Askews Legal LLP Comments on the Dreamvar and P&P Appeals
On 15 May 2018, the Court of Appeal handed down judgment for two cases heard together relating to property sales involving fraudulent sellers. The cases of Dreamvar (UK) Limited v Mishcon de Reya and P&P Property Ltd v Owen White & Catlin LLP both dealt with claims by property purchasers whose solicitors paid over monies to the sellers’ solicitors for completion of a property purchase which turned out to be scams perpetrated by fraudsters who subsequently escaped with the buyers’ money.
What Were the Facts in each Case?
In P&P Property Ltd v Owen White & Catlin LLP [2016] EWHC 2276 the defrauded purchaser, P&P, brought a claim against the seller’s solicitors who had signed the contract on behalf of their client and against the estate agent which had prepared the sales particulars. The claim asserted that the solicitors and agent had acted in breach of warranty of authority because the professionals were to be taken as warranting that they had instructions from the actual property owner and not just that they had authority to act for the person giving them instructions, whoever that was. It was also claimed that they owed a duty to the purchaser to carry out identity checks on their client. The problem for the seller’s solicitor was that they had not fully complied with anti-money laundering regulations and the estate agent had just assumed that the solicitor had verified the seller’s identity. Finally, there was a claim that the seller’s solicitors acted in breach of undertaking and breach of trust by sending the purchase price to their client whereas the undertakings given and the trust created by the Law Society Code for Completion by Post (2011) required payment to the true owner of the property. There was no claim by P&P against its own solicitors.
In Dreamvar (UK) Ltd v Mischon de Reya [2016] EWHC 3316 the fraud was essentially the same. In this case the disappointed purchaser, Dreamvar, brought a claim against its own solicitors (MDR) and the seller’s solicitors but not the seller’s agent. Dreamvar’s claim against the seller’s solicitors was also based on breach of warranty of authority, breach of undertaking and breach of trust. As in the P&P case, the seller’s solicitors had not carried out the correct anti-money laundering identity checks. Its claim against its own solicitors was that they had acted negligently as they had not sought to protect Dreamvar against fraud risk. It also alleged breach of trust. The argument was that the trust on which MDR held Dreamvar’s money was to release it to the seller’s solicitors in the context of a genuine transaction not just one that looked genuine.
In the High Court, P&P’s claim against both parties failed on all counts and P&P appealed. In Dreamvar, a different judge held that MDR were not negligent but were in breach of the strict terms of the trust on which they held their client’s money. The Court also declined to grant discretionary relief to MDR under the Trustee Act 1925 primarily on the grounds that it was not just to do so as MDR were insured against such liabilities whereas Dreamvar could not insure against the risk. However, as in P&P, the Court also decided that the seller’s solicitors were not in breach of warranty of authority or in breach of trust as they were not guaranteeing that their client was genuine. Dreamvar appealed the decision in respect of its claim against the seller’s solicitors. MDR appealed the Trustee Act decision against it but supported the claim against the seller’s solicitors.
The Court of Appeal Decision
The appeals in both cases were heard together. The Court of Appeal reviewed the authorities relating to breach of warranty of authority, where a solicitor could owe a duty to someone other than their client, breach of trust and the relief of trustees from liability. These points are conserved in turn below:
- Breach of Warranty of Authority
The Court of Appeal construed the meaning of the warranty of authority but emphasised that the terms of the warranty fell to be construed according to the circumstances and facts arising in the transaction concerned. However, the fact that the solicitor signed as “the seller’s solicitor” but the transaction was a nullity (rather than voidable) was key. The sellers’ solicitors were therefore taken to be warranting that they acted for the actual owner and able to give title to the purchaser and not just a person that they believed to be the owner.
However, the evidence in the cases was that the buyers’ solicitors had not relied on this warranty as they had not given it any thought. The breach of warranty of authority claims against the solicitors therefore still failed.
- Breach of Solicitors’ Duty of Care
The Court of Appeal upheld the High Court’s decision and found that the sellers’ solicitors owed no duty of care to the buyer when complying with anti-money laundering regulations as these regulations were aimed at deterring crime and not protecting buyers.
- Breach of Undertaking
The Law Society Code for Completion by Post 2011 (“the Code”) applied to each property transaction. Paragraph 7 of the Code states that “the seller’s solicitor undertakes (i) to have the seller’s authority to receive the purchase money on completion…BUT if the seller’s solicitor does not have all the necessary authorities then…not to complete without the buyer’s solicitors instruction”. Similar to the breach of warranty of authority issue, the question was whether the seller’s solicitor had undertaken that he had the authority of (i) the fraudster or (ii) the genuine registered owner. The High Court held the former, finding the seller’s solicitor was not in breach of Undertaking. The Court of Appeal reversed this decision and held that on a proper interpretation of the Code, the seller’s solicitor was in breach of Undertaking – “The only person who could give that authority for the purposes of the completion of a genuine sale would be the true owner of the property”.
- S.61 Trustee Act 1925
The solicitors all sought relief from liability under section 61 Trustee Act 1925 which gives the court a discretion to relieve a trustee from liability when the trustee has acted honestly, reasonably and ought fairly to be excused. The Court of Appeal declined to grant relief to any of the solicitors involved. Although all were honest, they had not all acted reasonably. The sellers’ solicitors had not carried out identity checks properly (even though it was not clear that the fraud would have been stopped if they had). MDR would also not be granted relief in the Dreamvar case as although they were not negligent they could have advised Dreamvar about the risks and MDR were better placed to absorb or insure against the risk and losses. In addition, MDR were now able to seek a contribution from the seller’s solicitors on a Civil Liability (Contribution) Act claim basis.
Conclusions on the Decision
The Court of Appeal’s decision places responsibility on the solicitors for both parties in a fraudulent transaction – an unwelcome and concerning development. Solicitors are at risk of having to compensate the buyer if the seller turns out to be a fraudster and reasonable care is not enough to avoid liability. Simply paying the money over when the transaction is based on fraud is a breach of trust.
In terms of options to limit exposure, purchaser’s solicitors could try to mitigate their risk by seeking to agree retainers which relieve them of liability in the event that the seller turns out to be a fraudster. Alternatively, they could seek evidence of the identity checks which the seller’s solicitors have carried out. Ultimately, the burden of fraud on conveyancing solicitors and their insurers has become heavier.
