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	England and Wales High Court (Queen's Bench Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Queen's Bench Division) Decisions >> UCB Home Loans Corporation Ltd v Carr & Ors [2000] EWHC 557 (QB) (19 April 2000) URL: http://www.bailii.org/ew/cases/EWHC/QB/2000/557.html Cite as: [2000] EWHC 557 (QB)

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

		Royal Courts of Justice Strand, London WC2A 2LL
		19 April 2000

Introduction

1. The Claimant is a mortgage lender. The claim is for damages and/or equitable compensation for deceit, breach of trust, breach of contract and/or negligence against those who were partners in the solicitors' firm Compton Carr in 1988. This is the trial of preliminary issues on limitation as a result of the order of Master Leslie on 18 October 1999.
2. In September 1988 two residential mortgages were provided. The first was on 45 Talgarth Road to Mr. and Mrs. Tiwari. The second was to Dr. Bajpai on 60 Chigwell Rise. In each case Mr. Barry Shaw, an assistant solicitor then employed by Compton Carr, acted for both the Claimant and the borrowers. The Claimant alleges that he acted fraudulently. The Claimant makes the claims against the partners on the basis of their employment of Mr. Shaw, who subsequently left the firm. It is not suggested that the partners were in any way personally at fault.
3. The preliminary issues are:

1. When did each cause of action relied on by the Claimant accrue?

2. In relation to each cause of action relied on by the Claimant:

(i) does any limitation period apply to that cause of action; and

(ii) if it does, what is the relevant limitation period?

3. For the purposes of section 14A(4)(b) of the Limitation Act 1980, what was the starting date for the Claimant's claim in negligence?

4. In relation to each cause of action relied upon by the Claimant, did the claimant discover that cause of action more than six years before the issue of the writ in this action or could it with reasonable diligence have done so?

5. If the answer to the preceding issue is that the Claimant did discover or could with reasonable diligence have discovered one or more of the causes of action relied upon more than six years before the issue of the writ in this action, are the causes of action which were, or could with reasonable diligence have been, discovered more than six years before the issue of the writ in this action barred by the provisions of the Limitation Act 1980 and/or by analogy with t

. Numerous files have been submitted to the court. I should make it clear that I have read the documents and the authorities referred to both in the very full and helpful skeleton arguments and in counsel's oral arguments, but not any other documents or authorities.

hose provisions and/or by the doctrines of laches and/or acquiescence?

4. The evidence presented by the Claimant is principally that of Mr. Stephen Glassborow, now a Business Recovery Specialist in the Debt Recovery Department. Over the years a number of employees of the Claimant have had dealings with these matters. Some have left the company. Thus the evidence has been presented through the mouth of Mr. Glassborow. He has reviewed the files. No complaint is made about presenting the evidence in this way through him.
5. . Numerous files have been submitted to the court. I should make it clear that I have read the documents and the authorities referred to both in the very full and helpful skeleton arguments and in counsel's oral arguments, but not any other documents or authorities.
6. It is important to note at the outset that these mortgages were granted at a time when the property market was still rising. It was not until about 1990 that the crash in the property market occurred. Until that crash mortgage lenders generally relied primarily on their security, which in the conditions that prevailed was usually adequate to protect their interests.
7. The writ was issued on 26 November 1998. Hence the period of 6 years expired on 25 November 1992. It is clear that the Claimant did not in fact begin to suspect fault of the part of Mr. Shaw until 1996, when Mr. Glassborow noticed in the Bajpai file that Mr. Tiwari had witnessed the Bajpai offer. He was aware of the name Tiwari and caused inquiries to be made.
8. It is now common ground that all causes of action accrued in September 1988. It is also common ground that the burden of proof rests on the Claimant. It is clear that the claimant did not in fact discover any of the causes of action until after 25 November 1992.

The pleaded case

9. The Claimant contends that Mr. Shaw and Dr. Bajpai were personally involved in the Talgarth Road transaction. Their case is that originally that property was to be sold by Acrebond Ltd. to Idealson Ltd. The Tiwaris were substituted as purchasers, but many of the ordinary conveyancing formalities did not take place. The true purchase price was £219,500 or some other sum less than any price revealed to the Claimant. The equitable interest in the property was in fact to be shared between the Tiwaris, Mr. Bajpai and Mr. Raj Kumar. All that, it is alleged, Mr. Shaw knew well.
10. As to Chigwell Rise, the Claimant's case is that Mr. Shaw was again personally involved. He was fully aware of various dealings by Dr. Bajpai with the property, involving two companies, Steptoe Ltd. and United Air Travel Services Ltd. The advance was in fact shared between Commercial Acceptances (to redeem a charge), United Air Travel Services Ltd., Dr. Bajpai and Idealson Ltd. The representation that Dr. and Mr. Bajpai were separated was untrue. The valuation was false. Again all this, it is alleged, was well known to Mr. Shaw.
11. In these circumstances the Claimant contends in paragraphs 22 and 42 of the Statement of Claim that Mr. Shaw made deliberately false representations to the Claimant, which induced the advances, initially to him as the Claimant's solicitor. Those representations induced the advances (see paragraphs 14 and 35). It is contended that Mr. Shaw was in breach of his duty in each case to bring relevant matters to the attention of the Claimant prior to completion. The advances were paid to Mr. Shaw on trust to retain them and only pay them over on completion and only then if Mr. Shaw believed that the special conditions had been met (see paragraphs 18 and 38, both paragraphs being preceded by a heading "Duties of the Defendants"). Alternatively the payments out of the completion moneys were fraudulent breaches of trust by him (see paragraphs 23 and 43).
12. The question was raised whether the trial of the preliminary issues must proceed on the assumption that the Claimant's pleaded case is correct. Ultimately no contrary argument was advanced on behalf of the defendants.
13. I shall make findings on the evidence considered in detail during the hearing which relates to the preliminary issues. On the primary issues of liability I shall assume that the Claimant can establish their pleaded case. I shall refer to the main features of the evidence on which the Claimant proposes to rely on the primary issues. It is impossible to consider the question what the Claimant could have discovered, without regard to what there was to be discovered.

The law relating to limitation: deceit

14. The Claimant submits that the Limitation Act 1980, section 21(1) applies to deceit. The sub-section reads:

"(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action -

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; ....".

15. The argument on behalf of the Claimant is that the action is "by a beneficiary under a trust" (namely the Claimant) and that this is an action "in respect of any fraud" to which the trustee (Mr. Shaw) was a party or privy. I shall consider later whether there was here a trust within the meaning of the section. If there was, the argument has some attraction on the wording of the sub-section. However, in my view the sub-section cannot have the effect claimed. If the argument is correct, it would mean that once a person was identified as the beneficiary of a trust and another person was identified as a trustee of that trust, any action in respect of any fraud brought by the former against the latter would be within section 21(1), although the action had nothing whatever to do with the trust. The fraud must be connected with the relevant trust.
16. The limitation period for deceit is therefore governed by the section 32 of the Act:

"(1) ..... Where in the case of any action for which a period of limitation is prescribed by this Act, either -

(a) the action is based upon the fraud of the defendant; or

(b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant; ..

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment.... (as the case may be) could with reasonable diligence have discovered it" (my underlining).

(2) For the purposes of subsection (1) above, deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty".

17. Thus in deceit, the issue is whether the Claimant could with reasonable diligence have discovered this cause of action before November 1992. The Claimant could also escape the limitation period if there was a deliberate concealment of the right of action. And sub-section (2) provides that deliberate commission of a breach of duty in certain circumstances amounts to such deliberate concealment. However, these alternatives are unlikely on the facts of this case to arise unless fraud also arises.
18. I turn to the crucial phrase "could with reasonable diligence have discovered it". In Paragon Finance PLC v. D.B. Thakerar & Co. [1999] 1 All ER 400 the Court of Appeal was considering whether amendments to add allegations of fraud and fraudulent breach of trust against solicitors who had acted for mortgage lenders arose out of substantially the same facts as allegations of negligence. At 418b-d Millett L.J. said:

"The question is not whether the plaintiffs should have discovered the fraud sooner; but whether they could with reasonable diligence have done so. The burden of proof is on them. They must establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take. In this context the length of the relevant period of limitation is irrelevant. In the course of argument May L.J. observed that reasonable diligence must be measured against some standard, but that the six-year limitation period did not provide the relevant standard. He suggested that the test was how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency. I respectfully agree".

19. With respect, it appears to me that the word "exceptional" should be omitted: it raises the standard too high, as both counsel now agree. Otherwise these remarks, although made obiter, are of great assistance.
20. Counsel for the Defendants emphasises, as did Millett L.J., that the word used is "could", not "should". However, consideration of what they should have done is required by the words "with reasonable diligence". It is necessary to consider, first, whether they proceeded with reasonable diligence, not in running their business, but in detecting possible claims against third parties. It is relevant to consider their employees' diligence in noticing evidence of possible claims. However, it is also important to consider the company's diligence in putting systems in place to detect possible claims.
21. The test has been considered by judges in several cases, including Finance For Mortgages Ltd. and another v. Farley & Company [1998] P.N.L.R. 145 (a decision of Kay J. relating to section 14A); Abbey National Building Society v. Wilkin & Chapman (unreported, 7 October 1997) (Judge McGonigal sitting in the High Court); Birmingham Midshires Building Society v. Infields [1999] Lloyd's Reports P.N. 874 (Judge Bowsher QC sitting in the Technology and Construction Court); Abbey National PLC v. Sayer Moore & Co. [1999] EGCS 114 (Jacob J., on section 14A); Halifax PLC v. Ringrose & Co. [2000] Lloyd's Reports P.N. 309 (Bell J.). It is pointed out on behalf of the Defendants that judicial attitudes have tended to be robust, expecting claimants to take early steps. However, each case depends on its facts and I particularly bear in mind that the present case was not one of back-to-back sales. I also bear in mind the dicta of Stuart-Smith L.J. in Forbes v. Wandsworth Health Authority [1977] Q.B. 402 at 412, although he was there discussing the application of section 14 to an individual in a personal injury case.
22. I shall for convenience refer to the issue that arises in each case under section 32 as "the discovery issue".

Deceit: evidence relating to the discovery issue

23. I found Mr. Glassborow to be an entirely truthful witness and I judge him to be a very conscientious man. He has carried out a meticulous examination of the files available from various sources. However, it is no disrespect to him to note that he was in various capacities carrying out instructions. He was not laying down policy and it was not his job to do so. As will become apparent, I do not necessarily accept all his opinions or conclusions about what could or should have been appreciated by the Claimant at various times. I shall return later to comment on the paucity of evidence about policy decisions in the Claimant company.
24. I shall deal with the history of each of the mortgages chronologically. However, it must be remembered that the facts now known were often not known to those in the Claimant who were dealing with the matters. Whether the Claimant should have known more is of course a crucial issue in the case.

The discovery issue: evidence of the organisation and systems in place

25. Mr. Glassborow has been employed by the Claimant in various capacities since 1978, throughout the time it has been involved in residential mortgage lending. The Claimant is a centralised mortgage lender, that is, it does not have any high street outlets.
26. In the 1980s the general experience was that if a borrower defaulted, a lender would be able to enforce its security and suffer no loss. The Claimant in those days put fewer resources into recovering arrears. Mr. Glassborow regarded the crash in the property market in 1990 as a novelty. It created a very real risk that the Claimant would go out of business, as some other mortgage lenders did. He described a lack of resources in the Claimant.
27. Much of the Claimant's business was in non-status mortgages, that is, where the income of the borrower was not independently verified.
28. Mr. Glassborow worked in the Litigation Department of the UCB Group until February 1989, when he transferred to the Consumer Division of the Claimant, as Manager of the Collections Department. He was to develop that department to handle its own litigation. At first there was only one other person in the department, but by the end of 1989 that rose to three. By the end of 1990 the effects of the recession had begun to hit home. The number of collectors in Mr. Glassborow's department had increased to 10, plus two administrators, but they were still struggling against increasing and unprecedented default levels. The Claimants' priority was to stem arrears. Repossession and sale were regarded as a last resort, for two reasons. First, given the poor market, such action would often lead to irrecoverable losses. Secondly, there were government initiatives to avoid repossessions.
29. The Collections Department did not routinely obtain the underwriting file (sometimes referred to as the "main file"). They created a "dummy file", that is a file containing their dealings with the matter. When a matter was later passed to the Litigation Department for repossession proceedings, the files would be put together for that Department. However, they would not carry out a full review of the file, but merely extract what was needed to launch the proceedings. The litigators did not have the time, resources or training for a full review.
30. Mr. Glassborow told me that the Claimant thought and believed that case law indicated that no proceedings could be brought against, for example, valuers, until the loss was crystallised on sale of the property.
31. Early in 1991 the Group Litigation Department, unable to cope with the number of cases, was divided into residential and commercial departments and in February 1991 Mr. Glassborow became manager of the residential department. There were four or five litigators and two administrative staff. The portfolio of cases was 800-900 when Mr. Glassborow took over and, as predicted, increased to about 2400 by the end of 1991. During the first half of 1992 the number of cases in the Collection and Litigation Departments remained static, then increased fairly significantly in the second half. New staff were being moved across from other departments, but it took about three months for a new person to become fully effective.
32. During early 1992 a member of Mr. Glassborow's team drew his attention to a number of cases where the resale value of the property seemed disproportionally lower than the original valuation. There was an increasing number of cases in which there was a strong possibility of overvaluation. During late 1992 and early 1993 the Claimant developed a more mechanised way of identifying cases of potential negligence by valuers, using a property price index which had been constructed. Where actual resale values were more than 20% less than the anticipated value, the case was flagged up for further investigation. At the end of 1992 Mr. Glassborow was seconded to the Internal Audit Department to devise and manage a project on how best to identify and pursue potential claims for professional negligence. In about January 1993 a colleague joined him, bringing a portfolio of about 80 cases under investigation, all against valuers. The project continued until April 1993, when the portfolio was placed with the Group Legal Department. For each of the cases identified the primary limitation period (6 years from the original valuation) was noted on the file.
33. Since August 1993 Mr. Glassborow has had an operational role, investigating matters including professional negligence. He has since then investigated a number of cases involving solicitors, but all except one or two have involved negligence rather than actual wrongdoing. In his previous posts Mr. Glassborow could only recall one instance of fraud by a solicitor, brought to the Claimant's attention by the police after discovery by another lender that finance had been raised on one property from several lenders. He took the view that fault on the part of solicitors was likely to lead to problems over title. The Claimant's manual on Debt Recovery stated that a claim against solicitors would generally become apparent when selling a property or when seeking possession. However, the lack of awareness of fraud by solicitors raises the question whether that was the result of a lack of any system for detecting fraud.
34. In 1994 a Shortfall Recovery Department was set up. Yearly reviews of all high value shortfall cases were carried out to determine whether there were any viable steps to be taken. It took a while for cases to reach the department. The priority of the Claimant was to control arrears. By 1995 the head count in the department had increased from one and external contractors were being used to help. About 900 cases required attention. It was as part of this department's review exercise that in 1996 the Bajpai file was referred to Mr. Glassborow as Business Recovery Specialist in the Debt Recovery Department. That referral led to the discovery of the connection between the Tiwari and Bajpai transaction.
35. Also in 1994 the Claimant instructed Financial Investigation Services Ltd. ("FIS") to identify recovery potential and where appropriate to pursue various high balance shortfall cases. FIS held themselves out as recovery specialists, but Mr. Glassborow took the view that they were enthusiastic amateur ex-CID staff and found that their standard response was that a case should be explored. FIS were remunerated by commission as a percentage of any recovery.
36. The Defendants point to the Mortgage Fraud Manual of the Council of Mortgage Lenders, for which the Claimant received regularly updates at all material times. The evidence of Mr. Glassborow is that it was kept in the Internal Audit Department. I do not accept the Defendants' criticism that the Manual was not more widely disseminated, because, as counsel for the Claimant points out, there is a warning that access to it should be restricted to those dealing with fraud matters. However, it could and in my view should have been considered by senior management in deciding what systems for detecting, as well as preventing, fraud should be in place. There were references to fraud involving solicitors or professionals generally in August 1989, March 1991, June 1991 and April 1992.

The discovery issue: the Tiwari mortgage

37. Mr. and Mrs. Tiwari signed a mortgage application dated 22 August 1988 for an advance of £191,250 to finance the purchase of 145 Talgarth Road in London, W.14. The introductory brokers were FMC. According to the application the purchase rice was £255,000 (altered from £285,000). It was a "private sale: Mr. Dako". The purchasers' solicitors were "Compton & Carr [sic] F.A.O. Mr. Shah". Mr. Tiwari was a director of an import/export business, Idealson Ltd., and had a gross income of £79,750 a year. Mrs. Tiwari had no income. The balance of the purchase price was to be aid from "personal sources". Thus the application was for an advance of 75% of the purchase price, the maximum which the Claimant would lend for a non-status mortgage. The advance would be within the Claimant's other criteria that allowed an advance up to a maximum of three times the stated income. With the application came an independent valuation by Honey & Wise dated 26 August 1988, valuing the property at £255,000. FMC also sent confirmation of Mr. Tiwari's income in the form of a self-certification letter from FMC dated 30 August 1988, certifying that the broker had verified that he was employed as stated and that he was satisfied as a result of his inquiries that his income was as stated.
38. The vendors were Acrebond Ltd. and their solicitors Irving Brown.
39. FMC Mortgage Services were mortgage brokers who introduced borrowers to the Claimant. The proprietor was David Zerfahs.
40. On 8 September 1988 the Claimant offered to advance the sum requested, subject to conditions, including the following special conditions:

"1. Solicitor to confirm purchase price of £255,000.

4. Solicitor to confirm that property is unencumbered.

5. Solicitor to confirm applicants will be sole owners".

The Claimant instructed Compton Carr by a letter dated 9 September 1988, requiring the firm to "make all necessary investigations, enquiries and searches" and to bring any matter arising to the Claimant's notice.

41. The Tiwaris signed the offer letter, accepting the offer, on 15 September 1988. Mr. Shaw witnessed their signature.
42. Compton Carr confirmed by fax to the Claimant on 22 September 1988 that

"1. The purchase price is £288,000;

3. The property is unencumbered;

4. The applicants will be the sole owners of the property".

43. On the same date Compton Carr sent their Report on Title to the Claimant, also showing a purchase price of £288,000 and confirming satisfaction of the other special conditions. The underwriter dealing with the file was Debbie Holmes. She would have checked that the special conditions were fulfilled and obtained a manager's signature authorising the advance. Mr. Glassborow says that the purchase price was important, but that although it was stated to be more than that stated in the application, the advance would have been made as long as it was no less than the price stated in the special condition. In fact Compton Carr's files reveal that the purchase price was less than £255,000. If this had been known, the transaction would not have proceeded. The advance was sent to Compton Carr. The apparent date of completion was 28 September 1988.
44. Mr. Shaw left Compton Carr on 31 October 1988 to work for Irving Brown. After a short period he formed Shaw & Co., incorporating Irving Brown. That was not known to the Claimant at the time. Mr. Glassborow realised from his dealings with the Bajpai file in March 1989 that Mr. Shaw of Compton Carr, who had acted for the Claimant, was working for himself at Shaw & Co., but he did not know of Irving Brown.
45. The Claimant' case is that the true facts were these. On 4 July 1988 Mr. Shaw exchanged contracts on behalf of the purchaser on the sale of this property by Acrebond Ltd. to Idealson Ltd. at a price of £285,000, with a stated deposit of £50,000. He received his instructions on behalf of Idealson Ltd. from Dr. Bajpai. He was Secretary of Idealson Ltd. and they were both Directors of that company. A director of Acrebond Ltd. was Mr. Kumar. Mr. Tiwari and Dr. Bajpai were shareholders in Naturalcombat Ltd. Mr. Tiwari signed the application made by Dr. Bajpai. On 8 September 1998 Mr. Shaw noted that Acrebond Ltd. needed money desperately and needed to complete the Talgarth Road transaction. There were other connections between the various individuals. All this was unknown to the Claimant and was not revealed to it.
46. The £191,000 was paid to the vendors on 28 September 1998, but apparently the balance of the purchase price was not paid then. There is a file note which suggests that the beneficial interest was divided.
47. There was default on the first six payments, due by direct debit. Complete records of letters and telephone calls to the borrowers would not have been kept, but such letters were sent and telephone conversations took place. Some payments by the Tiwaris began in February 1989 and continued during 1989. Mr. Glassborow himself was involved in writing and speaking to Mr. Tiwari between May and September 1989, chasing payment, but promises were not kept. On 11 September 1989 the loan was called in. Arrears stood at £10,544. (I ignore the pence in all figures). On 6 September 1989 a member of the Collections Department commented on a form: "Another FMC, Honey & Wise production!". Mr. Glassborow had begun to be uncomfortable about FMC introductions, which were leading to more default cases than others. He also had reservations about "packages" where a broker arranged the valuation. His views would be known by others in the department.
48. About that time the Inland Revenue carried out a MIRAS audit on the Tiwari mortgage, selected at random. They obtained information, apparently from an accountant, that the borrower "does not live there" and later that Mr. Tiwari was thought to be visiting India. Mr. Glassborow told me that the usual conclusion if the borrower was not living at the mortgage address would be that the property had been rented out. In his statement he implies that it was for that reason that the mortgage was withdrawn from the MIRAS scheme.
49. On 16 October 1989 Compton Carr sent the Charge Certificate to the

Claimant.

50. By the end of 1989 arrears stood at £15,508. Possession proceedings were issued on 11 January 1990 and a suspended possession order obtained on 20 March 1990. There had been further discussions and an agreement by the Claimant to accept £3526 a month. The agreement was not adhered to, although lower payments were received until December 1990, when they ceased. Enquiry agents reported on 27 March 1991 that they had attempted without success to contact the Tiwaris. In a further report on 7 June 1991, the enquiry agent said that he had been told by Mr. Tiwari that he had a buyer for the property and hoped to complete that month. There was no further contact and Mr. Glassborow decided to proceed with a warrant for possession, which was issued on 16 July 1991.
51. In his statement Mr. Glassborow indicated that during 1989 and 1990 there was nothing to arouse suspicion about the borrowers or those who had acted in the transaction and nothing to suggest that this was other than an ordinary case of default by a borrower, which had become commonplace.
52. In August 1991 the Claimant obtained a valuation from Andrew Taylor & Co.: £160,000 (37% less than the original valuation). They said that the original valuation had been carried out at the peak of the market and "was probably about right". They said that values had dropped by up to 30% and the property had probably deteriorated.
53. Meanwhile on 6 August 1991 Mr. Kumar of Acrebond telephoned the Claimant, saying that he had sold the property to the Tiwaris and asking for details of the original purchase price. Mr. Kumar said that he was trying to sue his solicitors "Shaw & Co.", who had acted on his behalf on the sale. Mr. Kumar was requested to and did put his request in writing, saying in a letter dated 14 August 1991:

"Due to a big fraud by our acting solicitors - Irving Brown we are looking into certain information from yourselves which we have to produce for the police".

The letter asked for confirmation of the purchase price "that your client/solicitor told you" and asked for relevant documentation to be sent to the investigating police officer, Mr. J. Nicholls. Mr. Glassborow was shown the letter and the Claimant wrote to D.I. Nicholls saying that a Data Protection Act Certificate was required before the files could be released. No response was received. Mr. Glassborow made no connection between Shaw & Co. and the solicitors who had acted for the Claimant in August 1988; nor did he recall the dealings with Shaw & Co. in March 1989 over the Bajpai mortgage. Leaving aside the question whether there should have been a system, which picked up such connections, I fully understand why the connection did not occur to Mr. Glassborow. Mr. Glassborow concedes that Mr. Kumar's request was odd.

54. A planned execution of the warrant in September failed because the bailiffs did not attend. Possession was in fact taken on 4 December 1991. The file was transferred to Residential Property Sales. Managing agents and selling agents were appointed. On advice from the agents an asking price of £195,000 was set, although prices of £130,000 upwards had been suggested by local estate agents. Offers of £150,000 - £160,000 were rejected early in 1992. New selling agents were appointed. Cleaning and maintenance were authorised. Andrew Taylor & Co. valued the property in May 1992 at £120,000 and a sale was agreed in August 1992 at that price. Completion took place on 1 October 1992, with net sale proceeds of £116,672. That left a shortfall of £109,158, which was written off for accounting purposes.
55. Mr. Glassborow points out that the obtaining of possession and the sale went through uneventfully.
56. It was not cost-effective to pursue borrowers for a shortfall immediately after repossession. Early in 1993 tracing agents were instructed, but could not trace the Tiwaris.
57. It appears to have been during 1993 that the expiry of the 6-year limitation period from the original valuation was noted on the Tiwari file: 26 July 1994.
58. In late 1993 the Tiwari file was referred by Mr. Glassborow, as part of the investigation of potential claims against valuers, to the Claimant's in-house Chief Valuer, Bill Johnson, for assessment. Mr. Johnson advised further investigations with a view to taking action against the surveyors. The value of a possible claim was assessed at about £41,000. Ray Robson, surveyors, were asked for a retrospective valuation and in April 1994 they suggested a figure of £200,000 (£55,000 less than the valuation received). Mr. Glassborow referred the matter to the Legal Department and there were further discussions with an underwriter and Bill Johnson, partly to assess any contributory negligence. However, shortly after this the Claimant became aware that Honey & Wise had ceased trading without run-off insurance cover. It was thus not worth pursuing them, although the individual file was not noted to this effect. No further action was taken.

The discovery issue: the Bajpai mortgage

59. Dr. Sheela Bajpai submitted an application dated 22 August 1988, the same date as that of the Tiwari application, for a re-mortgage advance of £300,000 to refinance a bridging loan and to purchase a holiday home ("home improvements" had been crossed out). The value of the property was stated to be £420,000. She was stated to be a freelance doctor in a medical surgery, earning £120,000 per annum gross. Dr. Bajpai was stated to be separated. Only Dr. Bajpai and her son were to occupy the property. Again, the purchaser's solicitors were "Compton & Carr [sic] F.A.O. Mr. Shah". The introductory broker was again David Zerfahs of FMC, who provided a letter dated 24 August 1998 certifying Dr. Bajpai's income. He also provided a valuation by Honey & Wise of £425,000. On 31 August 1998 the Claimant offered to advance £300,000.
60. The offer was subject to special conditions:

"5. Solicitor to confirm all liabilities arising from separation/divorce of Dr. S.Bajpai.

6. Solicitor to confirm applicant and son will be sole owner/occupier of the subject premises.

7. Solicitor to confirm that the applicant's husband has no legal or financial interest in the property. He is to sign a consent form".

61. Dr. Bajpai signed the offer in acceptance, her signature witnessed by Mr. Tiwari, and her solicitors Compton Carr sent it to the Claimant. Although the underwriter, Debbie Holmes, who still works for the Claimant, was the same person who dealt with the Tiwari mortgage, there was no reason why she would have noticed the name Tiwari as a signature on another acceptance. She would have been dealing with about 100 transactions a week.
62. In most cases, if there was no conflict and the borrower's solicitors had at least three partners, the Claimant instructed the same solicitors. They did so here by standard form letter dated 7 September 1988, listing the special conditions. By letter dated 14 September Mr. Shaw of Compton Carr confirmed that the special conditions had all been satisfied, including numbers 5 and 7. On 16 September the Claimant paid the advance money to Compton Carr. The Claimant had no reason to be suspicious. Completion took place that day.
63. Again, the Claimant' case is that they were kept in the dark. Dr. Bajpai had in fact been sued for possession by her existing mortgagees and had been involved in successive remortgages. She had paid various sums to reduce the indebtedness of Steptoe Ltd., of which she was a director and shareholder and of which Mr. Shaw had previously been company secretary. In July 1988 Mr. Shaw had given an undertaking to Mr. Di Stefano of United Air Travel Services Ltd. to pay £25,000 from any remortgage, the same Mr. Di Stefano who had on behalf of Acrebond Ltd. ("(Legal Department") effected the exchange of contracts for 45 Talgarth Road on behalf of Acrebond Ltd. When the money was received (£298,399), in fact £224,696 was paid to redeem the existing mortgage; £10,000 was paid to United Air Travel Services; £50,000 was paid to Idealson Ltd.; £13,489 was paid to Dr. Bajpai. Again, all this was unknown to the Claimant and not revealed to them.
64. There was default on the first five payments, due by direct debit, and the direct debit was cancelled in January 1989. Again, complete records of letters and telephone calls to the borrowers would not have been kept, but such letters were sent and telephone conversations took place. On 28 February 1989 Mr. Shaw (by then, of Shaw & Co.) telephoned Mr. Glassborow and a compromise agreement was reached about the arrears, subject to Mr. Shaw obtaining instructions. When Mr. Glassborow tried to telephone Mr. Shaw again, no number was available from Directory Inquiries and he had to ask Compton Carr to pass on a message. Mr. Bajpai, Dr. Bajpai's husband, telephoned and gave a telephone number of Mr. Shaw. Mr. Glassborow and Mr. Shaw did speak again on 3 March 1989 and a compromise agreement was confirmed. Mr. Glassborow was aware that Mr. Shaw was the same person who had acted for the Claimant and Dr. Bajpai in the original transaction and saw nothing unusual in that. Even if Mr. Glassborow had known that Dr. Bajpai had been stated to be separated from her husband, he would not have regarded it is unusual for Mr. Bajpai to become involved, since Asian families were in his experience often close-knit.
65. In fact no payment was received from Dr. Bajpai. Later in March 1989 Mr. Glassborow chased first Mr. Shaw and then Compton Carr for the Charge Certificate, since that would be needed for possession proceedings. On 31 March 1989 a colleague of Mr. Glassborow was told by Compton Carr on the telephone that Dr. Bajpai was a personal client of Mr. Shaw who came and went with him when he left. Mr. Glassborow spoke to Mr. Di Stefano at Shaw & Co., who said Compton Carr had the deeds. On 4 April 1989 the Claimant called in the loan. The matter was transferred to the Litigation Department. On 10 April 1989 Compton Carr confirmed registration of the charge, with priority (and sent the certificate and other deeds shortly afterwards). Compton Carr had thus been remiss in not registering the charge earlier, but the matter had been rectified. Possession proceedings were issued on 19 April 1989 and served. No payment was made to the Claimant until after proceedings were commenced. Mr. Shaw of Shaw & Co. acknowledged service on behalf of Dr. Bajpai. After service of an affidavit in support of the Claimant's application, Shaw & Co. wrote to the Claimant, asking for details of the amount due. The writing paper of Shaw & Co. showed that the firm incorporated Irving Brown. There was no occasion to make the link with the fact that Irving Brown had acted for the vendors of the Tiwari property. Even if a link had been noticed, it would not have raised suspicions.
66. On 24 July 1989 the Claimant applied for a hearing, which was fixed for 1 November 1989. Meanwhile Dr. Bajpai attempted to re-mortgage the property in the period April to June 1989, and the Claimant was approached for references. On 29 August 1989 Shaw & Co. wrote to say that they were in a position to clear the arrears immediately, but nothing was received. A 28-day possession order was granted on 1 November 1989.
67. On 12 December 1989 the Claimant received, apparently by hand and possibly via Mr. Bajpai, a cheque for U.S.$ 55,000, drawn on the account of Josephine-Meri Di Stefano at Wells Fargo Bank. Understandably, no link was made with the name of the person spoken to in April. On 14 December 1989 the Claimant received a letter from Shaw & Co., asking the Claimant to accept the cheque in satisfaction of the arrears, saying that Dr. Bajpai was hoping to re-mortgage within 14 days and asking the Claimant not to enforce the order. On 18 December someone at the Claimant met Mr. Bajpai, confirmed that the arrears were now £15,000 (after payment of the cheque) and agreed to monthly instalments. Mr. Bajpai advised that Shaw & Co. were no longer trading and that Mr. Simmonds of the Law Society was taking them over. By letter dated 16 January 1990 the bank notified the Claimant that the cheque had not been honoured. Steps were taken to enforce the order. The Bajpais instructed new solicitors, Noory Norell, and Shaw & Co. were not informed of the dishonouring of the cheque. Mr. Norell told the Claimant's Miss Fanner on 25 January 1990 that Shaw & Co. were under investigation. The file makes it appear that the investigation related to the dishonoured cheque. Mr. Norell said that the property was on the market.
68. During the first half of 1990 a total of £29,000 was received from the Bajpais and taking of possession was postponed. The Claimant was pressing and Dr. Bajpai was attempting to re-mortgage, although in June 1990 the Claimant declined consent to a second mortgage. In June 1990 the Claimant agreed to raise no objection to an action on the dishonoured cheque. Arrears were now £42,222. On 10 July the Claimant re-instructed the sheriff to obtain possession, but that was again postponed because refinancing appeared to be available from the Leamington Spa Building Society and Abbey Life. On 29 August 1990 Miss Fanner met Dr. Bajpai and Abbey Life (who were offering finance). Arrears stood at £53,547. It was agreed that £18,547 would be paid by 12 September by a post-dated cheque. Miss Fanner was told that the remaining £35,000 would "eventually be indemnified by the Law Society" and apparently later by Noory Norell that this would happen probably after the trial of Barry Shaw, but not in the near future. The assumption appears to have been made that this related to the dishonoured cheque and that the Claimant accepted that the Bajpais had paid the amount of the cheque to Shaw & Co. with a view to payment being made to the Claimant. It is improbable that Miss Fanner in fact realised that Mr. Shaw was the same solicitor who had acted for the Claimant originally. It was hoped that the re-mortgage would be arranged.
69. The re-mortgage did not materialise. On about 2 January 1991 Mr. Glassborow was told that Mr. Norell thought that the original valuation was very suspect. Mr. Glassborow took a decision to stop adding interest to the account, since it was likely that a balance would anyway have to be written off. Small amounts were received from the Bajpais and appointments for repossession were postponed several times. In early 1991 Mr. Glassborow became aware of the dishonoured cheque, but the possibility of fraud or negligence in relation to the inception of the mortgage did not occur to him. On 24 May 1991 Mr. Glassborow met Mr. Bajpai to discuss his proposals. Mr. Bajpai said that his wife's income was £25,000 a year and that she owned a property in Preston. He said that he had an outstanding compensation claim with the Law Society Indemnity Fund and that he had lost about £340,000 due to the activities of his former solicitor on another matter. Mr Glassborow did not realise that the solicitor was the one who had acted in the original transaction. In the summer of 1991 the Bajpais by fax authorised the Claimant to show all relevant papers regarding the property to D.S. Nicholls. No connection was made with the information from Mr. Kumar in 1991 about the Tiwari property. On 19 August 1991 Mr. Bajpai proposed by fax an assignment of the £35,000 which should become available after the prosecution of Shaw. He referred to D.S. Nicholls as having been seen by the Claimant, but Mr. Glassborow says that neither he nor anyone else had in fact seen D.S. Nicholls. He would have been present at any meeting with the police. When asked in 1998, the police indicated that no records of such a police investigation survive.
70. The Claimant rejected further proposals from Mr. Bajpai. The court agreed to stay repossession until 2 September 1991. In fact Mr. Bajpai signed a form of surrender on behalf of his wife and himself and the Claimant took possession on 5 September 1991. The Nationwide advised that £250 - £270,000 could be expected. Offers were received in the range £250 - 261,000, but no sale resulted. In January 1992 Black Horse valued the property at £240,000. In February 1992 Andrew Taylor & Co. advised £250,000, the condition of the property being poor. The property was in fact sold for £250,000, with completion on 28 May 1992.
71. In September 1992 the Claimant wrote off for accounting purposes the shortfall of £127,844. In early 1993 agents failed to trace Dr. Bajpai. In April 1993 the Claimant learned that Mr. Bajpai had been made bankrupt in 1992. In May 1993 they learned that Dr. Bajpai had moved to India. Although the file was referred to the Legal Department, for obvious reasons no proceedings were commenced. In 1994 the file was passed to the new Shortfall Recovery Department. In July 1996 FIS approached Dr. Bajpai to negotiate a settlement.
72. Meanwhile in 1994 the Bajpai mortgage was referred to FIS for investigation. In November 1994 FIS suggested consideration of claims against Dr. Bajpai, the mortgage brokers, the solicitors and the valuers. Precise shortfall figures were provided to FIS in February 1995. In February 1995 Compton Carr were asked by letter to send their file to Rosenbergs, who were acting for the Claimant, but Compton Carr refused to release any papers without Dr. Bajpai's consent. In April 1995 a new address in Ilford was discovered for Dr. Bajpai. Rosenbergs expressed the view to FIS that since this was a re-mortgage, there would only be a remote chance of finding anything in the papers which pointed to the completing solicitors. In May 1995 FIS, having spoken to the borrower and his solicitor, reported that "apparently the story is that there was a bent solicitor at Compton Carr to whom he made the repayments; he was investigated and made bankrupt". The borrower's solicitor was prepared to supply information, but FIS expressed the view that as this was a re-mortgage, it was highly unlikely that the file would contain anything of use against the original solicitor and that perhaps the borrower was cashing in on information that that solicitor was in trouble. FIS contacted Dr. Bajpai's solicitor, Mr. Norell. Mr. Norell replied on 30 August 1995, saying that Dr. Bajpai had no complaint against Mr Barry Shaw of Compton Carr in respect of the actual re-mortgage, only about subsequent events in connection with the £35,000. Dr. Bajpai was telling Mr. Norell that she had no idea that her income had been shown at £120,000; that was done by the brokers. No further action was taken.

The discovery issue: the final investigation

73. As I have already mentioned, the Bajpai file was in 1996 referred by the Shortfall Recoveries Department to the Debt Recovery Department and to Mr. Glassborow. It was referred to Mr. Glassborow because it appeared that the amount recovered on sale was lower than the original valuation by more than other cases and there might be a claim against the valuer, the person concerned not realising that Honey & Wise had ceased trading in 1994. The original mortgage offer was on top of the file. Mr. Glassborow had dealt with the Tiwari file over the years and noticed that Mr. Tiwari had witnessed Dr. Bajpai's signature. This was the first time that a link had been noticed. Mr. Glassborow obtained the Tiwari file. It was then apparent to him that David Zerfahs of FMC, Honey & Wise and Compton Carr had been concerned in both matters. David Zerfahs and Honey & Wise were familiar to Mr. Glassborow. The former had certified the high income in both matters, probably untruthfully in the light of the immediate defaults. Honey & Wise had produced about half a dozen valuations subsequently considered for possible negligence claims. Mr. Glassborow did not recall that the individual solicitor from Compton Carr had subsequently gone to Shaw & Co. and been the subject of investigation. Compton Carr had not been involved in any pattern of default cases.
74. In October 1996 Mr. Glassborow wrote to David Zerfahs about the Tiwari certification of income. His solicitors responded with a strenuous denial. Having obtained Dr. Bajpai's address from FIS, Mr. Glassborow wrote to her in January 1997 for details of her current circumstances. He made searches on her Preston and current properties. In April 1997 Mr. Glassborow decided on legal proceedings against both borrowers, partly to see whether something could be recovered but more importantly to force them to contact the Claimant and enable him to meet them and explain further evidence. By now he suspected foul play by the brokers and possibly by the solicitors.
75. Judgment was obtained against the Tiwaris by June 1997. Unsuccessful steps were taken to try to enforce the judgment. Mr. Glassborow did not manage to meet the Tiwaris.
76. An approach was made by Dr. Bajpai to negotiate. Eventually on 16 October 1997 Mr. Glassborow met Dr. Bajpai and her current solicitor (Mr. Norell had died). She claimed that she had given Mr. Shaw £35,000 and that he had issued the $55,000 cheque which was dishonoured; and that Mr. Shaw had been suspended from the Roll of Solicitors in 1990 and struck off in November 1995, which was news to Mr. Glassborow. Dr. Bajpai denied any associations with Mr. Tiwari, but he was a relative. She said she had left everything to Barry Shaw. She was put forward for the mortgage because her husband was an undischarged bankrupt. She denied knowledge of David Zerfahs. She could not recall how she proved her income. She said that the mortgage was intended for short-term financing. She agreed that her income would not have been sufficient to meet the mortgage payments, but claimed that these could have been met as a result of £500,000 worth of policy surrenders. She spoke of suing Compton Carr. Mr. Glassborow did not find Dr. Bajpai credible. He thought that the transaction had been a money-raising scam to obtain a residential mortgage to fund commercial development, because interest rates on commercial mortgages were higher. Dr. Bajpai declined to agree to the release of Compton Carr's file, but said that she would ask her solicitors to obtain it and provide a copy to the Claimant. Mr. Glassborow still needed Compton Carr's file to investigate further. Inquiries at the Land Registry produced nothing useful.
77. Summary judgment was obtained against Dr. Bajpai in November 1997. Steps were taken to try to enforce it. Mr. Glassborow still hoped that the proceedings could be used as a level to obtain useful information from Dr. Bajpai.
78. It was not until about February or March 1998 that Mr. Bajpai delivered Compton Carr's file to the Claimant. In that file the ledger is apparently not an ordinary client account ledger. According to the ledger on 6 October 1987 Dr. Bajpai obtained bridging finance of £24,450 paid into the client account. From this various payments were made to Steptoe Ltd. between October 1987 and March 1988. The ledger showed payments of £6000 to M.Pandey, £47,000 and £50,000 to Idealson Ltd., £10,000 to United Air Travel Services. The was a ledger printout for a file in Dr. Bajpai's name called "Company Formation", referring to a nil balance brought forward at 6 April 1988 in the name N.N. Tiwari and a debit entry for £1000 to N.Tiwari on 31 May 1988. There was a client account ledger for Dr. Bajpai for the purchase of a flat at 10 Heathfield Park, showing a deposit of £4750 from Idealson Ltd. and the same sum paid back. The files also showed that Acrebond Ltd. had lent Dr. Bajpai £10,000, which was to be repaid from the re-mortgage. And Mr. Di Stefano of United Air Travel Ltd. was involved in events prior to the re-mortgage. The files include a note that of the £300,000 advanced, Commercial Acceptances were redeemed, £50,000 was paid to Idealson Ltd., £10,000 to United Air Travel Services Ltd., with the balance going to Dr. Bajpai.
79. Company searches showed that Mr. Shaw and Dr. Bajpai were both officers of Steptoe Ltd. They were also both officers of Idealson Ltd., the original alleged employers of Mr. Tiwari. Various members of the Kumar family, including Raj Kumar, were officers of Acrebond Ltd. Mr. Shaw and Mr. Raj Kumar were both directors of United Air Travel Services Ltd. and of United Air Travels Ltd. Dr. Bajpai and Mr. Tiwari were both officers of a company called Naturalcombat Ltd. Other interconnections were found.
80. In late April 1998 the Claimant instructed their present solicitors. Mr. Glassborow then met Dr. Bajpai in May 1998. Terms of settlement were discussed. In June 1998 Mr. Hopper told Mr. Glassborow that he had represented the Law Society at disciplinary hearings of Mr. Shaw relating to failing to account for clients' funds, misappropriation of clients' funds, misleading clients and acting where there was a conflict of interest. Mr. Shaw was struck off at the second hearing. One of the charges had involved a loan to Dr. Bajpai organised by Mr. Shaw.
81. In June 1998 Mr. Glassborow was telephoned by a friend of Mr. Tiwari, asking for a meeting, which took place on 16 June 1998. Mr. Tiwari said that he had been unemployed when the loan was taken out, although he had substantial funds available. He knew Dr. and Mr. Bajpai simply as friends. Mr. Bajpai introduced him to David Zerfahs and Mr. Shaw. He signed the mortgage application in blank. He had never worked for Idealson Ltd. He was never asked to prove his income. He paid the deposit moneys for Talgarth Road to Mr. Bajpai. It was intended that he should live at Talgarth Road but let out a couple of rooms. He had been involved with Dr. Bajpai and Mr. Shaw in Naturalcombat Ltd. Mr. Tiwari's friend said in Mr. Tiwari's absence that Mr. Tiwari was inclined to act without thinking and that alcohol had affected his decisions. The Claimant's claim against Mr. Tiwari was finally settled on payment of £12,500.
82. Compton Carr's file on Talgarth Road was not received, after repeated chasing, until 1 October 1998. It transpired for this first time that the total purchase moneys paid to the vendors, Acrebond Ltd., of £219,500 was less than Compton Carr stated the purchase price to be. A conference with counsel was held on 24 November 1998. The writ was issued on 26 November 1998. It is the Claimant's case that it was only on receipt of Compton Carr's Talgarth Road file that the true nature of the fraud could be identified.

The discovery issue: conclusions

83. In my judgment the Claimant cannot simply rely on the fact that those who dealt with each of these files in the normal course of business had no cause to suspect fault on the part of Mr. Shaw. Such individuals would not review the file, or even necessarily see the file, on each occasion. Reasonable diligence required that those in control of the Claimant had in place proper systems to detect claims against third parties.
84. It is instructive to consider what a review of all the information actually available on each of the two files to the Claimant in May 1992 would have revealed. I take that date to allow a further six months for investigation of any such information.
85. Talgarth Road:

(1) This was a high-value mortgage.

(2) The introducing brokers were FMC, who were not regarded by Mr. Glassborow was wholly reliable.

(3) The valuation was by Honey & Wise, who were sometimes associated with FMC.

(4) Quite apart from the identity of the particular brokers and valuers, this was a package produced by the brokers and valuers: "another FMC, Honey & Wise production".

(5) This was a non-status mortgage, with the income certified by FMC.

(6) The purchase price seemed to alter from £255,000 to £2888,000 although that was of less concern that a reduction.

(7) There was immediate default, the first six direct debits not being paid.

(8) There was information from the MIRAS audit in the autumn 1989 that the borrower was not living at the property.

(9) There was an odd request from Mr. Kumar of the vendors for confirmation of the purchase price, saying that his solicitors Shaw & Co. were being investigated by the police.

(10) Although valuers in August 1991 described the original valuation as "about right", in May 1992 they valued the property, admittedly in poor condition, at only £120,000.

86. Chigwell Rise:

(1) This was a high-value mortgage.

(2) The introducing brokers were FMC, who were not regarded by Mr. Glassborow was wholly reliable.

(3) The valuation was by Honey & Wise, who were sometimes associated with FMC.

(4) Quite apart from the identity of the particular brokers and valuers, this was a package produced by the brokers and valuers: "another FMC, Honey & Wise production".

(5) This was a non-statute mortgage, with the income certified by FMC.

(6) There was immediate default, the first five direct debits being unpaid.

(7) By February 1989 the estranged husband was actively involved in negotiations.

(8) In December 1989 the cheque for $55,000 was dishonoured. Subsequently Shaw & Co. were blamed.

(9) By August 1991 not only had Shaw & Co. been blamed for the dishonouring of the cheque, but the file showed that Shaw & Co. had ceased practice and that there was a police investigation.

87. Not until late 1992 was there a system of identifying suspect valuations. At about the same time Mr. Glassborow was asked to devise and manage a project on how best to identify and pursue potential claims for professional negligence. Only from August 1993 did Mr. Glassborow have an operational role, investigating professional negligence. Not until 1995 were there investigations by FIS of high value shortfall cases. No other systems were put in place.
88. I have not seen or heard evidence about how the policy of the Claimant was decided. Mr. Glassborow is able to tell me that after the disastrous drop in house prices, the Claimant was placed in serious financial difficulty and that the company concentrated on reducing arrears. He was able to tell me what systems were put in place. However, if those directing the company had been reasonably diligent, they would clearly have given early consideration to the possibility of claims against third parties. The burden is on the Claimant to show that they did so. On the evidence I am driven to the conclusion that inadequate consideration was given to the need for systems which could identify third party claims. There is no evidence before the court about comparable systems in other companies.
89. I conclude that if the Claimant had been reasonably diligent, they would have put in place by early 1992 at the latest systems which identified (a) cases in which a high shortfall was likely; (b) cases in which there was reason to think that the borrower's income and/or the value of the property had been misrepresented; and (c) professionals who had acted in more than one of such cases. Each of the present cases would clearly have been identified. Moreover, the same professionals were involved. That should have led to a comparison of cases in which those were involved. That would have led to the consideration of these two cases together.
90. Even if that had occurred, the next question is whether that could have led to the discovery of the cause of action against Mr. Shaw. The Claimant points to the reluctance of Compton Carr to release the files. It is said that without Compton Carr's files, the Claimant could not have discovered their cause of action. Despite the arguments of counsel for the Defendants, I consider that that reluctance would probably have been the same in 1991 or 1992 as it was later. However, the consideration of the Claimant's files together could have identified the existence of a police investigation in August 1991. It could have led to the identification of the solicitor under investigation as the individual who had acted for the Claimant. Company searches could have revealed the same information as was revealed later.
91. I conclude that if reasonable diligence had been shown, the Claimant's causes of action could have been discovered by November 1992.

The law relating to limitation: breach of trust

92. I have already set out section 21(1) of the Act. Can the Claimant rely on a breach of trust?
93. By section 38(1) "trust" and "trustee" have the same meanings as in the Trustee Act 1925. That is, by section 68:

"(17) "Trust" does not include the duties incident to an estate conveyed by way of mortgage, but with this exception the expressions "trust" and "trustee" extend to implied and constructive trusts, and to cases where the trustee has a beneficial interest in the trust property, and to the duties incident to the office of a personal representative, and "trustee" where the context admits, includes a personal representative, ....".

94. In the normal way, when a client transfers the purchase price to his solicitor with a view to its payment over to the vendor on completion, the solicitor holds the sum on trust. There is a separate principle of equity that a person implicated in a fraud is accountable in equity for what is referred to as equitable compensation. Such a person is sometimes referred to as a constructive trustee.
95. The question arises whether there was a breach of a trust of the first kind or only of a remedial constructive trust. The Claimant submits that the advance was paid to Mr. Shaw on trust to retain it until completion and then to pay it over only if Mr. Shaw believed that certain conditions were met. The Claimant submits that there was a breach of an express trust. Alternatively the Claimant relies on the fact that an express trust is pleaded. The Claimant further or in the alternative submits that the payment over (or draw down in the Bajpai case) was a fraudulent breach of trust by Mr. Shaw.
96. The Defendants contend that if Mr. Shaw was fraudulent when he received the moneys, no trust of the normal kind arose. They further contend that although if he was fraudulent, he would be a constructive trustee in the second sense, such a trustee is not within the definition of trustee for the purposes of section 21 of the Act.
97. It is to be noted that in each case it is pleaded by the Claimant that the advance was sent to Compton Carr and was paid "into the client account in the name of Bajpai" (see paragraphs 14 and 35 of the Statement of Claim). It is of interest that in each case the name "Bajpai" was used. However, for present purposes it may be of relevance that the advance was credited to the client account. As I have already noted the Claimant pleads that the advance was sent "to Compton Carr" and the paragraphs setting out the nature of the trust are preceded by a heading "Duties of the Defendants", in the plural.
98. I turn to the authorities. In Paragon Millett L.J. at 408j - 409e described the two kinds of constructive trust:

"Regrettably, however, the expressions 'constructive trust' and 'constructive trustee' have been used by equity lawyers to describe two entirely different situations. The first covers those cases already mentioned, where the defendant though not expressly appointed as trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the plaintiff. The second covers those cases where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff.

A constructive trust arises by operation of law whenever the circumstances are such that it would be for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of the another. In the first class of case, however, the constructive trustee really is a trustee. He does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff. His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust. ...

The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be 'liable to account as constructive trustee'. Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff. In such a case the expressions 'constructive trust' and 'constructive trustee' are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are 'nothing more than a formula for equitable relief': Selangor United Rubber Estates Ltd. v. Cradock (No.3) ... [1986] 1 WLR 1555 at 1582 per Ungoed-Thomas J.".

99. Two questions arise. First, in circumstances where there is alleged to be fraud by Mr. Shaw at the time when the advance was paid over by the Claimant, can the Claimant rely on the first kind of trust? If the Claimant can do so, such a claim would obviously fall within section 21. Secondly, if not, does the second kind of constructive trust fall within section 21?
100. In Paragon a breach of the first class of trust was not relied on, as Millett L.J. made clear in two passages:

"As counsel for the plaintiff acknowledged, it was not a breach of the trust that would have arisen in the ordinary way from the receipt of the advance money for payment of the amount due on completion. That trust was discharged according to its terms, but its existence assumes that the defendants acted honestly; on the plaintiffs' case it never came into being but was displaced ab initio by the constructive trust in their favour" per Millett L.J. at 408c - d.

"The constructive trust on which the plaintiffs rely is of the second kind. The defendants were fiduciaries, and held the plaintiffs' money on a resulting trust for them pending completion of the sub-purchase. But the plaintiffs cannot establish and do not rely upon a breach of this trust. They allege that the money which was obtained from them and which would otherwise have been subject to it was obtained by fraud and they seek to raise a constructive trust in their own favour in its place" per Millett L.J. at 409g - h.

101. I understand Millett L.J. to be expressing the view that the plaintiff in Paragon could not rely on the first kind of trust. In the first passage he appears to be setting out the plaintiff's argument. However, in the second passage he appears to accept the plaintiff's argument that they could not rely on such a trust.
102. The reason why the plaintiff in Paragon was not able to rely on a breach of the first kind of trust was that the trust was to pay over the money on completion. As Millett L.J. said in Bristol and West Building Society v. Mothew [1998] 1 Ch. 1 at 22D - E:

"It is not disputed that from the time of its receipt by the defendant the mortgage money was trust money. It was client's money which belonged to the society and was properly paid into a client account. The defendant never claimed any beneficial interest in the money which remained throughout the property of the society in equity. The defendant held it in trust for the society but with the society's authority (and instructions) to apply it in the completion of the transaction of purchase and mortgage of the property. Those instructions were revocable but, unless previously revoked, the defendant was entitled and bound to act in accordance with them.

The society's instructions were not revoked before the defendant acted on them, and in my judgment there was no ground upon which the judge could properly conclude that his authority to apply the money in completing the transaction was determined".

103. Millett L.J. went on (at 24) to note that the solicitor's authority to apply the mortgage money was not conditional on his having first complied with his contractual obligations to the building society. Nor was it vitiated by his misrepresentations, which were in that case not fraudulent, to the society.
104. It is submitted on behalf of the Claimant that it would be odd if the Claimant was prevented from relying in the first instance on the trust that would arise when the advances were paid to Compton Carr. Why, they say, should we be obliged to rely on the equitable remedy imposed by reason of fraud? Their difficulty is that in the light of Mothew Mr. Shaw's authority to pay over on completion would prevent any breach of that trust. They seek to avoid that by contending that in this case the clear wording of the retainers prohibited the paying over of the money. At page 24 in Mothew Millett L.J. leave open the possibility of such clear words in a retainer. And it is argued that the Claimant has in any event circumvented the difficulty by relying (in paragraphs 18 and 38 of the Statement of Claim) on a duty to pay over on completion "only then in circumstances such that the Solicitor at the time of payment believed that the special conditions of the...Offer had been met by the borrowers". It is argued that if the Defendants are correct, a Claimant who alleges fraud from the outset may be in a worse position under the Limitation Act than a Claimant who alleges fraud arising only after a trust has arisen.
105. On behalf of the Defendant it is argued that since the limitation period in deceit at common law is subject to section 32, with its exceptions, it is not contrary to principle that an action based on fraud from the outset should be subject to a similar limitation period by analogy, on the principle preserved by section 36(1) of the Limitation Act 1980.
106. I must refer to one principle which was not raised in argument. Under the Trustee Act 1925, section 30(1), a trustee in answerable only for his own acts and defaults and not for those of any other trustee. In the absence of argument I express no firm view. However, it may be that at trial the Claimant will face difficulty in establishing liability for breach of trust against the Defendants in the absence of wilful default on their part, such default not being alleged. Mr. Shaw is not a Defendant.
107. In these circumstances, on this preliminary issue, it seems to me that I can only express these views. The evidence relating to the possible breach of trust, of either kind, has not been fully presented before me. First, in the light of section 30(1) of the Trustee Act 1925, there may be no liability in the Defendants for any breach of trust arising from the acts of Mr. Shaw in any event. Secondly, if such liability can arise, the Claimant has pleaded a trust of the first kind, and its breach. In my view such a trust and its breach can in principle be relied on in the light of the clear terms of the retainer in each case. In other words, if the Claimant can prove a fraudulent breach of the clear terms of the retainer, Mr. Shaw's authority to complete would not entitle him to complete. It would follow that under section 21(1) of the Act, no limitation period would apply.
108. In case I am held to be wrong in my conclusion that the Claimant is entitled to rely on a breach of the normal kind of trust, I next consider whether a remedial constructive trust falls within section 21.
109. In Paragon Millett L.J. obiter preferred the view that section 21 did not apply to a remedial constructive trust. He examined the history of the section. He noted that in Taylor v. Davies [1920] AC 636, the Privy Council held that such trustees were not within the relevant terms of the Canadian Act which was closely modelled on the Trustee Act 1888. He noted that section 19 of the Limitation Act 1939 (which is virtually the same as section 21 of the 1960 Act) was enacted in response to the Law Revision Committee's 5th Interim Report (Statutes of Limitation) (1936). He noted that in Barlow Clowes International Ltd. v. Eurotrust International Ltd., now reported in 1998/99) 2 O.F.L.R. 42, the High Court of Justice of the Isle of Man, sitting on appeal, held that a statutory provision in the Isle of Man in identical terms to section 21 did now apply to remedial constructive trustees. Millett L.J. went on to set out (at 412e - 414d) ten "formidable" arguments for concluding that section 21 does not apply to such trustees.
110. The Claimant submits that it is not permissible to resort to history to construe a provision in a consolidation Act, which the 1980 Act is, in the absence of ambiguity: see Farrell v. Alexander [1977] AC 59. However, the dicta of the Court of Appeal in Paragon reveal that there is here an ambiguity.
111. I respectfully adopt the formidable arguments of Millett L.J. and hold that section 21 does not apply to remedial constructive trustees. Therefore, if the Claimant cannot rely on a breach of the normal kind of trust, the six-year limitation period applies.
112. Even if section 21 prevents any limitation period from applying, can the Defendants rely on acquiescence, as section 36(2) of the Act permits? In the event that was not the subject of any detailed argument. Although I make findings above that there was delay on the part of the Claimant in discovering its right of action, there is no evidence of acquiescence in any breach of trust once such breach was discovered. Laches and waiver were not actively pursued, in my judgment rightly.

The law relating to limitation: breach of contract and/or negligence

113. The claims in breach of contract and/or negligence are statute barred unless one of two exceptions applies. The first arises if there was deliberate concealment by Mr. Shaw of the right of action under section 32(1) and (2). My conclusions on section 32 have already been set out. The second exception could arise under section 14A, which provides an alternative limitation period for claims in negligence, but only if section 32(1) does not apply: see section 32(5).
114. The Claimant has accepted, realistically, that if I have concluded that section 32 does not apply, my findings on the evidence prevent the Claimant from bringing itself within the provisions of section 14A.

The preliminary issues

115. I set out these issues again, with my decisions on each.

1. When did each cause of action relied on by the Claimant accrue?

September 1988.

2. In relation to each cause of action relied on by the claimant:

(i) does any limitation period apply to that cause of action; and

(ii) if it does, what is the relevant limitation period?

In the case of each cause of action, (i) yes, (ii) 6 years, subject to sections 232 and/or 14A of the Limitation Act 1980. The single exception is the cause of action based on the normal trust that arises when mortgage moneys are sent to a solicitor, if the Claimant can establish such a trust; see paragraph 107 of this judgment.

3. For the purposes of section 14A(4)(b) of the Limitation Act 1980, what was the starting date for the Claimant's claim in negligence?

At the latest, May 1992.

4. In relation to each cause of action relied upon by the Claimant, did the claimant discover that cause of action more than six years before the issue of the writ in this action or could it with reasonable diligence have done so?

They did not, but could with reasonable diligence have so.

5. If the answer to the preceding issue is that the Claimant did discover or could with reasonable diligence have discovered one or more of the causes of action relied upon more than six years before the issue of the writ in this action, are the causes of action which were, or could with reasonable diligence have been, discovered more than six years before the issue of the writ in this action barred by the provisions of the Limitation Act 1980 and/or by analogy with those provisions and/or by the doctrines of laches and/or acquiescence?

Yes, with the single exception stated in Answer 2 above.