Main & Orsv (Giambrone & Law (a firm) & Ors

This judgment is in eight parts, namely:

This is an appeal by lawyers practising in England and Italy against a judgment holding them liable to compensate clients who lost money in a disastrous ‘holiday homes’ venture. The principal issues in this appeal are whether the claimants are entitled to equitable compensation for their lost deposits and whether the losses suffered are within the scope of the lawyers’ duties.

There are 185 claimants, who live variously in England and Ireland.

The defendants are a firm of Italian lawyers, who were practising in London and Italy at the material time. The names, membership and status of the firm varied from time to time, but nothing turns on that in this appeal. I shall refer to the firm as “Giambrone”.

The moving force in that firm is an Italian advocate, Avvocato Giambrone. I shall refer to him as “Mr Giambrone”. Mr Giambrone became registered to practise in England in April 2005. In 2009 restrictions were placed on his practising certificate. Following a decision of the Solicitors’ Disciplinary Tribunal in April 2013, Mr Giambrone lost his entitlement to practise in England.

Two Italian companies who feature in the story are RDV Srl (“RDV”) and Veco Construzioni Srl (“Veco”). The administrator (i.e. director) of RDV at the material time was Mr Cuppari. The administrator of Veco at the material time was Mr Velardo.

On 20^th June 2005 the Italian Legislature enacted Legislative Decree No 122. I shall refer to this as “Decree 122”. The purpose of Decree 122 is to protect purchasers of properties which have not yet been built. Article 2 of Decree 122 provides:

“Upon the conclusion of a contract which has the purpose of the non immediate transfer of ownership or other real right of enjoyment of a property to be built or an act having the same purposes, or at an earlier time the builder is obliged, on penalty of voiding the contract, which can only be enforced by the purchaser, to obtain a surety and consign it to the purchaser, also in accordance with Article 1938 of the Civil Code, for an amount corresponding to the sums and the value of any additional settlement that the builder has received and in accordance with the terms and conditions laid down in the contract, must still receive from the buyer before the transfer of ownership or other real right of enjoyment.”

Article 3 of Decree 122 requires that the surety referred to in Article 2 be a bank, insurance company or similar body registered under Article 107 of the Consolidated Law on Banking and Credit (“CLBC”).

Some banks, insurance companies and similar bodies are registered under CLBC Article 106, not 107. They have less share capital than organisations registered under Article 107. They are not acceptable as guarantors for the purposes of Article 2 and 3 of Decree 122.

Paragraph 22 of the Solicitors’ Accounts Rules 1998 provides:

“Rule 22 – Withdrawals from a client account

(1)

Client money may only be withdrawn from a client account when it is:

(a)

properly required for a payment to or on behalf of the client (or other person on whose behalf the money is being held);

(aa) properly required for a payment in the execution of a particular trust, including the purchase of an investment (other than money) in accordance with the trustee’s powers;

(b)

properly required for a payment of a disbursement on behalf of the client or trust;

(c)

properly required in full or partial reimbursement of money spent by the solicitor on behalf of the client or trust;

(d)

transferred to another client account;

(e)

withdrawn on the client’s instructions, provided the instructions are for the client’s convenience and are given in writing, or are given by other means and confirmed by the solicitor to the client in writing.”

From time to time the judgment under appeal refers to paragraph 15 of the Solicitors’ Accounts Rules, when clearly the judge meant to refer to paragraph 22. Nothing turns on that slip. Like all counsel, I shall treat every reference to “rule 15” as if it were a reference to rule 22.

After these introductory remarks I must now turn to the facts.

In 2006 Veco and RDV were planning to construct luxury apartments on two adjoining sites at Brancaleone in Calabria. That is on the toe of Southern Italy. Veco was planning to build 30 to 40 units on a site by the beach. This is referred to as “the Beach Front development”. RDV was planning to build 560 to 570 units on a larger site just behind Veco’s land. This is referred to as “the Main Development”. Veco and RDV hoped to sell the apartments as holiday homes to people living in the UK and Ireland. The two developments together were known as “Jewel of the Sea” (“JoTS”). RDV and Veco no doubt hoped that this enticing name would boost sales.

Unfortunately, there are allegations that the whole project was a money laundering operation organised by the IRA and the Italian Mafia, in order to recycle the proceeds of IRA criminal activities. I do not know whether those allegations are well founded. The Italian Financial Police are currently investigating the matter. They have taken possession of the entire JoTS development.

Be that as it may, the position in 2006 was that RDV and Veco wished to maximise their returns by selling the apartments before they were built. They therefore made arrangements for two individuals in the UK and Ireland to sell apartments “off plan”. Those individuals were Mr Velardo and Mr Fitzsimons. Mr Velardo was a property salesman. According to press reports produced at trial, Mr Fitzsimons was a convicted IRA terrorist.

In November or December 2006 Mr Velardo and Mr Fitzsimons met Mr Giambrone at a property exhibition in London. They told him about the planned JoTS development and said that they needed lawyers to whom they could refer prospective purchasers. Mr Giambrone agreed to accept that role.

In December 2006 Mr Velardo and Mr Fitzsimons set up a company called VFI Overseas Properties Real Estate Agent Ltd (“VFI”). VFI was registered in the Republic of Ireland on 18^th December 2006.

On 3^rd March 2007, VFI entered into two separate written agreements, one with RDV and one with Veco. These were called “JoTS mandates”. Under the mandates, VFI (described as “the AGENT”) agreed to promote the JoTS development in return for a commission of 31% of the sale prices of the units. Article V of the RDV mandate provided:

“By the signing of the present agreement, V.F.I., Overseas Properties Real Estate Agent Limited gives - and RDV srl takes note – irrevocable mandate to Giambrone & Law International Law Practice, main office in London, to collect in a fiduciary deposit on its own non interest bearing deposit account the deposit and the commission due to the AGENT.

The law firm – “Giambrone & Law” – which undersigns this agreement through its own legal representative Avv. Gabriele Giambrone – takes note and undertakes to release the deposit and the commission due to the AGENT only following a written ratification of the preliminary contract by Mr Antonio Cuppari and the issuing of a regular Invoice from the AGENT to the PRINCIPAL.”

Article V of the Veco mandate was in similar, but not identical, terms.

VFI prepared a glossy, coloured promotional brochure. The brochure was couched in inviting terms. It said that by purchasing a property in the JoTS development it would be possible to “live the Italian dream” at the same time as buying a property on the coast at a price which “it is estimated…will triple over the next decade”. The brochure also contained the following passage on page four:

“We will provide a full legal package with qualified lawyers and handle all aspects of moving in, including any legal documentation that is required.”

The lawyers referred to in that paragraph were Giambrone.

VFI’s marketing exercise was highly successful. A large number of people living in England and Ireland agreed to buy JoTS apartments.

Each purchaser paid an initial deposit of €3,000 to VFI. Upon receipt of that money VFI notified Giambrone, who then sent a retainer letter. The retainer letters were all in similar form and included the following passages:

“Re: Purchase of your property in Calabria

We have been passed your details from VFI following your reservation of a new property in Jewel of the Sea (Calabria).

Giambrone & Law LLP is one of the leading Italian Law firms in the United Kingdom and Ireland and we have a dedicated department specialising in Italian Real Estate law and off-plan property acquisitions.

We have been requested to complete the necessary due diligence over the development, issue the Preliminary Contracts and to advise you in relation to the legal aspects of the aforementioned purchase. We have experience in advising a growing number of foreign investors in the Calabrian market, which is now fast becoming one of the "hot spots" in the Italian real estate market, with prices increasing rapidly.

Our lawyers from the London office have visited the area of Calabria and met with the representatives of VFI and of the Builders in order to discuss the legal aspects of these new developments in more detail.

Moreover, we will soon be opening a new office in Reggio Calabria: we hope to build a long relationship with you and be able to advise you on all different aspects of Italian law after you complete your purchase in Italy.

A brief overview of the purchasing process

Although we may been recommended to you by the Promoters, we wish to emphasise that our Italian Lawyers are completely impartial from any other party associated with this purchase and therefore we will act solely in your best interests and advise you on all aspects of Italian law which will be relevant to your purchase.

The initial part of our remit is to carry out the customary due diligence over the Development and draft the Preliminary Contract in compliance with the provisions of the Italian Civil Code and local legislation. Our Italian Lawyers have already requested a number of documents to enable us to carry out the due diligence over the Limited Company which is building the Complex.

We have already carried out a number of land registry searches, called visure catastali, visure ipotecarie, and check the certificate di destinazione urbanistica, to verify that everything stated in the initial draft of the Preliminary Contact is correct.

…

We would routinely carry out enquiries to ensure that there are no liens, encumbrances, and rights of way in favour of third parties and that the land is legally registered with the urban registry, and, furthermore, that valid planning permission is in place for the project to go ahead.

We will ensure that the Builders/developers or the Promoters will provide us with a copy of a "fidejussione bancaria", which is now mandatory in certain circumstances: this is a bank loan guarantee that has to be provided by them so that, in the event of bankruptcy, we can claw back any funds anticipated at this stage directly from the guaranteeing Bank.

We will draft a Report on Title which will give you a clear idea of the legal status of the apartment that you wish to purchase and of the land upon which it is being built. At the same time, the final version of the Preliminary Contract will have been prepared by our lawyers and it will be sent to you for your consideration. Our documents are always drafted in Italian and English so that you will know the exact content of what you are required to sign: however, it is important to note that only the Italian version of the Contract will be legally binding.

Our professional fees

…

All our lawyers in the London office are regulated by strict rules of conduct imposed by the Law Society (England and Wales) and we have professional indemnity insurance of £5,000,000 for your extra peace of mind. You can rest assured that we will constantly strive to provide you with the highest level of service possible.”

Subsequently Giambrone prepared a letter, which gained wide circulation (as described in paragraph 100 of the judgment below). It included the following passages:

“Re: Due Diligence Report –

“Jewel of the Sea” Development (Brancaleone)

We would like to confirm that Giambrone & Law, an independent firm of Italian lawyers in London, has carried out the due diligence over the land and the development called “Jewel of the Sea”.

Upon inspection of the land registry searches, we have found that the Municipality of Brancaleone has granted two building licences on the 7^th July 1994 (27/1994 and 26/1994) for the building of a residential complex located in Brancaleone, and hereby referred to as “Jewel of the Sea”, for the sheets n. 45 (parcels 165, 166, 85 and 86) and sheet 45 parcel 175.

…

Finally, we also confirm that the Developer has provided us with a sample of a “Fidejussione Assicurativa” which is a bank loan guarantee valid under the current Italian legislation in accordance to decree 122 of 2005 and is a safeguard to any potential buyers for the event of default or bankruptcy of the building company.”

In due course Giambrone sent to their clients a report on title and a preliminary contract for signature.

The report on title included the following passage:

“Giambrone & Law has independently carried out the due diligence in relation to the Real Estate Residential Complex known as “Jewel of the Sea” in Calabria (Italy), promoted by VFI Overseas Properties Real Estate Agent Limited, and has also carried out a multiple object investigation aiming at determining the feasibility of the targeted purchase and at reviewing the clauses of the “Contratto Preliminare di Compravendita Immobiliare” (Preliminary Sale Agreement for Immovable Property) prior to exchange between the client and the Vendor.”

In a separate letter Giambrone stated that it was only able to advise on legal aspects of the purchase. In my view, that brief passage did not have the effect of undermining the much wider obligations which Giambrone undertook in the documents quoted in paragraphs 21 - 24 above.

Upon signing the preliminary contracts, the clients paid (as they were required to do) deposits ranging between £30,000 and £105,000. Upon receipt of the deposits, Giambrone wrote to clients in the following terms:

“We write with reference to the above transaction to acknowledge safe receipt of the deposit in our client account.

We confirm your instructions to release the exact funds received in our client account to the Vendor upon receipt of their signed copy of the preliminary contract and the issue of a bank loan guarantee in compliance with Italian Decree 122/05.”

Unfortunately, Giambrone never received from either RDV or Veco guarantees which complied with Decree 122. The guarantees which the developers provided were non-compliant. First, the issuers were registered under CLBC Article 106, not CLBC Article 107. Secondly, the guarantees lasted only for one year, rather than up to the date of completion of purchase. Some, but not all, of those guarantees were replaced by later guarantees. But again, those later guarantees came from issuers registered under CLBC Article 106 and they were only valid for one year.

Giambrone was not perturbed by those matters. It therefore proceeded to release the deposits received. It paid out 38% of those monies to RDV or Veco and 62% to VFI as commission. Giambrone did not inform its clients that such a small part of the deposits was going to the builders and such a large part was going to the promoters as commission.

Thereafter all did not go smoothly. Only a very small number of the units were completed and conveyed to purchasers. Problems came to light with the planning permissions which had been granted. Those permissions were suspended in June 2008 and all construction work stopped on site. In March 2009 stories appeared in the press about malpractice on the part of those carrying out the development. In March 2013 the Italian Financial Police took possession of the entire JoTS development because of suspected money laundering.

The final outcome was that most of Giambrone’s clients never acquired units at Brancaleone. They rescinded their contracts of purchase but were unable to recover their deposits.

Many of the disappointed purchasers took the view that Giambrone, as their solicitors, were responsible for the losses. Accordingly, they commenced the present proceedings.

A total of 185 claimants issued proceedings against Giambrone in relation to its conduct of 119 attempted purchases of properties in JoTS. Each of the claimants lives in England or the Republic of Ireland. Some claimants are represented by Penningtons Manches LLP, others are represented by Edwin Coe LLP. These two cohorts have been referred to as the “PM claimants” and the “EC claimants”. A few of the PM claimants face a limitation defence. These are referred to as the “PM limitation claimants”. There are other special features affecting individual cases, which will be important in due course but which do not affect the present appeal.

A trial of generic issues took place before Mr Justice Foskett (“the judge”) over four weeks in March 2015. The judge handed down his reserved judgment on 7^th July 2015: Various claimants v Giambrone & Law (a firm) [2015] EWHC 1946 (QB). I shall refer to this as “the July judgment”.

The judge held that Giambrone was in breach of duty to the claimants in eight respects:

The original intention had been that, after the trial of the generic issues, there would be a second trial of all other issues in the litigation. In the event, however, 101 claimants or pairs of claimants found a short cut. They applied for summary judgment on the basis of the judge’s findings in the July judgment.

The judge heard the application on 29^th October 2015 and handed down his reserved judgment on 17^th November 2015: Various claimants v Giambrone & Law (a firm) [2015] EWHC 3315 (QB). I shall refer to this as “the November judgment”.

In the November judgment the judge allowed the applications for summary judgment. He held:

Giambrone was aggrieved by the judge’s decision. Accordingly it appealed to the Court of Appeal.

By an appellant’s notice filed on 8^th December 2015 Giambrone applied for permission to appeal on seven grounds.

On 19^th February 2016 I considered this application on the papers. I refused permission in respect of two grounds. These related to (i) the judge’s refusal to grant relief under section 61 of the Trustee Act 1925 and (ii) the judge’s decision to defer consideration of certain planning issues to the second trial.

I granted permission to appeal on the other five grounds, observing that they raised serious issues which merited argument on a full appeal. Those five grounds are:

This appeal was argued on 27^th and 28^th June. Mr William Flenley QC leading Mr Jamie Carpenter appeared for the appellants. Ms Zia Bhaloo QC and Mr Simon Johnson appeared for the PM respondents. Mr Shantanu Majumdar appeared for the EC respondents. I am grateful to all counsel for their helpful submissions on difficult points.

Mr Flenley and Mr Carpenter had the burden of presenting this appeal on unattractive facts against an array of opponents. Because of the complexity of this case their skeleton argument, for good reason, exceeded the normal upper limit of twenty five pages. That skeleton argument is a model of its kind, which I commend to others. It sets out the facts and issues with clarity. It then concisely summarises the arguments which Mr Flenley was intending to (and did) deploy orally.

Having set the scene, I must now address the individual grounds of appeal, starting with the issue of equitable compensation.

Giambrone was obliged to hold the purchasers’ deposits until such time as it received guarantees which complied with Articles 2 and 3 of Decree 122. In the event, neither RDV nor Veco ever did supply guarantees which complied with those articles. The guarantees which RDV and Veco provided to purchasers through Giambrone were deficient in two respects, as set out in Part 2 above.

The judge found that it was a breach of trust for Giambrone to pay out the deposits to the promoters and the developers in those circumstances. On appeal Giambrone does not challenge that finding.

The central question arising on this issue is how the court should assess equitable compensation for that breach of trust. It is common ground that, perhaps surprisingly, the events at Brancaleone did not constitute a “crisis” situation which triggered the obligation of the guarantors to pay out. Throughout the turbulent events on site, neither RDV nor Veco ever became insolvent.

Against that background, Mr Flenley argues that the measure of equitable compensation must be nil. Even if Giambrone had obtained compliant guarantees before paying out the deposits, the claimants would be in no better position.

Ms Bhaloo and Mr Majumdar, on the other hand, argue that the measure of equitable compensation must be the amount of the deposits which Giambrone wrongly paid out.

Three authorities are central to the submissions on this issue. They are Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4^th) 129; Target Holdings Ltd v Redferns [1996] 1 AC 421 and AIB Group (UK) PLC v Mark Redler & Co Solicitors [2014] UKSC 58; [2015] AC 1503. In Canson solicitors failed to disclose a secret profit which they were making from sequential sales. If the purchasers had known about the secret profit, they would not have proceeded. Misfortunes followed the purchase, because a warehouse subsequently built on the property suffered damage owing to defective foundations. The purchasers recovered compensation from the solicitors for breach of fiduciary duty, but that compensation did not include any of the losses related to the warehouse. McLachlin J, who concurred in the result, rejected the suggestion that there was an analogy with damages in tort. At [154] she said:

“My first concern with proceeding by analogy with tort is that it overlooks the unique foundation and goals of equity. The basis of the fiduciary obligation and the rationale for equitable compensation are distinct from the tort of negligence and contract. In negligence and contract the parties are taken to be independent and equal actors, concerned primarily with their own self-interest. Consequently, the law seeks a balance between enforcing obligations by awarding compensation and preserving optimum freedom for those involved in the relationship in question, communal or otherwise. The essence of a fiduciary relationship, by contrast, is that one party pledges herself to act in the best interest of the other. The fiduciary relationship has trust, not self-interest, at its core, and when breach occurs, the balance favours the person wronged.”

McLachlin J added at 156 that she preferred to start from trust, “using the tort analogy to the extent shared concerns may make it helpful”.

On a number of occasions since 1991 English courts have cited the judgment of McLachlin J in Canson as reflecting English law.

In Target CG purchased a commercial property with the aid of a loan from T, a finance company. As security, T required a charge over the property. R acted as solicitors for both CG and T, the mortgagor and mortgagee. T gave £1,525,000 to the solicitors, with instructions not to pay that money out to CG until CG had bought the property and it was charged to T. In breach of trust R paid out the money to CG before the purchase was completed and the charge was in place. A month later the property was charged to T. Ultimately the finance company enforced the charge, but suffered substantial losses. There were other significant features of the case, which I need not explore for present purposes. The Court of Appeal held that R were liable to restore to T the money which R had paid away in breach of trust. The House of Lords, reversing that decision, held that T had suffered no compensatable loss. T had obtained precisely what it would have obtained if no breach of trust had occurred, namely a valid charge over the property.

Lord Browne-Wilkinson gave the leading speech, with which Lord Keith, Lord Ackner, Lord Jauncey and Lord Lloyd agreed. Lord Browne-Wilkinson cited the judgment of McLachlin J in Canson as correctly stating the relevant principles. He said at [439] that equitable compensation makes good the loss suffered by the beneficiaries “which, using hindsight and common sense, can be seen to have been caused by the breach”.

In AIB the claimant bank, A, proposed to lend £3.3 million to S, secured by a first legal charge of S’s property. That property was already subject to a charge in favour of another bank B, to secure borrowings on two accounts. A instructed their solicitors, M, to secure an enforceable first legal charge over the property and to secure the redemption of all existing charges. M failed to do that and left a sum of £309,000 owing to B, secured on the property. Ultimately S defaulted. B was repaid in full. A recovered only £867,697 after selling the property. The Supreme Court held that principles of equitable compensation required the trustee to restore the trust fund, if still in existence, to the position in which it would have been but for the trustee’s breach and, if the trust were no longer subsisting, to pay compensation to the beneficiary on the same basis. Accordingly the Supreme Court, in agreement with the lower courts, assessed the equitable compensation due to A as £273,777.

Lord Toulson and Lord Reed JJSC gave the two principal judgments, with which Lord Neuberger PSC, Baroness Hale DPC and Lord Wilson JSC agreed. Lord Toulson refused to qualify or “reinterpret” the speech of Lord Browne-Wilkinson in Target. He held that it would not be right to give redress to a beneficiary for a loss which would have been suffered if the trustee had properly performed its duties.

Lord Toulson said at [71]:

“I agree with the view of Professor David Hayton, in his chapter “Unique Rules for the Unique Institution, the Trust” in Degeling & Edelman (eds), Equity in Commercial Law (2005), pp 279-308, that in circumstances such as those in Target Holdings the extent of equitable compensation should be the same as if damages for breach of contract were sought at common law. That is not because there should be a departure in such a case from the basic equitable principles applicable to a breach of trust, whether by a solicitor or anyone else. (If there were a conflict between the rules of equity and the rules of the common law, the rules of equity would prevail by reason of section 49(1) of the Senior Courts Act 1981, derived from the provisions of the Supreme Court of Judicature Act 1875 (38 & 39 Vict c 77).) Rather, the fact that the trust was part of the machinery for the performance of a contract is relevant as a fact in looking at what loss the bank suffered by reason of the breach of trust, because it would be artificial and unreal to look at the trust in isolation from the obligations for which it was brought into being. I do not believe that this requires any departure from proper principles.”

Lord Toulson concluded at [76]:

“My analysis accords with the reasoning of Lord Reed JSC and with his general conclusions, at paras 133-138. Equitable compensation and common law damages are remedies based on separate legal obligations. What has to be identified in each case is the content of any relevant obligation and the consequences of its breach. On the facts of the present case, the cost of restoring what the bank lost as a result of the solicitors’ breach of trust comes to the same as the loss caused by the solicitors’ breach of contract and negligence.”

Lord Reed’s judgment went along similar lines. He came to the following conclusion:

“135.

The measure of compensation should therefore normally be assessed at the date of trial, with the benefit of hindsight. The foreseeability of loss is generally irrelevant, but the loss must be caused by the breach of trust, in the sense that it must flow directly from it. Losses resulting from unreasonable behaviour on the part of the claimant will be adjudged to flow from that behaviour, and not from the breach. The requirement that the loss should flow directly from the breach is also the key in determining whether causation has been interrupted by the acts of third parties. The point is illustrated by the contrast between Caffrey v Darby, where the trustee’s neglect enabled a third party to default on payments due to the trust, and Canson Enterprises, where the wrongful conduct by the third parties occurred after the plaintiff had taken control of the property, and was unrelated to the defendants’ earlier breach of fiduciary duty.

136.

It follows that the liability of a trustee for breach of trust, even where the trust arises in the context of a commercial transaction which is otherwise regulated by contract, is not generally the same as a liability in damages for tort or breach of contract. Of course, the aim of equitable compensation is to compensate: that is to say, provide a monetary equivalent of what has been lost as a result of a breach of duty. At that level of generality, it has the same aim as most awards of damages for tort or breach of contract. Equally, since the concept of loss necessarily involves the concept of causation, and that concept in turn inevitably involves a consideration of the necessary connection between the breach of duty and a postulated consequence (and therefore of such questions as whether a consequence flows “directly” from the breach of duty, and whether loss should be attributed to the conduct of third parties, or to the conduct of the person to whom the duty is owed), there are some structural similarities between the assessment of equitable compensation and the assessment of common law damages.

137.

Those structural similarities do not however entail that the relevant rules are identical: as in mathematics, isomorphism is not the same as equality. As courts around the world have accepted, a trust imposes different obligations from a contractual or tortious relationship, in the setting of a different kind of relationship. The law responds to those differences by allowing a measure of compensation for breach of trust causing the loss to the trust fund which reflects the nature of the obligation breached and the relationship between the parties. In particular, as Lord Toulson explains at para 71, where a trust is part of the machinery for the performance of a contract, that fact will be relevant in considering what loss has been suffered by reason of a breach of the trust.”

Let me now apply the principles emerging from those authorities. The first task is to identify the duty which has been breached or the content of the obligation which has not been performed. Mr Flenley says that the duty or obligation was to procure guarantees which complied with Decree 122. Ms Bhaloo and Mr Majumdar say that it was the duty of the developers, not the solicitors, to provide compliant guarantees. The duty or obligation of the solicitors was to receive deposits from purchasers and to hold that money as custodians until the developers provided compliant guarantees.

On this issue I accept the submissions of the respondents. The essential difference between this case and Target or AIB is the solicitors’ role in relation to the security. It was not the function of Giambrone to liaise with the providers of the guarantees. Giambrone had no input into the drafting of the guarantees or any of the other formalities under Italian law. Giambrone’s role was to receive whatever guarantees the developers provided and to check whether or not they complied with Decree 122. If (and only if) the guarantees did comply, then the solicitors were under a duty to release the deposits. In the language of Lord Toulson in AIB at [76], that was “the content” of the “relevant obligation”.

The position was different in Target and AIB. In Target the solicitors were under a duty to take active steps to secure a charge over the property, before releasing the monies. In AIB the solicitors were under a duty to take active steps to secure the removal of prior charges before releasing the money.

In the circumstances which unfolded in the present case, I would characterise the solicitors’ obligation as an obligation to act as custodians of the deposit monies indefinitely. Compliant guarantees never appeared. Therefore Giambrone should have remained as custodians of the deposit monies until the preliminary contracts were rescinded, and then paid those monies back to their clients.

In Target the plaintiff’s claim failed on the “but for” test. In the present case the claimants’ claim passes the “but for” test. In AIB the claimants’ loss was limited to that which would have been recoverable in contract, because the trust was “part of the machinery for the performance of a commercial contract”. In the present case the trust was part of the machinery for the performance of the solicitors’ contract of retainer. Giambrone’s breach of contract consisted of wrongfully paying out deposit monies which it had undertaken to keep safe. The contractual measure of damages is the amount of the deposits, because those monies have now vanished. This is a case where equitable compensation and contractual damages run in tandem.

Subject to argument about South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 (which I will address Part 7 below), I therefore conclude that the judge was correct to award the amount of the lost deposits to the claimants as equitable compensation. I reject the first ground of appeal.

Giambrone held the deposits received from purchasers in its client account. Giambrone could only make withdrawals from the client account in accordance with rule 22 of the Solicitors’ Accounts Rules. I have set that rule out in Part 1 above.

The judge held that Giambrone ought to have informed its clients before paying out such a substantial part of the deposit to VFI as commission. The payment of those sums to VFI without notice to the clients was a breach of rule 22 of the Solicitors’ Accounts Rules. That was also a breach of trust: see Bristol and West Building Society v May, May and Merrimans (a firm) [1996] PNLR 138 at 158 – 159. Giambrone deliberately concealed that breach by pretending, in its letter to purchasers dated 29^th April 2009, that it had only just discovered the commission paid to VFI. Therefore the PM limitation claimants can recover the amount of the commission. There can be no limitation defence to that head of claim.

Mr Flenley submits that Chadwick J’s dictum in May, May and Merrimans has been overtaken by the Court of Appeal’s decision in Bristol and West Building Society v Mothew [1998] Ch 1. In Mothew solicitors made a misrepresentation to the lender, as a result of which they were instructed to, and did, pay over the loan monies. Millett LJ, with whom Staughton and Otton LJJ agreed, held that that was not a breach of trust. At 23 Millett LJ said:

“The defendant knew that he was a trustee of the money for the society; but he did not realise that he had misled the society and could not know that his authority to complete had determined (if indeed it had). He could not be bound to repay the money to the society so long as he was ignorant of the facts which had brought his authority to an end, for those are the facts which are alleged to affect his conscience and subject him to an obligation to return the money to the society.”

Mr Flenley draws attention to paragraph 396 of the judge’s judgment in this case. He submits that Giambrone did not initially realise that it ought to disclose to clients the commission payments to VFI.

The difficulty with that argument lies in later passages of the judgment. At [375] the judge said:

“As has already been indicated (see paragraphs 257 – 263), I am satisfied that the firm realised by no later than April 2009 (if, which I doubt, it had not realised before) that it should have told the claimants at the outset about this division. This could be the only explanation for the pretence maintained in about April/May 2009 (because pretence is what it was) that it had only recently discovered that the level of commission received by VFI was as it was then acknowledged to be.”

At [459] – [460] the judge stated:

“However, as I perceive it, the substantive claim made by the claimants arising on the basis of the Mandates is the knowledge they demonstrate that the firm had at the outset about the levels of commission. The claim advanced is that, in breach of duty, the firm failed to reveal it to the individual claimants prior to signing the preliminary contract. That claim could only be advanced when a claimant knew or ought reasonably to have known the fact that the firm knew about this at the outset, but did not reveal it to the claimants, and the letter of 29 April 2009, which revealed the level of the commission, contained the pretence that the firm had only recently discovered it.

…

In my judgment, a fundamental fact underlying the cause of action based upon the failure to reveal the commissions was suppressed deliberately on 29 April 2009 and the full truth was not revealed until the Mandates were revealed later.”

It was obvious that Giambrone ought to have disclosed the payment of such large and over-generous commissions. Giambrone appreciated this as soon as it gave serious consideration to the matter. Giambrone felt so embarrassed about its conduct that it sought to suppress the truth. In my view that package of circumstances is sufficient to “affect the conscience” of Giambrone in the manner described by Millett LJ in Mothew at 23.

I would therefore dismiss the second ground of appeal.

South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 is an authority on the measure of damages cited so often by lawyers that it is popularly known as SAAMCO. The House of Lords held that the plaintiff lenders could only recover from negligent valuers the difference between the defendants’ valuation and the correct valuation. The plaintiffs could not recover other losses flowing from the transaction, because those other losses were outside the scope of the valuers’ duty.

At 214 Lord Hoffman famously formulated the relevant principles as follows:

“I think that one can to some extent generalise the principle upon which this response depends. It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them.

The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong.”

Judges in subsequent authorities have accepted the distinction between (1) cases where D is liable for the specific consequences of its information or advice being negligently wrong and (2) cases where D is liable for all the consequences flowing from C entering into a transaction in reliance on D’s negligent advice. But those later authorities make clear that the distinction between categories 1 and 2 does not turn on a simplistic division between “information” and “advice”. Therefore to talk about “information” and “advice” cases as counsel sometimes did in their submissions may be misleading. It is better to use the terms “category 1 cases” and “category 2 cases”, as the Court of Appeal did in Haugesund Kommune & Anr v Depfa ACS Bank [2011] EWCA Civ 33; [2011] 3 All ER 655.

In Haugesund the claimants entered “swap” transactions which WR, Norwegian lawyers, advised were permissible. That advice was wrong. The Court of Appeal held that WR were not liable for all the claimants’ losses from having entered into “swap” transactions. At [73] – [75] Rix LJ said:

“73.

It seems to me that the primary question raised by this appeal is as to the scope of Wikborg Rein's duty. It may be that in the context of contract that might have to be rephrased as a question of assumption of responsibility, but the Saamco line of cases shows that English law is prepared to adopt the phraseology of tort, scope of duty, even in cases where there are parallel obligations in contract and tort. I bear in mind that in the present case, which is formally one of Norwegian law, Wikborg Rein's obligation arises only in contract. But the obligation remains one to exercise a duty of care, and it has been common ground in this court, as before Tomlinson J, that it is appropriate to consider the scope of that (contractual) duty in the terms laid down in Saamco and the cases which follow it.

74.

In this context, the preliminary question is whether this is a category 1 or category 2 case. Mr Pollock contends for the former, and Mr Railton contends for the latter. In my judgment, however, this is a category 1 case. For these purposes, I am prepared to assume, with Lord Lloyd in Aneco, that category 2 reflects the primary category, and category 1 reflects the exceptional cases. Nevertheless, it seems to me that it is difficult to see Wikborg Rein's duty as being that of a general, as distinct from a specific kind. Wikborg Rein was asked to advise about a specific question, the validity of the proposed swap contracts. It did not have a general retainer to report or notify problems about the proposed transactions. It was not concerned with the creditworthiness of the Kommunes. It warned Depfa that it could not execute a judgment against the Kommunes, so that in that, different, sense, its contractual rights could not ultimately be vindicated or, one might say, be enforced. In such circumstances, Depfa knew that it ultimately relied on the creditworthiness and good faith of the Kommunes: and on those qualities Depfa made up its own mind and was wholly confident.

75.

It is of course true that Depfa would not have entered into the transactions at all unless it could be advised that the contracts were valid and within the Kommunes' capacity. In effect, that causal connection between advice and loss goes without saying in all such cases. It is not in itself the reason for finding that the scope of duty concerned embraces all the loss consequential upon entering into the transaction concerned. For these reasons it does not seem to me that it is a sufficient explanation for characterising a case as a category 2 case to say that, without the forthcoming albeit negligent advice, the transaction concerned would not have been "viable". That is simply another way of saying that, if the claimant had not received the advice it did, it would not have entered into the transaction. A lender who is given a negligent overvaluation does not know that his transaction is not viable on the basis of the true value of the property concerned: but if he would not have gone ahead had he known the truth, it is because the transaction was not commercially viable, or not safely so. Alternatively, if he would have gone ahead even on the basis of that true value, for instance because he was content to rest on the safety of the borrower's covenant alone and was not concerned with the passing value of the property, then there has been no reliance and for that separate reason no relevant loss.”

Lord Millett stated the relevant principles in his dissenting judgment in Aneco Reinsurance Underwriting Ltd (in liquidation) v Johnson & Higgins Ltd [2001] UKHL 51; [2002] 1 Lloyd’s Rep 157 at [66] as follows:

“(1)

Where a plaintiff enters into a loss-making transaction in reliance on the defendant's negligent advice, he is not entitled to recover the whole of the loss on the transaction merely because the defendant was aware that he would not have entered into it but for the advice he received. He is liable only for the loss which is due to the advice being wrong.

…

(2)

The court does not ask what would have happened if the defendant had performed his duty and stated the true facts (in which event the transaction would not have gone ahead at all). This is not the basis of the defendant's liability.

(3)

The correct measure of damages is not the difference between the loss which has in fact occurred (the loss on the transaction) and the loss which would have occurred if the defendant had performed his duty and stated the facts correctly (which would have been zero since the transaction would not have gone ahead). This would not exclude the loss which ought to be irrecoverable. They are measured by the difference between the loss on the transaction and the loss which would have been sustained if the facts had been as the defendant represented them to be (when the transaction would still have gone ahead).

(4)

The case is different where the defendant assumed responsibility for advising generally what course of action to take in relation to a particular transaction. But it is necessary to identify the transaction in question, for he is not liable for loss arising from some other transaction even though it may be linked with it, particularly if it called for the exercise of a different professional judgment. A broker should not lightly be assumed to undertake responsibility for an underwriting decision.

(5)

The defendant's liability is measured by the scope of his duty. Accordingly, where the complaint is that he failed to report or give any advice at all on a particular matter, the plaintiff must prove that he was under a legal obligation to do so. It is not enough that he would probably have volunteered the information if asked.”

The most recent and important re-statement of the SAAMCO principles is to be found in Hughes-Holland v BPE Solicitors & Anr [2017] UKSC 21; [2017] 2 WLR 1029. In Hughes-Holland G lent £200,000 to L secured upon a disused building. G mistakenly thought that L was going to spend that money on developing the property. G instructed BPE Solicitors to draw up a facility letter and charge over the building. BPE duly carried out that task. Unfortunately, the facility letter (which was based on an earlier draft for a different transaction) contained statements that the loan was a contribution to development costs. That unintentionally confirmed G’s understanding of L’s plans. The project was a failure and G lost the £200,000 which he had lent.

In the subsequent litigation the trial judge found that BPE had been negligent and awarded damages representing G’s entire loss from the transaction. The Court of Appeal allowed BPE’s appeal and reduced the damages to nil. G then became bankrupt. His trustee in bankruptcy, Mr Hughes-Holland, appealed to the Supreme Court. The Supreme Court dismissed the appeal. Lord Sumption JSC gave the only judgment. Lord Neuberger PSC and Lords Mance, Clarke and Hodge JJSC all agreed with that judgment.

Lord Sumption’s essential reasoning was that G’s losses were not within the scope of the solicitors’ duties, which were limited to the drafting of documents. Lord Sumption’s judgment provides an excellent distillation of the SAAMCO principles, as they have developed over the last 21 years.

I would serve no useful purpose by paraphrasing Lord Sumption’s judgment. I do, however, draw attention to the following features:

How do the SAAMCO principles affect the present case? The first point to note is that this was not a conventional conveyancing situation. The claimants were buying properties in Italy and had no knowledge of Italian law and conveyancing procedures. Giambrone decided what information the claimants needed and provided that information to them. The documents which I have referred to in Part 2 above show that Giambrone were (albeit imperfectly) guiding the whole decision-making process. They were telling the clients what protection they needed, what sums they should pay out and when it was safe to pay those sums out.

If and in so far as the claimants’ claims rest upon negligent information or advice, in my view this is a category 2 case. Obviously the claimants decided whether or not they wanted to buy holiday homes in Southern Italy. But having taken that primary decision, they put themselves into the hands of Giambrone as their experienced Anglo-Italian lawyers.

The actual breach with which I am concerned at this stage of the judgment is paying out sums of money to VFI and the developers in circumstances where those payments were breaches of trust and breaches of contract. The loss which those breaches caused was the disappearance of the deposit monies. The claimants were never able to get those monies back. In my view that was a direct loss, which the SAAMCO cap does not shut out.

The mere fact that the claimants can surmount the “but for” test is not the end of the matter. The claimants must establish that the loss which they suffered was within the scope of Giambrone’s duty.

That loss clearly was within the scope of Giambrone’s duty. It was Giambrone who explained to the claimants their rights, liabilities and protections under Italian law. Giambrone explained to the claimants that they would be adequately protected by guarantees complying with Decree 122. Having done all that, Giambrone proceeded to pay out the deposits when no such guarantees were in place.

In the result, therefore, the SAAMCO principles do not shut out the claimants’ claims for the deposits which they have lost. I reject the third ground of appeal.

I can deal with these two grounds of appeal more briefly. These grounds are challenges to breaches of duty (iii) and (viii) found by the judge, as set out in Part 3 above.

In relation to planning permission, the appellants argue that the judge never identified precisely what the planning problem was. Therefore he could not hold that the claimants were in breach of duty.

The difficulty with this argument is that Giambrone undertook to carry out extensive due diligence, including ensuring that there was valid planning permission. In the event, there were serious flaws in the planning permissions, such that they were suspended in June 2008. The nature of the planning problem seems to have been within the knowledge of Giambrone and its experts (see paragraphs 190-191 and 196-197 of the judgment), but they did not reveal the details.

The judge found, on the evidence, that Giambrone undertook to carry out an enhanced level of enquiry into the existence of valid planning permissions. In fact Giambrone did no more than observe that there were apparently valid planning documents. The judge held that Giambrone should have done more than that, but he left over to the second trial whether further investigation by Giambrone would have uncovered the problem.

Having regard to the terms of the retainer letter and the particular circumstances of this case, the judge was entitled to find that Giambrone undertook to carry out an enhanced level of enquiry into the planning permissions. Giambrone, but not his clients, knew perfectly well that Calabria was a “crime-ridden part of Italy” (see paragraph 105 of Giambrone’s defence in the Noel action). In cross-examination Mr Giambrone said that crime infiltrated all sectors. That included the construction sector. Any lawyer with that degree of knowledge about how things were done in Calabria would do more than merely take the planning permissions at face value. Whether Giambrone’s breach of duty in this regard had any practical consequence will be a matter for the second trial, if there is one.

I turn finally to ground 5. Giambrone did not warn the claimants about the risk of organised crime in Calabria. Quite the opposite. The documents which Giambrone sent out suggested that everything was above board and the clients were making safe investments in holiday homes.

Giambrone knew perfectly well about Mafia activities affecting all sectors in Calabria, including the construction sector. He was acting for foreign clients whose knowledge of the area was based upon VFI’s glossy brochure and the clients’ ‘inspection visits’.

The judge found that Giambrone’s failure to warn the claimants about the risks of criminal activity in the construction sector was a breach of duty. He was entitled to make that finding.

Mr Flenley submits that the judge’s decision has the effect of substantially widening the duties of conveyancing solicitors. I disagree. The judge’s decision is based upon the particular facts of this case. It has no impact on the usual scope of the duties of conveyancing solicitors in England and Wales.

Let me now draw the threads together. For the reasons set out above, I would reject all five grounds of appeal and accordingly dismiss this appeal.

I agree with Jackson LJ’s conclusion and reasoning on all grounds save ground 4. But I would like to add a little on grounds 2 and 5.

As to ground 2, I was at first dubious about whether the Judge was right to hold that Giambrone was obliged to inform its clients about the size of VFI’s commission and/or that, in consequence of it, so large a proportion of the deposit was payable to VFI rather than the relevant developer. I was not sure that the split between promoter and developer was a matter in which a purchaser in a case like this would have a legitimate interest. But the Judge’s conclusion to the contrary was based on his evidently very thorough understanding of the unusual circumstances of this particular case, including what he found to have been Giambrone’s deliberate decision to conceal the fact that it had known this information from the start; and I am not prepared to say that he was wrong.

As to ground 4, my disagreement with Jackson LJ is a matter more of form than of substance, and I will state it briefly. At para. 315 of his judgment the Judge held that Giambrone should have conducted “a degree of enquiry … higher than normal” into whether the developments had planning permission; and he appears to have decided that, since it admittedly did no more than ascertain that there were planning permissions from the comune which on their face applied to the developments, it was in breach of that enhanced duty. But he made it clear in the following paragraph that the evidence available to him did not enable him to decide what further steps could have been taken. That of course puts in issue whether the breach that he found caused any loss, which was deferred to the next stage of the trial. But to my mind it also undermines the finding of breach. I do not think that it was right for the Judge to hold in the abstract that Giambrone was in breach of an obligation to do more than he did unless and until he was in a position to identify what the further steps were. However, if I am right about this, there is no substantive difference in the nature of the enquiry required at the second stage. On either basis it will be necessary for the Judge to decide, with the benefit of such further evidence as may be called, what further steps, if any, Giambrone could and should have done to ascertain whether the developments had valid planning permission; and, if so, what information such steps would have disclosed.

As to ground 5, again, I was at first dubious whether Giambrone could really be under an obligation to advise clients about the prevalence of organised crime in the construction industry in Calabria, which might be said to go more to the overall wisdom of the purchase than to a matter within the remit of a lawyer, even a lawyer advising on a foreign purchase. But it is, again, necessary to bear in mind the very particular circumstances of this case and the width of the role undertaken by Giambrone; and I have come to the conclusion that the Judge was entitled to make the finding that he did.

I agree with Jackson LJ’s judgment including in respect of Ground 4, with which Underhill LJ disagrees. Given the disagreement, I very briefly set out my reasons for agreeing with Jackson LJ.

As set out in paragraph 34(iii) above, the judge held that Giambrone was in breach of duty to the claimants in respect of planning permission. In my view, these were breaches which the judge was entitled to find having regard to his conclusion that Giambrone was under an “enhanced level of due diligence” in respect of “checking the validity of the planning permission” (paragraph 315) based significantly on Giambrone stating in the retainer letter that the firm “would “carry out enquiries to ensure … that valid planning permission is in place …”” (paragraph 313).

The judge found that the enquiries which Giambrone had undertaken in respect of planning permission did not fulfil this enhanced level of obligation. This is not surprising because Giambrone did not accept that there was any such obligation. The judge referred to one expert who gave evidence that ““the regulatory and specialist plans” would have demonstrated the “mistake on the part of the municipality …””. The judge also gave examples of the type of additional enquiries which, in his view, were required.

As Jackson LJ says, whether the breaches of duty had any practical consequences will be a matter for the second trial, if there is one. However, this does not mean that the evidence before the judge was not sufficient for him to find that there had been such breaches, even if the judge was unable to determine whether those additional enquiries would, in fact, have discovered the problems which existed with the planning permission.