The Court of Appeal has begun hearing two cases that raise questions over which solicitors should be held liable to victims of conveyancing fraud.
The court is hearing arguments in the much-discussed cases of Dreamvar (UK) Ltd v Mishcon de Reya [2016] EWHC 3316 (Ch) and P&P Property Ltd v Owen White & Catlin LLP [2016] EWHC 2276 (Ch); [2016] PLSCS 261 – each of which involves a fraudulent “seller” making off with a would-be purchaser’s funds.
Jon Mowbray, partner at IBB Solicitors, said that the eventual decision would be “keenly awaited”, as the two cases raise important issues as to the potential liability of conveyancing solicitors where a fraud is perpetrated.
He said: “In particular, [the case will determine] whether the solicitors should be held liable for breach of trust where they have released completion monies otherwise than for a genuine completion of the sale of the subject property.
“In the case of Mishcon, they acted for the buyer and released funds to solicitors acting for a party who fraudulently claimed to be the property owner. It was held that they were in breach of trust as they were only authorised to release completion funds on a genuine completion.”
Mishcon sought to rely on section 61 of the Trustees Act 1925 to obtain relief against the breach of trust.
Mowbray continued: “Section 61 requires a consideration, firstly, of whether the trustee acted honestly and reasonably, which Mishcon had, but also, secondly, whether the trustee should be fairly excused for the breach of trust. In exercising its discretion on these matters, the court was particularly influenced by the fact that the client had no other practical remedy available to recover its money and that the solicitors, as opposed to the client, had insurance cover. As a result relief was declined and Mishcon ordered to pay substantial damages.”
In a separate transaction, Owen White & Catlin (OWC) unknowingly acted for a fraudulent seller and, on receiving the completion monies, transferred them to their client. The innocent purchaser sought to claim that OWC was in breach of trust. While the court did not reject the possibility that a seller’s solicitors could be a trustee for the purchaser, it held that, on the particular facts of the case, OWC was not.
Mowbray added: “The decision in Dreamvar has, in particular, provoked significant concern among conveyancing solicitors and their professional indemnity insurers that, even in circumstances where they have been held not be negligent, they may be found liable to the innocent party of a property fraud. The outcome of the Appeal hearing is, therefore, keenly awaited, particularly for what is held in relation to the existence of a trust relationship and the correct treatment of section 61.”
The Dreamvar ruling is one that causes “significant uncertainty”, according to Owen Talfan Davies, partner at Fieldfisher, who said it “flies in the face” of anti-money laundering regulations.
Commenting on the High Court judgment currently under challenge, he said: “The decision has very significant ramifications for all transactions, whether property related or otherwise. The court is essentially saying that there is no actionable duty imposed on a vendor’s solicitor to verify the identity of his or her client and/or the ownership of the assets that the client purports to sell.”
Dreamvar v Mishcon de Reya: the facts
The case involves an unoccupied mews house at 8 Old Manor Yard, Earl’s Court, London SW5, which was owned by David Haeems. On 17 September 2014 a fraudster impersonating Haeems purported to sell the property to Dreamvar (UK) for £1.1m. In exchange for the purchase price, the fraudster gave Dreamvar a forged transfer document. The fraud was discovered in November 2014, before Dreamvar had been registered as the owner of the property. But by that time the fraudster, and the money he received from Dreamvar, could no longer be found.
Dreamvar sued the solicitors instructed by it on the purported purchase, Mischon de Reya, as well as claiming against the firm instructed by the fraudster, Mary Monson Solicitors (MMS), for breach of warranty of authority and breach of undertaking.
Deputy judge David Railton QC rejected negligence claims against Mishcon, and all claims against MMS, but found Mishcon liable for breach of trust in paying away the purchase monies “in circumstances where there was not, nor could there be, a genuine completion of the contract of sale, which was in any event a nullity”. He ordered Mishcon to pay Dreamvar £1,080,200 plus interest. That sum reflects the purchase price paid, less the commission charged by the estate agent, D&G, which it returned when it became aware of the fraud
In doing so, he said that Mishcon de Reya is insured for events such as this, and is “far better able to meet or absorb” the loss than Dreamvar.
P&P Property Ltd v Owen White & Catlin LLP: the facts
In this case, a fraudster targeted a high-value, unoccupied residential property at 52 Brackenbury Road, London W6, and pushed a sale through, claiming that it was urgent. Nobody suspected that he was an impostor, and the fraud was not discovered until after the “sale”, when the registered proprietor walked past the property and discovered builders working there.
The would-be purchaser, P&P Property, sued OWC, which had acted as the solicitors for the “vendor”, for breach of warranty of authority, negligence, breach of trust and breach of undertaking, and also claimed that the estate agent, Winkworth, which marketed the property, was liable for breach of warranty of authority and negligence.
However, deputy judge Robin Dicker QC dismissed P&P’s claim for breach of warranty of authority against both firms on the grounds that, absent special facts or clear words to the contrary, such a warranty operates only to confirm that an agent has authority to act on behalf of his client. An agent does not, simply by acting as such, represent that his principal will perform the contract, or is solvent, or make any other representation as to his principal’s attributes or characteristics.
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