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Fraud



Buyer’s failure to obtain title to property

Liability of seller’s solicitor and buyer’s solicitor

P&P Property Ltd v Owen White & Catlin LLP; Dreamvar (UK) Ltd v Mischon de Reya
(Conjoined appeals)
[2018] EWCA Civ 1082

Summary

The Court of Appeal has laid down principles relating to the liability of the seller’s solicitor and the buyer’s solicitor in cases where a fraudster purports to be the legal owner of a property and the buyer pays the purchase price without obtaining title to the property. In such a situation both solicitors will be in breach of trust, and the Court will not grant relief from liability under s 61 of the Trustee Act 1925.

Facts

This was a conjoined appeal, featuring two separate cases where a fraudster had posed as a property owner and instructed solicitors to act on their behalf on a sale. In both cases, completion was to take place in accordance with the Law Society Code for Completion by Post (2011). The frauds were discovered when applications were made to register the change in ownership of the two properties at the Land Registry, and in both cases the purchase monies were irrecoverable. The Law Society intervened in the appeal.

Although the facts in the two cases were similar, there were some additional issues in the P&P Properties case which did not apply to the Dreamvar case. These were that the fraudster also instructed agents (W) to act on its behalf, as well as solicitors (OWC) and OWC signed the contract on behalf of the seller. In addition, following exchange of contracts, the buyer agreed that a substantial portion of the purchase funds could be held by OWC as agents for the seller, to allow the seller to use that sum to buy another property.

First instance (P&P)

The prospective buyer (P&P) claimed against OWC and W on the basis that:
  • They had held themselves out as having the authority of a true owner to conclude the sale, and
  • They had negligently failed to carry out checks to establish their client's identity, and
  • That OWC had paid the purchase monies to its client without proper authority, in breach of trust.
Those claims were dismissed. P&P did not claim against its own solicitors. P&P appealed against the High Court judgment on all the issues.

First instance (Dreamvar)

The buyer (D) brought claims against its own solicitors (MdR):
  • In negligence and
  • For breach of trust
and against the fraudster's solicitors (MMS):
  • For breach of warranty of authority, and
  • For breach of an undertaking, and
  • For breach of trust).
The negligence claim against MdR was dismissed, but it was held in breach of trust for releasing the purchase monies, and relief under s 61 of the Trustee Act 1925 was refused on the basis that MdR was covered by indemnity insurance, whereas D had no other recourse.

The claims against MMS were dismissed, although the judge said that, had he found MMS to be in breach of trust, he would have granted relief to MdR (though not to MMS) under s 61.

D and MdR appealed against the findings that there had been no breach of undertaking or breach of trust by MMS. D also appealed against the finding that MdR had not been negligent, on the basis that MdR should have obtained an undertaking from MMS only to use the purchase money to complete a true sale of the property.

D did not appeal against the judge’s dismissal of its claim based on breach of warranty of authority (the solicitor at MdR having confirmed that she did not treat MMS as warranting that they had the authority of the true owner).

MdR did not appeal against the judge’s finding that they were in breach of trust by releasing the purchase money, but if successful in appealing against the finding that MMS was not in breach of trust or undertaking, they would seek relief under s 61 (Dreamvar opposed the granting of relief under s 61 to MdR).

Decision on appeal

The Court of Appeal found that the solicitors who had acted for each of the defrauded buyers and those who had acted for each of the fraudsters were liable for breach of trust by parting with the completion monies in circumstances where it was not possible to complete the transaction (because the legal owner of the land was not involved).

This finding turned upon the wording of the Law Society Code for Completion by Post (2011). Neither the buyer nor their solicitor (in each case) had, or was intended to have, access to the seller to establish their identity. Third parties could not rely on the Money Laundering Regulations 2007, as these were intended to discourage money laundering and terrorist financing, and accordingly any liability that OWC, W or MMS had to the relevant innocent buyer had to be founded upon the general law. In each case where it was relevant, the Court declined to grant relief under s 61.

In relation to each of the various claims:

Breach of warranty of authority

It was necessary to consider whether the obligations of solicitors acting for each of the fraudsters to carry out identity checks was sufficient to extend the warranty of authority to a representation that they were acting for the actual owner of the land. The Court was not convinced that a solicitor's obligation to check a client's identity in order to prevent money laundering amounted to a warranty to a buyer that they were acting for someone other than the person they regarded as their client.

In relation to the P&P Properties case, the Court of Appeal found that the High Court had been wrong to construe the warranty inherent in OWC's signature of the contract on behalf of the seller as no more than a warranty that they had the authority of the client who had instructed them. OWC had signed the contract "on behalf of" the seller named in the contract, which meant that OWC warranted that they were authorised to act on behalf of the actual owner of the property.

However, P&P had not relied on this warranty when deciding to proceed to exchange, and a third party must have relied on the warranty of authority for it to have a claim in relation to breach, so P&P’s claim against OWC based on breach of warranty of authority failed.

W's failure to carry out proper checks instead of relying on those done by OWC was insufficient to create a warranty that they were acting for the actual owner of the land, since the memorandum of sale which they had prepared pre-dated the contract and was no more than a statement of the details they had been given.

Breach of undertaking

While there had been no express undertakings from OWC or MMS that each of them acted for the actual owner of the relevant property, the Court of Appeal found that each of them had provided relevant undertakings in the form set out in paragraph 7(i) of the Completion Code, which provides that the seller's solicitor will obtain the seller's authority to receive the purchase money on completion.

Although the term "seller" was not defined in the Code, the Court of Appeal held that the undertaking was intended to refer to the seller identified in the contract (the owner of the property) rather than the person instructing the solicitor. By agreeing to be bound by the Code, OWC and MMS had each given undertakings in the form of paragraph 7(i) and were therefore in breach of undertaking by not obtaining the actual seller's authority.

Negligence

The Court of Appeal considered if each of OWC, W and MMS had been negligent in failing to check the identity of their respective clients, and in proceeding to act on behalf of someone who was not the actual owner. Had each of them assumed responsibility to the innocent buyer?

The Court of Appeal indicated that there will rarely be an "actual, conscious and voluntary" assumption of responsibility by a professional, towards someone else's client, in part because the professional will have a contractual relationship with its own client. There might still be scope for an implied assumption of liability and ascertaining this will require balancing the foreseeability that the third party will rely on the professional to act in a competent manner against any factors that would make the imposition of such a liability unreasonable or unfair.

There was no actual assumption of responsibility by OWC, W or MMS, and P&P and D had each instructed their own professionals to act for them. Those solicitors, PBC and MdR, had been free to raise enquiries in relation to the intended transactions, and could have sought specific undertakings that the necessary identity checks had been carried out, but did not do so.

In the circumstances, the Court of Appeal found that it was not fair or reasonable to treat OWC, W or MMS as having assumed responsibility to the respective purchasers. The Court dismissed D's application to amend their claim to seek damages for negligence from MMS, and D's claim that MdR had been negligent in not seeking an undertaking from MMS only to use the purchase money to complete a true sale of the property failed, because MMS had in fact given such an undertaking by agreeing to comply with the Completion Code.

Breach of trust

The parties agreed that, in view of the frauds, the contracts were nullities and that there was no completion.

As to the solicitors acting for P&P and D, the Court of Appeal stated that the agreed starting point was that purchase monies held by a buyer's solicitors are held on a bare trust for the buyer pending completion. The buyer's solicitor's entitlement to part with that money is governed by the instructions they receive from their client. The court explained that there was no dispute that those instructions only allowed the buyer's solicitors to release the monies on completion of a genuine sale and purchase of the property. For that reason, MdR did not appeal against the High Court's finding that they were liable to D for breach of trust when they released the purchase monies.

The Court of Appeal disagreed with the High Court findings that OWC and MMS had not been in breach of trust for paying the purchase monies to fraudsters. The authority of the seller's solicitor to release the money to their client depended upon completion having taken place within paragraph 10 of the Completion Code. Completion could not take place without the actual property owner, so both OWC and MMS had acted in breach of trust when they released the purchase money to their clients.

Under paragraph 3 of the Completion Code, the seller's solicitor acts as agent for the buyer's solicitor on completion. The Court of Appeal's view was that this agency was very limited in scope, but it did not exclude liability on the part of the seller's solicitor for breach of trust and did not give the seller's solicitors authority to release the purchase money other than for a genuine completion.

In relation to the sum of money that was to be held as agents for the seller in the P&P Properties case, the Court of Appeal rejected OWC's argument that this part of the purchase price was not held on trust for the buyer when it was released to the fraudster. As the underlying contract was a nullity because of the fraud, any variation to that contract must also be a nullity. OWC was therefore unable to rely on the purported variation as removing that sum from the amount that was subject to the trust.

Relief under s 61

As the Court of Appeal was satisfied that in both cases the seller's solicitors had been in breach of trust for parting with the purchase monies to someone who was not the owner of the land, and the buyer's solicitors had acted in breach of trust in releasing the completion monies to a firm that was not acting for the property's true owner, the question arose as to whether the court should exercise its discretion under s 61.

In the original P&P Properties case hearing, the High Court decided that, had it found that OWC had been in breach of trust in releasing the completion monies to the fraudster, it would not have exercised its discretion to relieve OWC of liability. The Court of Appeal held that while OWC had not acted dishonestly, they could not be said to have acted reasonably.

There had been a series of failures to carry out relatively basic checks on the identity of their client, and so the Court of Appeal saw no reason to depart from the High Court's view that relief should not be granted to OWC. As P&P had not claimed against its own solicitors for breach of trust, there was no need to consider the application of s61 to them.

In the Dreamvar case, the Court of Appeal did not consider if it would grant MMS relief under s61, because relief was not sought. By a majority (LJJ Patten and Floyd, LJ Gloster dissenting), the Court of Appeal decided not to exercise its discretion under s61 in favour of MdR. This was in spite of the High Court stating that it would have granted relief, had it found MMS to be in breach of trust. Instead, the Court of Appeal thought that the mere fact that MMS was also liable for breach of trust did not affect MdR's liability and that MdR should instead seek a contribution from MMS in respect of MdR's liability for breach of trust.

Comment

The court specifically mentioned the fact that the solicitors acting for the buyers could have raised some additional enquiries or sought specific warranties or undertakings, but these are unlikely to be forthcoming in practice. Another possibility may be to obtain indemnity insurance to cover the risk of fraud.

It may be that lawyers acting for prospective buyers will seek to exclude liability for fraud on the part of the purported seller in their retainer with their client, but the effectiveness of such a limitation has not been tested. It is unfortunate that the majority of the Court of Appeal decided not to afford MdR relief from liability for breach of trust under s61, as this creates an obvious risk for lawyers acting for buyers.

The Law Society has said that it is considering the Court of Appeal ruling in detail and that it is currently updating the Completion Code to provide greater clarity as to roles and responsibilities.

It seems likely that there will be an appeal to the Supreme Court in this case, particularly in view of the dissenting judgment of LJ Gloster in relation to s61 relief.


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