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Breach of Trust: Dreamvar (UK) Limited v Mischon De Reya

Dreamvar (UK) Limited v Mischon De Reya (a firm) & another [2016] EWHC 3316 (Ch)

The recent case of Dreamwar (UK) Limited v Mischon de Reya is the latest in a series of decisions involving breach of trust and breach of warranty in respect of losses resulting from identity fraud. The case has attracted significant media attention following the court's ruling against Mischon de Reya, notwithstanding a finding that they had not been negligent. Mischon de Reya have been granted leave to appeal and the Law Society is considering intervening in the appeal to explain the concerns of the profession in the event the judgment is upheld.

In this article Michael Robin and Chris Lewis of DWF, who were instructed on behalf of Mischon de Reya, consider the significance of this decision for solicitors and their professional indemnity insurers.


This claim arises out of a property conveyance in relation to which Mishcon de Reya (“MdR”) was instructed to act by the Claimant (Dreamvar) who wished to buy a property for the sum of £1.1m from an individual purporting to be the freehold owner. Following completion it transpired that this individual was a fraudster who disappeared with the purchase monies and the true freeholder emerged preventing the transfer of the property.

The fraudster had instructed Mary Monson Solicitors (“MMS”) based in Manchester. The fraudster provided MMS with forged identification documentation, and shortly before trial MMS admitted that it had been negligent in carrying out its obligations under Money Laundering Regulations to verify the identity of its client.

The Claimant issued proceedings against MdR for breach of duty and/or negligence. Subsequently the Claimant amended its claim to incorporate a claim for breach of trust and to add that MdR failed to seek an undertaking from MMS that it had taken reasonable steps to establish its client’s identity. As part of the same proceedings the Claimant also claimed against MMS for breach of warranty of authority and breach of trust.

MdR issued a claim for contribution/an indemnity against MMS on the basis of breach of trust and breach of undertaking. The latter claim was based on the undertakings defined within the Law Society’s Code for Completion by Post 2011 (“the Code”), which had been adopted by the solicitors during the course of the transaction.


At trial, the judge, Mr David Railton QC took the view that MdR had not acted in breach of duty and/or negligently in failing to inform the Claimant: of the risk of fraud; to advise the Claimant that he should withdraw from the transaction; or to advise the Claimant that further investigations should be made as to the identity of the vendor or the circumstances of the sale. He also found that MdR had not acted negligently in failing to obtain a specific undertaking from MMS that it had verified the identity of its client, on the grounds that MdR had obtained the best available protection by securing the adoption of the Code.

In circumstances where there was not, nor could there be, a genuine completion of the contract of sale, the Judge took the view that he was bound by existing Court of Appeal authority to conclude that MdR was in breach of trust in paying away the purchase monies to MMS. Following this finding the Judge was then left to consider whether MdR was entitled to relief under s61, Trustee Act 1925. However before doing so (the reason for which will become apparent) the Judge first considered the claims advanced against MMS.

MMS’ defence in relation to both claims placed substantial reliance on the decision of Mr Robin Dicker QC in the recent case of P&P Property Ltd v Owen White & Catlin LLP & Anor ("P&P Property") (which is subject to an appeal). Based on this decision, the Judge found that MMS was not liable for breach of trust finding that a vendor’s solicitor is entitled to release purchase monies to their client even if genuine completion does not take place, as to find otherwise would place a burden on a vendor’s solicitor similar to the imposition of a warranty of authority. He took the view that any obligations there may be on a vendor’s solicitor are properly found in the undertakings given under the Code.

In considering the construction of the Code the Judge again followed the decision in P&P that the Code does not confer upon the solicitor the responsibility for the contractual obligations assumed by the Vendor (i.e. to provide a genuine TR1 transferring the title to the Property) nor any obligation (whether absolute or otherwise) to have the authority of the true registered owner to receive the purchase monies. Therefore, MMS was found not to have acted in breach of undertaking. Based on the same logic, the Judge also dismissed the claim that MMS was in breach of warranty on the basis that it would be “inappropriate to consider an implied assumption of contractual responsibility to exercise reasonable care separately from the circumstance in which such an assumption of responsibility would arise in tort.”

Having reached this view, the Judge turned to consider MdR’s application for relief under s61 Trustee Act 1925, which provides that:

If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same.

The Judge conceded that MdR satisfied the first limb of the test under s61, as he had already held MdR to have acted honestly and with reasonable care and skill. However, when considering the second discretionary limb, whether MdR ought fairly to be excused for the breach of trust, he identified that consideration ought to be given to the consequences of the breach of trust on the Claimant. The Judge took the view that the Claimant did not have insurance, or any ability (or knowledge) to enable it to self-insure against the risk of fraud. However, because MdR is insured for events such as this, on balance, it was better able to “meet or absorb” the loss than the Claimant. Further and finally, in the absence of any recourse against MMS, the only practical remedy the Claimant has is against MdR.  For these reasons the Judge denied relief to MdR finding MdR liable to compensate the Claimant for the loss suffered.

It is noteworthy that due to the fact that the Claimant’s claims for breach of duty and negligence against MdR failed and that the Claimant ultimately succeeded due to a very narrow determination based on the exercise of the Court's discretion under s.61 Trustee Act 1925, no order was made against MdR in relation to costs (with the exception of a £75,000 award as the Claimant succeeded in bettering its own Part 36 offer). MdR was granted leave to appeal on the Judge’s findings in relation to the finding of breach of trust, the exercise of the discretion under s61 and the Judge’s interpretation of the Code. MdR are seeking leave for the appeal to be heard in conjunction with the pending appeal in P&P Property.


The points considered in this case, both in relation to breach of trust and the application of s61 are of major importance not only for purchasers of property, but also for the whole of the solicitors’ profession and their insurers. There have been several Court of Appeal decisions recently on solicitors’ liability for breach of trust in conveyancing transactions, but none has arisen in this particular context, and therefore the Court of Appeal’s decision in this case will be of great significance.

Whilst this decision has been made in the context of residential conveyancing, it potentially affects all matters where client money is being held by a solicitor on trust for a specific purpose. The Court of Appeal’s decision should provide clarity on the proper construction of the undertakings given pursuant to the Code, the basis upon which solicitors acting for vendors hold purchase monies received into their client account prior to completion and/or before transmission to their own client, and the criteria to be applied by the Court when considering an application for relief under s61 Trustee Act, where the Trustee acted honestly, reasonably, and in accordance with standard practice.

In the event that this decision stands, there will be implications for solicitors' professional indemnity insurance to account for the evolving risk presented by this type of fraud, with the heaviest burden potentially falling on those firms which carry out residential conveyancing as a cornerstone of their practice. The Law Society may wish to be heard on the appeal, as may the Insurance Market, in view of the Judge’s comments regarding the weight to be given to the existence of professional indemnity insurance when considering whether s61 Trustee Act 1925 relief should be allowed by the Court.


For further information please contact  Michael Robin, Chris Lewis or Tim Barr.

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.