On 15 May 2018, the Court of Appeal handed down judgment for two cases, heard together, relating to house sales involving fraudulent sellers. The cases of Dreamvar (UK) Limited v Mishcon de Reya and P&P Property Ltd v Owen White & Catlin LLP  EWCA Civ 1082 both dealt with claims by house buyers whose solicitors paid over monies to sellers’ solicitors for completion of a house purchase, which in fact turned out to be scams perpetrated by fraudsters who subsequently escaped with the buyers’ money.
High Court Decisions
In both cases the sellers’ solicitors were duped by fraudsters who provided faked documentation, purporting to be the real owners. In P&P the buyer did not claim against their own solicitor, rather claiming loss as against the seller’s solicitor who failed to identify the fraud. In the Dreamvar case the buyer pursued both their solicitor and the seller’s solicitor. Whilst the High Court dismissed any claims against the sellers’ solicitor in both cases, in Dreamvar they held that the buyer’s solicitor acted in breach of trust by transferring monies to the seller’s solicitor despite the fact that the buyer’s solicitor had acted honestly and reasonably, with no knowledge of the fraud.
Court of Appeal Decision
This seemingly unfair result caused concern amongst practitioners as it imposed liability on a buyer’s solicitor in the situation of a fraudulent seller. This led to the Law Society joining as an interested party when the cases were heard by the Court of Appeal, with the main issues at appeal centering around the sellers’ solicitors’ liability for negligence, breach of undertaking and breach of trust.
In Dreamvar, despite failing to carry out sufficient client checks on the seller and ignoring various red flags, the Court of Appeal held that the seller’s solicitor owed no duty of care to the innocent buyer and so were not liable for negligence.
However, in both cases, the Court of Appeal did find that the sellers’ solicitors had acted in breach of trust and breach of undertaking when the fraudulent transaction was completed. It was held that when the sellers’ solicitors used the Law Society Code for Completion by Post the words “completion” and “seller” meant a ‘genuine’ completion and the ‘real’ seller. Therefore, as the transaction was a fraud, the act of sending and releasing monies was a breach of trust on the part of both the sellers’ and buyers’ solicitors. The important thing to note is that the breach of trust took place notwithstanding the conduct of either the sellers’ solicitors or buyers’ solicitors.
The decision by the Court of Appeal reversed the unbalanced approach taken by the High Court and has made it clear that when there is a fraudulent sale, liability for the buyer’s loss will most likely be imposed on both the buyer’s solicitors and the seller’s solicitors, regardless of any fault on the part of the solicitors involved.
For breach of trust claims, the court does have discretion to excuse the trustee under Section 61 of the Trustee Act 1925 if the trustee acted honestly and reasonably, however, it will also have to be “fair” for the trustee to claim an exclusion. In both cases, the Court of Appeal decided against exercising its discretion under s61 in favour of the solicitors and made it clear that in a situation where the court has to decide whether liability for loss has to fall on an innocent buyer or solicitors backed by insurance, an exclusion under s61 is unlikely to be “fair” and will likely not be granted.
This decision will be welcomed by home-buyers as it effectively offers them insurance (through the insurance of the solicitors involved) against losing their money as a result of fraud. Conversely, the burden on conveyancers and solicitors (and their insurance premiums) has extended beyond having to protect themselves against negligence claims relating to inadequate identity and money laundering checks, with practitioners now facing potential liability to buyers and sellers alike if they are caught up in a fraudulent transaction, regardless of their conduct.
Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.
For further information, please contact Paul Jagger