In what is being hailed as a significant victory for conveyancers, a law firm and estate agency have defeated a claim brought against them after it turned out that the seller they acted for was a fraudster.
The fraud only came to light when the real owner walked past his property and saw builders ripping out the kitchen.
In P&P Property Ltd v (1) Owen White & Catlin (2) Crownvent Ltd t/a Winkworth, Robin Dicker QC, sitting as a deputy High Court judge, ruled last week that while solicitors’ checks were designed to reduce the risk of fraud, they could not reasonably be thought to eliminate it.
That meant the implied warranty of authority did not mean the seller’s solicitors had to establish that their client, a Mr Harper, was the true Mr Harper.
According to a briefing issued by solicitors BLM, who acted for the defendant law firm Owen White & Catlin (OWC) – a practice with seven offices in London and the south-east – the imposter posing as Mr Harper, the owner of a residential property in Hammersmith, instructed estate agents Winkworth to market the property for sale and OWC to act for him as seller.
He said he was living in Dubai and he needed a speedy sale to complete the purchase of a property in Dubai. OWC met Mr Harper and carried out the usual checks required to check his identity. A deal was agreed between Mr Harper and P&P Property for the sale of the property, which was unoccupied and free of any charges, at £1.03m.
Contracts were exchanged with a deposit of £103,000 paid. The purchase was completed with the balance of £927,000 being transferred to OWC. The net sale proceeds were then transferred to Mr Harper’s account in Dubai the same day. By the time the true Mr Harper turned up at the property, both the fake Mr Harper and all the money were long gone.
P&P pursued claims against OWC and Winkworth for breach of warranty of authority and breach of a duty of care. As they paid the money away to Mr Harper a claim was also pursued against OWC in breach of trust.
On the warranty of authority, the judge found that the basic representation was only that the solicitor as agent has authority to act for another. The agent does not simply by acting as such make any other representation about the principal’s attributes or characteristics.
BLM said: “If a warranty was given that the client is the registered proprietor, solicitors in conveyancing would effectively be guaranteeing that their client was the registered title holder and would be strictly liable if they were not. This was not the position as generally understood amongst conveyancing solicitors. Such an implication is also difficult to reconcile with the detailed rights and obligations in the Law Society Code for Completion by Post (2011).
“The court has to be cautious about holding a professional person to have undertaken an unqualified obligation in the absence of special facts or clear words to that effect. Having considered the exact sequence of events and discussed the authorities, the judge was satisfied that any warranty given by OWC extended no further than that OWC had authority to act on behalf of its client.”
The judge also found that Winkworths was not in breach of warranty of authority, but commented that there was nothing in principle to prevent such a claim.
Mr Dicker went on to reject the contention that OWC owed the purchaser a duty of care to take reasonable care to ascertain the true identity of Mr Harper should be imposed. He found no special circumstances resulting in OWC having accepted responsibility to do this or to ensure that he was the true owner.
Similarly Winkworth had not “crossed the line” such that a responsibility to P&P, who was not its client, had been assumed.
On the alleged breach of trust, BLM said the judge found that under paragraph 3 of the code, a seller’s solicitor was not required to investigate or take responsibility for any breach of the seller’s contractual obligations. This being so, if a seller’s solicitor was liable for breach of trust because no genuine completion occurs, it would involve the seller’s solicitor effectively taking responsibility for what paragraph 3 of the code said he was not.
“In the light of the guidance in the authorities, the judge found that it would be wrong to construe the code as giving right to a breach of trust if as a result it required seller’s solicitors to give an effective guarantee of title. Accordingly the claim in breach of trust failed.”
The judge distinguished the case from the ruling earlier this year in Purrunsing, which found both the buyer’s and the seller’s solicitors equally liable in breach of trust to a buyer who was the victim of a property fraud. That case had been concerned with an earlier version of the code with different wording.
BLM said: “In the light of this judgment, solicitors for buyers might seek to protect their clients by carrying out enquiries about the right of the seller to sell. The judge noted that in P&P, it was open to the buyer’s solicitors to have sought undertakings that the seller’s solicitor would only release monies to their client on confirmation that they had carried out due diligence, but did not do so.
“The checks that are routinely carried out by solicitors on the identity of the client are designed to reduce the risk of fraud – it’s not possible to eliminate it entirely. Those checks should be carried out scrupulously as the consequences can be severe. And perhaps it would be a brave seller’s solicitor who gave any sort of undertaking concerning his client due diligence in the light of that.
“Whilst there must be sympathy for the position that P&P finds itself in, to have found for it in its claim against OWC would have been to put a vendor’s solicitor in the position of effectively guaranteeing their client was the true owner and that he had title – that just can’t be right.”
Another briefing on the case, this time from Winkworths’ solicitors, Mills & Reeve, said the problem in situations such as occurred here was that the immediate victim, the purchaser, was the party least likely to be able to protect themselves. But if the seller’s solicitor or estate agent is liable to make good the loss, “they are equally innocent victims. No matter how good the money laundering checks, sophisticated frauds will still occur”.
The firm said: “It therefore feels like an area where some statutory scheme should step in, or where the insurance market should find a solution to protect buyers. Until then, the decision will be of considerable relief to solicitors, estate agents and their insurers.
“To help protect themselves, savvy purchaser’s lawyers should be asking for express warranties from the seller’s solicitor, but savvy seller’s solicitors should not be agreeing to provide them.”