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Conveyancers beware!

16 July 18

The Court of Appeal ruling in Dreamvar, which imposed liability on both parties’ solicitors for a fraud committed by one party, the implications, and mitigating actions conveyancers might consider

by Gail Cook

The High Court Decision in late 2016 in Dreamvar (UK) Ltd v Mishcon de Reya [2016] EWHC 3316 (Ch) sent ripples around the conveyancing fraternity in England & Wales. That decision, together with a similar case P&P Property Ltd v Owen White & Catlin LLP [2016] EWHC 2276 (Ch), was appealed and the Court of Appeal ruling handed down on 15 May 2018 ([2018] EWCA Civ 1082), while upholding some parts of the appeal, did little to provide any further comfort for solicitors. 

Breach of trust

The question being asked was, who should bear the risk of loss when a fraudster looks to sell a property which they purported to own? For the purposes of this article we will use the Dreamvar case as our example. 

Dreamvar was a property development company duped into buying a London property from fraudsters posing as the true owners of the property. It was represented by Mishcon de Reya (MdR) and the fraudulent vendors were represented by Mary Monson Solicitors (MMS). The fraud came to light when staff at the Land Registry decided to undertake a check of the identity documents obtained by MMS. Their investigations showed that the individuals who had engaged MMS were in fact fraudsters. Dreamvar had paid over £1.1 million in a transaction where there was no genuine completion and where the fraudsters then made off with the money.

Dreamvar brought a case against MdR and MMS asserting various causes of action. In short, in late 2016, the High Court ruled that MdR should bear the £1 million-plus losses of its client. MdR was found to be in breach of trust on the basis that it was an implied term of the retainer that MdR would only release monies for a genuine completion (which of course this was not). MdR was refused relief from liability despite the fact that it was established that it had acted honestly and fairly. 

A similar breach of trust allegation against MMS was dismissed. Further, whilst MMS admitted that its proof of identity procedures were not carried out competently, it was not deemed to owe a duty of care to MdR or to Dreamvar arising from these vetting processes. Thus the purchaser’s solicitors were held to be solely liable – a decision which did not sit comfortably with many, including the Law Society of England & Wales who, after the initial judgment, sought leave to intervene in the case. 

On appeal, the breach of trust claim against MdR was upheld, but the original decision that MMS was not in breach of trust was overturned by Lord Justice Patten in the leading judgment, and so liability is to be shared between MdR and MMS – proportions as yet to be determined. 

In P&P, similarly the decision at appeal found that the vendor’s solicitors were also in breach of trust, in the same way as MMS. 

Implications for Scotland?

In essence, the ruling means that conveyancing solicitors could effectively be in the position of being held as guarantors as to the genuine nature of a property transaction. It is very concerning that a solicitor acting for an innocent client can be found to be in breach of fiduciary duty, having arguably been as much of an innocent victim of the fraud as their client. Equally, the case makes clear that neither purchasers nor their solicitors can rely on the standard of identity checks made by the vendor’s solicitors. 

While the Court of Appeal decision will not be authoritative in the Scottish jurisdiction, it undoubtedly provides guidance and it is likely that the Scottish courts will provide further clarification on the subject in due course. The decision in this case was very fact-specific, and pursuers’ agents will have to tread carefully when seeking to rely on this judgment. However, we expect, over time, to see some repercussions in both Scotland and England.

In Scotland, we have seen a handful of matters displaying some subtle differences in how the claims have been presented, with some arguments that are not that typical in claims of this nature. Time will tell how these matters will play out, but we must remember that the biggest impact of a breach of trust claim is that such breaches entail strict liability and so the usual defence arguments which may be deployed around contributory negligence would not apply.

Risk mitigation

A question for all firms, whether acting for the purchaser or vendor, is: how do we manage an exposure over which we have potentially no control?

Due to the changing and sophisticated nature of some fraudsters’ methods, no risk mitigation steps are foolproof, but we advise firms on either side of a transaction to consider taking some of the following steps, depending on their role in the transaction:

• Check the identity of parties to a transaction carefully. This should include electronic identity checks. It should also include checks to verify the seller’s ownership of the property. This could include asking for details of the solicitors they used for the purchase of the property, and the date of purchase – as these facts can be verified, and may trip up a fraudster. As the purchaser’s solicitor, you may wish to ask for documentary evidence that assists in confirming the seller’s rights in the property (such as a stamp duty land tax return which only the real owner could produce).

• Use a robust client and transaction vetting process, including internal referral, and keep a record on file. Any high risk transactions should be flagged to a senior partner or a risk and compliance partner. “High risk” would include properties with any resale within six months of a purchase, or where the correspondence address of the seller is not the same as that shown on the property title.

• Ask for confirmation as to how and what processes were used to verify the seller’s identity (if you are acting for the purchaser). You may wish to request formal evidence of the seller’s property ownership (request a document that only the real owner is likely to be able to produce). 

As the firm acting for the purchaser you may consider carrying out some of your own limited identity checks on the vendor.

Or you may want to make it clear that the purchaser relies on the vendor’s solicitor’s warranty that it acts for the true owner – the lack of reliance in Dreamvar meant that the breach of warranty allegation failed.

• Advise your purchaser client of the potential risks, and of any requests for information to which you have not received a (satisfactory) response.

All of these pointers may help avoid claims for the firms and, if a fraudulent transaction does transpire, may assist greatly in determining the proportionate allocation of liability. 

Gail Cook is a client executive within Lockton’s Master Policy team. She has 30 years’ experience in the field of professions underwriting and risk management and is the main Lockton contact for risk management matters. She can be reached on 0131 345 5571 or gail.cook@uk.lockton.com

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