The High Court has recently considered the liability of solicitors and estate agents who acted for a fraudulent seller: P & P Property Ltd v Owen White & Catlin LLP and another [2016] EWHC 2276 (Ch).

Background

The buyer (“P&P”), a property investment company thought it was purchasing 52 Brackenbury Road, London W6 (the “Property”) in December 2013 from a Mr Harper. After paying £1.03m for the Property, P&P discovered that the purchase price paid to the fraudster’s solicitors, Owen White & Catlin LLP (“OWC”) was gone, and OWC’s client was an imposter. The actual owner of the Property knew nothing about it even being on the market. The scam only came to light when the genuine Mr Harper walked past his property and saw builders ripping out the kitchen.

P&P sued OWC for breach of “warranty of authority”, negligence, breach of trust, and breach of undertaking under the Law Society’s Code for Completion by Post (2011 edition) (2011 Code). P&P also claimed breach of warranty of authority and negligence against the estate agents who marketed the property, (“Winkworth”).

Court’s Decision

Robin Dicker QC, sitting as a Deputy High Court judge, held that although solicitors’ checks were designed to reduce the risk of fraud, they could not reasonably be thought to eliminate it. As such, the implied “warranty of authority” did not mean the seller’s solicitors OWC had to establish and guarantee that their client, a Mr Harper, was the true Mr Harper.

  • Neither the solicitors nor estate agents were in breach of warranty of authority.
  • The judge found that the basic representation was only that the solicitor as agent has authority to act for another (the client).
  • Neither had represented to the buyer that it had authority to act for the true owner of the property.
  • Neither the solicitors nor estate agents owed the buyer a duty of care to ascertain the seller’s identity, or that it was the true owner of the property.
  • The solicitor’s obligations on completion were governed by the express undertakings in the 2011 Code.
  • It was wrong to construe the 2011 Code as giving rise to a breach of undertaking which would in effect amount to a title guarantee.
  • The effect of paragraph 10 of the 2011 Code was that on becoming aware of the receipt of the completion monies the solicitors were permitted to use the money for the purpose of completion and were not required to hold the money on trust to the order of the buyer’s solicitor.
  • The effect of paragraph 3 of the 2011 Code was that the solicitors were not to be regarded as permitted to use the completion monies only for the purpose of a genuine completion and therefore were not liable for breach of trust.

The judge held that it was P&P’s solicitors, Peter Brown & Co, not OWC, who owed a duty of care to P&P.The judge reaffirmed the general rule that OWC acted on the instructions of and owed duties to their client, not P&P. A solicitor does not owe a duty of care to the other side in a transaction as a general rule Gran Gelato Ltd v Richcliff (Group) Ltd [1992] Ch 560.

  • Therefore, OWC did not owe a duty of care to P&P and there were no special circumstances to indicate otherwise.
  • The Judge granted permission to appeal.
  • The judge distinguished the case from the ruling earlier this year in Purrunsing, which found both the buyer’s and the seller’s solicitors equally liable in breach of trust to a buyer who was the victim of a property fraud. That case had been concerned with an earlier version of the code with different wording.

Commentary
1. This case highlights the risks involved when carrying out anti-money laundering checks and the importance of ensuring checks are completed correctly. The Judge said “the checks that solicitors are required to undertake are designed to reduce the risk of fraud and cannot reasonably be thought to eliminate it…..such checks can never be expected to be infallible”.

2. If the judge had decided that a warranty was given by OWC to P&P that their client was the registered proprietor, solicitors in conveyancing would effectively be guaranteeing that their client was the true owner. The vendor’s solicitors would be strictly liable if they were not. This has never been such a general obligation imposed on vendor’s solicitors. That interpretation would also conflict with the detailed rights and obligations in the Law Society Code for Completion by Post (2011).

3. However, if a solicitor steps beyond the narrow role as solicitor for its client (i.e. outside the scope of the solicitor’s authority as agent for that client) and accepts direct responsibility towards the buyer, then the solicitor owes a duty to the buyer.

4. A duty may be owed where a solicitor makes a representation or gives a report or certificate to a third party with the intention that it should be relied on or where the solicitor has voluntarily assumed responsibility to that person.

5. Whilst this decision appears to limit the extent of solicitor liability in situations of fraud in such transactions, solicitors should undertake further enquiries regarding the seller’s right to sell the property they purport to own. Where necessary, solicitors should seek express warranties in order to not only protect themselves, but to protect the parties involved in the transaction.

6. However, it would perhaps be a brave seller’s solicitor who gave any sort of undertaking concerning his client due diligence in view of the judge recognising the harsh reality that “such checks can never be expected to be infallible”.

7. The current situation appears unsatisfactory, because the immediate victim, the purchaser P&P was the party least able to protect itself. On the other hand, if the seller’s solicitor or estate agent was held liable to pay compensation, they too would be innocent victims. Irrespective of the money laundering checks and due diligence, elaborate frauds can still get through.

8. There are suggestions that a statutory scheme should be set up to compensate innocent victims of conveyancing fraud, or the insurance market should find a solution to protect buyers. In any event, purchasers, solicitors and estate agents should be on their guard against conveyancing fraud. We will continue to monitor developments, including any Appeal.

Paul Sykes is a Director in our Disputes Management department. For further information regarding professional negligence / commercial disputes contact Paul.Sykes@luptonfawcett.law

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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