In a decision handed down earlier this month, the High Court in Purrunsing -v- (1) A'Court & Co. (a firm); (2) House Owners Conveyancers Limited  EWHC 789 refused relief under section 61 Trustee Act 1925 to a firm of solicitors and a firm of licensed conveyancers who acted in the sale of a property by a fraudster. Both firms had acted in breach of trust and both were equally liable to the Claimant. This is believed to be the first time that the Court has considered section 61 in the context of a claim by the buyer against the seller's solicitors.
Solicitors A'Court & Co. ("ACC") were ostensibly instructed by the seller, Mr Dawson, to sell his property at 35 Merton Hall ("the Property"). It transpired that ACC's client was not the real Mr Dawson, the real owner of the Property, but a fraudster. ACC carried out client due diligence and inspected a passport which identified the fraudster as Mr Dawson. There was no suggestion that ACC ought to have known that the passport was in fact a forgery. ACC also obtained copies of two utility bills and a bank statement addressed to Mr Dawson at an address in Maidenhead. However, the address for service given by the Land Registry on the Office Copy Entries for the Property was an address in Cambridge. ACC did not attempt to contact their client at the Cambridge address...
The first buyer, Mr Crompton, had agreed to purchase the Property for £440,000. The fraudster was (understandably) keen for a speedy sale and instructed ACC that he required the sale to be completed within 7 days. Mr Crompton's solicitors raised a number of requisitions, including requiring a statutory declaration from Mr Dawson regarding a right of way.
The fraudster instructed ACC to prepare the stat dec and answer the requisitions. However, Mr Crompton's solicitors then asked ACC to identify the hospital at which Mr Dawson worked in Abu Dhabi. This strikes us as an unusual question, and one wonders whether Mr Crompton had suspicions about the identity of the man claiming to be Mr Dawson. ACC were not, it seems, aware that their client worked at a hospital in Abu Dhabi – the address at which they were corresponding with him was an address in England (the Maidenhead address). When they asked the fraudster to answer the question about his occupation, the fraudster, instructed ACC that he no longer wished to proceed with the transaction because the requisitions raised by the buyer were causing delay.
The second buyer, the Claimant, agreed to purchase the Property for £470,000. The Claimant instructed a firm of licensed conveyancers, Home Owners Conveyancers Limited ("HOC"). HOC asked ACC for a number of documents and to "please confirm you are familiar with the sellers and will verify they are the sellers and check ID to support the same." ACC replied to say that they had no documents other than those already supplied and that, prior to their instruction in relation to the sale, they had no knowledge of Mr Dawson. They stated that they had met him in person, seen his passport and copies of utility bills "showing his UK address as notified to us". ACC did not explain that the address notified to them (the Maidenhead address) was not the same as the address for service shown on the OCE. HOC considered the answer satisfactory and did not raise any concerns with the Claimant.
Breach of trust
Contracts were exchanged and a purported completion took place. The purchase money was sent by the Claimant to HOC, who in turn sent it to ACC, who paid it to an account in Dubai on the instructions of the fraudster. None of the money was recovered.
The Court in an earlier decision in the case found that both HOC and ACC had acted in breach of trust. Presumably, HOC was found in breach of trust for paying away the completion funds to ACC otherwise than on the Claimant's informed instructions and/or in breach of the Solicitors Accounts Rules (eg. SAR 20.1 "Client money may only be withdrawn from a client account when it is…(a) properly required for a payment to or on behalf of the client …").
Upon receipt of the money from HOC, ACC held it on trust for the Claimant until completion. Since completion never took place, ACC's payment of the money to the fraudster's bank account was a payment in breach of trust.
You might be forgiven for thinking that you only have to worry about your duties to your own client. This aspect of the case serves as a reminder to be mindful of your duties as trustee when holding money for a third party. This is an unusual case as completion did not take place because the party who actually owned the property was not involved. In usual (non-fraudulent) residential transactions, the money will only be released after completion has taken place – in those cases, the seller's solicitor would hold the money on trust for his own client when the money is received.
Relief under section 61
One of the issues before the Court was whether HOC and/or ACC could be excused from their breach under section 61 Trustee Act 1925. Section 61 provides:
"If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same."
There was no suggestion in this case that anyone other than the fraudster acted dishonestly. The relevant questions were therefore:
- Whether HOC and/or ACC had acted reasonably; and
- If so, whether they ought fairly to be excused for the breach.
The Judgement sets out at paragraph 38 the principles relevant to the application of section 61. In essence, the threshold of reasonableness that a solicitor who parts with completion money must overcome is a high one as equity has high expectations of a trustee discharging fiduciary obligations. The Court will disregard unreasonable conduct that is unconnected to the loss unless it increases the risk of loss by fraud.
ACC argued that they ought to be subject to a lower threshold of reasonableness because they were not acting for the Claimant. The Court rejected that submission – it was not in their capacity as solicitors owing a duty of care that the firm was being judged, but in their capacity as trustees with fiduciary obligations. In the latter case, they were on the same footing as the buyer's conveyancer, HOC.
The Court found that neither HOC nor ACC ought fairly to be excused from the breach of trust because neither had acted reasonably.
In HOC's case, they had acted negligently and/or in breach of contract in failing to advise the Claimant that they had not received sufficient answers to their enquiries so that he had the opportunity to decide whether to proceed. The Court found that, if he had been told about the ambiguous answer to the question about verification of the fraudster's identity, he would not have proceeded with the transaction.
In ACC's case, they had failed to carry out adequate customer due diligence and this barred them from obtaining relief under section 61.
Having acted in breach of trust, the firms were liable to reconstitute the trust fund. Both parties filed claims for contribution against the other and the Court found that HOC and ACC were equally liable for the Claimant's loss. They were each responsible for 50% of the Claimant's loss.
This is another concerning example of solicitors (and/or their insurers) being the ultimate victim of property fraud.
It is also a welcome indication of the Court's attitude to section 61 applications in cases of loss caused by fraud. At a time when we are seeing increasing numbers of client account frauds in conveyancing transactions, many of us have pondered the extent to which the Court is likely to be amenable to reliance on section 61.
The Court's approach to HOC is not controversial - negligent conduct is likely to be unreasonable conduct and in this case, if HOC had not acted in breach of duty in that respect, the fraud could have been avoided. It is the Court's approach to ACC which is more interesting.
The Court recited that, whilst solicitors seeking relief under section 61 must have acted "with exemplary professional care and efficiency", the test remains one of reasonableness, not perfection. As such, the test sounds familiar ("the reasonably competent solicitor…"). In this case, ACC did carry out some client due diligence – they went so far as to meet with the fraudster in person (a step not routinely taken by many conveyancing solicitors) so that they could compare the passport photograph with the person. They also obtained two utility bills and a bank statement.
They key issue upon which it appears the Court placed a significant amount of weight is that the addresses shown on the utility bills and bank statement was absent from the OCE (that only contained the Cambridge address and the address of the Property itself). There could have been an innocent explanation for this – Mr Dawson could have failed to update his address for service with the Land Registry when he moved, or he could own more than one other property. However, the Court did weigh other factors which it considered ought to have raised ACC's suspicion: the fact that the Property was vacant, unencumbered and of comparatively high value; the fraudster was pressing for expedited completion; the fraudster had not mentioned that he was employed in Abu Dhabi (but why should he, one might ask?); there was an inconsistency in a property information form about building works; and the fact that the fraudster refused to complete the sale to the first buyer, Mr Crompton, when Mr Crompton asked for confirmation of where the fraudster worked.
The rules governing customer due diligence are not prescriptive; rather, the solicitor is encouraged to adopt a risk-based approach. The key problem with this (like other outcomes-focussed regulation) is that one person's perception of the risk is not the same as another person's perception of the risk. Stereotypes tell us that litigators are more risk-sensitive and property lawyers less so – whilst stereotypes are seldom helpful (and seldom true) – the fact is that some lawyers (not necessarily defined by their area of practice) are more risk-sensitive than others.
Whilst the Courts are familiar with the task of determining what the reasonably competent solicitor would do in any given situation, the reliance on the Money Laundering Regulations in this context does not quite sit right.
The time for filing an appeal has not yet expired.