The Court of Appeal has recently handed down its judgment in the case of Main & Ors v Giambrone & Law.The judgment is notable as it applies the Supreme Court decision in BPE Solicitors & Hughes-Holland (2017), which considered the scope of duty of a firm of solicitors and the relevant test as to whether that duty comprised information or advice. The Court of Appeal held that Giambrone provided advice and therefore was liable to the claimants for the losses suffered. Also of note, is that the Court of Appeal upheld the duty of the firm to advise clients of the risk of crime affecting the transaction, in light of the fact that the claimants were resident in a different jurisdiction to that in which the transaction was taking place. This is something that might normally be considered to go towards the wisdom of the transaction, rather than legal advice.
Giambrone had been approached by agents acting for the developers of a luxury development to be built in Calabria, Italy, named 'the Jewel of the Sea'. The properties were marketed 'off plan' by means of glossy brochures provided to English and Irish purchasers. Purchasers were referred to Giambrone by the developers to act for them as conveyancer. Following each referral, Giambrone issued a retainer letter which stated that Giambrone was a leading Italian law firm in the UK specialising in Italian Real Estate and off-plan property acquisitions. It specified that Giambrone would, amongst other things, complete due diligence over the development and would ensure that the developers provided a copy of a specific bank guarantee which was mandatory under Italian law and in order to provide security for the purchasers if the Developer became insolvent.
Subsequently, Giambrone sent their clients a report on title and the preliminary contract for execution. The report on title included a paragraph that stated: "Giambrone & Law has independently carried out the due diligence in relation to the… 'Jewel of the Sea' in Calabria (Italy) promoted by VFI Ltd, and has also carried out a multiple object investigation …determining the feasilibility of the targeted purchase and … reviewing the clauses of the Preliminary Sale Agreement for Immovable Property"
Upon signing the contracts, the purchasers paid deposits to Giambrone of between £30,000 and £105,000. Giambrone wrote to the purchasers to confirm that they would release the deposit to the developers upon receipt of their signed copy of the preliminary contract and the bank loan guarantee. Giambrone did not receive from the developers a compliant guarantee, but nevertheless proceeded to release the deposits with 38% going to the Developer and 62% going by way of commission to the agents. Giambrone did not explain to their clients that monies were being paid to the agents.
Unfortunately the development collapsed. Only a small number of units were completed and problems came to light with the planning permissions, which were suspended in June 2008. In March 2013, the Italian Financial Police took possession of the entire development due to suspected money laundering amid reported allegations of involvement by the IRA and Italian Mafia (although it is noted in the judgment that it is not known if the allegations are well-founded). Whilst the purchasers rescinded their contracts, they were unable to recover their deposits under the guarantees.
One hundred and eighty-five claimants brought claims against Giambrone.
A trial of generic issues in the civil claim was initially heard in the High Court. Foskett LJ held that Giambrone had breached its duty of care to the purchasers, by failing to tell the purchasers that the guarantees were not compliant, failing to advise of the adequacy of the preliminary contracts and had failed to carry out appropriate checks in relation to planning permissions or adequate due diligence. Further, Giambrone had failed to advise the purchasers that the non-returnable deposit of 50% was unusually high. Foskett LJ stated that Giambrone should not have permitted the purchasers to pay out the deposits when sufficient guarantees were not in place and Giambrone had therefore released the deposits in breach of their fiduciary duty of trust to the claimants, in contact and in tort. Finally it was held that Giambrone should have alerted the purchasers as to the risks of criminal activity in Calabria.
Following the decision, an application was made for summary judgment which was allowed. It was held that the majority of claimants should recover as equitable compensation for breach of trust the full amount of their deposits. Relief under s.61 of the Trustee Act 1925 (where a trustee has acted honestly and reasonably and therefore ought to be excused for the liability arising from that breach of trust) was denied.
Court of Appeal judgment
Giambrone appealed against the decision of the High Court. Lord Justice Jackson gave the main judgment, making the following key findings:
Giambrone argued that it had been incorrect for the Judge to assess equitable compensation for the breach of trust that occurred as the full repayment of the deposits because, even if fully compliant guarantees had been obtained, the guarantees would have been worthless (as they were only triggered if the development companies became insolvent or there was a 'crisis' situation and, despite the turbulent events at the site, they did not fulfil either criteria) and therefore the purchasers would have lost their deposits anyway. Hence, there was no causation.
The Court of Appeal upheld the first instance decision. Jackson LJ distinguished the case from the leading authorities of Target v Redferns (1995) and AIB v Redler (2014). Giambrone's duty was to receive the guarantees provided, check if they were compliant with the relevant law, and if so then to release the deposits. In the absence of a fully compliant guarantee Giambrone should have retained the deposits indefinitely. At the time the contracts were rescinded, the deposits could then have been returned to the purchasers, and the claimants would not have suffered loss. The claimants' claims passed the "but for" test. In this case the trust in question was part of the machinery for performance of the solicitor's retainer, the breach consisting of wrongfully paying out monies that should have been kept safe. The equitable and contractual loss suffered by the claimants therefore ran in tandem and comprised the loss of the deposit.
The application of SAAMCo post BPE Solicitors v Hughes-Holland
Jackson LJ went on to consider the application of SAAMCo to the case. The well-known principle distinguishes between a professional's duty to provide information for the purpose of enabling a client to take a decision (known as category 1) and the duty to advise a client as to the course of action they should take (category 2).
The key issue is that in a category 1 case the measure of damages is the foreseeable loss which arises as a consequence of the information being wrong. If, on the other hand, it is a category 2 case, then the measure of damages is all foreseeable losses which have arisen as a consequence of a client relying on the advice and proceeding with that course of action.
Jackson LJ restated the principle as follows: "The true distinction between categories 1 and 2 does not depend upon information or advice. The distinction lies in whether [the Defendant] is guiding the whole decision making process or merely providing part of the material on which [the Claimant] will rely... In a Category 2 case "it is left to the advisor to consider what matters should be taken into account when deciding whether to enter into the transaction."
Applying these principles to the facts, Jackson LJ held that this was a category 2, advice case, noting that this was not a "conventional conveyancing situation". Whilst the purchasers had taken the decision to purchase a property in Italy, after that they were reliant on Giambrone. The purchasers were buying properties abroad and had no knowledge of the local law or conveyancing procedures. Giambrone had decided what information the claimants required and provided this to them. The content of the retainer letter and subsequent correspondence had guided the purchasers' decision making process as Giambrone was telling the clients what protection they required, what sums they should pay and when (in reliance on the insufficient guarantees) they should pay that money out.
The loss of the deposits was held to be within the scope of the duty.
The failure to warn of the risk of organised crime
Giambrone argued that the first instance finding that there was a breach of duty in failing to warn the purchasers about the risk of organised crime in Calabria had the effect of substantially widening the duties of conveyancing solicitors.
Jackson LJ disagreed, stating that the decision was based on the particular facts of the case, and had no impact on the usual scope of the duties of conveyancers in England and Wales. Giambrone knew about the risk of Mafia activities affecting the construction sector in Calabria, whereas the clients knew nothing beyond what was in the glossy brochure and "inspection visits". Underhill LJ noted that he was dubious about whether the prevalence of organised crime might be said to go more to the overall wisdom of the purchase than within the remit of a lawyer, even one advising on a foreign purchase, however, on the facts of the case, including the width of the role Giambrone had undertaken, Underhill LJ would also uphold the first instance decision.
The facts of the case are unusual. It is however, a warning to practitioners who act on cross border transactions where their client may have limited or no local knowledge. Such circumstances may widen the solicitors' duties to advise of matters that might not otherwise be encompassed by the retainer, and which might not apply where the client is resident in, or otherwise familiar with, the same country or area.
The case also illustrates the dangers of over-marketing and failing to restrict or define the scope of the retainer. Much of the initial documentation emphasised that Giambrone was a leading Italian firm in the UK, with particular experience in the off-plan property market and confirmed that due diligence would be carried out. This all conveyed to the purchasers that the solicitors would go beyond just dealing with the purely necessary legal formalities of the purchase.
The finding that this was an advice case is also of interest. It remains likely that following BPE Solicitors v Hughes Holland (2017) it will be difficult for claimants to establish that solicitors guided the whole transaction, and therefore should be liable for the claimant's full losses. However the case demonstrates that where, circumstances are such that the individuals have limited knowledge of the subject matter of the transaction and are wholly reliant on their solicitors, the position may be different.