Solicitors acting for the buyer of a property purportedly ‘sold’ by an imposter were liable for the losses suffered by their client, the Court of Appeal has ruled by a majority in the long-awaited decision in Dreamvar.
However, in granting the appeal in part, the court also found the seller’s solicitors liable, meaning that the other solicitors could sue them for a contribution.
But it means that solicitors are the effective guarantors that a property transaction is genuine.
The court was ruling in Dreamvar (UK) Ltd v Mishcon de Reya and the linked claim in P&P Property Ltd v Owen White and Catlin LLP. The Law Society intervened in the cases.
In both, the money was lost. The buyers, Dreamvar and P&P, sued the imposter’s solicitor and estate agent, while Dreamvar also sued their own solicitor. At trial, both cases failed against the imposter’s solicitors – Mary Monson Solicitors (MMS) in Dreamvar and Owen White & Catlin – and the estate agents.
MMS and OWC contended that Law Society Code for Completion by Post provided them with the necessary authority to hold and release the money to their client free of any liability to the purchaser.
However, despite not having done anything wrong, Dreamvar’s solicitors – Mishcon de Reya (MdR) – were not given relief from liability under section 61 of the Trustee Act for their breach of trust in paying out the money and were ordered to pay £1m.
In a crucial passage, the High Court said: “It is common ground that [MdR] is insured for events such as this, and that its insurance cover is sufficient to cover in full the loss suffered, should it not be excused from liability. In terms of balancing the relative effects or consequences of the breach of trust, it is apparent that MdR (with or without insurance) is far better able to meet or absorb it than Dreamvar.
“While, as I have held, it was not unreasonable for MdR not to have advised Dreamvar about the risk of fraud, or to have sought greater protection for Dreamvar against that risk (such as further undertakings), it is also not irrelevant that MdR was necessarily far better placed to consider, and as far as possible achieve (a matter not in the event tested), greater protection for Dreamvar against the risk which in fact occurred.
“As I have already found, Dreamvar has no recourse against MMS, and (it appears) no practical likelihood of either tracing or making any recovery from the fraudster. As a result, the only practical remedy it has is against MdR.
“For these reasons, I conclude that MdR ought not fairly to be excused for the breach of trust, and that I should in any event, in my discretion, decline the relief sought.” I would however add that if, contrary to my conclusions above, MMS were liable to Dreamvar, I would have exercised my discretion to relieve MdR of its liability for breach of trust to the extent of the liability found against MMS.”
On the core issue of breach of trust, Lord Justice Patten – with whom Lord Justice Floyd agreed – overturned the lower courts by finding that the sellers’ solicitors were in breach of trust because there was not a “genuine completion”.
“The result in my view is that both OWC and MMS acted in breach of trust when they released the purchase monies to or at the direction of their clients.”
The Law Society code could not be construed as releasing or excluding any liability for breach of trust, “still less as giving him authority to release the purchase monies in the absence of a genuine completion of the sale”.
In both cases, the judge at first instance said they would have refused section 61 relief for the seller’s solicitor had they found them in breach of trust, and in Dreamvar the judge said he would have granted MdR relief in such circumstances.
OWC sought relief, but Patten LJ said that, given its failures to carry out proper due diligence into the client, there was no reason to grant it.
But this did not mean that MdR would be given relief, he said: “The judge was entitled to take all these factors into account in exercising his discretion and in my view his conclusion is unimpeachable.
“But his indication that he would have excused MdR in the event that MMS is also liable to the purchaser for breach of trust is, with respect to the judge, difficult to follow.
“Although such a finding of liability gives Dreamvar another means of recovering its money, it does not provide MdR with any grounds for being relieved of its own liability.
“The assessment of the reasonableness of its conduct and the inequality of position between it and its former client remain the same. [Counsel for Dreamvar] is right in my view to submit that any distribution of liability should be achieved through contribution proceedings and not by the exculpation of MdR under section 61.”
Dissenting on this issue alone, Lady Justice Gloster said she would have given MdR relief under section 61, noting that the High Court had found MdR acted reasonably and that it was clear that the fault lay primarily with MMS.
“I see no reason to go behind the judge’s contingent conclusion as to how he would have exercised his discretion, had the correct analysis been as we have indeed found it to be; namely that MMS were in breach of trust and were liable for breach of their undertaking.
“I do not consider that the fact that MdR is insured should in the circumstances of this case lead to the conclusion that MdR should bear financial responsibility for Dreamvar’s loss.
“Dreamvar was entering into what was for it a relatively substantial property development as a business transaction. I do not consider that the court’s sympathy should be with one commercial party (in reality with its loan creditors, given its insolvency) rather than another, simply because one, and not the other, has insurance.
“It is irrelevant, in my view, that Dreamvar was a newly formed company or that its beneficial owner was a young man.”
Further, there was no suggestion that MMS’s insurance would not be adequate to cover the loss, while “I see no reason why these proceedings should be prolonged by yet further contribution proceedings as between MMS and MdR”.
A statement from Mills & Reeve, which acted for the successful estate agents, said: “It is disappointing, given the wide potential effect of the decision, that the court did not give any real guidance about what solicitors can do to avoid their liability, and that the court was unwilling to excuse a breach of trust under section 61 of the Trustee Act 1925 when the solicitor in question had performed their role perfectly.
“The decision will have potentially significant effects on solicitors’ own insurance arrangements and it will inevitably lead to practical difficulties during the course of conveyances as buyers’ and sellers’ solicitors each try to pass liability onto the other.
“It can only be hoped that, pending any appeal, the Law Society and the Council for Licensed Conveyancers provide urgent guidance about how conveyancers should proceed in light of the decision.
“However, it may be that the real solution is for the insurance market to develop identity theft cover for transactions which can sit aside other policies such as defective title indemnity policies.”
Jerome O’Sullivan, partner at law firm Healys, who acted for Dreamvar, said: “This case has significant implications for all solicitors dealing with property transactions, their insurers, and all matters where funds are held on client account in relation to any other transactions, such as company acquisitions. It is good news for buyers who are victims of identity fraud.
“If the original judgment had been upheld it would mean that, even if a seller’s solicitor was grossly negligent, they would still have no liability to the defrauded purchaser.
“In contrast, the purchaser’s solicitor was left likely to be held solely liable for breach of trust, even if they had not been negligent.”