Dreamvar considered: a nightmare for conveyancers?

In a surprise judgment late in 2016, Mishcon de Reya (MdR) was held liable to its client — Dreamvar — in respect of a property purchase in which Dreamvar was defrauded by an unknown third party.

In a surprise judgment late in 2016, Mishcon de Reya (MdR) was held liable to its client — Dreamvar — in respect of a property purchase in which Dreamvar was defrauded by an unknown third party. The case has caused widespread consternation for conveyancers and transactional lawyers generally.

Mishcon de Reya was required to indemnify its client, despite an acknowledgement by the judge that it had not been negligent. This amounts to a requirement that law firms act as guarantor for any losses caused to their clients by fraudsters.

Mishcon de Reya is appealing the finding, and the Law Society recently announced that it may seek to intervene.

Background

Dreamvar sought to purchase a £1.1 million property in central London in September 2014. In November 2014 — after (purported) exchange and completion — Land Registry enquiries led to the ‘seller’ being identified as an imposter.

Dreamvar was left without title and unable to recover its monies, which had been paid into bank accounts out of the jurisdiction.

Dreamvar sued its solicitors, MdR, for negligence (in contract and tort) and for breach of trust. Dreamvar also sued the law firm appointed by the imposter to sell the property — Mary Monson Solicitors (MMS) — in negligence, and for breach of warranty and breach of trust.

Findings

Mary Monson Solicitors accepted that it did not act competently in performing due diligence checks, and that it should have insisted that its client attend its London office with proof of identity and proof of address.

Whilst negligence on the part of MMS was admitted in this regard, there was no duty owed by MMS to the purchaser. Meanwhile — as to breach of trust — applying the findings in P&P Property Ltd v Owen White & Catlin [2016], Deputy Judge David Railton QC refused to hold MMS liable. He nevertheless made such a finding against MdR.

Mishcon de Reya’s breach of trust arose because it held Dreamvar’s monies on trust pending completion of the transaction. It was said that an implied term of MdR’s retainer with Dreamvar was that the completion monies would only be released on genuine completion. As the purchase was a nullity, there had been a breach of trust.

The claim for breach of trust against MMS was made on the basis it received the purchase monies from MdR (on behalf of Dreamvar) and was likewise only entitled to part with them on genuine completion. The court however declined to confer this similar requirement for completion to be genuine, consequently finding no breach of trust by MMS in releasing the funds to its client.

Mishcon de Reya sought relief from sanction under s.61 of the Trustee Act 1925, on the basis it acted honestly and reasonably and ought fairly to be excused.

Whilst it was accepted that MdR acted reasonably and honestly, the court declined to exercise its discretion to grant relief.

The basis of the finding was that, whether insured or not, MdR was better able to absorb the loss than Dreamvar, and had been the party better placed to consider the risk the transaction had posed to Dreamvar

Appeal

Both this case and the P&P Property case are the subject of appeal, however it is unlikely that either judgment will be handed down until spring 2018.

The decision of the High Court appears perverse, with MMS having admitted negligence but not being liable because no duty was owed to the purchaser, and MdR not negligent but liable as a result of breach of trust.

The decision appears to be one of public policy, and to maintain public confidence in conveyancing. The terms and vigour of the Law Society intervention on this issue remain to be seen.

Impact

For solicitors and their insurers, the precedent set will be unpredictable.

When acting for a vendor, the present law will assist defence of claims of negligence/breach of trust; however when acting for a purchaser, it will not do so.

Further, there is the risk that transactional lawyers generally — who hold monies on trust for clients pending completion of transactions — will be construed as acting as guarantor against third party fraud, even where there is no question of fault on the part of the solicitors involved.

Whilst law firms could adapt their terms of business to exclude liability in such cases, this would likely fall foul of the Unfair Contract Terms Act 1977. For this reason we are doubtful such amendment would be effective.

Comment

Cases such as this one may highlight the need for identity theft protection insurance. However, in the short term, such an offering is unlikely to reduce the burden imposed on professional indemnity (PI) insurers since — as the law stands — insurers offering this may be able to pursue subrogated claims against PI insurers.

These cases may only prove to make PI insurers more selective concerning the conveyancing firms they are willing to insure, and to increase premiums.

Whether this will lead to a hardening of the present soft market is uncertain however, given the move to open market renewal for licences conveyancers and the increased number of capacity providers looking to write conveyancing business.

Related content:

Dreamvar revisited: the nightmare for solicitors and insurers continues…