Who is liable for the acts of a fraudulent vendor?

1 December 2016

P&P Property Limited –v– (1) Owen White & Catlin LLP (2) Crownvent Limited t/a Winkworth [2016] EWHC 2276 (Ch).

Background

This case serves as a welcome decision for professionals when considering where to pin the blame (and liability) in circumstances where a vendor in a property transaction turns out to be fraudulently impersonating the true owner.  The Judge in the case, Mr Robin Dicker QC, sets a reasonable limit to a solicitor’s liability when due diligence checks fail to help uncover sophisticated fraudsters, particularly where the victim is not in fact their client.

P&P Property Limited (‘the Claimant’) believed it  had successfully exchanged contracts and completed the purchase of a high value property however, almost immediately afterwards, it became clear that a fraudulent vendor, Mr Harper(1), had impersonated the true owner. The title to the property was not acquired and Mr Harper disappeared with the money.

The Claimant alleged that the vendor’s solicitors, Owen White & Catlin LLP (‘the First Defendant’), were liable for breach of warranty of authority, negligence, breach of trust and breach of undertaking. They also alleged that the estate agents, Winkworth (‘the Second Defendant’), were liable for breach of warranty of authority and negligence. All claims were dismissed.

Breach of warranty of authority  

Breach of warranty of authority claims arise where a person is alleged to have incorrectly represented that he has authority to act on behalf of another and induces a third party to act in a manner in which he would not have acted had the representation not been made. These claims are advantageous to claimants as liability is strict: it is no defence whether you honestly believed the fraudulent vendor to be the true owner.

In this case, the Judge decided it would be wrong to assume that a solicitor, acting as an agent, makes representations about the principal’s true identity or attributes.  The reference to ‘Mr Harper’ in the contract could not be construed as a reference to the true Mr Harper when determining the scope of the implied warranty. This will come as a relief to solicitors and estate agents alike as it reinforces the position that professionals are unlikely to be liable for a lost purchase price unless they have expressly warranted that their client was the true owner of the property, rather than just that their client says that they are the true owner. The Judge noted that due diligence checks are designed to reduce the risk of fraud but cannot reasonably eliminate it altogether.

Negligence

The Claimant contended that the First Defendant owed them a duty of care to take reasonable steps  to ascertain the true identity of Mr Harper, even though the Claimant, as the buyer, was not their client. This was rejected by the Judge on the basis that there were no special circumstances resulting in the First Defendant having accepted such a responsibility. Instead it was the Claimant’s own solicitors that owned them such a duty of care, but no action was brought against them.

Breach of trust

The Claimant argued that the First Defendant held the purchase monies that it received from the buyer on trust and that they were paid away in breach of that trust. The Judge carefully examined the Law Society Code for Completion by Post (2011) (“the Code”) but determined that under paragraph 3 of the Code, “In complying with the terms of the code, the seller’s solicitor acts on completion as the buyer’s solicitor’s agent without fee or disbursement but this obligation does not require the seller’s solicitor to investigate or take responsibility for any breach of the seller’s contractual obligations and is expressly limited to completion.”

Interestingly in the earlier case of Purrunsing v A’Court & Co and House Owners Conveyancers Ltd, somewhat controversially, both the purchaser’s and the vendor's solicitors were found equally liable in breach of trust to a purchaser who was the victim of a property fraud. However, the Judge in this case conveniently departed from this earlier judgment on the basis that the decision in Purrunsing had applied an earlier version of the Code which contained different wording.

Comment

This decision shows that professionals will be protected from being made liable for losses which arise from sophisticated frauds if they have acted reasonably: followed appropriate checks and  did not provide express warranties as to the true identity of their client. Potential purchasers are however left vulnerable and their solicitors would be prudent to enquire as much as possible as to the right of the vendor to sell. Meanwhile savvy solicitors acting for vendors should be careful not to agree to express warranties as to the identity of their client. 

 

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