Court: legal profession bears risk of 'imposter vendor' fraud

Out-Law News | 18 May 2018 | 3:12 pm | 4 min. read

Solicitors representing fraudulent property sellers may be liable for breach of trust, breach of warranty of authority or breach of undertaking in cases involving identity fraud, the Court of Appeal has ruled.

It has also backed a finding by the High Court that a law firm representing a purchaser who fell victim to such a fraud was also liable to its client.

Its judgment, in two linked cases where fraudsters had posed as owners selling property in London, could allow fraud victims to pursue a wide range of potential causes of action against professional services firms in cases of so-called 'imposter vendor' fraud, according to legal experts at Pinsent Masons, the law firm behind Out-Law.com.

"The prevailing view had been that solicitors who acted for imposter vendors in these cases did not generally warrant that their client was who he said he was," said professional negligence expert Mike Fletcher of Pinsent Masons. "This case shows that, depending on the particular wording used, it may be found that such a warranty as to identity was given, putting the solicitors in breach if their client is in fact an imposter."

"A breach of trust claim against solicitors who release purchase monies in circumstances where no genuine completion takes place is also likely to be widely available, the court having rejected technical arguments based on the wording of the particular edition of the Code for Completion by Post used. The continued finding that law firm Mishcon de Reya, which acted for one of the purchasers, was liable for breach of trust even though it had acted honestly and reasonably also demonstrates a focus on the often devastating impact of these frauds on their victims," he said.

However, the judgment was likely to be controversial with defendant law firms and their insurers, said Fletcher; who added: "It remains to be seen whether any of the parties involved will seek to take the matter to the Supreme Court".

"This case illustrates once again that property transactions are particularly susceptible to fraud," said commercial litigation expert Andrew Herring of Pinsent Masons.

"Clearly, in any situation involving fraud we would recommend that the victim obtains specialist advice at the earliest opportunity on all potential routes for recovering their losses. These may include taking urgent steps to identify wrongdoers, preserve assets using freezing injunctions, and potentially to recover losses from wrongdoers through civil recovery claims," he said.

Both cases before the Court of Appeal involved fraudsters who posed as the owners of registered property in London, and who instructed solicitors and agents to act for them on the sale of the property. In both cases, genuine purchasers were found, who each instructed their own solicitors and proceeded to exchange of contracts and completion in accordance with the Law Society's 2011 Code for Completion by Post ('the Code'). In both cases, the fraud was discovered following completion but before registration of title. However, by this time both the fraudsters and the purchase money had disappeared.

In the first of the cases, purchaser P&P Property Ltd (P&P) brought claims against the vendor's solicitors, Owen White & Catlin LLP (OWC), for breach of warranty as to their authority to conclude the sale of the property; breach of undertaking as to their authority to receive the purchase money on behalf of the true owner under the Code; negligence; and breach of trust. In the second case, purchaser Dreamvar Ltd brought similar proceedings against the vendor's solicitors; but also against their own solicitors, Mishcon de Reya (MdR), for negligence and breach of trust.

At first instance, the court rejected all of P&P and Dreamvar's claims against the vendor's solicitors but found in favour of Dreamvar in its breach of trust claim against MdR. The court then decided, to the surprise of many in the industry, against exercising its discretion under section 61 of the 1925 Trustee Act to exonerate MdR from liability, notwithstanding it having found that the acting solicitor at MdR had acted "honestly and reasonably" and had adhered to best practice throughout. In the court's view, the disastrous consequences of the fraud for Dreamvar, which had no insurance against fraud and had been left on the verge of insolvency, justified it not exercising its section 61 discretion in favour of MdR, which was fully insured against liability for breach of trust.

The Court of Appeal, after re-examining both of these decisions, reversed the High Court's decision and held that the fraudulent sellers' solicitors were in fact liable in both breach of trust and breach of their undertakings under the Code. One of those firms sought relief under section 61 in relation to the breach of trust, and the court refused to grant this. The court also found that one of the firms of solicitors acting for a fraudulent seller had given and breached a warranty as to the identity of its client, although as there had been no reliance on this the claim for breach of warranty failed.

It held that negligence claims against these firms had to fail, agreeing with the High Court, pointing out that the anti-money laundering regulations are designed to deter money laundering and terrorist financing rather than combat fraud.

The Court of Appeal also upheld the High Court's decision not to grant MdR relief under section 61. It found that the judge was entitled to take into account the financial consequences of MdR's breach of trust on Dreamvar, as well as MdR's own insurance position. The fact that the Court of Appeal had come to a different conclusion on the question of liability of the fraudulent seller's solicitors gave MdR a route by which it could seek a contribution and/or indemnity from them, but the court's "assessment of the reasonableness of its conduct and the inequality of position between it and its former client remain the same", Lord Justice Patten said.

In a short dissenting judgment on this point, Court of Appeal vice-president Lady Justice Gloucester said that MdR should be granted relief under section 61 now that it had been held that the fraudulent seller's solicitors were in breach of trust. She noted that MdR had not acted dishonestly, and added that "the court's sympathy should [not] be with one commercial party ... rather than another, simply because one, and not the other, has insurance".

"The practical effect of this decision is to place the risk of identity fraud in property transactions on the legal profession - which may, in turn, lead to insurers seeking to increase indemnity insurance premiums for firms with large property practices," said property disputes expert Siobhan Cross of Pinsent Masons.