Welcome relief for solicitors who receive funds from third parties

Bellis & Ors -v- Challinor & Ors in the Court of Appeal [2015] EWCA Civ 59

The scope of a solicitor’s duty to third parties who pay funds into a client account can create uncertainty.  The Court of Appeal decision in Bellis & Ors -v- Challinor & Ors gives guidance on the issue. 

At first instance, the High Court broadened the scope of a solicitor’s duty to third parties by holding that the solicitor owed a duty to third parties when they paid monies into the client account. The Court of Appeal, overturning that decision, held it was the objective intention of the parties that monies paid into the client account would be held by the solicitor as her client’s agent and there was no duty owed to the third parties.

Background

In late summer 2007, a group of 21 investors (the Investors) were invited to invest in the Fairoaks scheme which involved the purchase of Fairoaks Airport via an SPV company, Albemarle Fairoaks Limited (AFL) which had acquired the land. Juliet Bellis & Co acted for AFL in connection with the transaction.

AFL paid in full the £31 million purchase price for the land. The acquisition was funded by a loan from RBS. The Investors were then invited to invest immediately (i.e. prior to formal fundraising) in the scheme, by transferring money to the Bellis client account. The Investors advanced the aggregate sum of £2.28 million. Bellis used the Investors’ funds to partly repay the RBS loan.

The Fairoaks scheme was unsuccessful as insufficient investors were found. The Investors’ equity investments were not returned by Bellis, who by that time had already transferred the investors' funds to RBS. In November 2010, the Investors commenced proceedings against Bellis for breach of the terms of an escrow agreement or, alternatively, for breach of trust. The Investors argued Bellis was liable to repay the released funds.

First instance decision

Hildyard J at first instance found Bellis was liable. He held that a resulting trust had arisen in favour of the Investors. In reaching this conclusion, he considered the elements of a Quistclose trust (Quistclose Investments Limited -v- Rolls Razor Limited [1970] AC 567) and other similar forms of trust. He reaffirmed that, in order for a Quistclose type of trust to arise, there needs to be (1) money lent by one party to another for an exclusive purpose; (2) the purpose has to be sufficiently defined and communicated to the recipient of the money; and (3) there must be an express or implied direction for the return of the money to the payer if the exclusive purpose can no longer be satisfied which negates any intention of the payer to part with the beneficial interest in the monies in the meantime.

Hildyard J held that this retention of the beneficial interest until the Investors’ purposes could be fulfilled gave rise to a resulting trust in favour of the payer (Twinsectra Ltd -v- Yardley [2002] UKHL 12 applied). The Investors’ money was immediately impressed with a trust on receipt into the client account and Bellis had breached their duties as trustee in paying out that money to RBS without the Investors’ instructions.

The Court of Appeal decision

The Court of Appeal unanimously allowed Bellis’ appeal.

Contrary to the first instance decision, Briggs LJ held that the money paid to Bellis was an immediate loan to AFL and that no trust existed. This conclusion was reached by focusing on the objective common intention of the parties and on the documents known to both parties. The use of Bellis’ client account was simply a method of payment which did not specify a requirement for any protection for the Investors or the retention of a beneficial interest. Bellis was acting as AFL’s agent.

The Court of Appeal therefore concluded that no restriction was placed upon Bellis that would prevent the immediate payment of the investment monies, either to AFL, or for AFL’s benefit. No trust existed.  The Court of Appeal also dismissed a claim in restitution.

Comment

Had the first instance decision been upheld by the Court of Appeal, it would have significantly widened a solicitor’s duty when dealing with funds coming into client account. The effect of that decision was that, where monies are paid into client account by a third party, a solicitor is under a duty to that third party to establish who is the beneficial owner of monies paid into client account. This would have been an incredibly onerous obligation for solicitors. The lower court inferred that the very provision of access to a firm’s client account to a third party indicated an intention that monies should be kept separate from the solicitor’s own client’s monies. This outcome could have resulted in solicitors acting contrary to their own client’s instructions.

The Court of Appeal decision should come as welcome relief to solicitors who receive funds from third parties, given the scope for conflict that would likely have arisen had the High Court’s decision been upheld. Nevertheless, the issues in this case should serve to reinforce the importance of clarifying any uncertainty that may arise when receiving funds from a third party.