Jeremy Cousins QC and I were recently kindly invited by Bold Legal Group (together with Lawyer Checker and Today’s Conveyancer) to present a webinar on the implications of the Court of Appeal decision in Dreamvar (UK) Ltd v Mishcon de Reya and P&P Property Ltd v Owen White & Catlin LLP. During the webinar, we made particular reference to six practical issues arising from the judgment.
Prevention of property fraud is better than cure. Conveyancers are on the front line. It will be clear from the six points below that, in deciding carefully how to proceed, they will often need to have recourse to their professional experience and judgment. Any suggestion that, in the modern environment, conveyancing is a “commodity” is inconsistent with, and indeed hostile to, the maintenance of a culture which seeks to (i) minimise the risk of fraud and (ii) ensure that clients are making decisions on a fully informed basis.
(1) The Code. The Court of Appeal held that (i) paragraph 3 of the Law Society Code for Completion by Post (2011) does not operate to exclude liability for breach of trust on the part of a purported seller’s solicitors and (ii) the seller’s solicitors’ undertaking in paragraph 7 is (a) an undertaking to have the authority of the person genuinely entitled to sell and (b) sufficient (as in Dreamvar) to give the buyer’s solicitors an indemnity from the purported seller’s solicitors. There is no obvious need to update the Code as the Court of Appeal has re-established that paragraphs 3 and 7 mean what (i) the buyer’s solicitors in Dreamvar and P&P had argued all along that they meant, (ii) most practitioners had probably assumed before the first instance decisions that they meant and (iii) in the case of paragraph 7, the Court of Appeal in Santander v RA Legal clearly understood it to mean. The Law Society might choose to consider whether the Code should be updated to limit the extent of the paragraph 7 undertaking given by sellers’ solicitors (although any such limitation would raise potential issues of consumer detriment). Post Dreamvar, the Code provides solid protection to buyers and their solicitors but only in cases where (i) it applies and (ii) the seller’s solicitors’ paragraph 7 undertaking is backed by adequate insurance. It might be added that, although the Court of Appeal did not need to decide the point, it was also argued on behalf of the buyer’s solicitors in Dreamvar that, even without the Code, the effect of a combination of section 69 of the LPA and the decision of the House of Lords in Starkey v Bank of England (1903) is to imply an undertaking similar to that in paragraph 7.
(2) Section 61. In those conveyancing cases where the Code provides an enforceable remedy, the practical importance of section 61 has receded. In other cases (whether involving conveyancing transactions or not) section 61 remains potentially vital to professional (e.g. solicitors) and other trustees. Whilst the judgment of Patten LJ in Dreamvar undeniably makes it more difficult for the “good” (i.e. honest and reasonable/non-negligent) professional trustee to obtain relief, it does not impose a bright-line rule that they can never do so (for a start, this would have involved overturning the decision of a strong Court of Appeal in Nationwide v Davisons). The grant of section 61 relief remains a matter of discretion for the trial judge. In making submissions in future as to why the circumstances of their case justify the grant of relief, “good” professional trustees are likely to place considerable reliance upon the dissenting judgment in Dreamvar of the Vice-President, Gloster LJ. Such trustees may also seek to put in issue at an early stage the relative ability of commercial or wealthy clients or beneficiaries to bear the loss (this having implications for disclosure).
(3) Insurance. Conventionally, professional indemnity insurance is regarded as intended to protect professional firms and their clients against malpractice on the part of the firm (and presumably priced accordingly). If, in a Dreamvar-type case, the defrauded buyer is to be compensated by insurance, it can legitimately be asked why, as a matter of policy, that compensation should (but for the paragraph 7 indemnity) come from their “good” solicitors’ professional indemnity insurers rather than some other form of insurance. The risk of a client proving to have contracted with a fraudster is essentially a commercial one (and one which could arise in a wide variety of commercial transactions). Why should professional indemnity insurers be expected to underwrite commercial risks associated with conveyancing transactions (or, indeed, any other type of transaction)? Firms need to remain abreast of developments in the market for what is, in effect, a form of title insurance. Where a transaction goes wrong, specialist insurance might be expected to provide the client with a swifter remedy than litigation against the professional firms involved. Moreover, difficulties in insuring a specific transaction may alert conveyancers to more fundamental problems.
(4) Exclusion of liability. As referred to in point (1) above, it was unsuccessfully argued by the purported sellers’ solicitors in Dreamvar that paragraph 3 of the Code operated to exclude liability for their breach of trust. There is no obvious reason why, in principle, solicitors acting for a buyer should not be able, in their client care letter, contractually to exclude breach of trust liability in circumstances where they are in due course held (i) to have been “good” and thus (ii) to be liable solely on the basis of “long pockets”. Whilst exclusion might be possible in theory, in practice it would be likely to have to satisfy the requirements of UCTA and/or the Consumer Rights Act (as applicable). Those requirements might be more easily satisfied if there were available to the client some form of insurance (which the fully informed client might still chose to decline) against the residual commercial risk of fraud.
(5) Warranties of authority. Where the Code applies, the seller’s solicitors’ paragraph 7 undertaking is, in effect, a form of warranty of authority. In other cases (whether involving conveyancing transactions or not) implied warranties may be given by professionals acting for other parties, although the judgment in Dreamvar has highlighted the potential importance of reliance (and thus, by extension, the potential importance of knowing of the existence of such warranties in order to be able rely upon them). To maximise the chances of their clients having the benefit of any such warranties, solicitors and conveyancers may need to be able to give (truthful) evidence that they relied upon the relevant warranty. They should thus keep themselves informed as to what implied warranties those acting for other parties might, as a matter of law, be giving (for a start, by reading the relevant passages of the judgment in Dreamvar).
(6) “Red flags”. In addition to their basic anti-money-laundering obligations, the paragraph 7 undertaking makes it vital for sellers’ solicitors to do everything they can to ensure that fraudulent transactions are nipped in the bud. Much of the plethora of guidance (now including the joint Law Society and HM Land Registry note of September 2017) is directed at firms assessing the bona fides of their own (rather than somebody else’s) client. The seller’s solicitors’ obligations do not end at completion. If any firm becomes suspicious at any time about the proper status of money in its client account, it should think extremely carefully about whether it should pay that money away (and, if so, to whom). Turning to the position of the buyer’s solicitors following a fraudulent transaction, at best their defrauded client may be out of his money for as long as the paragraph 7 undertaking takes to enforce. At worst, there may be no paragraph 7 undertaking at all (if the Code does not apply) or it may be of no practical value (e.g. if the sellers’ solicitors’ insurance is inadequate). Prevention is clearly better than cure. Buyer’s solicitors may, though, be in a quandry; some “red flags” may be present in many transactions. There is the risk of the “false positive”, i.e. dissuading a client from a genuine transaction. Equally, there are risks in acting as an informal enquiry agent and then being accused, e.g., of not having asked the right questions. Often, it will be the buyer themselves who is best placed to make further enquiries, e.g. by insisting on meeting or speaking to the seller or asking questions in the neighbourhood. In many cases, the buyer’s solicitors’ principal obligation may be to ensure that their client is properly warned so that they can make their own fully informed decisions. Indeed, certain types of client may be happy (on the basis of price) to buy property even where the transaction is in some way unusual.