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Professional negligence claim against Law Society to proceed to trial

Out-Law News | 06 Sep 2017 | 5:13 pm | 3 min. read

A professional negligence claim against the Law Society based on information listed in its ‘Find a Solicitor’ (FAS) directory which turned out to be fraudulent should proceed to trial, the Court of Appeal has ruled.

The appeal court concluded that the judge below was correct to refuse to strike out a claim brought by now defunct London law firm Schubert Murphy. Whether or not a duty of care arose between the firm and the Law Society was “fact-sensitive” and “requires the answers to several questions which cannot be determined without further inquiry into the facts”, according to the court.

“It is true that a regulator such as the Law Society does not generally owe a duty of care in relation to the way it carries out its regulatory functions,” said Lord Justice Beatson, giving the judgment of the court. “But making information available through the FAS facility is arguably an additional step going beyond what it is required to do, and thus providing an additional but voluntary service.”

“By choosing to provide the facility, and in the light of the nature of the facility … I consider that it is arguable that the actions of the Law Society, which has control over the registration of solicitors, created the risk that it would be relied on and the opportunity for fraud and did so in a way going beyond the confines of its statutory regulatory obligations,” he said.

It was therefore arguable that there had been a “specific assumption of responsibility” by the Law Society that could lead to a finding of professional negligence, depending on a fuller consideration of the facts at a full trial, she said.

Schubert Murphy, which had been acting for the prospective purchaser on a property transaction, had used the FAS facility in order to confirm that a John Dobbs of Acorn Solicitors in Rotherham, who it was told was representing the seller, was a registered solicitor. It later discovered, after transferring the purchase price over to the seller's purported representative, that there was no such solicitor and no such firm. The fraudster disappeared with the money.

The prospective purchaser has already settled a claim for negligence and breach of trust with Schubert Murphy's professional indemnity insurer, which is now in the process of suing to recover its costs. The Law Society has, however, refused to compensate either Schubert Murphy or the purchaser from the Solicitors Compensation Fund, as the purported solicitor was not in fact a solicitor taking the fraud outside of the scope of the fund.

The Law Society has issued advice to solicitors to help them combat fraud in conveyancing transactions, including a recommendation that they check the status of the person acting for the other party with the relevant regulatory body. One of the questions raised by the Court of Appeal, which it has suggested should be considered when the case reaches trial, is whether there is a difference between obtaining that information by searching an online database or by telephoning the Law Society to ask whether the other party is a genuine solicitor.

The court may also wish to consider whether the Law Society's advice to conveyancing solicitors creates a different duty than it would have to a member of the public, Lord Justice Beatson said. Perhaps more significantly, it may also be required to consider the wider purpose and consequences of imposing a duty of care in these circumstances, for example with regards to insurance cover.

Litigation expert Stuart McNeill of Pinsent Masons, the law firm behind Out-Law.com, said that the case "highlights quite starkly the risks that every solicitors' practice faces from increasingly creative fraudsters, but equally the potential for the victims to be left without a remedy".

"If a solicitor follows the market practice in using the Law Society website to check credentials, they cannot be accused of negligence," he said. "While the solicitor victim's insurers paid out in this case, it is far from certain that this will always happen, and with the Law Society refusing to permit a payment from the Solicitors Compensation Fund, there could be a vacuum in the availability of insurance cover. Perhaps it is time for a 'safety net' of insurance cover to be provided that would limit the damage caused in this case."

"While this was an interlocutory decision, if the case now proceeds to trial and the Law Society loses it has the potential to open up the circumstances in which a regulated entity owes a duty of care to third parties while discharging its day to day duties. This makes it highly likely that the Law Society will settle but, if not, the bodies governing accountants, surveyors and other professionals will no doubt be paying close attention," he said.