Dreamvar: conveyancers – trust no-one
Dreamvar v Mischon de Reya [15.05.18]
The first lesson to take away from Dreamvar is that when acting for a seller, it is imperative to ensure that adequate and appropriate proof of identity and ownership is obtained, and moreover to use best endeavours to ascertain whether such proof is genuine.
The facts behind the Dreamvar case are sadly all too familiar for today’s conveyancers:
A fraudster offered to sell a property which did not in fact belong to them. They instructed Mary Monson Solicitors (MMS) to act for them on the sale and MMS believed they were acting for the legitimate seller. Dreamvar agreed to purchase the property for over £1 million and instructed Mishcon de Reya (Mishcon) to represent them. After purported completion, Land Registry enquiries revealed that the seller was an imposter. Dreamvar was left with no title to the property and lost its purchase monies which, having been transferred to the fraudster, had been dissipated to foreign bank accounts.
Dreamvar brought a claim against MMS and Mishcon. MMS admitted that they were negligent and had failed to carry out adequate due diligence on their purported clients, but the claim against them failed because it was established case law that, as solicitors for the seller, they did not owe a duty of care to the buyer. Mishcon were however found to have been in breach of trust because they held Dreamvar’s money on trust pending completion and it was an implied term of their retainer that they would only release money for a genuine completion.
S.61 Trustee Act 1925 provides that if a trustee is or may be personally liable for any breach of trust but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust, then the court may relieve him from personal liability.
The court at first instance acknowledged that Mishcon had acted reasonably and honestly but refused to grant relief under s.61. The rationale was that Mishcon (in reality their insurers) could bear the loss more easily than Dreamvar, and that they had been better placed than Dreamvar to consider the risks of the transaction.
In a decision which has caused consternation among conveyancers, the Court of Appeal upheld the refusal to grant Mishcon relief under s.61, finding that the judge at first instance was entitled to take account of Mishcon’s ability to meet the “disastrous” financial loss suffered by Dreamvar. However, whilst rejecting any finding of negligence on the part of MMS, because they did not assume a duty of care to the buyer, the Court of Appeal also found that MMS had acted in breach of trust when they released the purchase monies to the fraudster, in circumstances where there was no true completion of the transaction because of the fraud.
Acting for sellers
The first lesson to take away from Dreamvar is that when acting for a seller, it is imperative to ensure that adequate and appropriate proof of identity and ownership is obtained, and moreover to use best endeavours to ascertain whether such proof is genuine. If a client provides a copy of documents which have been verified by another law firm (as in Dreamvar), ask the client to confirm who certified the documents. Locate that law firm on the SRA website (rather than using details provided by the client) to verify their credentials, and if necessary, call them.
Further, remember that the duty to verify the veracity of your client is an ongoing one throughout the transaction, not just at the outset. Be aware of any inconsistencies, no matter how small, which might suggest that your client is not genuine. Such examples may include:
- Inconsistent contact addresses
- Continuous difficulty in making contact with your client
- Hearing a foreign ring tone when you call the supposed UK-based client
- The client’s inability to answer basic questions about the property, or answering them incorrectly. One such claim we have seen could have been prevented had the seller’s solicitors spotted that the fraudster had indicated that the property had a garden, when it did not.
When your client gives you details of their bank account for completion, ask yourself if the information provided makes sense. If the seller lives in the UK but wants the completion funds transferred to a bank in China (as in Dreamvar) or indeed any other jurisdiction outside the UK, this should ring alarm bells. Ask for explanations. Test if they are credible.
Given the Court of Appeal’s endorsement that there is no automatic assumption of a duty by the seller’s solicitors to the buyer, beware of attempts by buyers/their solicitors to trap you into assuming a duty, for example by asking questions about your AML policies and indicators of fraud. Consider whether you have policies in place to provide guidance on how to respond to such queries and if not, put policies in place and make clear that no assumption of any duty to the buyer should be construed from your response to any such queries.
Acting for buyers
The Dreamvar decision puts buyers’ solicitors in an invidious position. Although the Court of Appeal has paved the way for Mishcon to seek a contribution from MMS, the case has limited the potential for buyers’ solicitors to rely on s.61 to relieve them from liability.
A surprising feature of the claim was that Mishcon did not seek to appeal the finding that it acted in breach of trust and therefore the Court of Appeal was not invited to consider this question, which may well be the subject of further authority in years to come.
For now, the significant issue for buyers’ solicitors is the Court of Appeal’s approach to the grant of relief under s.61. In this case, there was no suggestion that Mishcon had acted unreasonably; rather the decision at first instance, which was upheld by the majority (Lady Justice Gloster dissenting), was based on Mishcon’s ability (by reason of its financial position) to compensate Dreamvar in circumstances where, at least at first instance, there appeared to be no redress from the seller’s solicitors.
In practical terms, when acting for buyers, we suggest that your correspondence with the seller’s solicitors should expressly state your reliance on them to carry out reasonable identity checks on their client, and expressly state that you will not undertake your own independent verification.
Rule 11 of the new SRA Accounts Rules (currently in draft and expected to come into force this Autumn at the earliest) enables solicitors to enter into an arrangement to use a third party managed account for the purpose of receiving or making payments from or to a client. This could remove the risk for solicitors of a breach of trust claim, such as that faced by Mishcon in Dreamvar and is therefore something a practice should give consideration to in due course.
Technological advancements should also make it increasingly harder for fraudsters to hoodwink solicitors in the future. For example, we are likely to see an increase in the use of cryptocurrency and block chains to effect the transfer of funds – block chain transactions are not only secure, but moreover the funds are traceable.
In summary, suspect everyone and trust no one! Try to be on your guard constantly throughout the transaction whether you are acting for seller, buyer or indeed a lender. The reality of a heavy caseload may make additional checks difficult but it is at least worth pausing for reflection before money changes hands – we understand that there may be a general reluctance to ask lots of questions of your clients, for fear of irritation, or simply due to time constraints, but when you consider the repercussions for getting this vital issue wrong, genuine clients will understand if their transactions are delayed, if the alternative is no title and no money!
This article first appeared in Pelican Underwriting’s, The Pelican Brief, August 2018.