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Acting for a fraudster: Scope of solicitors’ liability

Print publication

08/11/2016

Reports from both the UK Fraud Costs Measurement Committee and the Law Society suggest that mortgage fraud is on the increase. During 2016 alone, mortgage fraud has caused an estimated loss of at least £1.3 billion. The increasingly thorough professional and regulatory initiatives designed to ascertain the identity of clients to help prevent fraud have been matched by the increasingly sophisticated methods deployed by fraudsters to circumvent these measures to defraud their victims. This raises the difficult question of how far a solicitor can be held accountable for the fraudulent acts of its client.

The recent case of P&P Property Ltd v Owen White [1] clarifies the scope of a solicitor’s liability in fraudulent transactions and provides useful developments in relation to the law of breach of warranty of authority and breach of trust.

The Facts

The purported seller of a property, Mr Harper, wished to arrange a quick sale to fund the purchase of another property abroad. To facilitate this, Mr Harper was willing to sell the property at a discount. One of two defendants, the solicitors acting for the purported seller (“the Solicitors“), completed their money laundering checks and met with Mr Harper to verify their client’s passport photograph and identity.  The claimant, a property developer, agreed to purchase the property in cash for £1,030,000. The transaction purportedly completed and Mr Harper was paid the purchase price through the Solicitors’ client account.

The fraud became apparent when the genuine Mr Harper returned to his property and saw major building works taking place. The Land Registry refused to register the claimant as the owner, who consequently lost over £1m. The claimant attempted to pursue the purported seller, but he could not be traced. The claimant then sought to recover his losses from the Solicitors, alleging that it had acted in breach of warranty of authority and negligently, and that payment to the seller had been in breach of trust and breach of undertaking.

Breach of Warranty of Authority

The claimant argued that the Solicitors were in breach of warranty of authority as it represented that it had authority to act for the owner of the property, and specifically that it was instructed by the genuine Mr Harper, when in fact it was not. The claimant argued that it had agreed to purchase the property in reliance on the Solicitors’ warranty of authority.

The well-established doctrine of warranty of authority has oscillated between a reluctance and a readiness to hold solicitors strictly accountable. Although recent case law has suggested the courts will take a stricter approach [2], P&P Property represents a return of reluctance from the courts to hold solicitors as strictly accountable for the fraudulent actions of their client…

The judge held that the court will not construe an implied warranty of authority as operating more broadly than as “representing that the agent has authority to act on behalf of his client“. Furthermore, the court held that an agent does not, simply by acting as agent, promise that it had the authority of the true owner of the property. As such, it was held that the Solicitors did not their breach warranty of authority.

As an aside…

It bears noting, however, that the case does not deal with the question of whether there were elements to this transaction which should, nevertheless, have rung alarm bells for the Solicitors and, if there were, whether the Solicitors might be liable as a result [3].

Negligence

In this case the Solicitors had not accepted a direct responsibility to the claimant to take reasonable care to ascertain the fraudulent seller’s identity or to ensure that he was the true owner. The court held that there were no special circumstances in this case to justify imposing such a duty to the claimant, and so the allegation of negligence failed.

Breach of Trust

The claimant argued that the purchase monies were held on trust for them in the Solicitors’ client account, to be paid to the seller on completion. It claimed that because the transaction was a fraud, no completion took place and thus the transfer of purchase monies to the seller was in breach of trust.

The court emphasised the importance of considering the circumstances of the case. To establish whether the Solicitors were liable for breach of trust depended on “the basis upon which they received the monies” and “in what circumstances they were permitted to release them”. Therefore, the terms of the Solicitors’ relevant obligations must be considered to determine whether the completion monies were held on trust.

The court found that, in this case, the relevant provisions were to be found in the 2011 edition of the Law Society Code for Completion by Post (“the Code“).  The relevant obligations of the Code did not establish that the purchase monies were held on trust by the Solicitors.

Breach of Undertaking

The buyer claimed that, under the Code, the Solicitors undertook to have the seller’s authority to receive the completion money at completion and undertook to complete the purchase on receipt, such that the Solicitors breached both undertakings. The court rejected both claims on its interpretation of the Code but lenders should note that it is crucial to this element of the claim to highlight a key distinction between the wording of the 2011 and 2008 editions of the Code.  Had the 2008 edition of the Code applied, the outcome could have been different

WM Comment

P&P Properties provides valuable guidance to determine whether a purported vendor’s solicitor has breached warranty of authority and whether completion monies are held on trust.

  • A warranty of authority provides only the basic representation that the agent has authority to act for another. The courts will not imply a warranty of authority as having an effect beyond that basic representation unless the conduct of the parties makes it clear that an additional promise has been made.
  • Completion monies are held on trust by a vendor’s solicitors where the particular provisions of the relevant obligations make it clear that the monies are to be held on trust.

Although the court stressed the importance that facts have on the outcome of a case, this is an unfortunate decision for the victims of ID and mortgage fraud. For building societies and other lenders, breach of warranty of authority cases will become more difficult but they should consider whether they can recover their losses from other parties and/or whether there are other causes of action.

On the other hand, this is a helpful decision for the conveyancing solicitors, estate agents and professional indemnity insurers who are all at the transactional front line. The decision sets a high evidential bar for establishing breach of warranty of authority or breach of trust. The decision underlines 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”.

Lenders’ solicitors might seek to protect their clients by enquiring about the right of the seller to sell (but by the same token, sellers’ solicitors are unlikely to agree to provide such warranties); and care should be taken to check which edition of the Code applies to a transaction when any claim for breach of undertaking is considered.

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[1] [2016] EWHC 2276 (Ch)
[2] LSC Finance v Abensons [2015] EWHC 1163 (Ch) and see our earlier briefing..
[3] Please see our recent article, which flags some key indicators of fraud which conveyancers can watch out for.