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The Court of Appeal decision in Dreamvar - a fresh perspective

The recently handed down Court of Appeal judgment in the combined appeals in P&P v Owen White, Catlin and Another and Dreamvar v Mishcon de Reya and Another has received a great deal of coverage in the legal media.  However, in light of an as yet unpublicised aspect of the case, as the party that effectively ran the appeal on the crucial issues before the Court of Appeal, Mishcon de Reya (and its own advisors DWF) question the suggested impact of the judgment on conveyancers, for the reasons set out below.


Background to the Appeal

In both cases, the original Claimants were small property companies purchasing residential property who were the victims of identity fraud by dishonest rogues, posing as genuine owners/vendors.  Reputable firms of solicitors were engaged by all parties, but this did not prevent the Claimants paying over the respective purchase monies to the fraudsters without obtaining titles for the property.  In both cases, the fraudsters vanished with the money, leaving the Claimants with substantial losses. 

In P&P, the Claimant sued OWC, the solicitors acting for the fraudster, for breach of warranty of authority, breach of an undertaking, negligence and breach of trust.  It did not sue its own solicitors who had acted on the purchase.  In Dreamvar, the Claimant made similar claims against MMS, the solicitors who had acted for the fraudster, but also sued its own solicitors, MdR for negligence and (by late amendment) breach of trust. 

In both cases, all claims against the vendors' solicitors failed at first instance, as did Dreamvar's primary claim against MdR for negligence.  However, Dreamvar succeeded in its claim against MdR for breach of trust (in accordance with well-established authority), and the trial judge refused to grant MdR relief pursuant to Section 61 of the Trustee Act, despite finding that MdR had acted honestly and reasonably. 

It was the Dreamvar decision that caused particular consternation in the legal profession, because MdR had done everything correctly, whilst MMS, was found to have no liability, despite admitting that it had failed to competently undertake ID checks on its client.  Not only was this a breach of its anti-money laundering obligations, but had adequate checks been undertaken, the fraud was likely to have been avoided. 

The profession's concerns were exacerbated by the judge's rationale for refusing to allow MdR relief under Section 61.  Having found that MdR had acted honestly and reasonably throughout, and that it could not itself have prevented the fraud, he refused relief principally because MdR was insured, and thus in a better position to meet the loss than the Claimant, a small property company with limited means.  He said, however, that if he had found MMS liable, he would have afforded MdR relief, no doubt because Dreamvar would not then have suffered financial hardship, having made a recovery from MMS. 

Law Society Intervention

The main concern was that the perceived injustice suffered by MdR (and potentially any purchaser's solicitor acting competently, honestly and reasonably in such circumstances) should be redressed by the Court of Appeal.  This was considered to be of such importance to the profession, that the Law Society intervened in the appeal, submitting that "… it is not the role of solicitors (and their insurers) effectively to underwrite the conveyancing system in this country or … to give an effective guarantee of title".

It submitted, furthermore, that "The Society's position is that, absent breach of tortious or contractual duty or a failure to comply with the regulatory professional obligations, neither the fraudulent vendor's nor the innocent purchaser's solicitor should be liable".  However, it submitted that, if either solicitor were to be liable then "… it ought to be the fraudulent vendor's solicitor as it is, at least, in a position and, indeed, under a regulatory and professional obligation to take steps to verify the identity of its client and thus prevent fraud".

The Code

In both P&P and Dreamvar, the fraudulent vendor's solicitors could and should have done more to prevent the fraud, but yet the court at first instance did not find them liable.  This was unsurprising as regards the claims against them for breach of warranty of authority and negligence respectively.  The law in this area is well settled.  Special circumstances and proof of reliance (neither of which applied in these cases) would be required to establish an assumption of responsibility by a vendor's solicitor direct to a purchaser.  The Court of Appeal followed existing case law and accordingly dismissed the appeals on these issues. 

The more controversial aspect of the judgments at first instance was the dismissal of the claims against OWC and MMS respectively for breach of trust and breach of undertaking under the Law Society's Code for Completion by Post 2011 ("the Code"), which applied to these transactions (as it does for the vast majority of residential property sales and purchases). 

These findings turned on the narrow question of construction of certain provisions in the Code.  The Court of Appeal found that, absent the Code, both vendors' solicitors would have received the purchase monies as agents for the purchaser's solicitors and with knowledge that the money belonged to the purchasers.  Patten LJ said "On that hypothesis they would have had no authority to release the monies except with the express authority of the purchaser, which in this case was only given on terms that it would be used to fund an actual purchase of the property.  There was therefore a clear breach of trust."

The controversy about the first instance decisions in these cases was that they exculpated OWC and MMS respectively for liability for breach of trust by adopting what appeared to be a strained and unnatural interpretation of certain provisions in the Code.  In this regard, the Code had been drafted to deal with legitimate property transactions, and to provide the necessary protections for those involved in the sale and purchase of residential property that had formerly been provided by physical completion meetings when title deeds were exchanged for the purchase price paid by bankers' draft. 

The case advanced by OWC and MMS respectively (and accepted by the first instance trial judges) was that the references in the Code to (i) 'completion' and (ii) 'seller' should, in the case of a fraudulent transaction, be extended to embrace (i) a 'pretend' completion or the 'ceremony' of completion (because there could be no valid completion in the case of a fraudulent transfer) and (ii) an imposter who posed as a genuine vendor, provided that his solicitor was unaware that he was not the genuine vendor. 

Thus, it was submitted and found, the fraudulent vendor's solicitors should be discharged from any trust obligations to the purchasers and their solicitors otherwise imposed under the Code, and their only recourse should be against the imposter himself. 

Again, unsurprisingly, the Court of Appeal gave short shrift to these arguments, supported by the well-established authorities of Santander UK v RA Legal [2014] EWCA Civ183   ("RA Legal") and Lloyds TSB Bank v Markandan [2012] EWCA Civ 65 ("Markandan").

Patten LJ summarised the position thus: "… there was no completion of a sale of the property.  The vendors had no title and the transfers were forgeries.  Since completion did not take place, the vendors' solicitors had no authority to release the money to their clients or otherwise to dispose of it in accordance with their instructions.  The purchase monies should have remained in their account to await either a genuine completion of the sale or further instructions from the purchasers' solicitors."

Likewise, the Court of Appeal had no difficulty in finding that the undertakings given by the vendors' solicitors contained in the Code not to release the purchase money without the authority of the 'seller' can only refer to the genuine owner of the property, and not the imposter who describes himself as such to the vendors' solicitor. 

Patten LG found "Both OWC and MMS agreed with their opposite numbers to adopt the Code for the purposes of completion.  They therefore agreed to give the undertakings as set out in paragraph 7, and to be bound by the terms of the Code, which stipulate the obligations of the sellers' solicitors.  But the content of those undertakings and other obligations falls to be determined by the true construction of the Code, not by whether OWC and MMS were in fact instructed by the named vendor."

He accordingly held that both solicitors gave undertakings that they had the authority of the real owners to receive the purchase monies on completion, and were thus in breach of those undertakings to the respective purchasers and their solicitors. Thus, the already established authorities that both vendors' and purchasers' solicitors hold the purchase monies on trust for the purchaser for the purpose of a valid completion was confirmed by the Court of Appeal, in the context of clarifying the proper construction of the Code.  The Court simply followed the judgments in Markandan and RA Legal. 

Breach of Trust

What probably did surprise many, was the Court's approach to the application for relief of breach of trust under Section 61.

In its submission, the Law Society stated that, where the breach of trust is 'technical', (ie without any lack of honesty or reasonable care by the solicitor) the solicitor should be relieved of liability by the exercise of the Court's discretion under Section 61.  Quoting from the judgment in Markandan it submitted "The careful, conscientious and thorough solicitor, who conducts the transaction by the book and acts honestly and reasonably in relation to it in all respects, but still does not discover the fraud, may still be held to have been in breach of trust for innocently parting with the loan monies to a fraudster.  He is, however, likely to be treated mercifully by the Court on his Section 61 application."

MMS admitted that it had not acted carefully and reasonably, and did not seek relief under Section 61.  OWC was found by the Court not to have acted carefully and reasonably and was refused relief.  However, MdR did act without fault, but the judge at first instance refused relief because Dreamvar had no other recourse to compensation and could not afford to bear the loss, for which MdR was insured.  It was this that led to the Law Society's submissions at paragraph 10 above. 

As the trial judge had specifically said that he would have granted MdR Section 61 relief if MMS was found liable (on the basis that MMS would then relieve Dreamvar of its financial burden), it was widely anticipated that, in finding MMS liable to Dreamvar for breach of trust and undertaking, the Court of Appeal would 'rubber stamp' MdR's appeal against the refusal of Section 61 relief.  Indeed, Patten LJ said that he found the judge's conclusions on the exercise of Section 61 discretion 'unimpeachable', but then went on to say that, although the finding of liability against MMS gave Dreamvar another means of recovering its money (which appears to have been precisely the trial judge's point) "… it does not provide MdR with any grounds for being relieved of its own liability.  The assessment of the reasonableness of its conduct and the inequality of the position between it and its former client remains the same."

The learned Lord Justice's reasoning on these issues seems inconsistent .  Indeed, in a robust dissenting judgment, Lady Justice Gloster, Vice President of the Court of Appeal, reasoned thus:

"The Judge himself having heard the evidence clearly considered that MMS and not MdR should bear primary responsibility for Dreamvar's loss in circumstances where MMS were liable to Dreamvar.  I see no reason to go behind the Judge's contingent conclusion as to how he would have exercised his discretion, had the correct analysis been as we have indeed found it to be; namely that MMS were in breach of trust and were liable for breach of their undertaking."

"I do not consider that the fact that MdR is insured should in the circumstances of this case lead to the conclusion that MdR should bear financial responsibility for Dreamvar's loss.  Dreamvar was entering into what was for it a relatively substantial property development as a business transaction.  I do not consider the Court's sympathy should be with one commercial party (in reality with its loan creditors, given its insolvency) rather than another, simply because one, and not the other, has insurance.  It is irrelevant in my view that Dreamvar was a newly formed company or that its beneficial owner was a young man. 

There was no suggestion that MMS's insurance would not be adequate to cover the loss.

I see no reason why these proceedings should be prolonged by yet further contribution proceedings as between MMS and MdR.  Accordingly I consider that MdR ought fairly to be excused for breach of trust and the Court should exercise its discretion in its favour."


In the event, following the handing down of judgment, the admitted culpability of MMS has led to an agreed Order whereby MMS will indemnify MdR for any liability for damages or costs it may have to Dreamvar arising from MdR's breach of trust, and the refusal of Section 61 relief.  This includes reimbursing MdR its own costs of the proceedings.  Thus the perceived injustice perpetrated by the original judgment has been rectified and it seems that no party intends to appeal any aspect of the judgment. 

Despite the judgment of Patten LJ concerning Section 61 relief, the allowance or refusal of such relief will always be a matter for the discretion of the trial judge, and will depend upon the circumstances of each particular case.  However, there is now likely to be more focus when investigating such claim upon the circumstances of the parties and the impact of any loss or judgment upon them.


For the reasons set out above, the Court of Appeal's judgment on construction of the Code follows the previous case law.  Indeed, all aspects of the judgment and all of the key issues considered by the Court confirm the established law.  The net result (which has yet to be publicised) should certainly satisfy any objective sense of fairness.

Patten LJ’s judgment (against which Gloster LJ dissented) suggests that an honest and reasonable solicitor acting of the purchaser  should  pursue contribution proceedings against the vendor’s solicitors  in order to alleviate the consequences of refusal to grant s61 relief. However, in reality the purchaser’s solicitor will be entitled to an indemnity from the vendor’s solicitor by reason of the vendor’s solicitor breach of undertaking in any transaction to which the Code applies. In this regard, purchaser’s solicitors would be well advised to insist that the Code be adopted in every transaction upon which they are instructed. If the Code does not apply, then pursuant to the 1978 Contribution Act, the Court will apportion liability for the lost purchase monies by reference to the respective blameworthiness of the solicitors acting in the transaction.

These cases do highlight the extensive obligations and potential liabilities of conveyancing solicitors when dealing with potential or actual cases of property fraud.  As ever, prevention is better than cure, and no doubt those acting for vendors will now be aware of the importance of complying with AML regulations and the need for both vendor and purchasers' solicitors to be alert for any suspicious or unusual signs that may indicate a possible fraud, and take appropriate steps to warn/advise their clients accordingly.

As the judgment makes clear, the findings of liability for a breach of trust against OWC, MMS and MdR are strict in nature, and do not in any way depend upon the reasonableness or otherwise of their conduct.  That will only come into account when considering any claim for contribution and/or an application for relief under Section 61.  In theory a fraud may still be perpetrated whilst both vendor and purchaser solicitors act honestly, competently and reasonably, and yet the Court may refuse relief to either or both of them under Section 61.  Whilst that has always been the position, the profession, its insurers and the Law Society itself cannot say that it is now unaware of such a risk.


For more information please contact Micheal Robin Partner Michael.Robin@dwf.law or Chris Lewis Associate Chris.Lewis@dwf.law

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.