In the latest of a series of cases concerned with solicitors' liabilities in cases of identity fraud involving imposter sellers, in Dreamvar (UK) Ltd v Mishcon de Reya and Mary Monson Solicitors the High Court has imposed liability for breach of trust on the solicitors acting for the purchaser, declining to relieve them of liability for that breach of trust under s.61 of the Trustee Act 1925 notwithstanding a finding that those solicitors had acted both honestly and reasonably. This is something of an unwelcome development for solicitors and their insurers and comes soon after the more favourable decision in P&P Property v Owen White & Catlin LLP & anor. (2016) (see below).
Mr David Haeems was the registered owner of a property in Earl's Court, London (the "Property"). In September 2014, a fraudster impersonating Mr Haeems offered the Property for sale through estate agents Douglas & Gordon ("D&G"). Following negotiations through D&G, the seller accepted an offer from a developer, Dreamvar (UK) Limited, to purchase the Property for £1.1 million.
The seller instructed Mary Monson Solicitors Limited ("Mary Monson"). Dreamvar instructed Mishcon de Reya ("MdR"). Exchange and completion occurred simultaneously on 17 September 2014. On completion, MdR paid Dreamvar's £1.1 million purchase monies to Mary Monson, who duly transferred them to the seller. Dreamvar then immediately began renovation works at the Property.
Around two months later, periodic checks by the Land Registry led to the discovery of the fraud before Dreamvar had been registered as owner. Dreamvar ceased works at the Property. By that stage, both the seller and the proceeds of sale had disappeared, leaving Dreamvar with a substantial loss.
Dreamvar brought claims against MdR for:
- negligence, in failing to identify certain features of the transaction as indicative of an increased risk of fraud and in failing to seek an undertaking from Mary Monson that it had taken reasonable steps to establish its client's identity; and
- breach of trust, as a result of MdR's release of the monies to the (fraudulent) seller.
Dreavmar claimed against Mary Monson for:
- breach of trust;
- breach of an undertaking that it had the authority of the real Mr Haeems to receive the purchase monies on completion; and
- breach of warranty of authority, Mary Monson allegedly having warranted that it had (a) the authority of the registered proprietor of the Property and (b) exercised reasonable care and skill in establishing its client's identity.
MdR and Mary Monson also claimed against each other, pursuant to the Civil Liability (Contribution) Act 1978. There was no suggestion by any party that either MdR or Mary Monson had been complicit in the fraud.
The court dismissed both allegations of negligence against MdR. Having considered all the circumstances of the case – including that the seller had instructed a reputable firm of solicitors, Mary Monson, and a reputable estate agent, both of whom MdR was entitled to rely on to conduct money laundering checks and due diligence – the court held that MdR had acted reasonably in not alerting Dreamvar to any increased risk of fraud.
The court also rejected the second allegation that no undertaking had been sought from Mary Monson. Referring to the Law Society's 2011 Code for Completion by Post (the "Code") and Conveyancing Handbook, the court held that the "leading elements of the profession" had directed their minds to "what a solicitor needs to do to provide a proper level of protection for its client". Rejecting Dreamvar's argument, the court held that the standard practice of the profession in not seeking such an undertaking was neither unreasonable nor illogical.
Breach of trust
MdR was, however, held to have acted in breach of trust. Having reviewed the relevant case law, the judge held that it had been an implied term of MdR's retainer that the firm would release monies received from Dreamvar only on completion of a "genuine purchase" of the Property. There had been no "genuine purchase" in this case because the sale contract had been a nullity. MdR's defence that it had been entitled to release the monies against the strength of an undertaking provided by Mary Monson that it would forward the title documents failed.
The court held that MdR was not entitled to relief under s.61 of the Trustee Act 1925 (s.61"). Notwithstanding the court's acceptance that MdR had acted both honestly and reasonably, the court declined to exercise its discretion to excuse MdR from the breach of trust. The court weighed the comparative financial consequences of the breach of trust on MdR and Dreavmar. The effect of the breach on Dreavmar, who had paid £1.1 million and received nothing in return, had been "disastrous". MdR, on the other hand, had in place professional indemnity insurance that covered in full the amount of the loss. The firm, accordingly, was far better able to deal with the consequences of the breach than Dreavmar. It was also relevant (a) that MdR had been far better placed than its client to achieve greater protection for Dreavmar against the risk of fraud and (b) that Dreavmar had no recourse against Mary Monson and was highly unlikely to recover anything from the seller.
Mary Monson was not found to have acted in breach of trust. The court cast doubt on the analysis in P&P Property that the particular wording of the Code did not generally create a situation whereby the seller's solicitors held completion monies on trust. However, the court held that paragraph 3 of the Code expressly limited Mary Monson's duties to act as the buyer's solicitor's agent on completion and absolved the solicitors from responsibility for any breach of the seller's contractual obligations. Consequently, and following the High Court's decision in P&P Property on this point, Mary Monson was entitled to release the monies even though there had been only a "pretended", and not a genuine, completion.
Breach of undertaking
Mary Monson was also not found in breach of undertaking. By paragraph 7(i) of the Code, Mary Monson had undertaken to "have the seller's authority to receive the purchase money on completion". Following P&P Property, however, the court found that the reference to the "seller" in the undertaking was, literally, to the person instructing the solicitors as the seller. The undertaking did not support a construction in which "seller" could be read as referring to the true registered proprietor of the Property, Mr Haeems. Since Mary Monson had had the purported Mr Haeems' authority, there was no breach of undertaking.
Breach of warranty of authority
Mary Monson was not in breach of warranty of authority.
The court rejected the claim that Mary Monson had warranted that it had had the authority of the registered owner of the Property for two principal reasons. First, consistent with its findings as to the correct interpretation of "seller" in paragraph 7(i) of the Code, the court held that the other references to the "seller" in the exchanges between the parties had not been implicitly meant as a warranty that Mary Monson was acting for the registered owner. Secondly, it was clear from the evidence that MdR had not understood or relied on the warranty as referring to the registered owner.
The court also dismissed the claim that Mary Monson had warranted that it had taken reasonable steps to establish its client's identity. Mary Monson's responsibility to do this was not based on an obligation assumed to MdR, so there was no basis for a finding that a warranty had been given by one firm to the other. Furthermore, it was also relevant that the facts of the case did not support the implied assumption of any contractual responsibility in tort.
At a time when cases of identity fraud are reported to be on the increase, Dreamvar will be a source of real concern to solicitors who act for purchaser clients and to their professional indemnity insurers. Although Dreamvar may turn to an extent on particular facts, the increased share of responsibility which a purchaser's solicitors must apparently shoulder in verifying the identity of the seller appears at odds with a regime of practical conveyancing guidance that seeks to apportion responsibilities fairly between the parties. Equally, the emphasis placed by the court (in determining the availability of relief under s.61) on its finding that Dreamvar's losses could be absorbed easily by insurers may be seen as unwelcome.
Unfortunately, Dreamvar offers little in the way of practical guidance to solicitors. This may change: an appeal (in which the Law Society has indicated that it may intervene) is rumoured (permission having been given by the High Court), and any appeal may be heard in conjunction with the pending appeal in P&P Property. It is to be hoped that further judicial consideration of the issues in both cases, coupled with any detailed written guidance which the Law Society is assumed likely to offer in due course, will clarify more fully where we are now.
In the meantime, beyond exercising even greater vigilance, what steps can solicitors take to mitigate the risks? There is no easy answer:
- One option might be for solicitors acting for purchasers to draft engagement letters in a way that purports expressly to (a) exclude from the scope of the retainer the duty to undertake checks on the seller's identity and title to the property and (b) transfer that responsibility to the purchaser client.There may be a risk, in relation to retainers by consumers, that such provisions might fall foul of the requirement of fairness under the Consumer Rights Act 2015.Such provisions would also need to be drafted carefully to avoid being regarded as limitation clauses, which might fall foul of the Code of Conduct and/or the "reasonableness" provisions in the Unfair Contract Terms Act 1977. However, they might favourably influence the court's exercise of its discretion under s.61.
- An alternative is for solicitors to consider protecting their position by providing purchaser clients with more comprehensive advice on the risks of identity fraud by sellers and/or making further enquiries of the seller's solicitors about the identity checks carried out by them, particularly in transactions which carry hallmarks of being high-risk, such as those involving high-value, unencumbered and/or unoccupied properties or which are taking place at speed.Although MdR was found not to have acted negligently in not having given further advice, a clear understanding of the risks on a client's part and consideration of what further steps might be taken to check the position could uncover issues or at least increase the likelihood of a favourable exercise of the court's discretion under s.61.A word of warning, however: firms should be careful that, in giving any additional advice and/or raising further enquiries of the seller's solicitors, they do not inadvertently assume duties to their purchaser clients that go beyond any limits and exclusions included within engagement letters and/or terms of business.
- Solicitors might also consider ways of trying to shift the burden to their opposite numbers.As the present case suggests, however, sellers' solicitors are very unlikely to be willing to give undertakings or carry out checks that go beyond the scope of existing Law Society guidance.
- In high-value cases, solicitors might consider including an appropriate liability cap in their terms of business.Since these cannot be set below the mandatory minimum level of professional indemnity insurance cover (£2 million or £3 million, depending on the type of firm), however, such a cap would usually, at best, offer only a partial solution.