Investors who lost money in a failed property development in Liverpool should sue their former solicitors rather than the law firm which held and paid out their deposits, the High Court has ruled.
His Honour Judge Hodge QC, sitting as a High Court judge in Manchester, said Birkenhead firm 174 Law Solicitors acted “at all times” in accordance with the authority of those solicitors.
He acknowledged the significance of the ruling to 174 Law. While the claims were brought by the eight buyers of six of the 426 units at North Point Pall Mall, the firm released funds which it received as stakeholder from the purchasers of many other units.
“A second cohort of claimants, also represented by PMC [Penningtons Manches Cooper], have very recently issued a further, similar claim in which the total sums involved are substantial,” he noted.
PMC’s original group was made up of 138 claimants in respect of three residential developments at North Point Pall Mall and Baltic House in Liverpool and Angelgate in Manchester.
Most have settled, including the claims brought by 11 purchasers of seven residential units at North Point against the law firm Amie Tsang and Company (ATC), which in 2018 changed its name to Key Manchester and had acted for those buyers on their respective purchases.
The trial only concerned the North Point development. In 2015, 174 Law took over from another firm, David Roberts & Co (DRC), the role of acting for the developer (and seller) of the units which were being built.
The claimants alleged that, having received their deposits, 174 proceeded to release them to the seller in breach of the terms of the stakeholder contract. Whilst denying liability, 174 also brought a claim for contribution against ATC.
HHJ Hodge described North Point as “an ambitious development of some 426 residential and live-work units at a brown-field city centre site”.
It was sold off-plan, predominantly to overseas investors who intended to let the units out once the development was completed. The development adopted a fractional sales model that saw the buyers pay significantly larger deposits than usual – typically 50-80% of the purchase price – which were then to be used to fund the development.
The risks of such developments have since become clear and the construction of North Point came to a standstill in July 2017 after two years. Receivers were appointed and the site eventually sold without any of the units ever having been built.
The deposits had all been spent on construction, marketing and other costs, and the buyers lost all of their investments.
The stakeholder contract here was an unusual one in that not only did 174 Law hold the deposits until the triggering event for their release but there was also a precondition that the claimants’ interests should be protected by the registration of a first legal charge in the name of a buyer company, which had been established to protect the buyers’ interests.
The claimants, all from Hong Kong, argued that the precondition was never satisfied and so 174 Law never had their authority to release their funds to the seller.
The judge held that 174 Law only released the funds after the buyer company and the buyers’ solicitors had “indicated their understanding to the seller’s solicitors (first DRC and then 174) that they were authorised to release the buyers’ funds”.
He also upheld 174 Law’s alternative defence that the claimants must be regarded as estopped by convention from complaining that there was any breach of the stakeholder agreement.
“It would be grossly unfair for the claimants to be allowed now to go back on that shared and communicated assumption [about the basis for releasing the deposits] and to sue 174 for releasing their deposits in precisely the way that had been agreed.”
HHJ Hodge noted that no suggestion was made at the time that the release of the funds was wrong.
He concluded: “On the evidence, I am satisfied that the remedy of each claimant for the loss of its investment in the North Point development properly lies against their own former solicitors, and not the stakeholder, who at all times acted in accordance with the authority of those solicitors.
“The claimants have compromised their claims against their own former solicitors. They can look to those solicitor’s insurers to satisfy the sums due to them under their respective compromise agreements or, to the extent that those insurers are lawfully entitled to decline indemnity cover, to the Solicitors Compensation Fund as the fund of last resort.”