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Dreamvar: back to the future

17 May 2018

In 2017 the then Communities and Local Government Sajid Javid said that the utilisation of digital technology was a major theme of this government in its attempt to speed up and simplify home buying and selling process. He announced a consultation which closed in December based around embracing the online world and replacing current face to face, paper based approach and seeking ideas as to how the government can assist the development of E-Conveyancing.

In its judgment P&P Property Limited v Owen White and Catlin LLP and Dreamvar Limited v Mishcon De Raya, the Court of Appeal has rather derailed the initiative.

Enormous benefits have come from our day to day ability to conduct transactions online. Equally, personation fraud has been facilitated and there are few of us who have not been affected in some way by 'identity theft' or email scams.

Both cases, P&P Property and Dreamvar involved the personation of a seller. In both cases the supposed need or desire on the part of the seller for a quick sale attracted property speculator companies P&P in one case and Dreamvar in the other, looking for quick returns. At the end of the day, it transpired that the investment and development opportunity presented were too good to be true and the proceeds paid by the innocent buyers were lost to fraudsters.

The question for the courts was, where, if anywhere, should the risk fall in these cases and who (except of course for the actual thief) should bear financial responsibility for the successful sting operations? Either or both solicitors say their Lordships.

In both cases, the Court of Appeal decided that the risk could and should fall on both sets of solicitors (in P&P the buyer’s solicitors were not involved). Worse, in Dreamvar I see little analysis of why both and how one might apportion blame. As for the selling agents or blame attaching to clients who sniff a profit, forget that. On the plus side it is perhaps reassuring that the Court of Appeal thinks a good solicitor would rumble a fraudster.

As we know, when solicitors handle money through their client account they are acting as a trustee. They are holding money that does not belong to them.

It was not an issue in Dreamvar that when releasing completion monies Mishcon De Reya (MdR) were in breach of trust, MdR concede as much. However, what was an issue in both appeals was whether or not the solicitor acting for the fraudulent vendor was in breach of trust. In both cases the Court of Appeal analysed the Law Society’s Code for Completion by Post and past authorities on breach of trust (and there are plenty) and concluded that the seller’s solicitors were in breach of trust when they paid away the monies that they had received from a purported completion to their fraudster client. In the case therefore of Dreamvar it appears to have been open to a MdR to bring contribution proceedings against the solicitors Mary Monson and in the P&P case the seller’s solicitor, who had been found not to have been in breach of trust became liable to P&P for breach of trust. However, fortunately that was not necessary because the Court of Appeal found that as no true completion had occurred the vendors solicitors, Mary Monson, were in breach of their undertakings to MdR “to have the seller’s authority to receive the purchase monies at completion”. Thus MdR although in breach of trust and not exonerated from the breach could rely on the seller’s solicitors undertakings at completion.

In perhaps the most surprising aspect of a decision of the Court of Appeal (where Lady Justice Gloster dissented) the Court of Appeal refused to grant MdR relief from sanctions under Section 61 of the Trustee Act 1925 in very crude terms the majority, Floyd LJ pattern LJ did not think it appropriate to interfere with the exercise of discretion by the Judge in first instance. Mr David Railton QC. Gloster LJ by contrast felt that where a solicitor had done nothing wrong, was unaware of the failings of a seller’s solicitor who was in breach of trust and where it was acting for a commercial entity who made commercial decisions based around profit it seemed rather odd not to exonerate the innocent solicitor. She must be correct.

The ramifications are this decision will need to be worked through. The Law Society’s intervention in the action to point out the pickle this will cause in conveyancing transactions seems to have been wasted breath. There are also concerns that the decision will have knock on effects in other areas eg the identification of shareholders in a corporate transaction.

Most certainly the Law Society’s Conveyancing and Land Law Committee will revisit its code for completion by post. One would imagine that they will also have to look at the question of the extent which CDD has been carried out- have you met X and compared his passport photo. How much PII cover do you hold etc – and questions about such matters need to be answered and what standard enquiries those acting for a buyer can expect to be answered by a seller. For the present it seems likely that a good deal of time and effort will be taken up between conveyancers who will try to uncover what client due diligence has been carried out by the other and in seeking to distance themselves from giving any warranty about their clients identity, which will of course be entirely circular. Does a refusal of a warranty of the identity of one’s client amount to a red flag warning they may be a fraudster? Does my client agree that his personal data can be discussed?

In the context of the SRA’s current proposals to limit or exclude client protection in the conveyancing arena then this decision makes its reforms look inexcusable. If nothing else the Court of appeal have underlined the extent to which effective conveyancing relies upon solicitors’ undertakings and the availability of certainty of enforcement of awards.

No doubt insurers too will want to take stock of this decision which, as I say above, at first glance seems to make buyer’s and seller’s solicitors professional indemnity insurance responsible for personation fraud in conveyancing even when solicitors act competently or for sophisticated and plausible fraudsters who have taken in others and even when acting for speculative commercial clients.

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