Karen Stachura

In the English case of Dreamvar v Mishcon De Reya & another (2018 EWCA civ 1082) the claimant purchaser, Dreamvar, had paid funds, via their solicitors, Mischon De Reya (MDR), in order to purchase a property. They subsequently discovered that the alleged seller was not the real owner of the property but was in fact a fraudster, who had disappeared with the money, leaving Dreamvar out of pocket to the tune of £1.1M with no title to the property they had paid for.

So what did Dreamvar do?

They sued their solicitors, MDR, on the basis that (1) they were professionally negligent as they should have alerted them to the risk of fraud and they should also have obtained an undertaking from the seller’s solicitors that they had established the identity of the seller, and had failed to do either, and (2) they were in breach of trust for paying the purchase monies in circumstances where no genuine purchase had occurred.

The court at first instance (the High Court of Justice Chancery Division) held that there was no negligence on the part of MDR, as they found nothing unusual about the transaction which would have put MDR on enquiry of the risk of fraud.

However, the judge found that MDR were in breach of Trust for releasing the purchase funds without a genuine purchase occurring.

MDR therefore sought relief from liability under s61 of the Trustee Act 1925 (in Scotland, the equivalent is s32 of the Trusts (Scotland) Act 1921). S61 required MDR to prove that they had acted honestly and reasonably and to show that they ought fairly to be excused for the breach of trust. There was no question as to their honesty, so the question for the court was whether they had acted reasonably and if it would be fair to grant them relief.

In considering these issues, the court assessed the parties’ positions. It found that the claimant, a small building development company, had no other source of recovery. On the other hand, it found that MDR had professional indemnity insurance. Accordingly, it held that it was only fair that MDR be held liable.

MDR appealed.

MDR conceded that it had been in breach of trust, but sought relief under s61 for that breach.

The Court of Appeal refused to relieve MDR. They agreed with the judge that, as MDR had insurers who could meet the loss, it would be fair that they should be found liable to pay.

This is on any view a remarkable and sobering decision for solicitors and insurers alike. It would appear that if the court finds that one party has the means to meet the loss sustained, it may then follow that it would consider it fair to find against that party and hold them liable to pay, i.e. refuse to relieve them of any breach of trust. This is despite a finding that the party in question had acted honestly and reasonably. Whilst this case is not authoritative in Scotland, it will undoubtedly be persuasive and provide guidance on how such situations are approached in future.

This decision may also have wider implications as fraud becomes more commonplace in all areas of commercial life. Following this decision, we may see more cases in future based on breach of Trust. Watch this space!

Karen Stachura is a senior associate at BTO LLP