A buyer’s solicitor has been ordered to meet the loss caused by a fraudster whose own solicitors failed to check his identity properly.
In 2014, a fraudster sold a house in London to a company for £1.1m. The fraud was discovered before the company was registered as the owner of the property, by which time the fraudster had absconded with the money. The financial impact on the company was disastrous and, in Dreamvar (UK) Ltd v Mischon de Reya [2016] EWHC 3316 (Ch), the company sought to recoup its losses from the solicitors on both sides of the transaction. This Practice Point considers the fate of the company’s claims against its own solicitors in negligence and for breach of trust.
The company argued that its solicitors had been negligent because they had failed to identify that there was a risk of fraud, not least because the property was high value, unencumbered, and unoccupied and the sale was being rushed through. But the court rejected the claim. The facts known to the company’s solicitors at the time did not suggest that there was a real risk of identity fraud. Nothing had suggested that the fraudster’s solicitors were not competent to make the requisite identity checks on their client, or that they had not been satisfied with the results. Furthermore, the fraudster had instructed a reputable firm of estate agents, who were also required to make similar checks in order to comply with money laundering regulations.
The company also tried to persuade the judge that its solicitors had been negligent on the ground that they should have asked the fraudster’s solicitors to confirm that they had taken reasonable steps to establish their client’s identity. But the court refused to brand the standard practice of conveyancers, in not seeking undertakings to this effect, as either unreasonable or illogical. Consequently, the company’s solicitors had not been negligent.
In 2014, a fraudster sold a house in London to a company for £1.1m. The fraud was discovered before the company was registered as the owner of the property, by which time the fraudster had absconded with the money. The financial impact on the company was disastrous and, in Dreamvar (UK) Ltd v Mischon de Reya [2016] EWHC 3316 (Ch), the company sought to recoup its losses from the solicitors on both sides of the transaction. This Practice Point considers the fate of the company’s claims against its own solicitors in negligence and for breach of trust.
The company argued that its solicitors had been negligent because they had failed to identify that there was a risk of fraud, not least because the property was high value, unencumbered, and unoccupied and the sale was being rushed through. But the court rejected the claim. The facts known to the company’s solicitors at the time did not suggest that there was a real risk of identity fraud. Nothing had suggested that the fraudster’s solicitors were not competent to make the requisite identity checks on their client, or that they had not been satisfied with the results. Furthermore, the fraudster had instructed a reputable firm of estate agents, who were also required to make similar checks in order to comply with money laundering regulations.
The company also tried to persuade the judge that its solicitors had been negligent on the ground that they should have asked the fraudster’s solicitors to confirm that they had taken reasonable steps to establish their client’s identity. But the court refused to brand the standard practice of conveyancers, in not seeking undertakings to this effect, as either unreasonable or illogical. Consequently, the company’s solicitors had not been negligent.
However, the judge ruled that buyers’ solicitors hold their clients’ money on trust for them and, in conveyancing transactions, are authorised only to part with the funds on completion of a genuine transaction. And so he upheld the company’s claim for breach of trust. In such cases, trustees must restore the amount lost from the trust fund, unless the court decides that they have acted honestly and reasonably and ought fairly to be relieved, wholly or partly, from liability: section 61 Trustee Act 1925.
The company’s solicitors had acted honestly and reasonably, but would the court relieve them from liability for the breach of trust? The judge refused to do so, because the company’s solicitors were insured and were better able to absorb the loss than the company itself (which was unable to recover its money from the fraudster, or his solicitors.
And so, despite acknowledging that sellers’ solicitors are normally responsible for checking their own client’s identity and accepting that professionals do not usually assume unqualified obligations, the buyer’s solicitors have been saddled with what appears to be strict liability for the fraud, simply because they were fully insured. Has the law has taken a wrong turn somewhere? In what circumstances should professionals be liable in such cases? And will the result in this case really encourage sellers’ solicitors to exercise due diligence when carrying out identity checks? Practitioners will await the verdict of the Court of Appeal with bated breath.
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Allyson Colby is a property law consultant
