Risk management implications from the Dreamvar case

25 May 2018

Welcome to the latest Risk Focus Bulletin brought to you by JLT’s Legal Practices Group. In this issue, we, with the kind assistance of Keoghs, focus on the Court of Appeal’s decision on the notorious Dreamvar case. This decision will affect all law firms and we encourage all firms to take the time to fully understand its potential risk management implications.

It is far too early to say how professional indemnity insurers will react to what is clearly a perceived increase in exposure to a conveyancing transaction. We will keep you appraised of developments of developments in this regard. In due course, we would expect insurers to start asking specific questions on the steps firms are taking to safeguard against Dreamvar type exposure. Please do not be surprised if new questions are incorporated into Professional Indemnity Insurance (PII) proposal forms in the future.

We trust you will find this bulletin to be of interest.

We extend our sincere thanks to Chris Stanton and Dale Hilton at Keoghs for contributing the following analysis of the case and setting out their thoughts on its impact.

Overview

The Court of Appeal has handed down its decision in the landmark cases of Dreamvar (UK) Ltd v Mishcon de Reya and P&P Property Limited v Owen White & Catlin [2018] EWCA Civ 1082, which is likely to have significant implications for conveyancing solicitors and their professional indemnity insurers.

The decision has provided some potentially controversial guidance on which parties will be responsible for the losses suffered in the ever-increasing instances of fraudulent property transactions, particularly in situations where fraudsters pose as owners of a property in order to abscond with the purchase monies.

The background

The linked cases both involved the purchase of £1 million London residential properties by property investment / development companies. In each case, a fraudster posed as the owner/seller of the property and each of the fraudsters and the genuine purchasers instructed solicitors to deal with the transactions. Both transactions proceeded in the normal way (under the Law Society’s Code of Completion by Post), until the completion monies were received by the fraudulent sellers, who absconded with the funds leaving the genuine purchasers without title over the properties and with continuing liability for their mortgage loans.

Both purchasers (Dreamvar & P&P) pursued the sellers’ solicitors, with Dreamvar also pursuing their own solicitors, for breach of warranty of authority, negligence, breach of undertaking and/or breach of trust.

The decision

The Court of Appeal, in part allowing the purchasers’ appeals, found that both the sellers’ solicitors and, in the case of Dreamvar, the purchaser’s solicitors were responsible for the purchasers’ losses. In doing so, the Court addressed the following significant issues:

Breach of warranty of authority

The Court found that, when acting for a seller in these circumstances (and under the Law Society’s Code), the sellers’ solicitors warrant that they act on behalf of a genuine owner of the property and, providing a purchaser can demonstrate reliance, the sellers’ solicitors will be strictly liable for any resulting losses. In this case, however, the Court upheld the original decision that there was no such reliance by the purchasers and, therefore, that claim was dismissed.

Negligence

The Court upheld the commonly-held view that the sellers’ solicitors did not assume a duty to the purchasers for the adequacy, or otherwise, of their due diligence into the legitimacy of the sellers. The Court also found that the purchaser’s solicitors in Dreamvar had acted reasonably. Accordingly, the claims in negligence against those solicitors were dismissed.

Breach of undertaking

The Court found that, in providing the undertaking under the Law Society Code that they had the sellers’ authority to receive the purchase monies, the sellers’ solicitors were undertaking that they had the genuine sellers’ authority. Therefore, in the circumstances where the sellers turned out to be fraudulent imposters, the sellers’ solicitors were held strictly liable for breach of undertaking.

Breach of trust

Firstly, the Court found that, in releasing the purchase monies to the fraudulent sellers, the sellers’ solicitors acted in breach of trust, on the basis that under the Law Society Code the sellers’ solicitors only had authority to release the monies to a genuine owner. Whilst the Court had the discretion to grant relief to the sellers’ solicitors under section 61 of the Trustee Act 1925, it refused to do so on the basis that it found the sellers’ solicitors not to have acted reasonably in failing to carry out adequate due diligence on the sellers.

Secondly, in circumstances where the purchaser’s solicitors in Dreamvar had accepted that they acted in breach of trust in paying the purchase monies to the seller’s solicitors where the seller was fraudulent and there was no genuine completion, the Court refused their appeal that they should be entitled to relief under section 61 of the Trustee Act 1925.

Despite the Court acknowledging that the purchaser’s solicitors acted honestly and reasonably in the transaction, the Court refused, by majority decision, to grant relief. In refusing to grant relief, the Court had regard to the consequences on Dreamvar (and the fact that it was a small company with no insurance) compared to the position of the purchaser’s solicitors, who had the benefit of insurance sufficient to cover the losses. Accordingly, the Court in Dreamvar found that both solicitors acted in breach of trust and, as neither were entitled to relief, the distribution of liability should be achieved through contribution proceedings, which will now almost certainly follow.

The impact

The recent decision will come as a grave warning to conveyancing solicitors, and their professional indemnity insurers, and increases the possibility of both sellers’ and purchasers’ solicitors being liable to innocent purchasers involved caught up in fraudulent transactions.

Instances of property fraud are on the increase thanks to the growing sophistication of fraudsters. Going forward, conveyancing solicitors (and particularly those acting for sellers) must be more vigilant than ever in carrying out adequate due diligence and identity checks. Solicitors should be mindful of the significant obligations imposed on them when holding monies on trust and giving warranties and/or undertakings as part of residential property transactions, particularly as any breaches are likely to give rise to strict liability for any losses suffered. The Court also seems extremely reluctant to grant relief to solicitors, however reasonably they acted, when they are found to have paid monies out in breach of trust.

Buyers’ solicitors may want to seek express warranties from sellers’ solicitors that they have adequately verified the sellers’ identity, including specifying that they (and their clients) are relying on any such warranties.

The conveyancing profession will be closely monitoring any pending appeal of the decision and will also be eager for further guidance from the Courts on what solicitors can reasonably do in order to be granted relief under section 61 of the Trustee Act 1925, which was sadly missing in the recent judgment. The fact that the Court took into account the respective positions (including the insurance cover) of the relevant parties in refusing relief, will not provide solicitors or their insurers with any comfort. However, the dissenting judgment of Lady Justice Gloster, does suggest that the matter is ripe for further judicial debate, possibly on appeal to the Supreme Court.

Lastly, the fact that the damages awarded to the purchasers in such cases could be assessed at the total value of the property (which could commonly exceed £1 million – as was the case in both matters here), plus interest and costs, also brings into question the wisdom of the SRA’s current plans to reduce the level of compulsory professional indemnity cover that solicitors’ firms are required to obtain.

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For further information, contact Martin Ellis, Head of UK Professions and Legal Practices Group on +44 20 7528 4704 or email martin_ellis@jltgroup.com.