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Why Everyone is Still Talking About Dreamvar

08 November 2018

Perhaps the title of this article goes a little too far; clearly not everyone is talking about Dreamvar. But it is certainly true that, nearly six months after the Court of Appeal handed down its decision in Dreamvar* , it is still generating a great deal of discussion.

The Facts

In Dreamvar, the Court of Appeal gave judgment on two separate claims, which were sufficiently similar to be heard together.

Both claims arose out of the same basic scenario:

  • A fraudster poses as the owner of a property, and instructs estate agents to market it for him.
  • An innocent purchaser makes an offer on the property, and the offer is accepted by the fraudster.
  • The purchaser instructs solicitors..
  • The fraudster instructs solicitors.
  • The purchaser, both sets of solicitors, and the estate agent, all believe the fraudster to be the true owner of the property.

What happens next is no surprise: the purchaser pays the completion monies to their solicitor, who pays the monies to the fraudster’s solicitor, who (after having provided what they believe to be a validly executed transfer document to the purchaser’s solicitors) pays them to the fraudster. It is not until the purchaser’s solicitor tries to register the purchaser’s title with HM Land Registry that all is revealed, by which time the fraudster is long-gone with the purchase monies.

Who to Sue?

Through no fault of their own, the purchasers had suffered a very significant loss. Recovering the funds from the fraudsters was, unfortunately, not an option. So the question for the Court of Appeal was: who else could they recover it from, and on what basis?

There were a number of options: the purchasers’ own solicitors, the fraudsters’ solicitors and the estate agents were all potentially on the hook as defendants. The potential causes of action were: negligence, breach of warranty of authority and breach of trust.

Not all of the potential claims were run against all of the potential defendants. But between them, the two claimants in these two joined cases explored all of the options.

What was decided?

The short answer is that both the purchasers’ solicitors and the fraudsters’ solicitors were found liable on the basis of breach of trust. Why and how this was the case (and why and how the other elements of the claims failed) are summarised in this table:

Negligence Breach of warranty of authority Breach of trust
Purchaser’s solicitors FAILED. Purchaser’s solicitors did everything correctly, and were not negligent. N/A SUCCEEDED. When the purchaser’s solicitors received the purchase monies into their client account, this was on the basis that they would hold them on trust for their client. Their instructions were to release the purchase monies on completion of a genuine purchase, but not otherwise. In these cases, the purchase was not genuine, and did not complete. Ipso facto, the purchase monies had been released in breach of trust.
Fraudster’s solicitors FAILED. In one (but not both) of the joined claims, the fraudster’s solicitors had not carried out any identity checks on the fraudster. But the negligence claim against them still failed, because they did not owe the purchaser a duty of care. FAILED. Although the court found that the fraudster’s solicitors had warranted that they were acting for the true owner of the property, on the facts, the claim still failed because the Court held that the purchasers had not relied upon that warranty of authority. SUCCEEDED. As part of the approved completion process, a seller’s solicitor receives the purchase monies prior to completion of the purchase. At that point the seller’s solicitor ‘puts on a second hat’: as well as acting for the seller, they also take on the role as agent for the purchaser’s solicitor. In other words, for a short period, the seller’s solicitors hold the purchase monies as sub-trustee for the purchaser. This fixes the seller’s solicitor with the same trustee duties as the purchaser’s solicitor. Payment away of those monies other than upon genuine completion is therefore a breach of trust.
Estate agent N/A FAILED. The court found that the scope of an estate agent’s duty is much more limited than that of a solicitor. It includes marketing the property, but does not include providing any warranties as to title. N/A

So, the fraudsters’ solicitors and the purchasers’ solicitors both committed a breach of trust when paying out the purchase monies. Both sets of solicitors asked the court to grant relief under s.61 of the Trustee Act 1925, on the basis that they had acted honestly and reasonably, and therefore should be relieved of the loss caused by the breach. The court refused on both counts.

The court’s refusal to grant relief to the purchasers’ solicitors might seem rather surprising, as the purchasers’ solicitors carried out all of the required identity checks and conducted the transaction in an exemplary way; they were in no way ‘to blame’ for what happened. However, when deciding whether or not to grant s.61 relief to a trustee, the court is not concerned with ‘blame’, but with ‘who can best bear the burden of the loss’. In this case, the court took the view that the firms of solicitors (with the benefit of professional indemnity insurance) were better able to bear the burden than the purchasers (which were small, uninsured property development companies). Had the claims been brought by institutional lenders rather than by property purchasers, it is quite possible that the balance would have tipped the other way.

Before anyone feels too sorry for the purchaser’s solicitors, however, it is important to realise that, as a result of the solicitors’ undertaking provided as part of the conveyancing process, they were entitled to a full indemnity from the fraudsters’ solicitors. The final outcome is therefore fairer than it might appear at first glance.

Comment

There are various reasons why Dreamvar is still such a hot topic, but two of the most significant are:

  1. The findings are relevant to a wide variety of people. Professional liability practitioners were always going to find the decision interesting, but it is also relevant to a host of others, including property lawyers, property owners, trustees and those who advise them, and also to insurers.
  2. Although the decision is not being appealed, there is a feeling amongst practitioners that Dreamvar may not be the end of the story. In other words, there are a number of aspects of the judgment which raise questions, questions which in due course (and in relation to other cases) may well need to be considered by the Supreme Court. For example: Given that the purchasers’ solicitors failed to obtain relief under s.61 of the Trustee Act, despite doing everything right, has the bar for s.61 relief now been set unrealistically high? Had it not been the case that the purchasers’ solicitors were entitled to full indemnity from the fraudsters’ solicitors, would the court still have refused to grant relief under the Trustee Act? Is it really necessary to show ‘reliance’ upon a warranty, in order to succeed in a claim for breach of warranty?

If and when questions such as these are considered by the Supreme Court, it will be interesting to see how the Court of Appeal’s decision in Dreamvar is referred to. In the meantime, it seems likely that Dreamvar will continue to be a topic of conversation for a little while to come.

By Esther Millard

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* P&P Property Ltd v (1) Owen White & Caitlin LLP (2) Crownvent Ltd and Dreamvar (UK) Ltd c (1) Mishcon de Reya (2) Mary Monson solicitors and The Law Society [2018] EWCA Civ 1082