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Court of Appeal decision on Imposter Fraud
The Court of Appeal has today handed down judgment in the long-awaited conjoined appeals of P & P Property Ltd v Owen White & Catlin LLP and Dreamvar (UK) Ltd v Mishcon de Reya. It is not good news for conveyancing solicitors and their insurers.
Each case involved a fraudulent property transaction carried out by an imposter who had stolen the identity of the true owner of an residential investment property in London and purported to sell it to an innocent buyer. Once the money had been released to the fraudulent vendor (who had made off with it, never to be traced), and before registration, the fraud came to light and the buyer was prevented from obtaining title. The ultimate question was who should bear this loss.
In P & P the buyer sued the vendor’s conveyancing solicitors plus the estate agents who acted for the fraudulent vendor. In Dreamvar the buyer sued its own conveyancing solicitors and the vendor’s conveyancing solicitors. At first instance, the only defendant found liable was the buyer’s own solicitor in Dreamvar, on the basis of breach of trust.
It’s all change in the Court of Appeal. The results are not easy to summarise (because of the factual set-ups), but the following is an attempt.
There will be plenty of commentary on the effects of this decision in the coming months, and there may yet be an appeal to the Supreme Court, which would add to the uncertainty. But some immediate comments are these.
1. The attempt to change the long-standing rule that no common law duty in negligence would ordinarily be owed to the client’s counterparty (the other side in a transaction) failed. The rule in Gran Gelato (1992) was upheld, so that no duty in negligence was found to be owed to the buyer by the vendor’s solicitor or by the estate agents (who are agents for the vendor, not for the buyer).
2. Interestingly, the Court has confirmed the point made on behalf of the estate agents that the Money Laundering Regulations and the Anti-Money Laundering (AML) checks which are required to be carried out by solicitors, estate agents and other property professionals do not “create a statutory duty which if breached gives rise to a cause of action at the suit of the claimants. That is because the statutory duty was imposed for the benefit of society at large and not for any particular class of persons, such as the purchasers in these cases, who are likely to suffer loss if the vendor turns out to be an imposter. … The fact that the AML checks may have a deterrent effect on would-be fraudsters is not enough in itself to create a private law right of action for the benefit of a protected class: see X (Minors) v Bedfordshire County Council  2 AC 633.”
3. However, a vendor’s solicitor who signs the Contract of sale on behalf of her client might be held to have breached the warranty of authority. The question was whether the solicitor warrants that she acts for the true owner capable of passing title, or merely that she acts for the person who has instructed her and who claims such rights. In P & P the Court of Appeal has failed to give clear guidance, and found a breach of warranty made out because the solicitor, rather than her client, signed the Contract “on behalf of the Seller”. However, no liability flowed because on the facts there was no reliance by the buyer’s solicitor – and reliance was held to be required.
4. The estate agents were found to have given no warranty that they acted for the true owner. They prepared the Memorandum of Sale, which gave the name of the vendor (which, of course, was the same as the name belonging to the true owner). However, even though they had failed to carry out proper anti-money laundering (AML) checks, that was irrelevant, since the Memorandum pre-dated the Contract and was “no more than a statement of the details which they had been given by the fraudster in respect of the sale of the property”. The objective bystander would not regard this “as a statement or warranty by the selling agent that they had been given those instructions by [the true owner]”.
5. Breach of Undertaking has proved problematic for conveyancers acting for the vendor. Under the Law Society’s Code for Completion by Post (2011) the seller’s solicitor undertakes “to have the seller’s authority to receive the purchase money on completion”. Contrary to the trial judges’ decisions, the Court of Appeal have held that “seller” means “true seller” rather than “purported seller” and “completion” means “genuine completion” not “pretended completion”. So the solicitor acting for a fraudster, no matter how diligent, is incapable of complying with the undertaking given.
6. Breach of trust is where the real problems for the future will come from. The effect of this decision is that the buyer’s solicitor (no matter how diligent) acts in breach of trust in releasing her client’s purchase money to the vendor’s solicitor, and the vendor’s solicitor (no matter how diligent) similarly acts in breach of trust in releasing the funds to the fraudster in compliance with the client’s instructions. This is because the money should only be released in furtherance of completion, and that must mean “genuine completion”.
7. Accordingly, the true battleground in future claims is likely to be on the territory of relief under s 61 of the Trustee Act 1925, which allows the Court to relieve a trustee of personal liability for a breach of trust where the trustee has “acted honestly and reasonably and ought fairly to be excused”. Here, the relief was refused even to Dreamvar’s own (ie the buyer’s) solicitor who had carried out her retainer impeccably (although Gloster LJ dissented on that). It was also unavailable to the seller’s solicitor in each case, since those firms had made mistakes in the AML checks.
8. Stepping back, the difficulty for conveyancing firms and their insurers is that it is hard to see what an innocent and diligent firm will have to be able to show in order to secure the s 61 relief. As things stand this looks like a problem which insurers are likely to have to address urgently. The fear must be that the immediate “blunt instrument” response is a hike in premiums for firms with a significant diet of residential conveyancing work – at a time when making a profit from that work is proving very tough. Whether an insurance product (perhaps similar to title guarantee) will emerge as a practical solution remains to be seen.
Ivor Collett acted for Winkworth, the estate agent defendant in P & P v OWC LLP  EWCA Civ 1082, instructed by Mills & Reeve. The decision can be found at: