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Buyer’s solicitor beware

We now live in a world where identify theft is commonplace and fraudsters are becoming increasingly sophisticated in their pursuit of unsuspecting victims as modern technology helps to facilitate their dastardly deeds.

The recent cases of Dreamvar (UK) Ltd v Mishcon de Reya (Dreamvar) and P&P Property Ltd v Owen White and Catlin LLP (P&P) have considered the question of the liability of solicitors and estate agents in claims involving identity fraud. In circumstances where a diligent solicitor has done nothing wrong but a sophisticated ruse has gone undetected and a client subsequently suffers loss as a result, who should bear the victim’s loss?

In both Dreamvar and P&P, a fraudulent individual posed as the owner of registered property in London. Solicitors were instructed to act for the fraudulent seller and genuine buyers were found. The unsuspecting buyers instructed solicitors and the sales proceeded smoothly to completion. After completion but before registration of title, the fraud was discovered. By this time however, the fraudster and the purchase money had disappeared.

In P&P, the buyer brought a claim against the fraudulent seller’s solicitors, Owen White and Catlin LLP, claiming breach of warranty of authority, breach of an undertaking, negligence and breach of trust. The buyer also brought a claim against the selling agents for breach of warranty of authority and negligence.

In Dreamvar, the buyer (Dreamvar) brought proceedings against its own solicitors, Mishcon de Reya, for negligence and breach of trust as well as against the fraudulent seller’s solicitors for negligence, breach of warranty of authority, breach of an undertaking and breach of trust.

At first instance in both cases, the claims against the fraudulent seller’s solicitors and the selling agent failed. However, in Dreamvar, although the court did not criticise the conduct of Mishcon de Reya and found that they had not been negligent, they were held to be liable.

Appeals were brought against the first instance decisions in both cases. At appeal, the Court of Appeal examined a number of aspects of the conveyancing process and the duties of the solicitors on both sides of the transaction came under the spotlight.

The Court of Appeal’s findings in respect of breach of trust are particularly significant because a solicitor’s role in holding purchase monies on trust and transferring these on completion is key to any conveyancing transaction. A buyer’s solicitor holds its client’s purchase monies on trust pending completion. When these monies are transferred to the seller’s solicitor, if legal title to the property is not transferred (which is the case when the seller turns out to be a fraud), there is a breach of trust.

One of the central issues considered by the Court of Appeal, raised by Mishcon de Reya in Dreamvar, was: in circumstances where there has been a breach of trust because a buyer’s solicitor has transferred completion monies to a fraudulent seller’s solicitor, should the buyer’s solicitor be excused their liability for breach of trust as permitted by section 61 of the Trustee Act 1925 when they have acted properly?

The court at first instance concluded that Mishcon de Reya could not and the Court of Appeal affirmed this finding. The reasoning for this finding resulted from the consequences of the breach of trust for Dreamvar, which the judge at first instance described as “disastrous”. Dreamvar was a small company which had lost the purchase monies, had no insurance against fraud and was left with creditors owed more than £1.2 million. In contrast, Mishcon de Reya was insured for events such as fraud and its insurance cover was sufficient to cover the loss suffered in full. When balancing the relative effects or consequences of the breach of trust, the court held that Mishcon de Reya was far better able to meet or absorb the loss than Dreamvar. On appeal in Dreamvar, the court reversed the decision that there was no breach of trust by the fraudulent seller’s solicitors, Mary Monson Solicitors. Therefore the outcome was that both Mishcon de Reya and Mary Monson Solicitors should share responsibility for the defrauded buyer’s loss and each should make contributions. The division of responsibility has yet to be determined.

The decision in Dreamvar is unsettling for any solicitors engaged in conveyancing transactions and will also have implications for professional indemnity insurers. The decision has widely been seen as controversial because the Court of Appeal did not give any guidance on what conveyancers can or should do to avoid liability in circumstances where they have done everything right. If the cases reach the Supreme Court, which would be the next and final stage, solicitors and other professionals in the property business will be waiting with baited breath.

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