean, who was not sophisticated in these matters would not be instructing solicitors to protect his interests;
4     A&W knew, or ought reasonably to have known, that Mr. Dean was relying on them to put in place effective security;
5     A&W did not disclaim owing any duty to Mr. Dean or advise him to obtain independent advice;
6     whilst there was a conflict of interest between the borrowers and Mr. Dean in respect of many aspects of the transaction, there was an identity of interest in the provision of effective security;
7     the default in providing effective security occasioned no loss to the borrowers; the only party to suffer loss was Mr. Dean.

The court then referred to the principles laid down by the House of Lords in the case of Phelps v. Hillingdon Borough Council [2000] 3 WLR 776, to the effect that:
"the existence of a contractual duty of care (or other duties) owed by a professional …. to his employer or client did not of itself necessarily exclude the existence of a duty of care owed to those with whom he dealt in the course of his employment or engagement." The court then examined the speech of Lord Goff in White v. Jones [1995] 2 AC 207, to determine the ambit of duties owed by solicitors to third parties. It held that the approach adopted in that case "was that the assumption of responsibility by an adviser (in that case a solicitor) may extend beyond the client to those whom the client intended to benefit. In that case, the client was a prospective testator and the assumption of responsibility was to the beneficiaries under the proposed will. Later authority has established that this approach is not confined to such situations but is applicable in analogous situations…… Gorham v. British Telecommunications Plc [2000] 4 AER 867."

After examining the facts of the Gorham case, the court concluded:

"…by parity of reasoning and in the analogous situation which arose in this case, the law can and should impose a like duty of care on A&W towards Mr. Dean in respect of the provision of an effective security, the benefit of which to their knowledge the borrowers wished to confer on Mr. Dean and which was fundamental to the loan transaction. There is the necessary foreseeability of damage and the necessary relationship of proximity for the law to impose such a duty of care and it is fair, just and reasonable that such a duty should be imposed. [These three tests derive from the judgment of the House of Lords in the case of Smith v. Eric Bush [1990] 1 AC 831.] There are no policy reasons inhibiting recognition of the duty." As a result, the appeal was allowed and Mr. Dean’s claim against A&W succeeded.

A&W petitioned the House of Lords for leave to appeal (June 2001)