Solicitors’ liability in conveyancing fraud: Court of Appeal victory for victims

16th May 2018

Walker Morris’ Banking Litigation expert reviews the eagerly awaited appeal in the Dreamvar and P&P Property conveyancing fraud claims and explain the practical implications for buyers, sellers, solicitors and insurers alike.

Conveyancing fraud claims

Walker Morris has explained previously the decisions of the High Court in Dreamvar (UK) Ltd v Mishcon de Reya and Mary Monson Solicitors Ltd [1] and P&P Property Ltd v Owen White & Catlin LLP [2]. Those decisions rendered the scope of a solicitor’s liability in fraudulent property transactions somewhat unclear, and so the recent Court of Appeal judgment, covering both cases, has been eagerly awaited for the clarity would hopefully bring.

In both cases the fraudster posed as the owner of a registered property. He instructed solicitors and agents to act for him on the sale of the property and genuine purchasers were found. The purchasers instructed their own solicitors. Following completion, but before registration of title, the frauds were discovered but the fraudster and the purchase monies had, of course, disappeared.

In P&P the purchaser brought a claim but against the vendor’s solicitors (OWC) relying on breach of warranty of authority; breach of an undertaking; negligence and breach of trust and contending that OWC held themselves out as having the authority of the true owner to conclude the sale of the property; were negligent in not carrying out adequate checks to establish the identity of their client; and  had no authority to disburse the purchase monies to their client other than on the completion of a genuine sale. In Dreamvar the purchaser brought proceedings against its own solicitors (MdR) for negligence and breach of trust and against the vendor’s solicitors (MMS) for breach of warranty of authority, breach of an undertaking and breach of trust.

In P&P the High Court dismissed all of the claims. In Dreamvar the High Court dismissed the claim against MdR for negligence but found that the firm was in breach of trust in releasing the purchase monies in relation to a fraudulent sale. The judge declined to grant MdR relief from the consequences of their breach of trust under section 61 of the Trustee Act 1925 [3]. The judge also dismissed all the claims against MMS but indicated that, had he found MMS to have been in breach of trust, he would have granted relief to MdR (but not to MMS) under section 61.  On appeal MdR did not challenge the judge’s finding that it acted in breach of trust in releasing the purchase monies but both it and Dreamvar appealed the High Court’s findings that there was no breach of trust or breach of undertaking by MMS.

Court of Appeal decision

In a comprehensive and fairly technical judgment (which makes essential reading for conveyancing and professional negligence professionals), the Court of Appeal overturned most of the lower court’s findings, largely allowing the appeals.

In P&P the Court of Appeal decided that OWC had acted in breach of trust after all.  Contrary to the High Court, the Court of Appeal considered that the relevant provisions of the Law Society Code for Completion by Post (the Code) did not release or exclude any liability on the part of the vendor’s solicitor for breach of trust, nor did they provide authority for a vendor’s solicitors to release the purchase monies in the absence of a genuine completion.  Similarly in Dreamvar the Court of Appeal found that MMS had acted in breach of trust but, contrary to the High Court judge’s indication, it did not decide to grant relief, in those circumstances, to MdR.

WM Comment and practical advice

Fundamentally the Court of Appeal’s decision means that solicitors representing both buyers and sellers in a fraudulent property transaction should share liability to buyers who fall victim to fraud.  The decision recognises that the seller’s solicitor is generally in the best position to carry out due diligence checks as to the seller’s identity which, for practical reasons, the buyer’s solicitor will not be able to do.  If reasonable investigations to verify the seller’s identity are not properly carried out, the seller’s solicitor can now face liability to the duped purchaser.

The Court of Appeal’s judgment resolves the perceived problems with the earlier High Court decision in Dreamvar, which had meant that sellers’ solicitors could escape liability to defrauded purchasers even where they had failed to carry out necessary and reasonable identity checks on their client; and that buyers’ solicitors could be landed with all liability even where they had acted entirely reasonably, honestly and non-negligently.

Unfortunately, the judgment stops short of providing the practical guidance that practitioners were hoping for, as to exactly what checks should be carried out by sellers’ solicitors so as to protect themselves from this liability. The results are likely to be increased professional indemnity insurance premiums for conveyancing solicitors and additional legal wrangles as buyers’ and sellers’ solicitors seek to pass liability, or at least to allocate risk, between themselves.

Pending any possible further guidance from the courts in future, practitioners are advised to critically assess their file-opening and due diligence procedures to make sure that they are as robust as is practically possible, and potentially also to review the terms of their retainers in light of the outcome of these appeals.

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[1] [2016] EWHC 3316 (Ch)
[2] [2016] EWHC 2276 (Ch)
[3] Section 61 allows the court discretion to grant relief where a trustee in breach has nevertheless acted honestly and reasonably and ought therefore fairly to be excused.