Analysis
The claim arose from a purported sale of a property to the claimant by a fraudster who purported to be, but was not in fact, the registered owner of the property. By the time the fraud was discovered the whole of the purchase price had been paid by the claimant to the second defendant (the claimant’s conveyancer), by the second defendant to the first defendant (the fraudster’s solicitor) and by the first defendant to an account in Dubai upon the fraudster’s instructions.
The fraudster’s instructions to the first defendant were that the property had been given to him by his father, that the property was vacant and that a speedy exchange and completion would be required because he needed the money. The fraudster had informed the first defendant that his address was an address which was neither the property nor the alternative address for service on the register, had produced proof of that address and had provided what appeared to be a British Passport for himself which was in fact a forgery. The fraudster had not supplied the first defendant with any documentation to show a link between him and the property nor had he been asked for this. The fraudster completed a form for the first defendant stating that no building work had been carried out while in his ownership but searches by a prospective purchaser uncovered that building work had been carried out during the period of the fraudster’s purported ownership. The fraudster withdrew from that prospective purchase after the prospective purchaser asked for confirmation of the hospital that the fraudster worked in in Dubai, giving as his reason that he believed the prospective purchaser to be trying to prolong the transaction and may not proceed to completion, in circumstances where he could have provided such information within the time frame for completion.
Upon being instructed by the claimant, the second defendant requested from the first defendant (i) confirmation that an indemnity policy had been taken out in respect of the property, (ii) a bankruptcy search against the fraudster and (iii) confirmation that they were familiar with the fraudster, would verify his identity and check ID to support the same. The first defendant responded stating that they had no documents whatsoever in relation to the property save the ones already sent (being office copy entries and questionnaires completed by the fraudster) and that they had no personal knowledge of the fraudster but had met him in person and seen his passport together with utility bills showing his UK address as notified to the firm.
Contracts were exchanged and the purchase money transferred. The fraud came to light, none of the money paid had been recovered and there was never completion of the property purchase.
It was common ground that the moneys paid away by the first and second defendants were payments made in breach of trust and thus that both defendants were liable to the claimant for breach of trust. The issues to be determined were (i) whether either defendant should be granted relief under s61 of the Trustee Act 1925, (ii) whether the second defendant was liable to the claimant for breach of contract or negligence and (iii) whether and if so what contribution each defendant should be ordered to bear in respect of any liability that they might have to the claimant.
Held, that the claimant was entitled to succeed as against both defendants and as between the defendants each must bear an equal part of the loss:
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- 1) Both the first and second defendants were relevant persons for the purposes of the Money Laundering Regulations 2007 (MLR) in relation to the sale and purchase of the property being independent legal professionals participating in a transaction concerning the buying and selling of real property and thus were required to apply customer due diligence when establishing a business relationship or carrying out an occasional transaction. The approach to be adopted to customer due diligence would depend on the circumstances surrounding a particular transaction. What was appropriate in relation to a sale by an owner-occupier of a modestly priced residential property subject to a building society charge may not be appropriate in relation to the sale of a high value unencumbered property being offered for sale by a registered proprietor whose claimed address was not that of the property being sold or any other address for service on the register.
- 2) Section 61 imposed at least a two-stage test – being whether the trustee concerned acted honestly and reasonably and secondly whether in all the circumstances the trustee ought fairly to be relieved of personal liability either in whole or in part.
- a) The reasonableness test that is applied to a solicitor who parts with completion moneys without obtaining completion is necessarily a high one because of the need to interpret s61 consistently with equity’s high expectation of a trustee discharging fiduciary obligations. It is therefore one which requires the solicitor concerned to have acted with exemplary professional care and efficiency and to be careful, conscientious and thorough, though the test remains one of reasonableness not perfection;
- b) The onus rests on the trustees concerned – in this case the defendants – to prove that they acted reasonably;
- c) Conduct that is completely irrelevant or immaterial to the loss (or which played absolutely no part in the occasioning of the loss) will usually be disregarded by the court in its assessment but a departure from best or reasonable practice that increased the risk of loss by fraud will not be, even if the court concludes that the fraudster would have achieved his goal even if the solicitor had acted reasonably so that the relevant act or omission must at least be connected to the loss. It follows that if the trustee fails to prove that his unreasonable conduct played no material part in occasioning the loss then the trustee fails at the threshold stage;
- d) In deciding whether a trustee has acted reasonably, it will usually be inappropriate to look at each complaint separately but rather will usually be a question to be resolved by looking at the relevant conduct taken as a whole and in the round; and
- e) When considering the exercise of discretion, regard must be had to the effect of the grant of relief not only on the trustee but on the beneficiary and thus considerations such as the financial strength of the loser, and the availability of insurance to meet the loss, are relevant considerations.
- 3) A lesser standard of reasonableness should not be applied to a vendor’s solicitor than to a purchaser’s solicitor. The vendor’s solicitor was as much a trustee of purchase money while it was in its possession pending completion as the purchaser’s solicitor. The obligation in relation to purchase money is an absolute obligation not to release the money before completion. The liability that arises from a breach of that obligation is strict because of equity’s high expectations of a trustee discharging fiduciary obligations. Once it was found or admitted that a vendor’s solicitor is a trustee of purchase money and had parted with it in breach of trust, there was no obvious justification for interpreting s61 more leniently in respect of such a breach by a purchaser’s solicitor. The same standard of reasonableness applied albeit what each had to do in order to fulfil that standard may be different because of the different roles that each had in relation to the transactions.
- 4) The fact that the first defendant had not been paid by the claimant did not mitigate the standard of reasonableness that applied. The principle that the standard of reasonableness is likely to be higher for a paid than an unpaid trustee recognised a distinction between an unremunerated lay trustee on the one hand and a trustee such as a trust corporation acting for reward on the other. Further that principle went to the exercise of discretion not to the threshold question. Finally where the trustee under consideration is a solicitor or licenced conveyancer who has committed a breach of trust in a conveyancing transaction in which he is professionally engaged, there was no obvious justification for distinguishing between a solicitor acting for a purchaser (who has been paid by the beneficiary) and a solicitor acting for the vendor.
- 5) A solicitor or licenced conveyancer is not obliged to undertake investigations that are not expressly or impliedly requested by the client but if in fact they acquire information that may be of importance to a client, it is their duty to bring that information to the attention of the client. The second defendant ought to have known that the answers to its questions concerning the fraudster’s identity were unsatisfactory and have told the claimant of the unsatisfactory response and advised him not to proceed with the transaction until satisfactory responses had been received. The second defendant was in breach of contract and/or duty to the claimant in failing to inform him that these questions had been raised, that the purpose of the enquiry was an attempt to establish a link between the property and the apparent vendor and that the answers received showed that the first defendant had no documents relating to the property whatsoever, save those already provided, had no knowledge of the fraudster personally and had not verified and could not confirm from the information available to them a link between the fraudster and the property and therefore advise that there was a risk in proceeding with the purchase. If this information had been provided to the claimant it was close to inconceivable that he would have proceeded with the purchase. Consequently the claim for damages for breach of contract and negligence against the second defendant succeeded.
- 6) Furthermore, the same established that the second defendant had failed to discharge the burden of proving that they acted reasonably for the purposes of s61 and therefore could not rely on it.
- 7) Further, the first defendant had failed to discharge the burden on them to establish that they acted reasonably in the circumstances and thus they are not entitled to the benefit of s61. The Money Laundering Regulations 2007 imposed an obligation on the first defendant to look at all the information available and assess whether it was consistent with the transaction that the fraudster wished to carry out being a lawful one. A reasonable solicitor in the first defendant’s position carrying out client due diligence ought to have considered whether the fraudster was the owner of the property in order to assess whether the transaction was a lawful one. The factors known to the first defendant at the time clearly indicated the need for such an approach. In addition the first defendant had not seen any documents whatsoever relating to the property save for the forms completed by the fraudster and the office copy entries that they had obtained, they had no knowledge of the fraudster other than that obtained following his approach and was aware that the address he was using did not appear as an address for service on the register and no explanation had been offered (or sought) as to why that was so. The first defendant failed to carry out its MLR obligations in accordance with reasonable practice in the circumstances and that failure increased the loss by fraud. The fact that the second defendant should have carried out due diligence prior to the funds being transferred to the first defendant was immaterial. The first defendant’s obligation to carry out due diligence in relation to the fraudster could not in any sense be qualified by reason of a belief that the second defendant had complied with their obligation in relation to the fraudster.
- 8) Any person liable in respect of any damage may claim a contribution from any other person liable in respect of the same damage. The amount of contribution is such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question. In assessing the level of contribution the court must have regard to considerations of relative causal potency as well as comparative blameworthiness. Applying those principles, the first and second defendants must bear equal liability for the loss.
- a) The first defendant was under a professional obligation to ensure that the claimant proceeded at all times on an informed basis. They asked a question for the purpose of satisfying itself that the fraudster was entitled to sell the property and received an answer which was unsatisfactory and ought to reasonably have been reported to the claimant. It was probable that the claimant would have withdrawn from the transaction or declined to proceed without further information from the fraudster. Had that occurred the outcome is likely to have been that the purchase would not have proceeded.
b) The second defendant had significant responsibility for what occurred. They had a responsibility to carry out risk-based due diligence but made no serious attempt to do so. They knew the property was unoccupied, knew it was not subject to a charge and knew the fraudster had given an address which was neither the property or the alternative address for service in the register. They made no attempt to obtain an explanation for this or obtain any documentation to establish a link between the fraudster and the property. Had these enquiries been made, it is unlikely the fraud would have occurred.
HHJ PELLING QC: [1] This is a claim arising out of the purported sale to the claimant of 35 Merton Hall Gardens, Wimbledon (the property) by a fraudster who claimed to be, but was not, ‘Mr Nicholas Robert Dawson’, the registered proprietor of the property. Where I refer to Mr Dawson hereafter I am referring …Continue reading "Purrunsing v A’Court [2016] EWHC 789 (Ch)"