Can you provide us with some background, what were the main questions to be dealt with by the Court of Appeal?
The case involved a fraudulent property transaction. Dreamvar is a small property company that entered into an agreement to purchase a house in London. Eventually it was discovered that the Vendor had impersonated the real owner and absconded with the purchase monies.
Dreamvar issued proceedings against Mischon de Reya who acted on their behalf and Mary Monson Solicitors who acted on behalf of the fraudsters.
The main question the Court of Appeal had to decide was:
- If a solicitor is held to be in breach of trust, which involves strict liability, how should the Court exercise its discretion under Section 61 of the Trustee Act of 1925?
- Whether a vendor’s solicitor warrants to the purchaser that they acted on behalf of the genuine owner of the property, or an individual who merely claimed to be the owner.
- In relation to the Code for Completion by Post, whether the vendor’s solicitor only had authority to release the purchaser’s monies to the genuine owner of the property, or to an individual merely claiming to be the owner and;
- Whether under the same Code, a vendor’s solicitor is in breach of its undertaking to the purchaser’s solicitor when it pays the money to anyone other than the genuine owner of the property.
What are the main conclusions made in the decision? What were the key questions answered?
In relation the above questions, the Court of Appeal held as follows:-
- Even though Mishcon de Reya had acted honestly and reasonably, the Court was entitled to compare the effects of the breach of trust on both parties before applying the Court’s discretion to determine what was fair. The Court compared the catastrophic effect upon Dreamvar and the fact that the company was uninsured, against the fact that Mishcon de Reya was a large City firm, who enjoyed insurance cover of at least £3 million pounds to cover such a liability. The Court was therefore entitled to exercise its discretion so as not excuse Mishcon de Reya from a strict liability for breach of trust and therefore to compensate Dreamvar.
- The Court of Appeal overturned the High Court decision and confirmed that, in such circumstances, a vendor’s solicitor warrants that they act on behalf of the genuine owner of the property and not an individual who merely claims to be the owner. If the purchaser can demonstrate they relied upon such a warranty, then the vendor’s solicitor will be held to be strictly liable for any losses suffered by the purchaser as a result of the breach of warranty.
- The Court of Appeal confirmed that a vendor’s solicitor only has authority under the Code to release the purchase monies to the genuine owner and that they will be in breach of trust if they released it to a fraudster. However, the Court has the power grant the solicitor relief under Section 61 applying the test above.
- The Court of Appeal confirmed that under the Code a vendor’s solicitor gives an undertaking that they will only release the purchaser’s monies to the real owner of the property and if they release them to any other party they will be in breach of undertaking to the purchaser’s solicitors. This involves a strict liability, which can be summarily enforced.
What were the particular factors which you feel should have weighed more heavily in the final decision?
The Court of Appeal clearly made a just decision and what a typical purchaser would take to be common sense.
Did the decision go the way you expected?
While the Claimant was optimistic, he was aware that there was significant amount of conflicting case law that the Court of Appeal had to take into account and there was always a possibility that the matter would have to go to the Supreme Court.
Do you agree with the decision?
As both firms of solicitors are now being held jointly liable to the Claimant and the Claimant also improved upon a Part 36 Offer made before Trial, he will be seeking to recover the bulk of his costs on an indemnity basis, together with penal interest from the date of the Part 36 Offer expired.
What do you expect the direct impact of the Judgement will be?
Solicitors acting on behalf of vendors will have to take much more care when checking the identity of their clients and ensure, where possible, that they meet the vendor face to face and obtain and photocopy original authoritative documents to prove the vendor’s identity and connection with the property for sale.
They will also need to review their standard retainer documentation with a view to mitigating their potential liabilities in relation to breach of warranty and breach of trust.
Solicitors acting on behalf of purchasers will need to consider seeking specific assurances from the vendor’s solicitors that they have taken reasonable steps to verify their client’s identity. They will also wish to make it clear that they are relying upon the vendor’s solicitor’s warranty in this regard.
The Law Society is also likely to carry out a review of conveyancing practise to mitigate and fairly allocate the risk of identity fraud.
Do you think it will affect conveyancing fees or insurance premiums?
This judgement will serve as a wake-up call to the conveyancing market. It is likely to result in increased professional indemnity insurance premiums and conveyancing fees. However, there may also be a silver lining in that it will act as a counter weight to the de-skilling of the process. It may also bring conveyancing back to the High Street from remote call centres.
Much conveyancing work is carried out by paralegals or unqualified staff, with little or no solicitor involvement. The conduct of Mary Monson in particular highlights the risk of this approach and is likely to lead to more professionalism and solicitor involvement in the process.
How do you think conveyancers will feel about the ruling?
The decision is likely to come as somewhat of a shock. However, when the dust has settled it is likely to be an incentive to implementing best practice, which will have the effect of improving standards throughout the profession.
Now that we know the final decision, what is the key outcome of the case?
The Court of Appeal decision is good news for purchasers who are the victims of identity fraud. It has significantly increased the risk that vendor’s solicitors run when they do not adequately check the identity of a client, with potential liabilities for breach of warranty, trust and undertakings.