UK: Court Of Appeal Dreamvar And P&P

Last Updated: 28 June 2018
Article by Timothy Constable and Sonia Ferreira

When a villain impersonates a property owner and runs off with the purchase money, which honest party should be liable for the loss: the true owner of the property, the seller's solicitor, the estate agent, the buyer's solicitor or the buyer?

This was the question for the Court of Appeal in the long-awaited decision of Dreamvar (UK) Limited v. (1) Mishcon de Reya and (2) Mary Monson solicitors and P&P Properties Limited v. Owen White and Caitlin.

The answer is, in short, that solicitors acting for both the buyer and the seller may be liable, but not the true owner, the buyer or the estate agent. While the outcome of the judgment may be straightforward to understand, the fallout arising from it may prove to be more problematic.

Facts

Both cases involved innocent parties who thought they had purchased properties in circumstances where a solicitor purported to act for the genuine owner. However, after the contractual completion date, but before registration of the transfer at the Land Registry, it transpired that the sellers were fraudsters who had disappeared with the money. Cumulatively, the purchasers, both small family companies, lost in excess of £2 million and unfortunately received no asset in return.

First instance

In the first claim, Dreamvar, the buyer issued claims against:

  • the seller's solicitor, Mary Monson, for breach of trust, breach of undertaking (as stipulated by the Law Society's Code for Completion by Post (the Code)), breach of warranty of authority and also negligence (which Dreamvar sought to be added on appeal); and
  • its own solicitor, Mishcon, for negligence and breach of trust.

All the claims against the seller's solicitor failed. Mishcon were held not to be negligent, but were held in breach of trust. Despite Mishcon having acted honestly and reasonably, the High Court refused to grant relief from its breach (under section 61 of the Trustee Act 1925) on the basis that it was in a better position to absorb the loss as it had insurance.

In the second claim, P&P, the buyer issued claims against:

  • the seller's solicitor, Owen White, for breach of warranty of authority, negligence, breach of trust and breach of undertaking; and
  • the estate agent, Winkworth, for breach of warranty of authority and negligence.

All claims against both defendants failed.

Court of Appeal

Dreamvar appealed the finding that Mishcon was not negligent and Mishcon appealed the section 61 finding.

P&P appealed the judgment on all the issues. Winkworth, the estate agent, successfully resisted the appeal for reasons which are beyond the scope of this article.

The key elements of the decision are as follows:

Buyer's solicitor

The Court of Appeal reaffirmed what is now well-established law which is that the buyer's solicitor hold purchase monies on trust for the buyer until there is a genuine completion. In a fraudulent purchase transaction there is no genuine completion because the contract is a nullity. Therefore, the buyer's solicitor are in breach of trust when purchase monies are paid away to the fraudster.

Unsurprisingly in Dreamvar, Mishcon, which was arguably as much an innocent victim of the fraud as its client, applied for section 61 relief. Section 61 states that where a trustee "has acted honestly and reasonably and ought fairly to be excused for the breach of trust...then the Court may relieve him either wholly or partly from personal liability of the same".

Mishcon, however, was not granted relief, even though it was found to have acted honestly and reasonably. The following factors were taken into account by the High Court and Court of Appeal in making this decision:

  • with or without insurance, Mishcon was in a better position to absorb the loss;
  • Dreamvar is a small company;
  • Dreamvar lost over £1 million;
  • Dreamvar had no insurance against fraud;
  • Dreamvar was left with creditors in respect of the purchase monies; and
  • Mishcon was in a better position to give Dreamvar protection from fraud, even though it was not negligent in not doing so.

Gloster LJ dissented on the basis that the primary responsibility for failing to identify the fraud should have rested with the seller's solicitor, Mary Monson, who were also in breach of trust, rather than the buyer's solicitor. This was also the view of the judge, Mr David Railton QC, in the first instance decision, but he had not found that the seller's solicitor, Mary Monson, were in breach of trust.

However, the majority also found that the distribution of liability should be determined by contribution proceedings. It may be that Mishcon obtains a substantial contribution from the seller's solicitor, given the latter's failures to comply with its anti-money laundering obligations. The outcome of that claim is awaited with interest.

As to the issue of negligence, the Court of Appeal decided that there is no general duty on the buyer's solicitor to advise clients on the potential risk of identity fraud. Such a duty would only arise if there are red flag factors putting the buyer's solicitor on notice of an enhanced risk, of which there were none in Dreamvar. Further, there is no duty on the buyer's solicitor to obtain an undertaking from the seller's solicitor that they act for the true owner of the property. The buyer's solicitor are entitled to assume that the seller's solicitor have competently undertaken the money laundering checks, even though in Dreamvar, for example, the seller's solicitor had not carried out sufficient due diligence. The buyer's solicitor would not have been aware of this. The buyer's solicitor should, however, bear in mind that, following the earlier first instance decision in Purrunsing, if they do ask for evidence of identity they should give careful consideration to the actual answer given to ascertain whether it is sufficient.

Seller's solicitor

The judgment contains three important adverse changes to the position of the seller's solicitor.

First, breach of trust. It was previously determined in both P&P and Dreamvar that the seller's solicitor were not in breach of trust. This is because, under paragraph 3 of the Code, the seller's solicitor do not take responsibility for any breach of the actual seller's contractual obligations. Any assertion that the seller's solicitor are in breach of trust if there is not a genuine completion because the seller is not the true owner would be inconsistent with paragraph 3. However, the Court of Appeal disagreed, finding that the seller's solicitor hold the purchase monies on a bare trust for the buyer pending a genuine completion. Accordingly, it is now possible for a claim to be made against the seller's solicitor for breach of trust. In Dreamvar, Mary Monson did not make an application for section 61 relief, which is unsurprising given that the High Court had already determined that Mary Monson had acted unreasonably in failing to undertake satisfactory due diligence on their client.

Second, breach of undertaking. Paragraph 7(i) of the Code states: "The seller's solicitor undertakes: (i) to have the seller's authority to receive the purchase money on completion...". In the first instance decisions it was held that the seller's solicitor undertake that they represent someone identifying themselves as the true owner of the property, not necessarily the actual registered proprietor. The Court of Appeal disagreed and found that the seller's solicitor do, in fact, undertake that they represent the true owner of the property as they identify their client in the contract as the real owner.

Third, breach of warranty of authority. It was held that the seller's solicitor also warrant that they act for the genuine owner. But, on the facts of both P&P and Dreamvar the claims for breach of warranty of authority failed because it was found that there was no material reliance by the buyers on that warranty by the buyer's solicitor.

As to negligence, one unsurprising aspect of the judgment was to affirm that the seller's solicitor do not owe duties to the buyer to carry out proper due diligence on their client; there is no voluntary assumption of responsibility. Further, there were no aspects in the transactions which created a relevant assumption of responsibility and/or which made it reasonable for the buyers to rely on the seller's solicitor acting reasonably when carrying out the due diligence. Therefore, no claim in negligence against the seller's solicitor can be brought by a buyer.

Conclusion

Overall, the position of the seller's solicitor is now materially worse than had been previously. In these circumstances, the seller's solicitor will likely face a claim for breach of trust and, given that something must naturally have gone wrong with the client due diligence process, since the client is an imposter, section 61 relief may be difficult to obtain.

Moreover, there is now a claim for breach of the seller's solicitor's undertaking under paragraph 7(i) of the Code. And since this is a breach of an undertaking, it is likely that such claims may be disposed of on a summary determination.

Consequently, this judgment has been greeted with some consternation by conveyancers. We expect to see letters from buyers stating that they are relying on the seller's solicitor's warranty that the seller is genuine. There are also likely to be attempts by the seller's solicitor to remove paragraph 7(i) of the Code in any future transaction. In any event, the Law Society is also undertaking a review of the Code given the implications of this decision. Further, there are a number of new insurance products on the market to cover against imposter fraud (although practitioners should scrutinise the policy terms carefully).

Put simply, all of this trouble can be avoided, of course, if the seller's solicitor do not act for imposters in the first place. In both Dreamvar and P&P, the seller's solicitor were found not to have undertaken satisfactory client due diligence.

Will there be an appeal? The initial reaction was that an appeal would be inevitable, but this may not be the case. The obvious appeal would be by Mishcon on the section 61 relief point – the argument being that section 61 has been emasculated to the point of irrelevance. But Mishcon was given the benefit of a contribution claim against Mary Monson and any appeal on section 61 would more than likely result in a cross-appeal on the other aspects of the judgment which, if held against the solicitor, would likely create more problems for insurers than is currently the case. So it may be that this case will remain the ultimate authority on liability for imposter fraud for years to come – that is until another suitable case comes along.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions