“Off-Plan” Investment Schemes: Equitable Compensation

Background

The SRA has issued warning notices^[1] to solicitors regarding whether they should act and how they should act towards their clients in relation to purported transactions concerning investment schemes. However, for many the warning will have come too late since many investors have previously parted with deposits (in some cases amounting to the client’s life savings) in return for worthless insurance bonds and unsecured interests in land or property which are also found to be worthless when the developer defaults on the development and becomes insolvent.

Typically “Off-Plan” investment schemes (e.g. purchase of hotel rooms or student accommodation) concern multiple potential defendants (e.g. developer/seller, insurance bond provider, referrer and the client’s conveyancing solicitor) and multimillion pound losses to numerous clients. In cases where the insurance bond is worthless (or was never put in place), the developer is insolvent and its secured creditors have sold off the development and the referrer would be unable to meet such a large claim; the conveyancing solicitor and its professional indemnity insurer become the only viable defendant to consider commencing a claim against.

Aggregation

In large investment schemes there is a further issue in that following the decision of AIG Europe Ltd v OC320301 LLP [2017] UKSC 18 investors in such schemes are likely to fall foul of the aggregation cap on the professional indemnity insurance which is likely to cover all investors in an investment scheme rather than per investor. Unfortunately the investors in Various Claimants v Giambrone and Law (a firm) & Ors [2017] EWCA Civ 1193 (‘Giambrone’) know this all too well since despite a victorious win that was upheld in the Court of Appeal the investors to the claim have not received the return of their deposits because the insurer had previously paid out up to the indemnity insurance aggregate cap to other investors in the same investment scheme.

Common Law Causes of Action

In claims for breach of contract and/or professional negligence the claimant must prove that it has sustained a loss that was caused by the conveyancing solicitor’s common law breach in order to obtain a remedy.

Breach of Trust

‘Money on a solicitor’s client account is held on trust. The only question is the terms of the trust’ (Twinsectra Limited v Yardley [2002] UKHL 12). The Solicitors Account Rules that applied at the relevant time are implied terms of the trust. Thus a payment out of the client’s monies to or to the order of a third party which is not authorised by or properly required on behalf of the client is a payment made in breach of trust (Bristol & West Building Society v May, May  Merriman [1996] 2 All ER 801, Target Holdings Limited v Redferns (A Firm) [1995] 3 W.L.R. 352).

The advantage of breach of trust claims over common law causes of action is that the common law rules of causation of loss do not apply to breach of trust claims.

Summary Judgment

CPR 24.2 Grounds for summary judgment

The court may give summary judgment against a claimant or defendant on the whole of a claim or on a particular issue if—

(a) it considers that—…

(ii) that defendant has no real prospect of successfully defending the claim or issue; and

(b) there is no other compelling reason why the case or issue should be disposed of at a trial.

“The criterion which the judge has to apply under CPR Pt 24 is not one of probability it is the absence of reality” (Three Rivers DC v Bank of England (No.3) [2001] 2 All E.R. 513).

Conticini v Graham & Rosen

In the High Court case of Alessandro Conticini & Ors v (1) Graham & Rosen (a firm) (2) Graham & Rosen Limited (‘Conticini’) heard before Deputy Master Bard on 19 June 2018 eighteen claimants sought recovery of their deposits of £1,333,000 from the defendants who had acted as the claimants’ conveyancing solicitors in respect of hotel rooms in a property development known as The Keep.  The Claimants were referred to the development and the defendants by a company known as IPIN. Contracts were exchanged as per a typical conveyancing transaction, however, an Addendum to Agreement placed an obligation on the defendants to act as Escrow Agent such that the claimants’ deposits were not to be accessed for any reason until such time that an Insurance Bond had been obtained by the developer and reviewed and approved by the defendants. Unusually for such investment schemes, the developer had completed the development prior to becoming insolvent but the claimants (unsecured creditors) still lost their deposits because their interests in the hotel rooms were not secured (for e.g. by a unilateral notice) and the developers secured creditors sold the development to recover the sums the developer owed to them.

The Addendum to Agreement stated:

‘2(a) Deposit Amount … Said monies may not be accessed for any reason until such time that an Insurance Bond, as defined herein, has been obtained by Developer and reviewed and approved by Graham & Rosen Solicitors….’

The Defendants requested the Claimants send them signed copies of the Lease Agreement and Addendum to Agreement together with a signed Client Authorisation letter, drafted on the Defendants’ headed notepaper, which stated:

‘I/we [claimant]….authorise Bridgepoint Ventures LLC in association with IPIN to sign any and all Graham & Rosen’s Terms & Conditions of Business letters on my/our behalf; and to give authorisation, at the relevant time, for the exchange and termination of contracts on my/our behalf.’

Prior to exchange of contracts the Defendants emailed IPIN to request that they authorise exchange for each of the rooms of The Keep, an example of which stated:

‘Please authorise exchange of room [X] The Keep – [Claimant name] as set out below;’

[image missing]

IPIN simply responded to the request ‘Please exchange’.

The Particulars of Claim pleaded various common law breaches (e.g. breach of contract, professional negligence) and claims for breach of trust in that the claimants’ deposits were released:

(a) without an Insurance Bond, as defined in the Addendum, being obtained by the Seller/Developer and reviewed and approved by the Defendants;

(b) without paying the whole of the claimants’ deposits to the seller’s solicitor but rather distributing the deposit monies as follows:

a. 35% of the Claimants’ deposits to Agents (IPIN).

b. Graham & Rosen retained £600 from each of the Claimants’ deposits.

c. Remainder of the balance of the Claimants’ deposits paid to the Seller’s solicitors.

Following receipt of the defendants’ defence the claimants made an application for summary judgment in relation to the two breaches of trust.

The claimants relied upon the recent Court of Appeal case of Giambrone (See Annex) whilst the Defendants’ sought to argue that (1) defendants were not obligated to act as per the requirements set out in the Addendum to Agreement, (2) IPIN (the referrer) were the client’s agent who authorised (a) release of the claimants’ deposit monies without an insurance bond having been obtained by the developer and reviewed and approved by the defendants and (b) release of part of the claimants’ deposit monies as commissions to IPIN and (3) all of the deposit monies were paid out to the developers order which included making payments of commissions to IPIN.

Deputy Master Bard said in his judgment that:

1. Breach of Trust: no Insurance Bond – ‘…to the extent suggested the Defendants not obligated to heed those obligations in Addendum Agreement that has no real prospect of success. Thus to part with monies [without having reviewed and approved an Insurance Bond] would be a breach of trust unless authorised…’.

2. Authorisation: ‘…I do not accept IPIN authorised to do so or that the defendants could conceivably believe IPIN to do so or for IPIN to allow the claimants’ monies to be disbursed, partly for benefit of IPIN, thereby sweeping into disregard the deposit protection insurance to which the claimants were promised and entitled. Makes no sense to me that anyone could have thought emails [were adequate] without seeking authority from each claimant. [IPIN had] authorisation has no real prospect of success.’

3. Equitable Compensation: ‘[As to equitable compensation the judge read out paragraphs 45 to 47 and 59 to 64 of Giambrone (see Annex), the later he stated were highly important. And then went on to say] …that seems to me to represent on any view the position of the claimants’ entitlement. Defendants were to keep the money safe, released with no policy [in place]…money should be repaid back.’

4. Breach of Trust: payment of commission to IPIN: ‘…£38,500 to agents [equals] 7% [which equates to] 35% of deposit. Correct in Giambrone deposit was 50% with very high proportion paid to agents 62%, made it sufficiently high as a percentage of total which no solicitor should have allowed. 7% seems to me if part with money quite what developer did [with it is] not a matter of concern. Protection theoretically of Insurance Bond…thus the 2nd and alternative [breach of duty] would not have succeeded, view expressed that part would have a real prospect of a successful defence. But since breach of trust [for release of monies without an insurance bond] and authority of Giambrone I direct the deposits [£1,333,000] be paid to the claimants…’.

Conclusion

• In large investment schemes it is the first investors to the winning line (or settlement) that are likely to see the return of all or a significant amount of their deposits.
• Breach of trust claims have the benefit that common law rules of causation of loss do not apply, however, in order to obtain an award of equitable compensation the breach of trust must satisfy the “but for” test.
• In appropriate cases summary judgment on breach of trust issues can result in an early resolution of litigation with significant savings in legal costs and reduced ATE premiums. The latter being of particular benefit to claimants since ATE premiums, following the Jackson reforms, are no longer recoverable from defendants.

^[1] https://www.sra.org.uk/solicitors/code-of-conduct/guidance/warning-notices/Investment-schemes-(including-conveyancing)–Warning-notice.page

Annex

Extract from Lord Justice Jackson’s Judgment in Various Claimants v Giambrone and Law (a firm) & Ors [2017] EWCA Civ 1193 (‘Giambrone’):

“Part 5 – Ground 1: Equitable Compensation

45 Giambrone was obliged to hold the purchasers’ deposits until such time as it received guarantees which complied with Articles 2 and 3 of Decree 122. In the event, neither RDV nor Veco ever did supply guarantees which complied with those articles. …

46 The judge found that it was a breach of trust for Giambrone to pay out the deposits to the promoters and the developers in those circumstances. On appeal Giambrone does not challenge that finding.

47 The central question arising on this issue is how the court should assess equitable compensation for that breach of trust. It is common ground that, perhaps surprisingly, the events at Brancaleone did not constitute a “crisis” situation which triggered the obligation of the guarantors to pay out. Throughout the turbulent events on site, neither RDV nor Veco ever became insolvent.

…

59 Let me now apply the principles emerging from those authorities. The first task is to identify the duty which has been breached or the content of the obligation which has not been performed…The duty or obligation of the solicitors was to receive deposits from purchasers and to hold that money as custodians until the developers provided compliant guarantees.

60 On this issue I accept the submissions of the respondents. The essential difference between this case and Target or AIB is the solicitors’ role in relation to the security. It was not the function of Giambrone to liaise with the providers of the guarantees. Giambrone had no input into the drafting of the guarantees or any of the other formalities under Italian law. Giambrone’s role was to receive whatever guarantees the developers provided and to check whether or not they complied with Decree 122. If (and only if) the guarantees did comply, then the solicitors were under a duty to release the deposits. In the language of Lord Toulson in AIB at [76], that was “the content” of the “relevant obligation”.

61 The position was different in Target and AIB. In Target the solicitors were under a duty to take active steps to secure a charge over the property, before releasing the monies. In AIB the solicitors were under a duty to take active steps to secure the removal of prior charges before releasing the money.

62 In the circumstances which unfolded in the present case, I would characterise the solicitors’ obligation as an obligation to act as custodians of the deposit monies indefinitely. Compliant guarantees never appeared. Therefore Giambrone should have remained as custodians of the deposit monies until the preliminary contracts were rescinded, and then paid those monies back to their clients.

63 In Target the plaintiff’s claim failed on the “but for” test. In the present case the claimants’ claim passes the “but for” test. In AIB the claimants’ loss was limited to that which would have been recoverable in contract, because the trust was “part of the machinery for the performance of a commercial contract”. In the present case the trust was part of the machinery for the performance of the solicitors’ contract of retainer. Giambrone’s breach of contract consisted of wrongfully paying out deposit monies which it had undertaken to keep safe. The contractual measure of damages is the amount of the deposits, because those monies have now vanished. This is a case where equitable compensation and contractual damages run in tandem.

64 Subject to argument about South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 (which I will address Part 7 below), I therefore conclude that the judge was correct to award the amount of the lost deposits to the claimants as equitable compensation. I reject the first ground of appeal.

Part 6 – Ground 2: Solicitors’ Accounts Rules

65 Giambrone held the deposits received from purchasers in its client account. Giambrone could only make withdrawals from the client account in accordance with rule 22 of the Solicitors’ Accounts Rules …

66 The judge held that Giambrone ought to have informed its clients before paying out such a substantial part of the deposit to VFI as commission. The payment of those sums to VFI without notice to the clients was a breach of rule 22 of the Solicitors’ Accounts Rules. That was also a breach of trust: see Bristol and West Building Society v May, May and Merrimans (a firm) [1996] PNLR 138 at 158 – 159…

67 Mr Flenley submits that Chadwick J’s dictum in May, May and Merrimans has been overtaken by the Court of Appeal’s decision in Bristol and West Building Society v Mothew [1998] Ch 1. In Mothew solicitors made a misrepresentation to the lender, as a result of which they were instructed to, and did, pay over the loan monies. Millett LJ, with whom Staughton and Otton LJJ agreed, held that that was not a breach of trust. At 23 Millett LJ said:

“The defendant knew that he was a trustee of the money for the society; but he did not realise that he had misled the society and could not know that his authority to complete had determined (if indeed it had). He could not be bound to repay the money to the society so long as he was ignorant of the facts which had brought his authority to an end, for those are the facts which are alleged to affect his conscience and subject him to an obligation to return the money to the society.”…

71 It was obvious that Giambrone ought to have disclosed the payment of such large and over-generous commissions. Giambrone appreciated this as soon as it gave serious consideration to the matter. Giambrone felt so embarrassed about its conduct that it sought to suppress the truth. In my view that package of circumstances is sufficient to “affect the conscience” of Giambrone in the manner described by Millett LJ in Mothew at 23.

72 I would therefore dismiss the second ground of appeal.”