Can a Landowner Sue a Solicitor Who Acted for a Fraudster to Sell the Land?

Leong Wai Hong and Brenda Chan discuss the liability of solicitors who act for a fraudster in a land fraud case.
 
Does a solicitor who unknowingly acts for a fraudster to sell a piece of land owe a duty of care to the real owner of the land? This, in essence, was the question which the Federal Court had to determine in Pushpaleela R Selvarajah & Anor v Rajamani Meyappa Chettiar & Other Appeals [2019] 3 CLJ 441.
 
BACKGROUND FACTS
 
The fraudster was an Indian national who possessed an Indian passport bearing the same name as the real owner of the land as stated on the land title. At all material times, the solicitor who acted for the fraudster was not aware that her client, the fraudster, was not the real owner of the land. The fraudster sold the land to a purchaser who in turn sold it to a bona fide purchaser. The real landowner, upon discovering the fraud, commenced legal action against the fraudster, the purchasers, the solicitors who acted for the vendor and purchasers, and the land office.
 
After a full trial, the High Court held that the solicitor for the fraudster vendor did not owe a duty of care to the real landowner based on the earlier Court of Appeal’s decision in Yap Ham Seow v Fatimawati bt Ismail & Ors and another appeal [2014] 1 MLJ 645. However, upon appeal by the real landowner, the Court of Appeal reversed the High Court’s decision.
 
The solicitor for the fraudster vendor obtained leave to appeal to the Federal Court on the following question of law:
 
In deciding whether a solicitor who acted for a fraudster owner of land who sold the said land owes a duty of care to the real owner of the land, whether the Court of Appeal decision in Yap Ham Seow v Fatimawati bt Ismail & Ors and another appeal [2014] 1 MLJ 645 or the Court of Appeal decision below is the correct decision.
 
The appeal was heard before a panel of five judges comprising of Raus Sharif CJ, Zulkefli Ahmad Makinudin PCA, Ahmad Maarop CJ (Malaya), Richard Malanjum CJ (Sabah and Sarawak) and Azahar Mohamed FCJ.
 
As Raus Sharif CJ and Zulkefli Ahmad Makinudin PCA had retired after the hearing of the appeal, the remaining three members of the bench delivered a unanimous decision on 29 January 2019 allowing the appeal and holding that the solicitor who acted for the fraudster vendor did not owe a duty of care to the real landowner. We will now look at the Federal Court’s grounds of judgment.
 
ERRORS BY COURT OF APPEAL BELOW
 
The leave question required the Federal Court to determine whether the Court of Appeal in Yap Ham Seow or the Court of Appeal below had correctly decided the question as to whether a solicitor who acted for a fraudster owner of land owed a duty of care to the real owner of the land.
 
Yap Ham Seow dealt with a similar set of facts, whereby the solicitor in that case had acted for a fraudster who purported to sell a piece of land on behalf of the owner under a forged power of attorney. In that case, the Court of Appeal held there was no duty of care owed to the owner of the land.
 
The Court of Appeal in Pushpaleela on the other hand, held that Yap Ham Seow was not authority for the blanket proposition that solicitors did not owe a duty of care to third parties, but that under certain circumstances such a duty of care could be owed, citing the English cases of Ross v Caunters [1980] Ch 297, Penn v Bristol & West Building Society [1995] 2FLR 938 and Al-Sabah v Ali [1999] All ER (D) 49. The Court of Appeal said:
 
[88] We consider these authorities to be good law on liability in negligence by advocates and solicitors to third parties in circumstances peculiar to the facts and circumstances of the present case ... We agree with learned counsel for the plaintiff that the case is not authority for the blanket proposition that a solicitor never owes a duty of care to a third party. Whether a solicitor is to be held liable to a third party must depend on the facts and circumstances of each case.
 
 ...
 
[90] On the facts of the present case it is clear to us that the third and fourth defendants were negligent in failing to take all necessary steps to verify the true identity and status of the imposter, the bogus Rajamani. When the bogus Rajamani produced an Indian passport bearing No F4495077, which did not match with the real Rajamani/plaintiff’s passport which bears No X205536, and gave a self-serving declaration in the ‘Surat Akuan’ at p 2857 of the appeal record to link the two passports, the third defendant was put to notice of the need to make further enquiries.
 
APPEAL BEFORE THE FEDERAL COURT
 
In the leading judgment by Azahar Mohamad FCJ, the Federal Court, agreeing with case authorities from Canada and New Zealand, pointed out that the Court of Appeal below had erred by taking an overly simplistic view in failing to appreciate that the solicitor must owe a duty of care to the real landowner before the court considers whether there has been a breach of the duty of care. The Court of Appeal appeared to have erroneously conflated the question of breach, i.e. the solicitor’s alleged negligent acts, with the question as to whether a duty of care was owed by the solicitor in the first place.
 
A careful reading of the English cases relied on by the Court of Appeal below also show that they are not authorities for a broad proposition that a solicitor who acted for a fraudster owner of land owed a duty of care to the real owner of the land. In fact, a review of case law in other Commonwealth jurisdictions show that generally, solicitors do not owe a duty of care to third parties except in limited circumstances, namely disappointed beneficiaries in probate cases, and where there is reliance and assumption of responsibility.
 
The Federal Court went on to consider whether a duty of care should be imposed on a solicitor who acted for a fraudster vendor towards the real owner of the land, by applying the three-fold test of foreseeability, proximity and policy considerations.
 
Foreseeability and Proximity
 
Their Lordships found that viewed objectively, it was not factually foreseeable to the solicitor that her act or omission might cause the real landowner to be deprived of her rights to the land. This was because she had been retained as the solicitor for the fraudster, whom she believed to be the owner of the land, and whose interest she is responsible for protecting. The expected scope of her duties covered the carrying out of the fraudster’s instructions.
 
The solicitor could not be expected to take into account the interests of the real landowner, whom she did not even know existed, much less had any knowledge of her interest in the land. It was not reasonable for the solicitor to enquire whether her client was really who she claimed to be or whether her client’s action might cause harm to the real landowner. The Court held that it was unrealistic to expect the solicitor to be able to guard the real landowner’s interests under those circumstances.
 
On the question of legal proximity, the Federal Court pointed out that the real land owner only suffered pure economic loss which usually calls for a more restricted approach. The Court considered the question of whether there was voluntary assumption of responsibility by the solicitor and reliance by the real landowner to be important factors in establishing legal proximity between the parties.
 
From the facts, it was plain that the only nexus between the solicitor and the real landowner was the real landowner’s interest in the land, and this alone could not create legal proximity where the real landowner was never the solicitor’s client, and the real landowner had never relied on the solicitor. They never met each other prior to the commencement of the present action and did not know of each other’s existence. The solicitor never assumed responsibility for the real landowner.
 
As such, the requirements of foreseeability and proximity in establishing a duty of care were not fulfilled.
 
Policy Considerations
 
The Federal Court, agreeing with New Zealand and Singaporean case authorities, also held that there were policy considerations against imposing a duty of care on solicitors acting for a fraudster owner of land towards the real of owner of the land.
 
Their Lordships were of the view that imposing such a duty would require solicitors to assume that their clients are acting deceitfully and will put them in a position of potential conflict of interest. It would also effectively make solicitors an insurer for all transactions, leading to increased costs that are passed on to the clients.
 
Such a duty would necessarily also extend to any agents for any person in any transaction, including accountants, bankers, insurers, stockbrokers and any other manifestation of an agent.
 
Taking into consideration the above factors, the Federal Court declined to impose a duty of care on solicitors acting for a fraudster owner of land towards the real owner of the land and allowed the present appeal.
 
The apex court of Malaysia then ruled that the answer to the leave question was that the Court of Appeal’s decision in Yap Ham Seow is correct.
 
CONCLUSION
 
The Federal Court’s judgment is significant as it conclusively determines that in Malaysia, solicitors acting for a fraudster owner of land do not owe a duty of care to the real owner of the land, and puts to rest the uncertainty that arose from the refusal of the Court of Appeal below to follow the decision in Yap Ham Seow.
 
The decision of the Federal Court is also significant as it will lend some guidance to the scope of duty of care owed by other professionals to third parties in Malaysia, by re-emphasising the applicability of the three-fold test of foreseeability, proximity and policy considerations.