Solicitor – Estate agent – Warranty of authority – Fraudster dishonestly impersonating true owner of residential property – Fraudster instructing respondent solicitors and estates agents to act in sale of property – Appellant purchaser claiming respondents liable for breach warranty of authority – Whether respondents warranting to purchaser that they had authority to act for true owner – Whether respondents liable for breach of warranty of authority – Whether respondents liable in negligence – Whether respondents liable for breach of trust – Appeals allowed in part
Two appeals raised common issues about the liability of solicitors and estate agents in cases involving identity fraud. In both cases the fraudster posed as the owner of a registered property in London. He instructed solicitors and agents to act for him on the sale of the property and genuine purchasers were found. The purchasers instructed their own solicitors and proceeded to exchange of contracts and completion in accordance with the Law Society Code for Completion by Post (2011). Following completion, but before registration of title, the fraud was discovered but the fraudster and the purchase money had disappeared.
In P&P Property Ltd v Owen White & Catlin LLP the appellant purchaser brought a claim against the vendor’s solicitors (OWC), relying on breach of warranty of authority, breach of an undertaking, negligence and breach of trust. It also sued the selling agents (Crownvent Ltd) for breach of warranty of authority and in negligence. It contended that the respondents held themselves out as having the authority of the true owner to conclude the sale of the property; were negligent in not carrying out adequate checks to establish the identity of their client; and had no authority to disburse the purchase monies to their client other than on the completion of a genuine sale. The trial judge dismissed all the claims against both defendants: [2016] EWHC 2276 (Ch); 2016] PLSCS 261. The appellant appealed against the judgment on all issues.
In Dreamvar (UK) Ltd v Mishcon de Reya the purchaser (D) brought proceedings against its own solicitors (MdR) in negligence and breach of trust and against the vendor’s solicitors (MMS) for breach of warranty of authority, breach of an undertaking and breach of trust. A late application was made to re-amend the particulars of claim to add a claim for damages in negligence. The judge dismissed the claim against MdR for negligence but found that the firm was in breach of trust in releasing the purchase monies in relation to a fraudulent sale: [2016] EWHC 3316 (Ch). The judge declined to grant relief from the consequences of the breach of trust under section 61 of the Trustee Act 1925. He dismissed all the claims against MMS but indicated that had he found it to have been in breach of trust he would have granted relief to MdR (but not to MMS) under section 61. MdR did not appeal the judge’s finding that it acted in breach of trust in releasing the purchase monies. But both it and D challenged the judge’s findings that there was no breach of trust or breach of undertaking by MMS. If successful, MdR wished to seek relief under section 61 for the same reasons as the judge would have been minded to grant it in such circumstances but D opposed that. D also appealed against the judge’s finding that MdR were not negligent. It contended that MdR should have obtained an undertaking from MMS only to use the purchase money to complete a true sale of the property. D did not appeal against the judge’s dismissal of its claim based on breach of warranty of authority. MdR accepted that it did not treat MMS as warranting that it had the authority of the true owner to sell the property and did not rely on any such warranty.
Held: The appeals were allowed in part.
(1) An agent who represented to a third party that he had authority to act on another’s behalf was treated as warranting that he had such authority and was liable for any loss sustained by the third party in reliance on that representation: Collen v Wright (1857) 8 El & Bl 647 applied. The principle of liability established in Collen v Wright depended upon the agent being held responsible for the truth of what he represented. In P&P, the solicitors had a client who gave them authority to act in the sale but he was not the owner. Therefore, it was necessary to consider whether OWC’s obligation to carry out checks was in itself sufficient to extend the warranty of authority beyond the mere fact that they were authorised by the person who in fact instructed them. The deputy judge had wrongly construed the warranty inherent in OWC’s signature of the contract as no more than a guarantee that they had the authority of the client who had instructed them to handle the sale on his behalf. The additional factor of the person instructing OWC did not override the clear terms of their representation that they acted for the seller. In those circumstances, OWC had warranted that they were authorised to act on behalf of the actual owner of the property. However, on the evidence, the judge was entitled to find that the purchaser in P&P had not relied on the warranty as the contracts had been exchanged on the basis of his solicitor’s belief that the necessary due diligence had been carried out. Accordingly, the claim against OWC based on breach of warranty of authority failed.
(2) The agents’ failure to carry out proper checks instead of relying on those done by OWC was insufficient to make them liable on the basis of a guarantee of their client’s identity. Reasonably read, the memorandum of sale which they had prepared based on the particulars given to them by the fraudster pre-dated the contract and was no more than a statement of the details they had been given. The objective bystander would not regard that as a statement or warranty by the selling agent that they had been given those instructions by the real purchaser. In that regard, their position was different from OWC.
(3) The decision in Gran Gelato Ltd v Richcliff (Group) Ltd [1992] Ch 560 established the need (as in any other case where liability for economic loss was claimed on the basis of a tortious duty of care) to take all relevant factors into account including that the solicitor was providing the replies on behalf of his client and would often be dependent on the client for the content of those replies. The present appeals were not cases in which the claim in negligence was based upon any mis-statement which either the solicitors or the agents were said to have made. The particulars of negligence were details of omissions and other alleged failures by the defendants properly to carry out the identity checks required under the Money Laundering Regulations 2007. It followed that any imposition of liability based on the criteria in Caparo Industries plc v Dickman [1990] 2 AC 605 would depend upon placing on the solicitors and agents a duty to the purchasers when carrying out the checks even though the 2007 Regulations did not themselves create any parallel liability to affected third parties based on a breach of statutory duty.
(4) The imposition of liability in negligence towards a third party who was not the solicitor’s client clearly required something more than it being foreseeable by the solicitor that loss would be caused to the third party by a lack of care on the solicitor’s part in carrying out whatever was the relevant task. Nor was it sufficient that the test of proximity was satisfied whether by an actual assumption of responsibility or by the existence of a direct interest on the part of the third party in the product of the solicitors’ instructions. The incremental approach approved in Caparo required all those and any other relevant factors to be taken into account and globally assessed including any relevant policy considerations. In deciding whether it was just or reasonable to recognise a duty of care, the approach enshrined in the case law required the court to take account of the contractual framework and any other factors bearing on liability. The solicitors and agents in the present appeals did not voluntarily assume responsibility to the purchasers for the adequacy of the due diligence which they carried out. They were not asked to give undertakings or assurances that they had properly carried out the checks and, had they been asked to do so, they would have had the opportunity to refuse or to limit their liability in some way by a suitable disclaimer. There was nothing in the way that the transactions were conducted which made it objectively reasonable to assume that the checks would be complete and that the defendants should be legally accountable to the purchasers for the consequences. In all the circumstances, these were not cases in which it would be fair and reasonable to treat the solicitors and agents as having assumed responsibility to the purchasers for the adequacy of the due diligence performed in relation to their client’s identity. The deputy judge was therefore right in P&P to dismiss the claim in negligence against OWC and the agents. For the same reasons, the application for permission to amend made by Dreamvar would be refused.
(4) As regards breach of trust, the ultimate question was whether at the point when the purchase money was released by the seller’s solicitors to his client the solicitor had the authority of the buyer to make that payment even if the transaction was not a genuine sale. If the seller’s solicitor did not have the buyer’s authority to make that payment then, subject to any question of relief under section 61 of the 1925 Act, he acted in breach of trust. The purchase money was held on a bare trust for the buyer pending completion. The authority of the seller’s solicitor to release the money to his client depended upon completion having taken place within para 10 of the Law Society Code. Paragraph 3 of the Code, according to which the seller’s solicitor acted as agent for the buyer’s solicitor on completion, did no more than absolve the seller’s solicitor from responsibility as the buyer’s agent to investigate possible breaches by the seller of his contract. That paragraph could not be construed as excluding any liability on the part of the seller’s solicitor for breach of trust, still less as giving him authority to release the purchase money in the absence of a genuine completion. Accordingly, both OWC and MMS had acted in breach of trust by releasing the purchase money to, or at the direction of, their clients.
(5) Under Para 7(i) of the Code, the seller’s solicitor undertook to obtain the seller’s authority to receive the purchase money on completion. The word “seller” was not defined in the Code and had to take its meaning from the context in which it was used. It was intended to denote the seller identified in the contract rather than the person actually giving the solicitor his instructions. By agreeing to be bound by the Code, OWC and MMS had given undertakings to that effect and were therefore in breach of those undertakings.
(6) In Dreamvar, MMS did not seek relief under section 61 and did not do so on appeal. In P&P, although the vendor’s solicitors had not acted dishonestly, they could not be said to have acted reasonably. It had not been suggested that the judge misdirected himself as to the relevant legal test or failed to take into account anything that was material to his decision. The findings which he made about reasonableness were clearly open to him on the evidence and were not really contested. There had been a series of failures to carry out relatively basic checks on the identity of their client and there was no basis for interfering with the decision to refuse relief under section 61: Davisons v Nationwide Building Society [2013] 1 EGLR 73 considered.
Gary Blaker QC and Chris de Beneducci (instructed by JPC Law) appeared for P & P Property Ltd; Ben Patten QC and Katie Powell (instructed by BLM LLP) appeared for Owen White & Catlin and Mary Monson Solicitors Ltd; Ivor Collett (instructed by Mills & Reeve LLP) appeared for Crownvent Ltd; David Halpern QC (instructed by Healys LLP) appeared for Dreamvar (UK) Ltd; Jeremy Cousins QC and Peter Dodge (instructed by DWF LLP) appeared for Mishcon de Reya; David Holland QC (instructed by The Law Society) made written submissions on behalf of the intervener.
Eileen O’Grady, barrister
