Know Your Seller and Know Your Client: Avoiding Being Defrauded in a Property Transaction

how-well-do-you-really-know-your-customers

Singapore High Court: Chu Said Thong and another v Vision Law LLC [2014] SGHC 160

A conman and audacious identity thief named Victor Tan fabricated an option which purportedly gave him the right to buy a property at Jalan Berjaya from Lum Whye Hee, its true owner. He defrauded a law firm (defendant) into acting for him (posing as Lum), and he also defrauded the plaintiffs into agreeing to acquire from him his non-existent right to buy the property.

The Singapore High Court in Chu Said Thong and another v Vision Law LLC [2014] SGHC 160 made important findings on the remedies available to the plaintiffs when the fraud was uncovered. This case also reminds both potential purchasers on the steps to take to avoid being defrauded, as well as law firms on the precautions to be taken to avoid being liable in such conveyancing transactions (or any transaction for that matter).

Facts

Victor Tan masqueraded as a property agent from DTZ called “Steven Sim” (when in fact there was no such property broker), and advertised the property for sale at S$3.864 million (which was significantly lower than the asking prices around that time). The plaintiffs called Victor Tan, who was posing as “Steven Sim”. Unfortunately, the plaintiffs only viewed the outside of the property from the street (because their intention was to demolish and rebuild). “Steven Sim” told the plaintiffs that Lum Whye Hee (“Lum”) had granted an option to purchase the property to Victor Tan (and that Victor Tan wanted to urgently sell this right to purchase in order to pay his gambling debts). In truth, Lum was over 89 years old, had suffered a serious stroke in 2006, and was bed-ridden and entirely unable to communicate. She did not intend to sell the property and had not issued an option to purchase to anyone. The plaintiffs agreed to pay Victor Tan S$105,200 (consisting of option money of S$35,200 and a goodwill sum of S$70,000) to buy his right under the “option” to purchase the property.

“Steven Sim” told the plaintiffs that the defendant law firm acted for Lum in selling the property and gave them Susan Chua’s number. Victor Tan also subsequently met the plaintiffs posing as “Lucas Ong”, the purported assistant of “Steven Sim”. Victor Tan used his fabricated “option” to defraud the plaintiffs into agreeing to acquire from him his non-existent right to buy the property.

On a separate front, Victor Tan wrote a note on the “option” addressed to Susan Chua, a conveyancing secretary employed by the defendant law firm. In that note, he pretended to be Lum, instructed the defendant to act for him in selling the property and set out his own mobile phone number. At the foot of the note, he fraudulently signed Lum’s name. He then faxed a copy of the “option” to the defendant. Susan Chua conducted a title search, which confirmed that Lum was the owner of the property, and that the same Lum was the seller in the “option”. However, Susan Chua did not know that Lum was a woman. She called the mobile phone of Victor Tan, and spoke to Victor Tan (who masqueraded as “Mr Lum”). Apart from these steps, the defendant did not conduct any of the know-your-client identity checks mandated by the Legal Profession (Professional Conduct) Rules, and in fact never met the putative client (Lum).

Before the plaintiffs agreed to acquire the non-existent right to buy the property, the first plaintiff called the defendant and spoke to Susan Chua about the “option”. It is the plaintiffs’ case that Susan Chua in this conversation made three critical misrepresentations (including confirming that the defendant law firm acted for Lum (the “1st representation”), and that Lum had issued the “option” to Victor Tan (the “2nd representation”)). These misrepresentations, the plaintiffs say, gave them the confidence to enter into the transaction with Victor Tan by which he defrauded them and have thereby caused them loss and damage.

The fraud was subsequently uncovered. However, Victor Tan had fled the country by then.

The plaintiffs sued the defendant for, amongst other things, the return of the S$105,200, as well as the lost opportunity to enter the property market in their desired area at the lower values prevailing at the time of the fraud (for which they claimed around S$2 million for the difference in price in a rapidly-rising property market). Their three causes of action were: (1) fraudulent misrepresentation; (2) negligent misrepresentation; (3) breach of warranty of authority.

Holding

The Court dismissed the plaintiffs’ claim in fraudulent misrepresentation because there was no fraud in any sense of the word. The Court further held that the defendant did not owe the plaintiffs a duty of care and therefore dismissed their claim in negligent misrepresentation.

The Court found, however, that the defendant was liable to the plaintiffs for breach of warranty of authority, because: (1) Susan Chua had represented that the defendant had Lum’s authority; (2) Susan Chua’s representation is attributable to the defendant (because she made that representation in the course of her employment); (3) Susan Chua’s representation was false (in this regard, liability for breach of warranty of authority is strict, and does not require any fault); (4) Susan Chua’s representation induced the plaintiffs to transact.

The plaintiffs were therefore entitled to recover (albeit anomalously) damages of S$105,200, being the sum which the plaintiffs paid over to Victor Tan in reliance on Susan Chua’s first and second misrepresentations. The plaintiffs could not, however, rely on that cause of action to recover the lost opportunity to enter the property market in their desired area at the lower values prevailing in September 2010. That loss was too remote, because it was neither reasonably foreseeable on 20 September 2010 nor within the parties’ reasonable contemplation that the plaintiffs would be frozen out of a rapidly-rising property market for close to a year before the next property which met the plaintiffs’ requirements came onto the market in their desired area and the plaintiffs committed to purchase that property to replace the bargain that they thought they had reached with Victor Tan on 20 September 2010.

The Court also made some concluding comments on the anomalous nature of liability for breach of warranty of authority.

Comments

This is an important decision which reminds both potential purchasers on the steps to take to avoid being defrauded, as well as law firms on the precautions to be taken to avoid being liable in such conveyancing transactions.

In relation to potential purchasers, such fraud may have been avoided if: (1) the property was viewed from the inside rather than merely from the outside; (2) the purchasers met the actual owner and confirmed the owner’s identity; (3) the purchasers took steps to confirm that the owner did in fact grant the option to the first purchaser (who in this case was Victor Tan) other than relying on the first purchaser’s lawyers; (4) the purchasers confirmed the identity of the first purchaser’s property agent with their agency; (5) the purchasers exercised a high or higher degree of caution and prudence when the deal looks like a bargain (because there is often a catch to such “bargains”). In short, take all reasonable steps to know your seller(s) and/or their agent(s), regardless of whether one is merely acquiring a right to buy a property from the first purchaser or acquiring the property itself directly from the owners.

In relation to law firms, to manage risks, they should: (1) conduct all relevant and reasonable identity checks on their client(s); (2) meet their client(s) in person (insofar as possible); (3) ensure proper supervision of their staff, especially in relation to how their staff communicate to the world at large (whether client(s) or otherwise) on behalf of the law firm or its solicitors. In other words, take all reasonable steps to know your client(s) and to supervise your staff. This applies not only to conveyancing transactions, but to all transactions in general.

The usual disclaimer: All opinions expressed on www.singaporelitigationlawyer.com are entirely my own. Importantly, my opinions do not constitute legal advice and you should definitely formally engage a lawyer to confirm, vary or refute my views.

To Sue or Not to Sue: Demystifying Litigation in Singapore @www.singaporelitigationlawyer.com © Dominic Chan, a Singapore litigation lawyer. All rights reserved.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s