The Law Society has safeguarded its discretion over when to compensate victims of dishonest solicitors, following a successful appeal which it says “entirely vindicated” its policies.
In December the Court of Appeal held the Law Society was not obliged to compensate mortgage lenders defrauded by dishonest solicitors when the losses were caused principally by inflated valuations or a fall in the property market.
The decision has saved the society from paying out an estimated £20m compensation in mortgage fraud cases.
The case against the Law Society was brought by Mortgage Express and the Alliance and Leicester Building Society which argued that the Law Society unlawfully refused to compensate them in cases of mortgage fraud from the discretionary Solicitors Compensation Fund, which gives compensation to victims of dishonest solicitors.
But the Appeal Court said the Law Society's compensation policy was based on “rational and intelligible” grounds.
In mortgage fraud cases the Law Society normally compensates up to the value of the realised security on the basis that a conveyancing solicitor's principal function when acting for a commercial lender is usually to ensure that the lender obtains an effective security for its loan.
The society's legal adviser Anne Coles said: “If successful, the lenders' challenge would have destroyed the discretionary nature of the fund and turned it into another indemnity fund. This could have had incalculable consequences for the profession and the public we serve.”
The court refused leave to appeal to the House of Lords.
Meanwhile, 65 law firms are being taken to court by the Bristol & West Building Society over mortgage losses in cases where one lawyer acted for both borrower and lender in conveyancing deals.
Bristol & West argues that the solicitors should have warned the society when clients were a bad risk.
If successful, the case, due to start next month, could lead to other similar claims, reported to be worth £25m. Successful claims would have to be met by the Solicitors Indemnity Fund.