Liability of conveyancing solicitors in a "fake vendor" situation

Summary

In two linked appeals, the Court of Appeal considered the liability of conveyancing solicitors and estate agents following two transactions in which it was discovered post “completion” that the purported vendors, their respective clients, had in fact been imposters. The issues before the court were whether or not the solicitors and/or the estate agents were negligent, in breach of trust or undertaking, and/or had breached their respective warranties of authority to act for a "fake" principal. The solicitors were found liable, the agents not; the Court of Appeal’s reasoning on each of the issues is broadly summarised below.

Negligence

• The traditional position, as articulated in Gran Gelato v Richcliff [1992] Ch 560, is that absent special circumstances, the vendor’s solicitor owes no duties to the purchaser (who will of course be represented by their own solicitors) in an “ordinary” conveyancing transaction. The general rule is, of course, that a solicitor only owes a duty to his/her own client(s).

• The “focus of the claims in these cases is on the duty of the vendor’s solicitors to take reasonable care that the transaction is a genuine one…”. Referring back to the Supreme Court decision of Steel v NRAM, the Court of Appeal said that the basis of any liability to third parties will be the concept of assumption of responsibility (see our article here). This will involve balancing the foreseeability of reliance by the third party upon the professional performing his/her duties (including identity checks) competently against other factors which might make it unfair or unreasonable to impose liability.

• In both Dreamvar and P&P, the professionals were instructed to act for the vendors in arms-length property sales and these are “not cases in which it would be fair and reasonable to treat the [vendors’] solicitors and agents as having assumed responsibility to the purchasers for the adequacy of the due diligence performed in relation to their client’s identity". There was nothing in the way the transactions were conducted which made it objectively reasonable for the sellers’ solicitors to be legally accountable to the purchasers in respect of their AML checks.

Breach of trust

• On breach of trust, the question was whether, at the point of releasing monies to his/her client absent a true completion (because the transaction is fraudulent), a vendor’s solicitor has the purchaser’s authority to do so. It was held that the vendors’ solicitors had acted in breach of trust in both cases when they released purchase monies.

• The Court of Appeal construed the express obligations owed by the solicitors under the 2011 version of the Law Society Code for Completion by Post, which expressly provides that the seller’s solicitor is not required to “investigate or take responsibility for any breach of the seller’s contractual obligations”. The Court of Appeal rejected arguments that a finding of liability for breach of trust would be inconsistent with this part of the Code, which cannot be construed as releasing liability nor as granting authority for the vendors’ solicitors to release the monies even where it turns out that completion has not been genuine.

• The Court of Appeal declined to interfere with the decision I the P&P matter to refuse relief under s.61 Trustee Act 1925 to the vendors’ solicitors; there had been a series of failures to carry out a number of “relatively basic” checks”.

Breach of undertaking

The 2011 Code states that the seller’s solicitor “undertakes…to have the seller’s authority to receive the purchase money on completion”. It was held that this must mean an undertaking that the solicitors have the authority of a genuine seller and registered proprietor, rather than the person posing as such in giving instructions.

Breach of warranty of authority

As a general principle, “any agent who claims to have authority beyond what in fact exists may be liable to a third party for breach of warranty of authority”. The Court of Appeal held that in warranting that he/she acts for a “seller”, a solicitor is giving a warranty that he/she is acting for the real seller/property owner, and not (as was held at first instance) simply that they have the authority of their instructing client.

Commentary

Identity theft within the context of a conveyancing transaction has been considered a number of times by the courts. Where the would-be purchaser is out of pocket, having released the purchase monies at “completion”, the law has not to date provided the purchaser with an easy means of recovering those funds.

Where the seller is a fraudster who has absconded with the funds (and usually untraceable), a would-be purchaser may explore claim against his/her own solicitors, who owe contractual, tortious and fiduciary duties of care, and/or the seller’s solicitors. The difficulties with doing this are obvious; the seller’s solicitors owe their duties of care to their own client not to a purchaser.

This decision of the Court of Appeal provides those would-be purchasers with an easier route to pursuing the seller’s solicitors. Although it was not considered fair or reasonable to impose a duty of care in negligence, the Court of Appeal’s decision as to the construction of the word “seller” in the 2011 Code make claims for breaches of warranty of authority and/or undertaking more likely to succeed.

Where a party represents that it has the authority of another to act on its behalf, and a third party is induced by that representation, that representation is taken to be true, and there is strict liability for any consequent loss arising out of the breach of that warranty. This is a surprising decision, as it is akin to having the solicitor guarantee the transaction. It may well be that this is a policy decision, given the recent preponderance of this type of fraud and, possibly, a desire to ensure that the professionals on both sides of a property transaction take additional care. In addition, there is little alternative protection for a would-be purchaser who is left out of funds.