In Dreamvar (UK) Limited v (1) Mishcon de Reya (a firm) and (2) Mary Monson Solicitors Limited [2016] EWHC 3316 (Ch), Mr David Railton QC, sitting as a Deputy High Court Judge in the Chancery Division of the High Court of Justice decided that a buyer's conveyancing solicitors were liable to the buyer for a breach of trust arising out of a property fraud. The buyer's solicitors were unable to obtain relief under Section 61 of the Trustee Act 1925, which provides that where a trustee "has acted honestly and reasonably and ought fairly to be excused for the breach of trust…then the Court may relieve him either wholly or partly from personal liability of the same". The claims against the seller's solicitors were dismissed. This is an important decision because it is one of three recent professional negligence cases brought by buyers arising from a property fraud where the court's differing approaches in the three cases have left the law uncertain.

Facts

The claimant buyer, Dreamvar (UK) Limited (Dreamvar), purported to purchase a property from a fraudster impersonating the true owner of the property, Mr Haeems, but by the time the fraud was discovered, Dreamvar's money had been paid to the imposter and the imposter had disappeared, leaving the buyer with no title to the property.

Dreamvar brought claims against the imposter seller's solicitors, Mary Monson Solicitors Limited (Mary Monson), for breach of trust, breach of warranty and breach of authority. It also brought a claim against its own solicitors, Mishcon de Reya (Mishcon), for negligence in contract and in tort, and breach of trust. Both firms of solicitors denied liability.

The Decision

Mary Monson (the imposter seller's solicitors)

Mary Monson relied heavily on the recent decision of P&P Property Limited v. (1) Owen White & Catlin LLP and (2) Crownvent Limited t/a Winkworth [2016] EWHC 2276 (Ch) (P&P). In P&P, Mr Dicker QC, sitting as a Deputy High Court Judge, had dismissed claims brought against the seller's solicitors for breach of trust, breach of warranty and breach of authority. Mary Monson asserted that, although not bound by the decision, this case should be followed unless there was a powerful reason not to do so (Willers v. Joyce [2016] UKSC 44).

In relation to the claim for breach of trust, Mr Railton QC followed P&P deciding that, pursuant to the terms of the Law Society Code for Completion by Post (2011 edition) (the Code), Mary Monson was entitled to release the purchase monies to its client on completion. Unlike the position with the buyer's own solicitors, there did not need to be a "genuine" completion. Again, Mr Railton QC followed P&P and decided that, pursuant to paragraph 3 of the Code, the buyer's solicitor "does not require the seller's solicitor to investigate or take responsibility for any breach of the seller's contractual obligation and is expressly limited to completion pursuant to paragraphs 10 and 12". Mr Railton QC decided that any argument that the seller's solicitor is liable for breach of trust, if there is no "genuine" completion because the client is not the registered proprietor, is inconsistent with this provision.

Dreamvar also claimed that pursuant to paragraph 7 of the Code, Mary Monson had given an undertaking that it had the authority of the true seller, and Mary Monson had breached that undertaking. Mr Railton QC following P&P decided that the true construction of paragraph 7 meant that Mary Monson undertook that it had authority to act for someone identifying themselves as being the named registered owner of the property (Excel Securities v. Masood [2010] Lloyd's Rep. P.N. 165) rather than the true seller.

The final claim for breach of warranty was put in two ways. First, the buyer claimed that Mary Monson had warranted that it had authority to act for the registered owner of the property. Secondly, Mary Monson had warranted that it had exercised reasonable care and skill in establishing its client's identity as the registered owner. Unfortunately, the buyer's solicitor's evidence was fatal to the claim for breach of warranty as the solicitor's evidence was that she had not believed Mary Monson had given these warranties and had not therefore relied on them. Further, as held in P&P, the seller's solicitor does not owe the buyer a duty of care and it is therefore difficult to claim an implied contractual warranty.

The claims against Mary Monson therefore failed.

Mishcon (the buyer's own solicitors)

It was common ground that Mishcon owed Dreamvar a duty, in both contract and tort, to exercise reasonable care and skill. Dreamvar asserted that Mishcon breached its duty as it failed to identify several features which should have alerted Mishcon to the risk of fraud, and Mishcon failed to advise Dreamvar accordingly. Dreamvar also alleged that Mishcon breached its duty by failing to obtain an undertaking from Mary Monson that it had taken reasonable steps to establish its client's identity. Mr Railton QC dismissed the claims for negligence. He held that Mishcon's position not to advise Dreamvar of the risk of fraud was one which a competent solicitor could have formed. Also, standard conveyancing practice does not require the buyer's solicitor to obtain such an undertaking from the seller's solicitors.

It appears to be well established that it is not the buyer's solicitor's duty to establish the seller's identity. In another recent case, Patel v. Freddy's Ltd and others [2017] EWHC 73 (Ch), the fraud was only discovered after the defrauded buyer had been registered as the owner of the property. In that case, the High Court held that it is not standard conveyancing practice for buyer's solicitors to carry out identity checks of the seller and there were no special circumstances requiring the duty to be extended.

Dreamvar's second claim was that Mishcon released the purchase monies to Mary Monson in breach of trust as there was no genuine completion because of the fraud. Mishcon argued that it was authorised to release the purchase monies in exchange for undertakings from Mary Monson. In the alternative, if it was liable for breach of trust, Mishcon sought relief under Section 61 of the Trustee Act 1925 which provides that where a trustee "has acted honestly and reasonably and ought fairly to be excused for the breach of trust…then the Court may relieve him either wholly or partly from personal liability of the same".

Mishcon's entitlement to pay the purchase monies to Mary Monson depended on the terms of its authority and instructions. Its retainer with Dreamvar was silent on this point, so it was necessary for business efficacy to imply a term into the retainer (Marks & Spencer plc v. BNP Paribas [2015] UKSC 72). Mr Railton QC was prepared to imply a term that Mishcon held the purchase monies on trust until "completion" took place. He held that "completion" in this context meant a genuine completion i.e. an exchange of purchase monies for real documents (Lloyds TSB Bank plc v. Markandan & Uddin [2012] EWCA Civ 65). Mishcon could not release the purchase monies in exchange for undertakings from Mary Monson.

Section 61

Mishcon sought relief for breach of trust under Section 61 . In this case, although Mr Railton QC held that Mishcon was not dishonest or had not acted unreasonably, it would not be fair to excuse Mishcon for the breach of trust.

In any event, Mr Railton QC stated that Mishcon was insured for these events, which would cover the full loss suffered if found liable. Therefore, by carrying out a balance exercise, Mr Railton QC found that Mishcon was in a better position than Dreamvar to absorb the consequences of the breach of trust. He added that, as Mary Monson was not liable and recovery from the imposter seller appeared unlikely, the only "practical" remedy was against Mishcon.

Mishcon was therefore ordered to pay the purchase price of £1.1 million, less the sum of £19,800 being the estate agent's commission, which was returned on discovering the fraud.

Commentary

This is the third in a recent line of cases where an innocent buyer has purported to purchase a property and then found itself in a situation where it has lost large sums of monies and has not acquired title to the property. Unfortunately these decisions are not consistent and we are left in unknown territory.

In Purrunsing v. (1) A'Court & Co (a firm) and (2) House Owners Conveyancers Limited [2016] EWHC 789 (Ch), the defrauded buyer brought similar claims against both its own solicitors and the seller's solicitors for breach of trust. Both solicitors admitted breach of trust and were denied relief under Section 61. The solicitors were held equally responsible for the loss. That case differed from the case here in that Mary Monson had denied liability for breach of trust; perhaps the seller's solicitors in Purrunsing may have avoided liability had they done the same. Contrary to the present case, Purrunsing was also successful in its claims for negligence against its own solicitors, and also for breach of contract.

P&P featured heavily in Mr Railton QC's judgment. In P&P, the defrauded buyer issued proceedings against the seller's solicitors and the estate agent, but not its own solicitors. All claims were dismissed and P&P was therefore left with no remedy.

There are now two cases which suggest that defrauded buyers may have a claim against their own solicitors for breach of trust and, even if the solicitors are honest and reasonable, the court is unlikely to grant relief under Section 61. From the defrauded buyer's perspective this appears reasonable, as Mr Railton QC stated that an insured solicitor is in a better position to absorb the loss.

We understand that in both P&P and Dreamvar the trial judge granted permission to appeal on a number of issues. Therefore, the position may change. As things stand, however, conveyancing solicitors should act cautiously and implement measures to ensure that the risk of fraud is identified at an early stage so as to prevent such claims. A buyer's solicitors should seek an undertaking from a seller's solicitors that the latter act for the registered proprietor, not merely someone alleging to be the true owner. However, the court acknowledged that it is highly unlikely that a seller's solicitors would provide this undertaking (Excel Securities plc v. Masood [2010] Lloyd's Rep PN 165). It may be advisable for a seller's solicitors to carry out more sophisticated identity checks in circumstances which are more susceptible to fraud; for example, those in relation to empty or mortgage-free properties. However, as can be seen from these decisions, it is not always easy to identify situations where further checks should be undertaken. Clarity from the Court of Appeal as to how to deal with these issues is therefore to be welcomed.