Group action professional negligence specialists at Penningtons Manches acted for a group of over 100 UK and Ireland based claimant purchasers who successfully defended an appeal brought by law firm Giambrone & Law (Giambrone) and others against the High Court’s prior finding that Giambrone’s advice and conduct was negligent, in breach of contract and in breach of trust. The judgment handed down by the Court of Appeal ruled in favour of our claimant clients, dismissing all five grounds of appeal brought by the defendants.

Background

Giambrone (a firm of solicitors then practising in England and Italy) appealed against a High Court judgment in which it was held liable to compensate the claimants, who had lost money in a disastrous holiday home venture in Calabria, Southern Italy. Giambrone acted as solicitors to the claimants on the property transactions in question. The claimants unusually paid large deposits of 50% of the purchase prices to Giambrone for the to-be-constructed apartments in a development known as the “Jewel of the Sea”. Giambrone then paid out those deposits, 62% as commission to the promoter and 38% to the developers, in breach of its duty to the claimants because (as the High Court found):

  • it had failed to first ensure before paying the deposits out that valid guarantees were in place as required under Decree 122 of Italian law to protect the claimants’ investment, and had failed to tell the claimants that the guarantees that were obtained were not compliant;
  • it had failed to advise the claimants on the inadequacy of the preliminary contract;
  • it had failed to check the validity of the planning permission and merely taken it at face value;
  • it had failed to tell the claimants of, and in fact had deliberately concealed, the unusually high commission payment to the promoter;
  • it had failed to carry out adequate due diligence;
  • it had failed to advise the claimants that the non-returnable 50% deposit was unusually high; and
  • it had failed to alert purchasers to the risk of criminal activity in the construction industry in Calabria.

Problems with the planning permission later arose; the planning permission was suspended, construction work stopped and the Italian Financial Police took possession of the development due to suspected money laundering. The claimants, who were left without their holiday homes or their deposits, took action against Giambrone, with a large number being represented by Penningtons Manches.

Following the High Court’s findings, it subsequently ruled in favour of the claimants and ordered Giambrone to pay to the vast majority of them the full amount of the deposits that they had paid to Giambrone, as equitable compensation for the breach of trust. Giambrone appealed to the Court of Appeal.

Appeal

Ground 1: equitable compensation

The first ground was on whether equitable compensation should have been awarded for the breach of trust in the deposits being paid out. Giambrone argued that equitable compensation should have been assessed at nil, because, they said, even if valid guarantees compliant with Decree 122 had been obtained, a situation had not occurred which would have triggered the obligation of the guarantors to pay out, so the claimants would be in no better position. The claimants, on the other hand, contended that the measure of equitable compensation must be the amount of the deposits which Giambrone wrongly paid out.

The Court of Appeal, considering various leading case-law authorities, found that Giambrone was under an obligation to act as custodian of the deposit monies and to check whether or not the guarantees received were compliant with Decree 122. Only if the guarantees did comply was Giambrone then under a duty to release the deposits.

As compliant guarantees were never obtained, the deposits should never have been paid out, and Giambrone was therefore in breach of its contract with the claimants and in breach of trust in wrongfully paying out the deposit monies which it had undertaken to keep safe. The trust was part of the machinery for the performance of the contract. The Court of Appeal held, finding for the claimants and rejecting Giambrone’s argument, that the contractual measure of damages should be the amount of the deposits, because those monies had now vanished. In this case, equitable compensation and contractual damages ran in tandem.

Ground 2: Solicitors’ Accounts Rules

The deposits held by Giambrone for the claimants could only be paid out of Giambrone’s client account in accordance with Rule 22 of the Solicitors’ Accounts Rules. The High Court had found that Giambrone should have informed the purchaser claimants before paying such a substantial part of their deposits to the promoter as commission. Its payment of such large commission payments without either notice to the claimants and obtaining their informed consent was a breach of Rule 22. It was also a breach of trust that Giambrone deliberately concealed their knowledge of the commission payments in a letter to the claimant purchasers.

Giambrone argued on appeal, relying on Bristol and West Building Society v Mothew [1998] Ch 1, that it did not initially realise that it ought to disclose the promoter’s commission payment, and the High Court therefore erred in finding that the payment was a breach of trust. Rejecting this second ground of appeal, the Court of Appeal found that it was obvious that Giambrone should have disclosed the payment of such large and over-generous commissions, and once Giambrone appreciated this, it suppressed the truth out of embarrassment.

Ground 3: SAAMCO

The third ground of the appeal concerned a leading authority, South Australia Asset Management Corporation v York Montague Ltd[1997] AC 191 (known as SAAMCO) on the measure of damages. SAAMCO formulated a distinction between (1) a duty to provide information to enable someone to decide what course of action to take (described by the Court of Appeal in Giambrone as "category 1 cases"), and (2) a duty to advise someone on what course of action to take ("category 2 cases"). In category 1 cases, the defendant may be liable for the specific consequences of its information or advice being negligently wrong, but in category 2 cases, it may be liable for all consequences flowing from the claimant entering into a transaction in reliance on its negligent advice. Giambrone argued on appeal that the SAAMCO principles, applied to this case, prevented the claimants from recovering part or all of their deposits.

The Court of Appeal found, perhaps uniquely in the context of solicitors claims, that the Giambrone case is a category 2 case. The distinction between categories 1 and 2 lies in whether the defendant is “guiding the whole decision making process or merely providing part of the material on which C will rely”. Although conveyancers would normally fall into category 1, this was not a conventional conveyancing case because Giambrone was guiding the whole process.

The Court of Appeal went on to find that Giambrone’s breaches of trust and contract in paying out the deposits in the circumstances it did caused loss being the disappearance of those deposit monies. This was a direct loss, and that loss was clearly within the scope of Giambrone’s category 2 duty. Giambrone had explained to the claimants their rights, liabilities and protections under Italian law and that they would be protected by guarantees, yet proceeded to pay out the deposits when no such guarantees were in place. Consequently, the SAAMCO principles did not shut out the claimants’ claims for the deposits they had lost.

Grounds 4 and 5: planning permission and organised crime

Grounds four and five of the appeal challenged the findings of breach of duty in relation to failing to check the planning permission, and failing to alert the purchasers to the risks of criminal activity in the construction industry in Calabria.

Giambrone argued that as the High Court judge could not identify the issue with planning permission, he therefore could not properly hold Giambrone in breach of duty – Giambrone checked that apparently valid planning permission was in place and was not under a duty to do more. The Court of Appeal held however that the judge was correct to find a breach of duty given that Giambrone had undertaken to do extensive enhanced due diligence, including checking that there was valid planning permission, but in fact did no more than observe that the planning documents were apparently valid on their face. Moreover, Giambrone should have done more than merely take the planning permissions at face value because it was well aware that Calabria was a crime-ridden part of Italy.

The Court of Appeal also found that Giambrone should have warned the claimants about the risk of organised crime in Calabria, despite Giambrone’s argument on appeal that it was under no such duty to warn them. Giambrone knew that Mafia activities affected all sectors in Calabria including the construction sector, and was acting for foreign clients whose knowledge was based purely on promotional material for the properties. The High Court judge had therefore been entitled to find that Giambrone was in breach of duty in this regard.

Conclusion

This case is especially significant because it is the first of its kind - where solicitors have been held liable for the full consequences of their failure to properly advise their purchaser clients of the risks involved in the purchase, and failure to conduct the matter in a manner so as to protect the purchasers from those risks. In particular, conveyancers who undertake wider obligations than the usual scope of duties of conveyancing solicitors may find themselves liable for their clients’ wider losses should they breach those obligations.