The door remains shut - Court of Appeal rejects appeal in claim against stakeholder solicitors - Yee Shee Yin and others -v- 174 Law Solicitors Limited [2023] EWCA Civ 13

Published 17 January 2023

We have previously reported on the dismissal of an attempt by investors in a buyer-funded construction development to claim redress against the counterparty’s solicitors, who had agreed to act as stakeholders under the agreements for sale (One step too far - stakeholder solicitors defeat buyer-funded development claim - DAC Beachcroft).  By judgment handed down on 13 January 2023, the Court of Appeal has unanimously rejected an appeal against that decision.

Background

Whilst the dispute raised numerous issues, including questions of estoppel, it pivoted on the proper construction of the stakeholder contracts.  174 Law acted for the vendor developer, North Point (Pall Mall) Ltd, who was developing and selling off 366 residential and live work units at 70-90 Pall Mall, Liverpool.  The development was predominantly buyer-funded in nature under a fractional sales model.  The buyers paid large deposits (typically between 50%-80% of the purchase price) which would be used to fund the project.  The Agreements for Sale provided that the deposits were to be held by 174 Law as stakeholder and released on terms set out.

174 Law was not a party to the Agreements for Sale.  In such circumstances, which are common, the law implies the creation of a separate, implied stakeholder contract.  According to the judgment of Lord Justice Millett of the Court of Appeal in the unreported case of Manzanilla Ltd v Corton Property and Investments Ltd [1996], which the court herein approved, the rights and obligations of the stakeholder are “implicit in the transaction itself, and must be discovered, not by implying terms, but by analysing the relationship of the parties which arises from the deposit of the money.”  The court herein also approved Lord Justice Millett’s further comment that “the stakeholder holds the money to the order of both depositors and is bound to pay it (strictly speaking an equivalent sum) to them or as they may jointly direct”.

The key issue nevertheless was the proper construction of two clauses of the Agreements for Sale, paragraphs 5.1 and 5.2.  These provided as follows:

“5.0 DEPOSIT RELEASE

5.1       The Deposit together with the Instalment Payments shall be paid to the Seller’s Solicitor to be held as Stakeholder to the order of the Company and released by the Seller’s Solicitor in the manner and on the terms ….

5.2       … SAVE and it is agreed that any payment pursuant to this Clause shall not be made until the transfer of the Property to the Seller has been completed and evidence of the registration of such transaction and of the Legal Charge as a first Legal Charge (or that such registrations are pending) is produced to the Buyer or his solicitor or agent.”

The “Company” was North Point Buyers (Pall Mall) Limited, a company limited by guarantee which had been set up to protect buyers’ interests (the “BuyerCo”).   Two solicitors who acted for many of the buyers were appointed as directors of the BuyerCo.  Due to a “mix up” in the securitisation of titles, the legal charge in favour of the BuyerCo, which was to provide some protection to the buyers, was never registered as a first legal charge; instead, a charge in favour of a bridging finance company had been registered first, and the BuyerCo charge was registered behind it, as a second legal charge. 

The directors of the BuyerCo had agreed at the time that funds could be released by the stakeholder regardless, in what became known as the “work-around”.  The Agreements for Sale had anticipated that the priority of the charges could be switched in certain circumstances where external funding was required.  174 Law released the deposits to its developer client, but the development ultimately failed; the units were not constructed, the contracts did not complete, and nothing was returned to the buyers.

The buyers here contended that 174 Law was not entitled to release the deposits in such circumstances and claimed that 174 Law thus acted in breach of the stakeholder contracts, claiming damages for such breach.  At first instance, His Honour Judge Hodge QC (the “First Instance Judge”) held that the implications of the case were “very significant indeed” for 174 Law, given the extent of matters in which it acted, with a second cohort of Claimants having issued a further, similar claim in which the total funds involved were “substantial”.

The First Instance Judge held, however, that under clause 5.2, the onus was on the buyers’ solicitors, and not 174 Law, to satisfy themselves whether sufficient evidence of the registration of the BuyerCo charge as a first legal charge had been produced; and that the “work-around” represented such satisfaction, and thus 174 Law was not in breach of contract.  This led to the buyers’ appeal.

Judgment

The Court of Appeal dismissed the appeal and found unanimously for 174 Law, in the leading judgment of Lord Justice Newey, with whom Lord Justice Warby and Sir Christopher Floyd agreed.  They disagreed with the First Instance Judge’s analysis as to the satisfaction of clause 5.2.  However, they agreed with 174’s “alternative” case, which had been rejected at first instance, that the BuyerCo could, pursuant to clause 5.1, authorise the release of the deposits even where clause 5.2 had not been satisfied.  Accordingly, they agreed that there was no breach of contract, and dismissed the appeal.

Comment

This was an important judgment for 174 Law and its professional indemnity insurers, as the First Instance Judge had recognised.  The case revolved around the meaning of the words “to the order of the Company [BuyerCo]” under which the deposits were to be held as stakeholder under clause 5.1.  If, as the Appellants contended, the proper construction was that the circumstances in which the deposits might be released were strictly defined by the balance of clause 5 including clause 5.2, the words “to the order of the Company” would “appear to be without significance”. 

The court accepted that the stakeholder usually at law held monies to the order of the parties representing the joint depositors; and that there was “obviously a case” for the BuyerCo having such power here, where the buyers included, as found by the First Instance Judge, “potentially many hundreds of mainly offshore-based purchasers, with little or no knowledge of English conveyancing law or procedures, and with limited, if any, command of or fluency in the English language”.

The inherent risks arising in buyer-funded models of development, which increased in popularity after the restriction of finance following the 2008-9 credit crunch, have led to significant claims against buyers’ solicitors arising from failed developments, and a major headache for the UK professional indemnity insurers.  The possibility of claims by the buyers against not only their own solicitors, but also the counterparty solicitors acting as stakeholders, has been less explored. 

Whilst the case depended on the precise facts of this matter and the construction of the terms in question in that context, it should be a welcome outcome for the profession and its insurers that such claims have not been entertained.  More broadly, the endorsement of the existing law as to the right of the stakeholder to act on the direction of joint depositors should also encourage. 

Phil Murrin and Chris Lewis acted for the successful respondent, 174 Law, in the appeal, and in the successful defence of the first instance proceedings.  They instructed Jonathan Seitler KC of Wilberforce Chambers and Michael Bowmer of 4 New Square in the appeal.