Dundee sheriff rules victims of push payment fraud cannot recover funds under financial services legislation

About this case:

• Citation:
  [2023] SC DUN 13
• Judgment:
  External link
• Court:
  Sheriff Court
• Judge:
  Sheriff Jillian Martin-Brown

Muhammed Zahid and Faiza Ashraf argued that defender Rahim Zahak, trading as Razak Property Investments, had acted negligently in advising them in relation to the transaction. In an esto argument, they sought to establish that section 27 of the 2000 Act applied as the loss was sustained as a result of an agreement covered by it, namely the defender’s facilitation of a mortgage with a high street bank.

The case was heard by Sheriff Jillian Martin-Brown, with Logan, advocate, appearing for the pursuers and Royle, solicitor, for the defender.

No distinction

The pursuers had required to pay the sum of £27,168 as a deposit towards the purchase price of a house. However, they paid the amount to a fraudster’s bank account after receiving an email purporting to be from their solicitors informing them that their bank details had changed. While the fraud was reported to the police, the pursuers were unable to recover the funds, and as missives had already been concluded they required to raise additional funds to pay the deposit or face penalties.

It was averred by the pursuers that the defender, who they claimed had acted as their independent financial advisor, was negligent in his actions in that capacity. Alternatively, if he had not acted as an independent advisor, he had at least acted as an intermediary in obtaining the pursuers’ mortgage with Halifax, in contravention of section 19 of the 2000 Act, thus entitling them to the remedies set out in section 27.

Counsel for the pursuers submitted that there was no distinction to be drawn between the facilitation of a mortgage on the one hand and the payment of a deposit for a purchase on the other. Section 27(2) clearly allowed losses in respect of property transferred by a party under the agreement and ‘agreement’ was defined in section 27(3)(b) as ‘the making or performance of which constitutes, or is part of, the regulated activity in question carried on by the provider’.

The defender denied acting as an independent financial advisor to the pursuers and submitted that the 2000 Act was not engaged in this case. Only money or property paid or transferred under the mortgage agreement could be recovered and not the deposit money which formed the subject matter of the current claim.

Not party to contract

Sheriff Martin Brown, in her decision, said of the meaning of ‘agreement’: “Logically, the regulated activity in this case carried on by Halifax is the provision of a mortgage. The agreement which constitutes part of that regulated activity is the mortgage agreement. It is not the agreement between the pursuers and the sellers of the property, to whom the deposit funds represented part payment of the purchase price. The mortgage provider is not a party to that contract.”

She continued: “The first set of deposit funds were paid to a fraudulent bank account. The second set of deposit funds were paid to the sellers of the house and the purchase was completed. The agreement to purchase the house is entirely separate from the mortgage agreement. If the pursuers’ interpretation of section 27 was correct, then the agreement to purchase the house would be unenforceable.”

Assessing what the pursuers might recover, the sheriff said: “What is potentially recoverable is money paid by the pursuers to the mortgage provider under the mortgage agreement, or compensation for loss sustained by the pursuers as a result of having paid money to the mortgage provider under the mortgage agreement, in the event that the pursuers could prove that the mortgage was made in consequence of something said or done by the defender in contravention of the general prohibition.”

She concluded: “I am therefore of the view that the deposit funds which were paid in error to a fraudulent bank account do not constitute money transferred by the pursuers under the agreement, nor losses sustained as a result of having parted with money or property under the mortgage agreement. Consequently, the pursuers’ esto case under the 2000 Act is irrelevant. That leaves the pursuers’ common law case of negligence against the defender on the basis that he was acting as an independent financial advisor.”

The pursuers’ averments on their esto position under the 2000 Act were therefore excluded from probation.