Lawyers who become stakeholders in conveyancing transactions have a duty to hold the monies or documents deposited to them on behalf of either the vendor or the purchaser until the conclusion of certain transactions.

In Toh Theam Hock v Kemajuan Perwira Management Corporation Sdn Bhd, Hashim Yeop Abdullah Sani SCJ (as he then was) in delivering his judgment said that the word ‘stake’ is “in common parlance used to apply to any money to be disposed of in accordance with what may happen in future: and whoever is in possession of the money is often described as a stakeholder. The manner in which the money is to be disposed of depends on the terms on which it is held”.[1] Lawyers as stakeholders cannot release the money to either party until the registration of transfer or assignment has been completed, the Sale and Purchase Agreement (“SPA”) comes to an end through termination or when the deposit is forfeited by the vendor in accordance with the terms of the SPA.

The duty of lawyers as stakeholders is further emphasised in the Rules and Rulings of the Bar Council. Rule 14.10 (3) states that:
 

A breach of stakeholding terms amounts to misconduct. Dato’ Jeffrey Tan FCJ in delivering the judgment in Datuk M Kayveas & Anor v Bar Council held that the breach of duty as a stakeholder is not only contractual but also fiduciary.[2] In that case, the issue was whether the breach of stakeholding terms was only a mere breach of contract that can be remedied with damages, or whether it would amount to misconduct. The court held that mere civil liability in itself, such as a breach of contract would not amount to misconduct. Nonetheless, a breach of contract with elements of contravention of professional rules is misconduct.[3] The court further held that the relationship between the stakeholders and the parties in the transaction is fiduciary in nature, akin to the relationship between trustees and beneficiaries and as such, the breach of duty as stakeholders is a breach of duty as trustees.[4] Therefore it is beyond argument that the breach of stakeholding terms is a breach of trust and the failure to honour such terms and duties is prima facie evidence of professional misconduct.

Nevertheless, although lawyers as stakeholders are duty-bound to hold the stakeholding monies or documents in medio pending the completion of transactions, there were cases where lawyers breached this duty and released the stakeholding monies or documents without clients’ authority or contrary to the stakeholding terms. In such cases where lawyers notified the Insurer regarding claims brought against them for breach of stakeholding terms or stakeholder duties, the Insurer will repudiate cover under Clause 32 (e) of the 2015 Certificate of Insurance (“COI”) on the ground of misconduct. 

The following case studies explore such instances.

Case Study 1

In 2013 Philip Fry, the sole proprietor of Messrs Fry & Co. (“IP”) was retained by a long-time client Scruffy, to prepare a Sale and Purchase Agreement (“SPA”) to purchase a unit of a condominium. Scruffy was also a good friend to Philip’s wife, Leela who was the IP’s office manager. After all terms of the SPA had been agreed and finalised, Scruffy forwarded a cheque of RM500,000 for the full purchase price and instructed the IP to disburse the monies according to the terms of the SPA.

However three months later Scruffy received a letter from the Vendor’s solicitor demanding him to pay the balance purchase price of RM450,000 which was still outstanding. Bewildered, Scruffy contacted the IP to seek for clarifications. To his shock, the IP informed him that the balance purchased price had been released to Leela for her commission. Scruffy questioned Philip’s indiscretion in releasing the money to Leela without a written confirmation from him. It later transpired that the Philip had acted on Leela’s instructions. She had said that  Scruffy had agreed to release the money to her as commission for the work that she had carried out for Scruffy  on for a different file. The IP had been oblivious about any such  instruction. It had been  a common practice for for Scruffy to  to give  instructions to the IP through Leela.

Scruffy was also shocked to learn that the IP had given an instruction to the Vendor’s solicitor to terminate the SPA and forfeit the deposit due to the non-payment of the balance of purchase price within stipulated time under the SPA.

Scruffy filed a Writ against the IP to demand a refund for his money.
 

Case Study 2
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Elmo of Messrs Elmo & Associates (“IP”) was retained by one Mr Snuffy as a stakeholder to hold 5% balance purchase price amounting to RM2,000,000 for a development project. The retainer agreement stated that the monies were to be put in a fixed deposit account and shall be released after 12 months and 24 months from the delivery of vacant possession to the respective purchasers.

Elmo released RM1,000,000 of the stakeholder’s sum together with interest earned on the money to Mr Elmo pursuant to the retainer agreement. Nonetheless, Elmo only released RM500,000 and the interest earned for the second tranche. When Mr Snuffy asked Elmo to release another RM500,000, Elmo informed him the he did not have enough money to release the balance of the stakeholder’s money. Shocked with the revelation, Mr Snuffy asked for an explanation from Elmo and demanded him to release the money. It was later discovered that Elmo had used the money without Mr Snuffy’s knowledge and authority to invest in an investment scheme for profit and hence, the reason why the money could not be released to Mr Snuffy.

Mr Snuffy through his new solicitor filed a Writ against the IP to recover the money.
 

Risk Management Best Practices
 

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