20 August 2012

Client successfully disputes terms of retainer


Christopher Coffin
Partner | UK

Solicitors breached their duty to exercise reasonable skill and care when advising a client on a loan. In the absence of a written retainer, the client’s explanation of the purpose behind the loan prevailed. By failing to pass on information learnt from the other side to the transaction, the solicitors deprived their client of the choice of whether or not to proceed with the transaction.

Background

Mr Gabriel, the claimant, was an astute businessman who until the present dispute was a close friend of Mr Little, the first defendant. Mr Little was a builder and developer. Mr Gabriel was godfather to one of Mr Little’s children.

Following a meeting, Mr Gabriel agreed to lend Whiteshore, the second defendant company (50% owned by Mr Little and his wife) £200,000 to develop a property. The terms of the loan required Whiteshore to repay the loan with an additional £70,000, 15 months later. In fact, the money was not used for the development but so that Whiteshore could acquire the property from High Tech, the third defendant, a company wholly owned and controlled by Mr Little.

The solicitor defendants first learned of the transaction from a voicemail left by Mr Little in which he informed them that Mr Gabriel was lending the funds to enable Whiteshore to acquire the property from High Tech. Accordingly, when Mr Little’s solicitors wrote to the solicitor defendants to the same effect, they assumed that this was the arrangement Mr Gabriel had in mind. They did not provide Mr Gabriel with a client care letter nor confirmation of his instructions in writing. Also, when drafting the facility letter, they used a draft from a previous transaction, as a template, and in doing so left in two clauses which accorded with Mr Gabriel’s understanding of the transaction but not their own or Mr Little’s.

Time passed; no real development ever commenced; most of the loan remain unpaid and Whiteshore ceased to exist. Mr Gabriel looked to the other defendants to recoup his losses and brought various claims against them including in dishonesty and misrepresentation.

All of the claims failed save for the claim for breach of duty against the solicitors.

The solicitor’s failings

The solicitors were found negligent for drafting a facility letter that contradicted not only their own understanding of the transaction but what they had learnt from the other side as to the use to which Mr Gabriel’s money was to be put. The judge found that in the light of Mr Gabriel’s instructions to them they were under an obligation to inform him of what they learnt from Mr Little and his solicitors so that he could make an informed decision as to whether or not to proceed.

In terms of the commercial wisdom of the transaction, they had no duty to advise in that regard. However, they should have explained to Mr Gabriel that the funds were to be applied substantially for Mr Little’s benefit and that in reality Mr Little was not putting anything at all into the project.

The judge was satisfied that Mr Gabriel would not have entered into the loan had his solicitors fulfilled their duty so classed this as a ‘no transaction’ case for the purpose of assessing damages. The solicitors were held liable for the losses falling within the scope of the duty that was broken and not for all the consequences of entering into the transaction. The judge was not prepared to accept that the project was unviable from the outset and bound to fail and accordingly awarded Mr Gabriel the £200,000 investment less the small amount of the repayments.

Conclusion

This is a claim that could have been avoided if the solicitors had confirmed their instructions in writing. Had they done so, they would have alerted their client to the misunderstanding at the outset and clarified their own understanding at the same time.

Given the absence of a written retainer, it is fortunate that Mr Gabriel accepted in evidence that he never sought advice about the commercial wisdom of the transaction. Had he done so, the solicitors may well have been faced with an even greater award.

Finally, it should come as no surprise that solicitors in commercial transactions have a duty to pass on to their client relevant information obtained from the other side. Of course, knowing what is relevant requires a proper understanding of their own client’s position which was not the case here.

Case: Richard Gabriel v (1) Peter George Little (2) Whiteshore Associates Limited (3) High Tech Design & Build Limited (4) BPE Solicitors (5) BPE Solicitors LLP [2012] EWHC 1193.

Christopher Coffin Partner | British Virgin Islands, London

Category: Article