Gabriel v Little & Ors

A solicitor’s duty is measured by the retainer. A solicitor need not advise an experienced client on the commercial wisdom of a transaction without instructions, but must report a material problem discovered while carrying out the retainer where the client may be unaware of it.

A loan purpose clause does not create a Quistclose trust without mutual intention that the money is restricted to a special purpose. Loss caused by a solicitor’s breach is recoverable only if it falls within the scope of the duty. A duty to provide information does not make the solicitor responsible for commercial risks outside that information.

Richard Gabriel lent £200,000 to Whiteshore Associates Ltd in a transaction involving a proposed development property. The loan was secured by a legal charge. The money was instead used substantially to fund the purchase of the property from High Tech Design & Build Ltd and to discharge an existing bank charge.

Mr Gabriel sued Mr Little, High Tech and BPE Solicitors. The High Court dismissed the claims against Mr Little and High Tech, but found BPE negligent and awarded damages of £191,808.44: [2012] EWHC 1193 (Ch).

Mr Gabriel appealed the dismissal of his claims against Mr Little and High Tech and cross-appealed on trust and fiduciary issues. BPE appealed against liability and damages. The central issues were whether a Quistclose trust arose and whether BPE’s breach caused loss within the scope of its duty.

1. Little appeal. The appeal was dismissed. The trial judge was entitled to find that Mr Little had made no sufficiently clear representation that the money would be used only for development, and that he had not acted fraudulently. The elements of deceit include a false representation, knowledge of falsity or recklessness, an intention that it be acted upon, reliance and loss. Motive is immaterial, but an intention to influence the representee’s mind must be established. The question whether Mr Gabriel was fixed with his solicitor’s knowledge of falsity did not arise because fraud had not been proved.
2. Trust and restitution. The facility letter did not create a Quistclose trust. Under Twinsectra v Yardley and In re Goldcorp Exchange Ltd, a special-purpose loan requires mutual intention that the money is not at the borrower’s free disposal. The facility letter contained no exclusive wording, segregation requirement, restriction on drawdown or effective control over use. Its surrounding terms were inconsistent with a trust. The stated purpose of development did not create a fiduciary obligation. Knowing receipt, dishonest assistance and restitution claims therefore failed.
3. BPE cross-appeal. The cross-appeal was dismissed. BPE had authority to transfer the funds to Whiteshore or at its direction. A failure to clarify instructions or a contractual breach did not, without a specific restriction on drawdown or use, vitiate that authority or create liability for breach of trust.
4. BPE appeal. The appeal was allowed. BPE had a duty to understand the client’s instructions and to inform him that the funds would immediately be used to purchase the property and discharge the existing charge. That was an information duty, not a duty to advise on the commercial wisdom or risks of the transaction. Applying the scope-of-duty and causation principles in South Australia Asset Management Corp v York Montague Ltd and related authorities, the loss arose from commercial risks which Mr Gabriel assumed, including the absence of valuation, development controls and evidence of viability. The loss was therefore outside the scope of BPE’s duty and was not caused by its breach. The court added, obiter, that any recoverable loss would have been reduced by at least 75 per cent for contributory negligence.

Accordingly, the Little appeal and BPE cross-appeal were dismissed, and BPE’s appeal was allowed.

• Court of Appeal (Civil Division). The Little appeal and BPE cross-appeal were dismissed. BPE’s appeal was allowed: [2013] EWCA Civ 1513.
• High Court of Justice, Chancery Division. The claims against Mr Little and High Tech were dismissed. BPE was held negligent and ordered to pay £191,808.44: [2012] EWHC 1193 (Ch).