Conveyancing solicitors and their professional indemnity insurers have been keenly anticipating the Court of Appeal's decision, which was handed down on 15 May 2018.

Dreamvar (UK) Limited v Mishcon de Reya and Mary Monson Solicitors Limited, and P & P Property Limited v Owen White & Catlin LLP

The judgment still transfers the risk of property fraud onto solicitors, but it shifts the position as to which solicitors should bear the losses where a fraudster impersonates the owner of a property in a sale. Solicitors representing imposter vendors can now face exposure to the losses of innocent purchasers on the basis of breach of trust, breach of undertaking and, potentially, for breach of warranty of authority.

Solicitors representing innocent purchasers in an imposter sale scenario will still face a breach of trust finding, but should be able to obtain a contribution (potentially amounting to a full indemnity) from the solicitors acting for the imposter vendor, given that those solicitors are best placed to identify the fraud. On the basis of the judgment, they will not be relieved of this breach of trust.

Facts

Dreamvar (UK) Ltd ("Dreamvar") v Mishcon de Reya ("Mishcon") & Mary Monson Solicitors ("MMS")

  1. Dreamvar instructed Mishcon to act on its behalf in respect of the purchase of a property in Earls Court, London ("Property 1") for £1.1m.
  2. Mr Haeems was the registered owner of Property 1. MMS were instructed in respect of the sale of Property 1, but their instructions were from a fraudster impersonating Mr Haeems.
  3. The sale went through with monies transferred to the imposter vendor. The fraud was identified by the Land Registry prior to registration, leaving Dreamvar with substantial losses.

P & P Property Limited ("P & P") v Owen White & Catlin LLP ("OWC")

  1. P & P instructed Peter Brown & Co to act on its behalf in respect of the purchase of a property at 52 Brackenbury Road, London ("Property 2") for £1.03m.
  2. Mr Harper was the registered owner of Property 2. OWC were instructed in respect of the sale of Property 2, but their instructions came from a fraudster impersonating Mr Harper.
  3. The sale went through with monies transferred to the imposter vendor. Thereafter the fraud was identified, leaving P & P with substantial losses.

High Court decisions

Dreamvar sought to recover its losses from Mishcon and MMS. At first instance it was held that:

  • MMS had not acted in breach of trust, breach of undertaking or in breach of warranty of authority;
  • Mishcon were not negligent but were in breach of trust;
  • Mishcon were not granted relief for breach of trust, in essence due to the financial consequences of the breach of trust for Dreamvar compared to Mishcon who had professional indemnity insurance.

P&P sought to recover its losses from OWC and the selling agents, Winkworth, but did not pursue a claim against its own solicitors. The outcome at first instance was as follows:

  • The claims against OWC for negligence, breach of trust, breach of undertaking and breach of warranty of authority were dismissed.
  • The claims against Winkworth for breach of warranty of authority and negligence were also dismissed.

Grounds for appeal

Mishcon and Dreamvar appealed the High Court judgment that there was no breach of trust or breach of undertaking by MMS. Perhaps unsurprisingly given pre-existing Court of Appeal authority on the absence of 'completion' in fraudulent transactions leading to a finding of breach against purchaser's solicitors, Mishcon did not seek to overturn the breach of trust finding against itself, but rather again sought relief under section 61 of the Trustee Act 1925 if it was successful on the other aspects of the appeal (the judge having commented that if MMS had been in breach of trust he would have relieved Mishcon). Dreamvar did not allege negligence against MMS at first instance, but sought permission to add a claim in negligence. P & P appealed the High Court judgment on all issues.

Negligence

The Court of Appeal concluded (as was the case at first instance) that Mishcon had not been negligent in their conduct of the transaction.

As regards OWC and MMS, it was held that these were not cases where the seller's solicitors (or agents) had actually or voluntarily assumed responsibility to the purchasers for the adequacy of the due diligence performed in relation to their client in these arm's length transactions. As such, the first instance judge was right to dismiss the claim in negligence against OWC (and Winkworth), and the application to add the negligence claim against MMS was dismissed.

Breach of warranty of authority

This issue was not the subject of appeal in Dreamvar. In P & P, the Court of Appeal made a finding that a solicitor acting for a seller who signs and exchanges contracts is deemed to warrant that he has the authority of the true owner, not just the authority of the client who gave instructions. The implications of that are obvious. It was, however, held that there was no reliance on the warranty in this particular case.

As regards the selling agent, Winkworth, they had only prepared a memorandum of sale based on particulars from the purported vendor, so were not in breach of warranty of authority.

Breach of undertaking

Consideration was given to paragraph 7 of the Law Society Code for Completion by Post (2011) (the "Code") which states that the seller's solicitor undertakes "to have the seller's authority to receive the purchase money on completion". The conclusion at first instance was that the reference to the seller was to the person agreeing to sell the property, not the true owner, but the Court of Appeal took the view that the proper construction of the Code means that OWC and MMS gave undertakings that they had the authority of the true owners to receive the purchase monies and thus were in breach.

Breach of trust

As regards OWC and MMS, at first instance in both cases the trial judges considered paragraph 3 of the Code which states that the seller's solicitor is not required "to investigate or take responsibility for any breach of the seller's contractual obligations". This was construed as excluding liability for breach of trust. The Court of Appeal however took the view that this could not be construed so as to absolve liability for breach of trust, and even less so as giving authority to release purchase monies in the absence of a genuine completion. Since completion (meaning the completion of a genuine contract by way of an exchange of real money in payment of the balance of the purchase price for real documents that will give the purchaser the means of registering the transfer of title) did not take place, the vendor's solicitors (in both cases) had no authority to release the money to the client. MMS and OWC were therefore now found to be in breach of trust.

Section 61 of the Trustee Act 1925

The court has the power to relieve a firm from sanction for breach of trust where they acted honestly and reasonably, but for relief to be granted the court must be satisfied that it is fair to do so bearing in mind that relief would be at the expense of the innocent purchaser.

At first instance Mishcon were not granted relief as it was considered this would have been disastrous for Dreamvar who had no recourse elsewhere, whereas Mishcon had the benefit of a professional indemnity policy. Despite the trial judge indicating he would have granted relief to Mishcon if MMS was liable to Dreamvar, the Court of Appeal still declined to grant relief to Mishcon. It was instead concluded that any distribution of liability should be achieved through contribution proceedings. In a dissenting judgment on this aspect alone, Gloster LJ took the view that Mishcon should be relieved. MMS had the primary responsibility to check identity, and the existence of insurance should not lead to the conclusion that Mishcon ought to pay (in particular given MMS' insurance could meet the claim), and nor should contribution proceedings be encouraged.

MMS did not seek relief under section 61, but OWC did. This was declined as the Court of Appeal considered that they could not be said to have acted reasonably given there were a series of failures to carry our basic identity checks.

Impact

This Court of Appeal decision means that buyers who fall victim to imposter vendors have even greater protection, with a potential right of recourse against the vendor's solicitors as well as their own. It is perhaps surprising that Mishcon were not granted relief in circumstances where MMS was held liable to Dreamvar, but contribution proceedings (if agreement on contribution cannot be reached) ought to achieve an appropriate allocation of liability. This could potentially amount to a full indemnity for Mishcon, in circumstances where they were held to have acted reasonably and honestly but MMS did not carry out adequate due diligence on their client which might have prevented the fraud.

Conveyancing practices may be subject to change as a result of this decision, to include solicitors acting for a purchaser wanting express confirmations and warranties from solicitors acting for a seller with a view to minimising their own exposure to a purchaser in this type of scenario. Solicitors acting for vendors will also need to take greater care to ensure their client, the purported seller of the property, is in fact the genuine owner. There is the prospect that the Law Society may seek to make amendments to the Code as a result of this decision.

Lenders will often have crime insurance to protect against fraud risk, and there is a suggestion that a form of property fraud indemnity insurance for purchasers would be a welcome offering from the insurance market. The exercise of relief under section 61 may be exercised differently where a Claimant has its own insurance. Alternatively we may find that Mishcon seeks permission to appeal in light of Gloster LJ's comments.