Fraudulent transactions are unfortunately on the rise and the methods employed by fraudsters are also evolving with increasing sophistication. Fraud is an amorphous threat, arising in many forms, and in cases where a fraud has been committed the injured party will often be left with no realistic prospect of recovery. The steps that professionals take to verify the identities of their clients are a small but vital part of a much larger anti-fraud legislative machine. The recent case of P&P Property Limited-v-Owen White & Catlin LLP (1) and Crownvent Limited t/a Winkworth provides useful clarification on the scope of a solicitor's liability in cases of fraudulent transactions.
The Claimant company (P&P) purchased a residential property in London at a price of £1,030,000. The property had been marketed at a slight undervalue by Winkworth under the instruction of a Mr Harper, in order to secure a swift sale. Owen White and Catlin LLP (OWC) were instructed to deal with the legal aspects of the sale. Both OWC and Winkworth were told by Mr Harper that the transaction had to be completed quickly as he needed the sale proceeds available in order to purchase a property in Dubai, where he was based.
OWC completed the usual checks, including taking a copy of Mr Harper's passport which was provided in person, in order to verify their new client's identity. The documents were reviewed and found to be broadly consistent with the information provided by the client. OWC accepted Mr Harper's instructions on 5 December 2013 and by 12 December 2013, the property had been sold.
Shortly after completion it transpired that, unbeknown to all parties, Mr Harper had been an imposter posing as the rightful owner of the property. P&P brought claims against OWC for breach of warranty of authority, negligence and breach of trust and against Winkworth for breach of warranty of authority and negligence. P&P argued that, amongst other things, they had relied on the accuracy of both defendants' identity checks to authenticate the identity of the seller.
Mr Robin Dicker QC, sitting as a deputy High Court judge, set out the basic principles governing such claims:
- where a person represents to a third party that he has authority to act on behalf of another person; and
- that third party is induced to act to their detriment by that representation
- the representor is deemed to warrant that the representation is true and is liable for any loss suffered by the third party.
P&P formulated its claim for breach of warranty of authority on the basis that, in acting for Mr Harper, OWC had impliedly represented that they acted for not just someone who said he was Mr Harper and produced evidence to suggest he was Mr Harper, but that they acted for the Mr Harper who was in fact the owner of the property purported to be sold.
Distinguishing the case from a line of authority stemming from Penn-v-Bristol & West Building Society  1 WLR 1356 (a case concerning the forgery of a wife's signature by a husband pursuant to the fraudulent sale of a property) the Judge stated that the basic implied warranty is that the solicitor, as agent, has authority to act for another. This basic warranty does not extend to the solicitor guaranteeing, merely by acting as agent, any of the characteristics or attributes of the solicitor's client, in this case that the client was in fact the registered owner of the property being sold.
The Judge rejected P&P's argument that they were entitled to assume that OWC had carried out appropriate identity checks to establish that their client was the true owner of the property. He concluded that, in the absence of special circumstances and clear indications to the contrary, to impose such liability on solicitors would be akin to requiring the solicitor to guarantee their client's title to a purchaser, and that this was clearly inappropriate. The Judge commented that "the checks that solicitors are required to undertake are designed to reduce the risk of fraud, and cannot reasonably be thought to eliminate it". Moreover, such liability could not be reconciled with the wording of the Law Society's Code for Completion by Post 2011 (the Code).
The Judge noted that in some circumstances it would be correct to find that such a warranty had been given, but the court should be cautious about holding that a solicitor had taken on such an onerous liability.
The claims against Winkworth were dismissed on similar grounds.
The Judge dismissed the claim in negligence against OWC holding that, in the absence of an assumption of responsibility toward P&P, OWC did not owe it any duty to take reasonable care to verify Mr Harper's identity. On the facts, no such assumption had been made. The solicitors who owed P&P a duty to take reasonable care were those instructed on the purchase, not the sale. The Judge further commented that, on the facts, OWC had not been negligent.
The claim against Winkworth was also dismissed on the basis that they had not assumed responsibility to P&P either. In the absence of such an assumption and any pre-existing authority to guide in such cases the Judge considered the test laid down in Caparo Industries Plc-v-Dickman  2 AC 605, finding that it would not have been fair, just or reasonable to impose liability on Winkworth. To do so would create an onerous obligation with which all estate agents would have to comply. Again, the Judge referenced the fact that Winkworth were not instructed by P&P.
P&P sought finally to persuade the court that OWC had been holding the purchase monies on trust for it pending a valid completion and that the monies had been paid away in breach of that trust. The Judge rejected that argument, saying that the courts take a conservative approach when asked to hold that the unauthorised release of monies by a solicitor pursuant to a larger transaction is a breach of trust. He found that in some circumstances the terms of a solicitor's retainer may establish such a trust, however in this case the relevant provisions were to be found at paragraphs 3 and 10 of the Code.
Paragraph 3 of the Code states that the seller's solicitor is not required to "investigate or take responsibility for any breach of the Seller's contractual obligations". Paragraph 10 of the Code provides that, on receipt of the completion funds, the Seller's solicitors will complete unless there has been some agreement between the parties to the contrary. The Judge, having reviewed the relevant provisions, concluded that it would be wrong to construe them as giving rise to a breach of trust in these circumstances or, as a result, as an effective guarantee of title.
However, the judge did note that if he had concluded that OWC were liable for breach of trust, on the facts he would not have been satisfied that OWC acted reasonably for the purpose of granting relief under Section 61 of the Trustee Act 1925. The reasons why (such as missing opportunities for verifying addresses and questioning dates and locations of purchases on bank statements) are worth considering by conveyancing solicitors looking for good practice tips.
The case is a reminder that the diligent carrying out of "client due diligence" or "know your client" (KYC) procedures serve only to reduce, not eradicate, the risk of fraud. Additionally, in the context of negligence, the imposition of a duty on the seller's solicitors towards the buyer to verify the identity of the seller would be a step too far.
However, the case leaves open the question of the scope of duty on a buyer's own solicitors to verify the seller's identity, It also give examples of details which could have been checked which may have helped prevent the fraud from taking place.
The Judge also noted that, by paragraph 8 of the Code, it was open to the solicitors acting for P&P to seek undertakings from OWC that the purchase monies would not be released to Mr Harper unless OWC were satisfied as to his identity, and his title to sell.
This case is also interesting as it looks for the first time at the potential liability of estate agents in this context. Whilst it is difficult not to sympathise with P&P's unfortunate position, the case provides a note of comfort to defendant solicitors and their insurers – in the absence of special circumstances or express provisions to the contrary sellers' solicitors do not owe general obligations akin to indemnifying buyers against the risk of being defrauded.