The Dreamvar Appeal: A Conveyancer’s Nightmare
This week the trainee solicitor blog team caught up with Jack Davies, who is currently sitting with the Property Dispute Resolution team. Jack has written about the recent Court of Appeal judgement affecting the property and insurance sectors.
On 15 May 2018, following its judgment in the two conjoined cases of P&P v Owen White and Dreamvar v Mishcon de Reya (2018) EWCA Civ 1082, the Court of Appeal has sent shockwaves in both the property and insurance markets, leaving major questions unanswered in relation to liability for property fraud.
The facts in the two conjoined cases on appeal were broadly similar. In each case, (i) the buyer was genuine and instructed solicitors to buy a residential property, (ii) a fraudster purported to be the genuine owner/seller and instructed solicitors to handle the sale, (iii) the buyer’s solicitors sent the completion monies to the seller’s solicitor who then forwarded those monies to the fraudster seller and (iv) the fraudster fled with the cash while the true owner was oblivious throughout.
In the Dreamvar case, Dreamvar as buyer sued its solicitors, Mishcon de Reya (MDR), for negligence (in contract and tort) and for breach of trust. Dreamvar also sued the seller’s solicitors, Mary Monson Solicitors (MMS), in negligence, for breach of warranty and for breach of trust. The High Court rejected negligence claims against MDR, and all claims against MMS, but found MDR liable for breach of trust in paying away the purchase monies as there was no genuine completion as the sale contract was a nullity. The High Court then ordered MDR to pay Dreamvar £1,080,200 plus interest (being the purchase price paid, less the commission charged by the estate agent), mainly because MDR was best insured to deal with the shortfall.
In P & P conversely, the buyer sued the imposter’s solicitors for breach of warranty of authority, negligence, breach of trust and breach of undertaking. It also claimed that the estate agent was liable for breach of warranty of authority and negligence, having marketed the property. The High Court dismissed all these claims.
The Court of Appeal Decision
The Court of Appeal reversed the High Court decision on a number of issues:
(a) Breach of Warranty of Authority
Having spent considerable time traversing the law, the court reversed the High Court decision and found that when the Seller’s solicitor signed the Sale Contract on behalf of the seller, she was warranting that she acted for the true owner of the Property. No liability was found however as MDR had given witness evidence that they had not relied on this warranty.
(b) Breach of duty
The Court of Appeal upheld the High Court decision in that that the seller’s solicitor does not owe a duty of care to the purchaser to competently carry out its money laundering checks. An assumption of responsibility could potentially arise depending on the facts but where the buyer had its own solicitors, it would not be fair to impose a duty.
(c) Breach of undertaking
The question here was whether the seller’s solicitor had undertaken that he had authority of the fraudster or the genuine registered owner. The Court of Appeal held that on a proper interpretation of The Law Society Code for Completion by Post 2011, the seller’s solicitor was in breach of undertaking. Their reasoning being that the only person who could give that authority for the purposes of completion of a genuine sale would be the true owner of the property.
(d) Breach of Trust
It was not disputed that when releasing c
ompletion monies MDR were in breach of trust. MDR held the completion monies on trust and it was an implied term of the retainer to release monies for a genuine completion only. However, the main issue on both appeals was whether or not the seller’s solicitor was in breach of trust. The Court of Appeal analysed the Law Society Code for Completion by Post 2011 and concluded that the seller’s solicitor was in breach of trust when they paid away the monies that they had received from a purported completion to their fraudster client.
(e) S61 Trustee Act 1925
The most surprising aspect of the Court of Appeal decision involved the effect of section 61 under the Trustee Act 1925. The operation of the Act allows the court to relieve a trustee for breach of trust if they acted honestly and reasonably and ought to be fairly excused for the breach. However, the Court of Appeal refused to grant such relief to MDR. In other words, although MDR did nothing wrong, it must suffer the consequences of a fraud perpetrated by an imposter client of an opposing solicitor. While MDR remains liable to its buyer client for its shortfall, MDR can seek contribution from MMS on a Civil Liability (Contribution) Act claim basis.
The ramifications of this decision will need to be worked through. The key message is that the failure to carry out due diligence checks on behalf of the seller will have potential liabilities to the purchaser as breaches of warranty of authority, trust or undertaking. Conveyancers and insurers will have to approach each transaction carefully, particularly watching out for high-risk transactions. Each case will also differ depending on the terms of the client retainer, the contractual promise made between parties and their solicitors and the conveyancing mechanics adopted The Law Society had intervened in the appeal from the High Court given the importance of the case. They have since published a statement that they will consider the Court of Appeal ruling which would suggest that a Supreme Court appeal is more than likely.