The decision of Mr David Railton QC in Dreamvar (UK) Limited and Mischon De Reya and Mary Monson Solicitors Limited [2016] EWHC 3316 (Ch) has caused a major stir within the conveyancing industry and has led to a number of conveyancers questioning their exposure to liability on completing transactions on behalf of their clients.
The facts are pretty straightforward.
Mischon (MdR) acted for the Dreamvar in the purchase of a property from an imposter purporting to be the registered owner of the property. The seller was represented by Mary Monson Solicitors Limited (MMS). Upon completion, MdR on behalf of the purchaser, transferred the purchase monies to MMS, who in turn passed the money on to their client, the imposter. By the time the fraud was discovered the fraudster could no longer be found.
The case against the buyers solicitor (MdR)
Dreamvar was left significantly out of pocket and commenced action against its solicitors (MdR), as well as the sellers solicitors (MMS).
The claim against MdR was for negligence and for breach of trust. It claimed, in the first instance, MdR had failed to advise on the risk of fraud given a failure to identify certain ‘red flags’ which should have alerted MdR to the possibility of fraud. Later, and at the start of the trial, the Claimant alleged that MdR was also negligent in failing to seek from MMS an undertaking to the effect it had taken reasonable steps to establish the seller’s true identity. In reply, MdR argued that there were not any features which pointed to an increased risk of fraud or that it was under any obligation to advise the Claimant of the risk.
In addition, and in the alternative, Dreamvar alleged breach of trust on the part of its solicitors on the ground that MdR only had authority to release the purchase funds to MMS in connection with a ‘genuine’ as opposed to a fraudulent completion. MdR argued in defence of this allegation that the money was released in exchange for undertakings given in accordance with standard conveyancing practice and therefore there was no such breach. MdR also argued that if there was breach it should be able to avail itself of the relief offered under s61 Trustee Act 1925 on the basis it acted honestly and reasonably.
The case against the sellers solicitors ( MMS)
To begin with, the Claimant argued that MMS was liable for breach of warranty. By confirming to the buyer’s solicitor that it was acting for the seller, it was, so the Claimant argued, giving a warranty that the seller was in fact the registered owner. It also argued by giving such a warranty it had provided a secondary warranty that it had exercised reasonable care and skill in establishing the seller’s identity.
MMS argued there was no warranty other than a warranty that it had a client for whom it was acting and that this was not broken because it had a client even though the client was not the registered owner.
In answer to the other allegation MMS admitted that it did not undertake such identity checks as would have been undertaken by a competent solicitor. It argued however that no such warranty was given and had reasonable care been exercised the chances were that the fraud would have still occurred.
The breach of trust claim against MMS was based on the contention that upon completion it should not have released the funds to the fraudster as it was only authorised to do so in the case of a genuine completion which this was not.
In reply MMS argued that that it did not receive the purchase monies on trust and even if it did it was not wrong to release the monies even though the completion was not as the Claimant asserted ‘genuine’. In support of its defence MMS relied heavily in the Law Society’s Code for Completion by Post ( 2011 Edition ) ( Code). MMS did not seek relief under s61 Trustee’s Act due to its admission that it had not carried out the checks it should have performed.
The next limb of the Claimant’s case against MMS was based on an alleged breach of the undertaking that forms part of paragraph 7 (i) of the Code. This it was argued, allowed the Claimant when transferring the funds to safely assume that MMS had authority from the true owner of the property, as opposed to the fraudster, to accept the funds. MMS argued that the Code refers to the seller solicitor’s ‘client’ only and this does not, nor should it, imply that the client is the registered owner of the property.
The Seller’s Solicitor’s admission
The seller’s solicitors admitted that its identification checks were not sufficient. They relied on a driving license and TV license . The driving license had only just been issued and was limited for just three years. These features which were unusual were not challenged.
Furthermore, the TV license was accepted as proof of address when it ought to have been clear that this was not a source of proof recognised in the Law Society’s Anti Money Laundering Practice. No other checks were undertaken. Interestingly MMS conceded that they should have called the client into the office with proof of identity and address.
The claim in negligence against the buyer’s solicitors ( MdR)
The Claimant did not assert that a competent solicitor acting for a buyer should in every case advise a client of the theoretical risk of fraud however remote, though it was interesting that the Judge noted that it was possible that some competent solicitors would inform their clients.
In this case the agreement advanced was that there exists a duty to advise the client of the risks of identity fraud if there is ‘’some unusual feature of the case which would ring alarm bells in the mind of a reasonably prudent conveyancer.''
MdR accepted this proposition, but argued that the ‘unusual features’ were not present in this case.
In response the Claimant highlighted what it considered to be ten ‘red flags’ which ought to have alerted MdR and prompted them into warning of the risk of fraud. These included, the high value of the transaction and the fact the property was unencumbered and unoccupied. The fact that the seller’s address was not the same as that of the property was also mentioned.
The Judge was, on hearing the evidence from the solicitor at MdR who handled the case, satisfied that a sufficient risk assessment taking into account these factors had been carried out, that there was ‘…nothing in the conduct of the transaction which suggested to MdE that MMS was not competent’. It therefore followed that there was no need for MdR to warn the Claimant of the risk of fraud.
The other claim in negligence arose out of the alleged failure on the part of MdR to seek an undertaking from MMS to make sure it had taken reasonable steps to establish its clients identity. It was argued that this should have been done in every case, even where there was no indicators of possible fraud.
Interestingly, the Claimant accepted that there was no requirement in practice at the time which obliged a buyer’ solicitor to seek an undertaking of this sort, but contended notwithstanding this fact, that in the absence of other measures to protect a purchaser or steps ‘…. which a competent solicitor should take to guard against the risk for his client suffering loss of this type….’ ,then the profession should be expected to depart from normal practice and take other action to protect the client.
The Judge was not prepared however to be persuaded by this argument and found that this situation was not one where it would be right to say that the practice of the profession in not seeking an undertaking is ‘….unreasonable or illogical’. This was partly based on the Claimant’a admission that seeking an undertaking from a vendor’s solicitor in this regard had not been regarded as necessary or appropriate.
The sting in the tail however, was that the Judge did not rule out that an undertaking of this sort might not be regarded as such, if the protection provided by fraud risk assessment, the holding of money on trust and the Code undertaking was not held to be adequate.
The Claim for breach of trust against MdR
There was no doubt that the money paid by the Claimant to MdR were held on trust by MdR for the Claimant.
In handing these monies over to the seller’s solicitors on a completion which was not a genuine one, irrespective of the fact that completion took place in accordance with the Code, MdR had acted in breach of its trustee’s obligations and was therefore liable to the Claimant subject to the s61 relief argument.
The reasoning behind this is that the Judge held that the implied authority contained within MdR’s retainer only allowed MdR to release the completion monies to the seller in the context of a genuine and not fraudulent completion.
The Claim for breach of trust against MMS
The breach of trust claim against MMS was based on the contention that upon completion it should not have released the funds to the fraudster as it was only authorised to do so in the case of a genuine completion which this was not.
Looking at this from the seller’s angle the Judge had no contactual relationship to consider as with the buyer’s solicitors, and therefore had to look at the Code and the exclusions this contained. He was also heavily influenced by the findings of Mr Dicker QC in Purrunsing v A’ Court [2016] EWHC 789 (ch).
He found there was no breach on the basis that the provisions of paragraph 3 of the Code state that the obligation to act as agent for the purchaser’s solicitors on completion do not require the seller’s solicitors to investigate or take responsibility for any breach of the seller’s obligations.
Breach of Undertaking by MMS
This relates to the undertaking which MdR relied on as contained in paragraph 7(i) of the Code requiring the seller’s solicitors to have the seller’s authority to receive the purchase money.
The question which the Judge needed to consider was whether ‘the seller’ was referring to the seller’s solicitor’s client or the registered proprietor of the property. If the latter then as MMS did not have the authority to accept the money from the true owner they had acted in breach of the undertaking.
On hearing the evidence of the buyer’s solicitors, the Judge held the general understanding within the profession is that a seller’s solicitors would not give, and would not be expected to give, an undertaking to the effect that the seller was indeed the registered owner of the property.
He further found that if its right that there is no implied warranty by the vendor’s solicitors which extends to the identity of the vendor as the registered owner, it is ‘likely’ that the references to ‘seller’ in the Code relate to the person purporting to sell, and not to the registered owner. It is fair to say that the Judge found this conclusion a difficult one to reach.
Breach of warranty by MSS
MMS accepted that it held itself out as the solicitors for the seller, but not that the seller was the registered owner.
The Judge found that the evidence of the buyer’s solicitors was fatal to the Claimant’s argument. The solicitor accepted in evidence that she did not expect a seller’s solicitor to accept a contractual obligation that its client was who he said he was. Nor did she expect any warranty to this effect. Indeed she expressly stated that she did not rely on any warranty.
For similar reasons the second part of this allegation that MSS had failed to exercise reasonable care and skill in establishing the seller’s identity, also failed to impress the Judge. He found again relying on the buyer’s solicitors evidence that the buyer had not promised the buyer to exercise reasonable care, nor had the buyer’s solicitor relied on any such promise.
In the absence of any duty in tort, the judge also found that it would be ‘inappropriate’ to imply an assumption of contractual responsibility to exercise reasonable care.
The Section 61 claim for relief
The first hurdle for MdR was to demonstrate that it had acted honestly and reasonably.
In the light of the Judge’s finding of no negligence he was satisfied that MdR had discharged its onus of proving that its conduct was reasonable. There was no question of any dishonesty.
The next hurdle at which MdR failed was whether the Judge felt that MdR ought fairly to be excused for the breach, and if so, whether the Court should grant or refuse the relief.
Balancing the ‘relative effects or consequences’ of the breach the judge held:
‘While, as I have held, it was not unreasonable for MdR not to have advised Dreamvar about the risk of fraud, or to have sought greater protection for Dreamvar against that risk (such as further undertakings), it is also not irrelevant that MdR was necessarily far better placed to consider, and as far as possible achieve (a matter not in the event tested), greater protection for Dreamvar against the risk which in fact occurred. As I have already found, Dreamvar has no recourse against MMS, and (it appears) no practical likelihood of either tracing or making any recovery from the fraudster. As a result, the only practical remedy it has is against MdR.
For these reasons, I conclude that MdR ought not fairly to be excused for the breach of trust, and that I should in any event, in my discretion, decline the relief sought. I would however add that if, contrary to my conclusions above, MMS were liable to Dreamvar, I would have exercised my discretion to relieve MdR of its liability for breach of trust to the extent of the liability found against MMS.’
The knee jerk reaction within the conveyancing community has been that this case is authority for seeking, on each and every transaction, an undertaking from the seller’s solicitors to confirm that all reasonable efforts have been taken to identify the seller.
On close examination this is not correct. Indeed, as can be seen, the Judge accepted the buyer’s solicitor’s evidence that such an undertaking would not normally be regarded as appropriate or indeed essential.
It is perhaps helpful to note here what that buyer’s solicitor told the Judge in evidence:
‘I would find it hard to believe that any law firm would give an undertaking that they verify their client. It would be watered down -- sorry to interrupt you. It would be watered down. It would say "We have verified our client to the best of our ability" or, you know, "We have satisfied ourselves as to our client's identity but ..." and it will have the big caveat on it that every law firm puts on it, which says, you know "This confirmation will not have any fallback on this firm or its partners". It would be worthless, in my opinion.’
The Judge did not rule out the possibility that in the absence of other forms of protection that such an undertaking might be regarded as appropriate. He suggested that the Buyer’s solicitors were however better placed than their client to consider ways of providing better protection, but did not spell out what more could have been done, or more importantly, when such an undertaking might be regarded as essential.
Clearly had there been other ways to protect the client which the buyer’ solicitors had failed to implement, and a consequential finding of negligence, then we may have had some clues on what more is required of buyer solicitors when faced with these circumstances.
The conclusions to be drawn are as follows:
- If there are ‘red flags’ suggesting the risk of fraud then there is a duty on the buyer’s solicitor to make these known to the client. In this case the Judge found on the facts that had the solicitor warned the client of the risk of fraud it would have probably withdrawn from the transaction.
- So this means nothing has changed - always make sure a proper risk assessment is carried out, and clients are made aware of what you are doing, and of any concerns. There is an argument that we should perhaps be warning all clients of the risk of fraud. The Judge in this case did in fact infer that this was something which some conveyancers may already be doing.
- In this case even though the seller’s solicitors had failed to carry our adequate checks the Judge still found that there was no avenue of redress for the buyer. The seller’s solicitors were lucky and it is clear that had the positions been reversed the seller’s solicitors would not have escaped liability. The Judgment contains some useful guidance of the type of checks that a competent solicitor should undertake and it is clear that using a TV licence as proof of address is not acceptable.
Interestingly, the more important issue which arises from this case, is the one relating to implied authority and on how this only covers the release of completion funds when there is a ‘genuine’ completion.
I would suggest that retainers should be reviewed and an express authority added which makes it clear that the buyer client is giving authority to you to release funds received from the client on the basis that you as the buyer’ solicitor are unable to guarantee that the seller is in fact the registered proprietor. You would add to ensure the term could be viewed as fair that you will do everything expected to identify fraud and to alert the client of any concerns before any funds are released.
This is an interesting case and its a pity that the significance of the decision has in certain quarters been misunderstood.
David Pett
Solicitor and Conveyancer at MJP Conveyancing Limited
