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Property Section

Who pays for a property fraud? Determining liability post P&P and Dreamvar

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Jennifer Meech outlines the facts of the recent high profile Dreamvar and P&P appeals

When a fraud is committed, in any context, it is common for the fraudster to disappear immediately after the transaction. They take the money and run. In those circumstances, the defrauded party must either bear the loss caused by the fraud or find someone else against whom a cause of action can be brought.

In a property purchase, if the person pretending to be the vendor is not in fact that person, the purchaser will have paid over money and not received a property in return. The contract between the parties is void and the purchaser is entitled to have their money back from the vendor – but if that is not possible, what can they do? Do they have a cause of action against the purported vendor’s solicitors? On what basis? Might they have a claim against their own solicitors?

The case

The Court of Appeal heard the combined appeals of P&P Property Ltd v Owen White(P&P) and Catlin LLP and Dreamvar (UK) Limited v Mishcon de Reya (Dreamvar) [2018] EWCA Civ 1082 in February and March 2018, and gave judgment in May.

Both P&P and Dreamvar (in unrelated but similar transactions) believed that they was purchasing a registered freehold for around £1m. In each case, both parties to the transaction were represented by solicitors who agreed that the sale would proceed using the Law Society Code for Completion by Post (2011) (the Code). The purchaser (or their lender) paid money to their solicitors, and their solicitor paid that money to the vendor’s solicitors, who then paid it on to their client.

In fact, the firms who purported to act on behalf of the seller – and believed that they were – Owen White & Caitlin LLP (OWC) in the P&P case and Mary Monson Solicitors (MMS) in the Dreamvar case, had in fact been contacted and instructed by an unknown fraudster. They failed to identify this during their mandatory money laundering checks. The errors were discovered in each case by Land Registry, by which time the fraudster had disappeared with the money.

Both purchasers brought proceedings against the vendor’s solicitors for breach of a warranty of authority (P&P also claimed this against the vendor’s estate agent), breach of trust, and breach of an undertaking. P&P additionally claimed against OWC in negligence. Dreamvar claimed against Mishcon de Reya (MdR) (their own solicitors) for breach of trust. In relation to the breach of trust claims, all defendants sought relief under section 61 of the Trustee Act 1925.

All of P&P’s claims were dismissed by Mr David Railton QC (sitting as a High Court Judge). Mr Robin Dicker QC (sitting as a High Court Judge) dismissed all of Dreamvar’s claims. The two purchasers appealed all findings, except that Dreamvar did not appeal the rejection of its breach of warranty of authority claim. MdR supported Dreamvar in its appeal in relation to the claim against MMS.

Lord Justice Patten gave the leading judgment. Lord Justice Floyd agreed with him, as did Lady Justice Gloster, save for on one point which is considered below.

Breach of warranty of authority 

An agent who states that they act on behalf of a principal to a third party warrants to that third party that they have authority to so act. If the third party relies on that warranty to their detriment, the agent will be liable under that warranty.

The dispute here was whether OWC’s warranty was simply that they acted on behalf of the person who was instructing them, or whether the warranty went further and guaranteed that they acted on behalf of the real owner of the land. The judge at first instance decided that the more limited warranty had been given.

There was no authority on the point. Lord Justice Patten considered cases that might be of relevance, and then concluded that what warranty was being given was in fact a question of construction. In this case, a solicitor at OWC had signed the sale contract ‘on behalf of the seller’, which was defined in the contract which required the seller to transfer ‘the Property’. Lord Justice Patten held that this signature, within the context in which it was given, could only be construed as the broader warranty.

However, he additionally held that it was central to the cause of action that the warranty of authority had been relied upon, and the judge’s finding that there had been no reliance (which he determined in the alternative to his primary conclusion that the warranty was limited) was one which was open to him on the evidence, and could not, therefore, be overturned on appeal.

Breach of trust

When money is held by a solicitor in a client account, it is held on trust for their client. It can only be properly paid out in accordance with that client’s instructions.

In these cases, the apparent sale contract was a nullity, and therefore there had been no obligation on the purchaser to pay over money. It was for that reason that MdR admitted breach of trust in paying over the money to MMS.

The questions before the Court of Appeal were whether, once the monies had been paid over by the purchaser’s solicitors, (1) the vendor’s solicitor held it on trust for the purchaser, and (2) the vendor’s solicitor has the purchaser’s authority to pay that money out, even when there is no valid contract for sale. This requires a construction of the Code.

The judges at first instance determined that they would have held the solicitors in breach of trust, save for paragraph 3 of the Code, which provided that the seller’s solicitor is not required ‘to investigate or take responsibility for any breach of the seller’s contractual obligations’.

Lord Justice Patten disagreed with this analysis, stating that paragraph 3 did not allow a vendor’s solicitor to pay out money, other than in relation to completion of a genuine sale. There was nothing to complete, so there was no authority to pay out on completion.

All defendants (including MdR) had sought relief under section 61 of the Trustee Act 1925. This section gives the court discretion to relieve defendants of liability even when they have found to be in breach of trust. At first instance, the issue did not need to be determined, but Robin Dicker QC (in the Dreamvar case) stated that if he had found MMS liable for breach of trust, he would have given MdR relief. In the Court of Appeal, Lord Justices Patten and Floyd decided that MdR should not be granted relief, as the mere fact that someone else was liable did not make them any less culpable: what it meant was that they had a claim for a contribution against MMS. Lady Justice Gloster dissented on this point; she believed that MdR should be relieved of liability.

Breach of undertaking

Under paragraph 7 of the Code, the vendor’s solicitor undertakes to have the seller’s authority to complete the agreement. Lord Justice Patten (contrary to the judges below) determined that this was an undertaking that the solicitor had the genuine seller’s authority. The appeals were allowed on this ground.

Negligence

Lord Justice Patten declined to extend the categories in which a solicitor can be held liable in negligence to a person who is not its client. The appeal on this ground were dismissed.

Commentary

Lord Justice Patten emphasised throughout his judgment that many of the questions he was asked to determine were questions of construction of documents. This decision is therefore likely to be of particular relevance to transactional lawyers.

Of relevance to litigation lawyers is the finding that reliance on a warranty of authority is a central part of the cause of action, and evidence on this point must be adduced in order for the claim to succeed.

This decision includes several new points of law, and is sufficiently recent that it is not yet clear whether an appeal to the Supreme Court will be made.

The Law Society responded to the Court of Appeal judgment and is looking at how to reflect it in the work to update the Code and associated documents, which is currently underway.

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