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4 November 2016 | Comment | Article by David King

Catch 22: where should the burden lie in fraud claims?


We are all aware that fraud is on the increase, and fraudsters are evolving their methods of obtaining cash through more sophisticated techniques. We are constantly being told to be alert to scams, whether through people attempting to obtain our bank account details or through fraudulent transactions via the internet. It will therefore come as no surprise that claims against professionals where an individual or business has been on the receiving end of a fraudulent transaction are on the increase.

We recently discussed the outcome of Purrunsing v A’Court & Co, where a fraudster impersonated a seller in a house sale and disappeared with the proceeds of sale. In that case, the court held that the solicitors acting for both the buyer and the seller were liable for breach of trust to the buyer who fell prey to the property fraud.

In another recent decision in P&P Property Limited v (1) Owen White & Catlin; and (2) Crownvent t/a Winkworth [2016] EWHC 2276 (Ch), this issue again came before the court.

Background

At the beginning of December 2013, Owen White & Catlin (OWC), a firm of solicitors, and Winkworths, a firm of estate agents, were approached by someone purporting to be “Mr Harper” to act on his behalf in relation to the sale of a property in London for the sum of approximately £1,000,000. “Mr Harper” alleged that he needed to sell the property quickly in order to complete on another sale in Dubai on 15 December 2013, and said that he was living and working in Dubai. A purchaser, P&P Property Limited, was found and the sale of the property completed on 12 December 2013. On the same day, the sale proceeds were transferred through the bank account of OWC to a bank account in Dubai which had been nominated by “Mr Harper” for that purpose.

Shortly after completion it was discovered that “Mr Harper” was an imposter when the real Mr Harper turned up at the property to find P&P Property carrying out major refurbishment. The Land Registry subsequently refused to change the register of title of the property and P&P Property Limited accordingly suffered a loss of over £1,000,000.

The Claim

P&P Property brought a claim against both OWC and Winkworths (even though neither had acted for P&P Property on the transaction) on the following grounds:

Breach of warranty of authority

This allegation was on the basis that OWC and Winkworth had represented that they had authority to act for the owner of the property and that they were instructed by the true Clifford Harper, when they were not. P&P Property Limited alleged that it had agreed to purchase the property in reliance upon these warranties of authority.

HHJ Dicker QC explained that where a person represents, by word or conduct, that they have authority to act on behalf of another, and a third party is induced to act in a way in which he would not otherwise have acted as a result of that representation, the party making the representation is deemed to warrant that the representation is true and will be liable for any loss caused to the third party as a result of the breach of that warranty. The reason for this doctrine is that, if the agent does not have the authority which he claims, the third party may have no claim against the supposed principal. Treating the agent as having impliedly warranted his authority, gives the third party a claim against the agent, where otherwise he may have no claim at all.

After considering the case law on this area, HHJ Dicker QC concluded that in this case the solicitor had only warranted that she had authority to act on behalf of her client, namely the person who called himself Mr Harper and who claimed to own the property. He stated that:

“The checks that solicitors are required to undertake are designed to reduce the risk of fraud and cannot reasonably be thought to eliminate it…if…a solicitor who acts for someone purporting to sell a property thereby warrants that their client is the registered title holder, solicitors engaged in conveyancing transactions would effectively be guaranteeing that their client was the registered title holder, and would be strictly liable if this was not the case.”

In addition, he did not consider that by informing P&P Property that the name of the person selling the property was Clifford Harper, Winkworth were warranting that they had authority to act for the true owner.

Therefore, the claims for breach of warranty of authority against both defendants failed.

Negligence

P&P Property alleged that both OWC and Winkworth owed it a duty of care in tort to act with the skill, care and diligence of a reasonably competent professional and they had breached that duty.

HHJ Dicker QC held that since P&P Property was not a client of OWC or Winkworth, neither defendant owed P&P Property a duty of care. There were no special circumstances that resulted in OWC assuming a direct responsibility to P&P Property to take reasonable care to ascertain the identity of Mr Harper or to ensure that he was the true owner. In addition, it would not be fair, just and reasonable to impose a duty on Winkworth to establish that Mr Harper was the true owner of the property on behalf of P&P Property when conducting their anti-money laundering obligations.

In addition, P&P Property Limited brought the following claims against OWC:

Breach of Trust

P&P Property claimed that OWC held the funds that it received from P&P Property on trust, and that since no valid completion took place (because the seller was not the true owner of the property) the completion monies were paid away in breach of trust.

In reaching his decision on this point and in relation to the alleged breach of undertaking (see point (4) below), HHJ Dicker QC referred to a number of the provisions in the Law Society Code for Completion by Post (2011 edition) (the Code) which imposes certain duties on solicitors.

HHJ held that the Code states that “the seller’s solicitor will complete upon becoming aware of receipt of [the completion monies]”. Accordingly, from the moment the full completion monies had been received, OWC did not hold the money on trust to the order of the buyer’s solicitor. Instead, it was permitted to use the monies for the purposes of completion.

The issue was whether in the absence of a genuine “completion”, OWC had acted in breach of trust by paying the monies to “Mr Harper”. HHJ Dicker QC concluded that in light of paragraph 3 of the Code which provides that the seller’s solicitor is not required “to investigate or take responsibility for any breach of the seller’s contractual obligations”, it would be inconsistent to impose a liability on the seller’s solicitor for breach of trust in releasing the completion monies in the event that completion does not occur because the seller does not have title.

As a result, OWC had not acted in breach of trust by paying the completion monies to “Mr Harper”.

Breach of Undertaking

P&P Property alleged that OWC acted in breach of an undertaking that they had “Mr Harper’s” authority to receive the purchase money on completion and would complete the purchase on receipt of such money.

Finally, HHJ Dicker QC held that OWC had not breached any undertakings. This was because, in relation to paragraph 7(i) of the Code, which states that: “the seller’s solicitor undertakes (i) to have the seller’s authority to receive the purchase money on completion”, the reference to “seller” is to the person agreeing to sell the property, not a reference to the registered title holder if different.

The court has granted permission to appeal. It will be interesting to see if P&P Property does bring an appeal against this decision, and the outcome of any appeal.

Comment

The problem with any case involving an element of “fraud” is that it will always be unfair for the innocent party who is ultimately left bearing the burden of the fraud: whether that be the purchaser, the solicitor or another professional such as an insurance company.

Whilst it is clear that P&P Property’s own solicitors would have owed them a duty of care, what is not certain is whether P&P Property would have been able to bring a successful claim against that firm of solicitors because no submissions were made before the court on this point. It would be interesting to see if the outcome would have been different if such a claim had been brought. The judge commented that P&P Property’s solicitors could have asked OWC for an undertaking that the money would only be released to them on confirmation that they had carried out proper client due diligence, but this step was not taken.

It is possible that in light of this judgment, purchasers’ solicitors will be more vigilant in ensuring that a seller’s solicitor has undertaken extensive due diligence on the seller’s identity and title to the property. What is clear is that in circumstances where fraudsters are becoming increasingly sophisticated, it is essential that all parties: purchasers, and professionals alike, are diligent in trying to weed out fraud from transactions.

Author bio

With vast experience within the sector advising private network owners, investors and landlords, telecoms law is a key area of David’s portfolio.

Nationally recognised as a leading specialist in advising on the new Electronic Communications Code and telecoms leases, David’s niche extends to advising on the acquisition and decommissioning of telecoms sites by investors and operators, and in advising on the decommissioning of telecoms sites.

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