Dreamvar And P&P Court of Appeal Decision- Disappointing Result for Legal Advisers Found Liable for Losses Even When Not Negligent

The Court of Appeal has handed down judgments that will have great impact on the property conveyancing market.  This is a disappointing day for legal advisers, as the Court found them liable for losses caused to property buyers by fraudsters, even where those advisers were not negligent.

P&P Property v Owen White and Catlin LLP

In this case, the claimants lost £1 million to a fraudulent seller.  Owen White and Caitlin LLP (‘OWC’) the seller’s solicitors were originally approached by the fraudster to refinance the property, but he changed his mind half way through the process and instructed OWC to arrange a sale.  The fraudster claimed to live in Dubai, and the documents all came from Dubai, even though the property was in the UK.  OWC conducted the standard Anti-Money-Laundering checks and they came back as ‘referred’ but OWC accounted for this by the fact that the client lived in Dubai. 

The claimants therefore sued the seller’s solicitors in breach of trust for their failure to spot and avoid the fraud despite the red flags.  However, because the transaction was completed under the Law Society’s Code for Completion by Post, which specified that the completion monies are transferred to the seller’s solicitors as agent rather than as trustee, the claim failed at first instance as there was not the requisite trustee relationship.  On the issue of breach of warranty, the High Court considered whether by providing the warranty of authority the seller’s solicitors had also provided a warranty that the seller was a legitimate seller of authentic identity.  The judge held that the warranty of authority only represents that the solicitor is authorised to act for the person they are receiving instructions from, and makes no representations not to their characteristics or attributes.  To do so would be to impose on the solicitors a guarantee that the seller was the registered title holder.  Thusly, the seller’s solicitors were not liable.

Dreamvar (UK) Limited v Mishcon de Reya

The purchaser was defrauded £1.1 million.  The seller’s solicitors admitted that they had not performed the necessary checks on their client.  Even so, the court did not find them in breach of trust because they could not be said to have warranted that the seller was genuine, using similar reasoning pursued in P&P.

Mishcon de Reya were the purchaser’s solicitors.  The High Court found the firm was in breach of trust as it was an implied term that the money would only be released on a genuine completion of the purchase of the property.  

Having failed on their arguments based on breach of trust, the firm argued that they should be granted relief under the Trustee Act.  The judge acknowledged that the firm had acted honestly and innocently.  However the judge said that ‘the only practical remedy’ open to the claimant was against their firm of solicitors.  Furthermore, it was pointed out that the claimant was not insured for the loss, whereas the firm was.  Therefore, the firm was found liable even though it had not been negligent.

The High Court judgment in Dreamvar will strike many as legally dubious.  It is an allocation of risk based on affordability and policy considerations, rather than an allocation of liability based on established case law.

The Court of Appeal

The two cases were brought to the Court of Appeal jointly, and the Court handed down a truly surprising decision to the disappointment of legal advisors. In Dreamvar, the Court of Appeal found that Mishcon de Reya remains liable for a breach of trust despite the absence of negligence on their part.  No Section 61 relief was granted.  The Court of Appeal found similarly in P&P, that Owen White & Catlin being the solicitors for the fraudulent seller were liable.

The two law firms attained some partial success at the appeal.  In P&P, it was found that they were not liable for breach of warranty of authority as there was no material reliance by the purchasers on that warranty.  In Dreamvar, it was found that the seller’s solicitor Mary Monson Solicitors Limited were also liable for breach of trust, and therefore liability is shared between Mishcon de Reya and Mary Monson.

It may also be of interest to legal practitioners that liability was found on two grounds: breach of trust, and breach of the undertaking under the Law Society Code for Completion by Post (2011) to pay the completion funds only to the true owner of the property.  The Court found no negligence on the part of the legal advisers.  The buyers did not succeed on the point of common law warranty of authority.  And although the Court found that there was warranty of authority given under the Code, no liability was established under this warranty due to the lack of reliance.  Therefore, it is only on a relatively narrow ground that the conveyancing solicitors in these two cases were found liable.  Nevertheless, it was sufficient to place a significant financial burden on both.

The Court of Appeal commented that the vendor’s solicitors are best placed to do the appropriate checks and prevent fraud by verifying the identity of the seller, whereas the buyer’s solicitor may be reliant on the vendor’s solicitor to complete those checks adequately.

This is a pivotal ruling as the Court of Appeal has rewritten the law on breach of warranty of authority, overruling the judgment in Excel

Securities v Masood.  It may very well impact the checks and processes that take place in mortgaged conveyancing as lenders often rely on the vendor’s solicitor’s warranty of authority.

The Impact

This judgment will provide greater protection to buyers, but will shake up the conveyancing industry with much greater risk of liability.  Properties at risk of fraud can be worth millions of pounds.  Professional negligence insurance premiums will likely rise in response.

The Court has thusly chosen to allocate the costly risk of identity fraud on the professional advisers in a property transaction.  Whilst it is true in the cases above that the advisors are in a better position to afford that loss, that is not necessarily always the case in conveyancing deals.  We will need to see how this judgment will be followed in subsequent litigation where the legal advisers might be placed in significant financial hardship if found liable for the losses in property fraud.

Those in the conveyancing industry will keep their eyes peeled to see if the Code will be changed in response to this judgment.  If not, there could be a breakdown of the trust in undertakings that is so important in the conveyancing process.  But for now, undertakings under the Code will be enforceable summarily which is even better news for purchasers if the vendor’s solicitors have valid insurance which is not always the case and was not the case in the case of Santander v RA Legal.  

For now, property buyers can rejoice, and professional advisers should start penning new policies and put in place rigorous systems to prevent fraud in property transactions.