Legal notes: in whom should we trust?

Allyson Colby tackles a decision that has caused concern, in saddling a buyer’s solicitors with liability for a seller’s fraud Key points The solicitors had acted honestly and reasonably, and had not been negligent, but were liable for breach of trust The court denied them relief from liability under section 61 of the Trustee Act 1925 because they were better able to absorb the loss than their client Before issuing legal proceedings, claimants should always ask themselves whether they will be suing a “man of straw”. Knowing what a potential defendant is worth, or whether he has insurance on which to claim, is important. But the fact that he is wealthy, or insured, is not usually relevant to the issues. However, in Dreamvar (UK) Ltd v Mischon de Reya and another [2016] EWHC 3316 (Ch), these facts appear to have been relevant to the question of who should bear the loss caused by a fraud. The company had bought a house from an imposter who posed as the owner and absconded with £1.1m of the company’s money. The Land Registry smelled a rat and rejected the company’s application to be registered as the new proprietor, leaving the company to seek damages from the solicitors involved in the deal. Seller’s solicitors The seller’s solicitors admitted that their identification checks had fallen short. They had relied on a driving licence, which had been freshly issued for a period of just three years, and a TV licence, which is not usually recommended for use when identifying clients. Furthermore, they had never met their client. However, the court absolved them from liability for the company’s loss. The company’s claim for breach of trust had looked promising. The judge held that a seller’s solicitor holds the purchase money on trust while it is in his possession, pending completion of a sale and purchase. Nonetheless, he rejected the allegation that there had been a breach of trust because the transaction was not genuine. The parties had completed in accordance with the Law Society’s code for completion by post (2011), which obliges the seller’s solicitor to act as the buyer’s solicitor’s agent. However, the code also states that the seller’s solicitor is not required to investigate or take responsibility for any breach of the seller’s contractual obligations. This exonerated the fraudsters’ solicitors from liability for the fraud. Had the fraudster’s solicitors breached undertakings enshrined in the code? The judge ruled that clear words are needed before a solicitor assumes responsibility for a client’s fraud. The references in the code to “the seller” were to be interpreted as references to the seller’s solicitors’ own client. Therefore, the code does not require sellers’ solicitors to be acting with the authority of, and to provide a transfer executed by, the “registered proprietor”. The company turned next to Penn v Bristol & West Building Society [1997] 1 WLR 1356; [1997] PLSCS 100, claiming that the fraudster’s solicitors had warranted either that they were acting for the registered proprietor or that they had exercised reasonable care and skill when checking their client’s identity. However, the judge preferred the line taken in P&P Property Ltd v Owen White & Catlin LLP and another [2016] EWHC 2276 (Ch); [2016] PLSCS 261 and ruled that, in general, agents warrant only that they have a client for whom they are acting. The fraudster’s solicitors were not asked to confirm that their client was the registered proprietor and had not made any representations about his characteristics or attributes. Buyer’s solicitors Had the company’s solicitors negligently failed to advise the company that there was a risk of identity fraud? Or had they been negligent because they should have asked the fraudster’s solicitors to confirm that they had verified their client’s identity? The judge accepted that it is not standard practice for buyers’ solicitors to require sellers’ solicitors to give undertakings that a seller is who he says he is, and refused to rule that this was either unreasonable or illogical. Furthermore, the facts known by the company’s solicitors at the time did not suggest that there was a risk of fraud. The fraudster had used a reputable firm of estate agents, who were required to check their client’s identity. So too were the fraudster’s solicitors, and there had been nothing to indicate that they were not competent to make such checks or that the results were unsatisfactory. However, the company was able to pin liability for breach of trust on its solicitors on the basis that buyers’ solicitors hold clients’ money on trust and, in conveyancing transactions, are authorised only to part with the funds on completion of a genuine transaction. And, although the company’s solicitors had acted honestly and reasonably, the judge refused to relieve them from liability under section 61 of the Trustee Act 1925. The judge stated that the company’s solicitors had been better placed to consider, and protect it against, the risk of identity fraud. And, with no other remedies available, the company’s solicitors were – with or without insurance – better able to absorb the loss than the company. Appeal pending The judge accepted that sellers’ solicitors are responsible for checking their clients’ identities. But will the result in this case encourage them to carry out the stringent identity checks needed before acting for clients? Professionals do not normally undertake unqualified obligations. Indeed, the judge appeared to accept that it is almost inconceivable that a solicitor would guarantee to a third party that his client is the person named on the property register. So it seems anomalous that buyers’ solicitors should then be saddled with strict liability for the fraud of someone represented by another law firm, especially as, thanks to the rules of conduct that govern the way lawyers behave, the company’s solicitors did not, and could not, deal directly with the seller himself. Allyson Colby is a property law consultant