18 May 2018

A common place fraud occurs: an imposter sells a property that it does not own and disappears with the sale proceeds. The purchaser now has neither its money nor the property. But the solicitors and estate agents acting for the parties had no idea the seller was an imposter - are all or any of them liable to the purchaser? The High Court put the solicitors in the firing line in two cases from 2016. The Court of Appeal has just handed down judgment on appeals on those decisions and it is not good news for solicitors or their insurers.

What happened?

In P&P Property Ltd v Owen White & Catlin LLP [2016] EWHC 2276 the defrauded purchaser, P&P, brought a claim against the fraudster's solicitors which 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 on the other side of the transaction to carry out identity checks on their client carefully. The problem for the solicitor defendant 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 remitting 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 property owner in return for good title. 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 though the disappointed purchaser, Dreamvar, brought a claim against its own solicitors (Mischons) 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 Mischons 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. Meanwhile, in Dreamvar, a different judge held that Mischons 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 Mischons under the Trustee Act 1925 primarily on the grounds that it was not just to do so as Mischons 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. Mischons appealed the Trustee Act decision against it but also 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. There was also detailed analysis of the terms of the trusts and undertakings forming part of the Code for Completion by Post.

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 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. The Court also held in the P&P case the estate agent was not warranting that it had instructions from the genuine seller.

Solicitors' duty of care

The Court also 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 and trust

However, the undertakings given by the solicitors and the terms of the trusts on which they held the completion monies did require the transaction to be valid and so payment to an imposter put the solicitors in breach even without fault. The claims against the sellers' solicitors therefore both succeeded. Mischons had not appealed the finding that they acted in breach of trust and so they were also liable to Dreamvar but the Court held that the they could seek a contribution from the seller's solicitors now that the Court had found them to be in breach of trust.

Trustee Act relief

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). Mischons 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, crucially, Mischons were better placed to absorb or insure against the risk and losses. It was also important that Mischons were now able to seek a contribution from the seller's solicitors.

Lady Justice Gloster dissented in one respect and stated that, in her view, Mischons should be granted section 61 relief. Gloster LJ felt that Mischons had acted entirely normally as the purchaser's solicitor and so should be granted relief. Mischons' ability to insure or seek a contribution should not detract from this.

Implications of 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, in effect, 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. Two of the Lord Justices appear to have been significantly influenced by who is insured for such losses.

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. Seller's solicitors must tighten up identity checks and follow up on any discrepancies.

External help for conveyancers may be available if the Law Society Code for Completion by Post is amended to modify the terms of the trust on which completion monies are sent by buyer's solicitors and held by the seller's solicitors.

For the moment, however, the burden of fraud on conveyancing solicitors and their insurers has become heavier.