Gore & Anor v Mishcon de Reya

This is the trial of two claims which were heard together between Tuesday 13 and Friday 23 January 2015. The first, issued on 19 February 2013, is a claim by Mr Kwok Choon Chiang (who is known by the initials “KC”) and Merlion Limited (“Merlion”), a limited partnership formed in the State of Alabama, USA (and named after the well-known Singapore tourist icon which combines the head of a lion with the body of a fish) which is beneficially owned and controlled by KC. For the purposes of this judgment, it is unnecessary to distinguish between KC and Merlion; and I shall proceed as though KC were the sole claimant. This claim relates to some US $3.5 million (Footnote: ¹) received by the Defendants, the well-known firm of solicitors, Mishcon de Reya (“Mishcons”), from another well-known firm of solicitors, Simmons & Simmons (“S & S”), between 10 October and 9 November 2007 and representing part of a series of payments (totalling some $4 million) which had been transferred to S & S by two firms of Alabama-based attorneys instructed by KC. Mishcons released these moneys on the instructions of a client of that firm, Mr Mick Shephard (“Mr Shephard”), to persons and for purposes appointed by him. The claim by KC was the subject of an unsuccessful application for summary judgment before Roth J whose judgment (dated 23 May 2013) bears the neutral citation number [2013] EWHC 2319 (Ch). The second claim, issued on 26 November 2013, is brought by Mr Patrick Brian Gore (“Mr Gore”) and a UK-based company of which he is one of the three directors and an equal one third shareholder, Allied Developments (Europe) Limited (“ADEL”). This claim relates to £224,500 paid directly to Mishcons by Mr Gore on 27 November 2007 and released by Mishcons on the instructions and at the direction of Mr Shephard. For the purposes of this judgment, it is unnecessary to distinguish between Mr Gore and ADEL; and I shall proceed as though Mr Gore were the sole claimant, whilst bearing firmly in mind that Mr Martin Griffiths (who gave evidence before me) and Mr Christopher Hamilton (who did not) are also equal one-third shareholders and co-directors of ADEL with Mr Gore. All four claimants are represented by Mr Robert Hantusch (of counsel); and Mishcons are represented by Mr Robert Anderson QC leading Mr Robert Weekes (also of counsel).

In one sense this is an unusual case because there is really little dispute about the primary facts. Rather, the case centres upon the inferences to be drawn from the undisputed facts and the contemporaneous documents. With their written opening, counsel for Mishcons produced a written chronology with which Mr Hantusch has taken no issue. A more detailed survey of the facts is now to be found at Section E of Mishcons’ written closing submissions. Accordingly, it is necessary for me to provide only the most brief description of the facts which give rise to the present claims, supplemented by the schedule to this judgment which details (1) the sums received by S & S by and on behalf of KC and Merlion, (2) and (3) the sums transferred to Mishcons by S & S and Mr Gore respectively, and (4) the payments out of Mishcons’ client account. This judgment breaks no new legal ground; but it may serve as a salutary warning that even the most experienced and successful of businessmen can be taken in by an apparently plausible chancer.

In or about June 2007 ADEL and its affiliates needed to raise funding to refinance an existing development in Cardiff (Bay Pointe) and to acquire a property development in Orlando, Florida USA known as 1000 North Orange. The plan was that they should do so by procuring a bank guarantee which could then be “cashed” (in the sense of procuring a loan facility to be secured by the bank guarantee). Initially it was hoped to obtain the bank guarantee from UBS Bank in the United States with the assistance of a French Canadian, Mr Patrick Danan, and his associate, Mr Edmondson. Mr Shephard and his company, MKC Holdings International Limited (“MKC”), were introduced to ADEL by a broker, Mr Mark Timmis, as someone who could assist in obtaining the loan facility. However, having “planted the seeds of doubt”, by the end of July 2007 Mr Shephard had persuaded ADEL that this funding mechanism was not going to work and that the only viable option was for Mr Shephard to obtain the bank guarantee as well as cashing it. This became known as “Plan B”. Mr Shephard represented that this would require an advance fee of up to $10 million to be paid to the “owner” of the guarantee. Mr Shephard was prepared to provide part of this; but ADEL lacked the resources to provide the remainder. During the latter half of September 2007, KC was introduced to ADEL in the United States as someone who needed to raise money to refinance certain real estate owned by Merlion in Orange Beach, Alabama and to develop it as a condominium resort hotel, but who had the cash available to assist with the payment of the advance fee. As the matter developed, KC, Merlion and a specially incorporated affiliate of ADEL called CAMP (Orange Beach) Holdings LLC (“CAMP”) entered into a written agreement (“the JVA”) effective 1 October 2007 regarding a joint venture to be formed under which Merlion and/or KC were to deposit $3 million into “ a client escrow account” with S & S in the UK to be “used only for the specific purpose of closing the Credit Facility to complete” a $35 million loan to refinance the exiting secured indebtedness on Orange Beach and to develop the resort hotel. The moneys paid over to Mishcons were intended by KC, Merlion, Mr Gore and ADEL to be used by Mr Shephard to obtain the bank guarantee, which would then be cashed to raise the required finance. In fact, these moneys were “pocketed” by Mr Shephard in what is said (almost certainly correctly) to be an “advance fee fraud”.

The relevant partner in Mishcons was Mr Kevin Steele (“Mr Steele”). He was convicted on 5 December 2011, after a trial at the Crown Court at Southwark, on 2 counts of conspiring with Mr Shephard to use false instruments and to commit fraud by false representation – offences to which Mr Shephard had previously pleaded guilty – and on a third count of fraud for which Mr Steele was sentenced to a total term of 5 years and 6 months’ imprisonment (which was subsequently reduced on appeal to 4 years and 4 months). Those convictions related to a wholly separate fraud which had been committed against a Swiss bank, EFG Private Bank Limited, in or about the middle of 2008, some months after the events complained of in these actions, and it was in no way connected with the present claims. As a result of this latter fraud, Mr Steele had been expelled as a partner in Mishcons on 19 September 2008 (following a period of suspension); and he was subsequently struck off the Roll of Solicitors on 22 August 2012. He had earlier been adjudged bankrupt on 5 October 2011. The issue at this heart of this litigation is whether Mishcons can be rendered vicariously liable for Mr Steele’s actions in releasing the moneys which form the subject-matter of these two claims on the authority of, and in accordance with directions from, Mishcons’ client, Mr Shephard.

The claims against Mishcons are founded upon three separate but, by reason of their common factual basis, closely-linked causes of action. These are:

In the case of KC and Merlion:

In the case of Mr Gore and ADEL:

Mishcons submit that the following key points emerge from the trial:

As will become apparent, in broad terms I accept these submissions.When considering KC’s claim, Roth J observed (at [4]) that: “The loss of his money, some of which he had borrowed from his sister and other third parties, was undoubtedly a terrible blow for KC. But the issue in these proceedings is whether he can recover on account of his loss from Mishcons”. That is still the issue before me. The answer is that, whether or not Mr Shephard did defraud the claimants, and whatever sympathy one has for KC and Mrs Chiang – and I do entertain considerable sympathy for them (as distinct from Mr Gore) since they are the most deserving of individuals and they have been treated shamefully - Mishcons were not to blame for their misfortunes; and these claims must therefore be dismissed. If KC requires redress, I fear he must look elsewhere (if it is not already too late to do so).

I remind myself that the legal burden rests on the claimants to prove each element of their case to the civil standard of proof, that is to say on the balance of probabilities. Given the nature of the allegations made in relation to Mr Steele, I also remind myself of Lord Nicholls of Birkenhead’s well-known observations in Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 at 586D-F, where he said:

Both Mr Gore and KC gave evidence before me. KC and his wife, Mrs Terri Chiang, were present in court throughout the trial, and they have taken a lively interest in the proceedings (although KC told me that his presence in court did not mean that he understood all that was being said). Mr Gore left court at the conclusion of his evidence and he did not return (which may have been because I had been told that his father had been admitted to hospital in the Midlands during the course of the trial). In addition, I have heard oral evidence from three further witnesses for the claimants: Mr Richard Dyton (an experienced solicitor and the partner in the Projects and Construction Group of S & S, who acted for ADEL), Mr Griffiths, and Mr Mark Pattinson (who was Mr Shephard’s assistant). I also received two witness statements from Mrs Chiang without objection from the defendants, who did not require her to be tendered for cross-examination. For the defendants, I heard from one witness, Mr Jarret Brown, a partner in Mishcons, who had had some limited involvement with Mr Steele’s relevant file in October 2007 with a view to satisfying himself that the treatment of moneys received into, and paid out of, Mishcons’ client account complied with money-laundering requirements; and who later, in September 2008, became involved in investigating the EFG Bank fraud and, in consequence, Mr Steele’s conduct as a partner of Mishcons generally, including assuming overall responsibility on behalf of Mishcons for the conduct of this litigation.

With the exception of Mr Gore, there was no real challenge to the integrity or the probity of any of the witnesses or the contents of any of their written evidence. Rather, cross-examination was focussed upon establishing what each of the witnesses had known about events at the time and, in particular, whether they had seen certain documents; what they had understood the contemporaneous documents to mean; and whether certain of the documents accorded with their contemporaneous understanding of matters.

Mr Gore (who is now 46 years of age) was in the witness box for some 8 hours, starting at just after 3.30 pm on Day 1 (Tuesday 13 January) and concluding in time for the luncheon adjournment on Day 3 (Thursday 15 January). Mr Gore was a voluble witness who gave lengthy answers to questions. At times he professed a curious difficulty in understanding certain of Mr Anderson’s questions which I find to be attributable to a reluctance on Mr Gore’s part to provide a straight answer. Mr Anderson’s cross-examination established that Mr Gore was an experienced chartered accountant, with impressive professional and practical credentials in the field of auditing and corporate finance (including 10 years at Arthur Andersen) and some 20 years’ experience of deal-making and the like. In the course of his evidence, Mr Dyton described Mr Gore as “quite a diligent type of guy”, and I accept this description of Mr Gore in general. However, in relation to the series of events which have given rise to the present litigation, I am satisfied that Mr Gore was not merely naïve and gullible but (as Mr Gore himself accepted) he “compromised his integrity on several occasions”, and he told a number of lies in the process of which he was now “ashamed”. I find that (as Mr Gore described himself) he was “blinded by greed to try and get the deal away”, and spent some five months acting at Mr Shephard’s “beck and call”, “dancing to his tune”, and unthinkingly and uncritically going along with all that Mr Shephard instructed him to say or do. I find that I cannot accept Mr Gore’s evidence on any matter in dispute unless such evidence either (1) is corroborated by some contemporaneous document or other witness evidence which I accept as honest and reliable or (2) constitutes an admission against Mr Gore’s interests. I find that (not always at Mr Shephard’s behest, but sometimes of his own accord) Mr Gore was a knowing party to drafting a series of false documents that were designed to mislead (1) the financial institutions from which ADEL and its affiliates were seeking to raise money and their representatives, (2) ADEL’s own solicitor (Mr Dyton), (3) Mr Shephard’s appointed solicitor (Mr Steele), and (4) (in relation to the work that was being done to bring the transaction to a successful completion) even his own joint venturer, KC. Such conduct is inexcusable. I also find that Mr Gore was not prepared to be open and frank with the court during the course of his cross-examination, notably in relation to the identity of the “benefactor” of the original proposed guarantee from UBS, which I am satisfied (despite his protestations to the contrary) was understood by Mr Gore to be Mr Danan.

Mr Anderson invites me to find that Mr Gore also deliberately deceived KC into agreeing to inject $3 million into the transaction by the false representation that he and Mr Griffiths had already deposited $ 5 million towards obtaining the bank guarantee. At first I was attracted to this conclusion; but Mr Hantusch has persuaded me not to make such a finding. I accept KC’s evidence (at paragraph 28 of his witness statement, and affirmed in cross-examination) that initially he was told by Messrs Gore and Griffiths “that ADEL had invested US $5 million to get their part of the bank guarantee and my US $3-4 million was to obtain a larger bank guarantee”. However, KC accepts (at paragraph 32) that he was later given a copy of a letter dated 22 September 2007 from MKC to Mr Gore which confirmed that MKC could access (upon demand from Hiscox Limited, apparently one of Mr Shephard’s companies) the first payment of $5 million which Carlton Limited (another of Mr Shephard’s companies) was providing, and that further payments were expected in the near future. I accept Mr Gore’s evidence (at T2/160) that “there was nothing hidden or underhand about what we were trying to do” since they gave KC a copy of the “Hiscox letter”. I find that Mr Gore had originally been led to understand by Mr Shephard that MKC was already holding the first payment of $5 million towards “the cost and activation of the facility Carlton Limited are providing”; that this was why Mr Gore told KC that (as stated in Mr Gore’s discussion paper dated 24 September 2007) he and Mr Griffiths had “already deposited $5m”; and that Mr Gore drafted his email to MKC of 24 September 2007 requesting confirmation of the fact that MKC “was holding” the first payment of $5 million because that was his genuine understanding at the time. Mr Shephard faxed this email request through to Mr Steele for his urgent advice; and, no doubt following some undocumented discussion between himself and Mr Steele, Mr Shephard redrafted the confirmation to make it clear that MKC could “access” the first payment of $5 million “upon demand from Hiscox”. Such a revision of the facts would have been typical of Mr Shephard’s method of working. When dealing with a meeting in Birmingham on 3 November 2007 between KC and Messrs Gore, Griffiths and Shephard (at T3/21) Mr Gore described Mr Shephard (as I find accurately) as seeming “to change his mind, change the facts at least once every couple of days. So it’s very difficult. It’s like hugging jelly to actually know what Mick is actually saying to you.” KC accepted in cross-examination that it “was sometimes difficult to understand what was going on”, and that it was all “very confusing”. Mr Gore can be criticised for replicating his earlier language in the signed JVA (“CAMP’s affiliates have already deposited $5 million”) and for not telling KC that ADEL had no proof that this sum of $5 million ever existed. As a result, it is clear that KC was left with the false impression that Mr Shepherd had already loaned ADEL or its affiliates $5 million which had been deposited towards the fees. But I do not accept that Mr Gore deliberately set out to mislead KC in this way (although the fact that he was misled was convenient for Mr Gore).

Mr Dyton gave evidence for about 3 ½ hours on the afternoon of Day 3 (Thursday 15 January) and continuing until about 12.10 on the following day. I accept Mr Anderson’s description of Mr Dyton as a witness who gave honest and straightforward evidence which for the most part should be accepted. However, as Mr Anderson also points out, he was addressing conversations and events which occurred more than 7 years ago, in circumstances where he had taken few contemporaneous notes (whether in the form of an attendance note or email). I therefore accept that caution must be exercised when assessing Mr Dyton’s suppositions as to what Mr Steele may or may not have known about the relevant transactions at the time and, in particular, Mr Dyton’s assumption that Mr Steele would have known that the several transfers to Mishcons’ client account had been made “to lever the bank guarantee and the loan and everything else that was going to be needed for the transaction”; although I have no reason to take issue with Mr Dyton’s perception that Mr Steele “conducted himself in a normal manner”.

Mr Dyton described Mr Shephard as “a very unusual character … clearly commercially sharp” but one who never brought any papers into meetings or took any notes at all. He was not the sort of commercial person that S & S would normally deal with. Mr Dyton made it clear that S & S’s client was ADEL and that the firm had not acted for KC or Merlion. He was also very clear that the moneys derived from KC were never held in escrow by S & S, that he had no reason to suppose that KC had any title to those moneys, that he treated them as though they were ADEL’s moneys, and that he accepted instructions from Mr Gore as to how they were to be disbursed.

KC (who is now 57 years of age) gave evidence before me for about 2 ¼ hours starting at about 12.10 and concluding at about 3.45 on Day 4 (Friday 16 January). As Mr Anderson acknowledges, KC was a dignified and honest witness. He has lost a very substantial sum of money. He has been treated very poorly by his purported colleagues - Messrs Shephard, Gore, Hamilton and Griffiths. He and his wife deserve (and receive) the court’s sympathy. However, as Mr Anderson points out, neither KC’s testimony, nor that of Mrs Chiang, provide any real support for his claim, or for that of the ADEL claimants, against Mishcons. Indeed, it is to KC’s great credit (and I suspect characteristic of the man) that he did not seek to embellish his testimony so as to advance his claim. I accept the evidence of KC and his wife. However, I note:

Mr Griffiths gave evidence before me for about 1 ½ hours on the morning of Day 5 (Monday 19 January 2015). For the most part his evidence was measured and reliable. As Mr Anderson observes, although he was involved in the creation of some misleading or false documents, he was, on the whole, prepared to acknowledge his role. Thus, in relation to the request to act letter dated 8 June 2007 from ADEL to Mr Shephard (of MKC), Mr Griffiths accepted that he had composed the letter at Mr Shephard’s dictation because (even at that early stage in their acquaintance) “whatever he said, we did”, and without giving any “real thought to the actual contents”.

Mr Pattinson gave evidence before me for about an hour either side of the luncheon adjournment on Day 5 of the trial. I found him to be a candid, and an honest, witness who strove to be accurate and precise in answer to questions in cross-examination. (There were no questions put to Mr Pattinson in re-examination.) Mr Pattinson had pleaded guilty to his part in the EFG Bank fraud, he gave evidence for the prosecution, he described himself as the “forger-in-chief”, and he was sentenced to 18 months’ imprisonment. I accept Mr Anderson’s submission that Mr Pattinson’s evidence (which I accept) is significant in the following respects:

Mishcons’ sole witness, Mr Brown, gave evidence for just under 3 ½ hours, beginning at about 2.45 pm on Day 5 and concluding just before the luncheon adjournment on Day 6. As one should expect from an experienced solicitor in a reputable Mid-City firm, his evidence was measured, balanced, frank and honest; and I accept Mr Brown’s evidence so far as he was able to assist the court.

Mr Anderson criticises the claimants for their failure to call Mr Shephard and Mr Steele. He points out that they would have been able to speak to the allegations of dishonesty and conspiracy that the claimants advance; and he submits that it is difficult to see how the claimants can hope to sustain those allegations in the absence of both of them. He points to the fact that the claimants’ solicitors (Kennedys) have procured a (limited) waiver of privilege in relation to documents and Mishcons’ relevant files, and they have also called Mr Shephard’s assistant as a witness. Absent any explanation from the claimants, the court is invited to infer that Mr Shephard was not called (or, if necessary, summoned) because he would not have supported the claimants’ case. His evidence either would have been, or would have been established in cross-examination to have been, that Mr Shephard did mislead Mr Steele, and that the latter was not a party to any conspiracy concerning the transaction at issue in these claims. I decline to draw any inference adverse to the claimants from their failure to call Mr Shepherd. I cannot speculate upon what evidence he might have given; and I can well understand that none of the parties would have wished to proffer Mr Shephard as an honest witness upon whose evidence the court could safely rely. Likewise with Mr Steele. He was said to have fallen out with his former partners in Mishcons; and issues of client confidentiality were (I find genuinely) perceived by Mishcons as raising difficulties in adducing evidence as to matters (including advice sought and received by Mr Shephard and MKC) which, consistently with Mishcons’ case, they might otherwise have wished to adduce. Conversely, Mr Steele (who has already served one term of imprisonment) could hardly have been expected to have been prepared to give evidence supportive of the claimants’ case. I would undoubtedly have benefitted from hearing either (or both) of Messrs Shephard and Steele cross-examined; but I am not so naïve as to contemplate that this was ever a realistic scenario.

I accept that Mr Danan plainly had highly relevant evidence to give; but he is neither a UK national nor resident in the UK and I can understood why he would have been reluctant to come to the UK to give evidence voluntarily. I draw no adverse inference from the claimants’ failure to call him. However, the same does not apply to Mr Hamilton. He is a UK national who is still an equal shareholder in, and a director of, ADEL, one of the claimants. There is no valid reason – and none was suggested – for the claimants’ failure to call him. I am entitled to infer that Mr Hamilton has not been called either because he would not have given evidence supportive of the claimants’ case or (and perhaps more likely) for fear of the damage that might have been wreaked upon that case (in particular as to the knowledge and role of Mr Steele) were Mr Hamilton to have been cross-examined.

At this point, it is necessary for me to consider the knowledge and role of Mr Steele for they are central to the second and third limbs of the claimants’ case. Mishcons were retained pursuant to a retainer letter dated 11 September 2007. This letter had been prepared using a template (headed “Advising on foreign acquisition”), which required the writer to “include as much detail as possible as to the scope of our instructions and also specifically exclude matters in respect of which we are not instructed e.g. tax or foreign jurisdiction”. The retainer letter prepared by Mr Steele (and headed “Foreign acquisition/Patrick Gore and his companies”) began as follows:

“Thank you for instructing the Firm in relation to your claim, and your companies claim for fees from Patrick Gore and his company relating to the acquisition and development of the Orange County site in Florida. You, and others appointed by you, claim fees from Gore pursuant to various agreements under which you were to arrange funding. The agreements were prepared by Simmons and Simmons.

Simmons and Simmons propose to pay some fees but insist they are paid to us and that we pay your appointees. A list of payments and recipients must be kept available in the event the matter becomes litigious, or your appointees seek to claim directly against Gore.

I am to liaise with Richard Dyton of Simmons and Simmons. We expect everything to be resolved this year. He may seek an indemnity from you.

In addition some of the settlement proceeds are to be used by your family to acquire property in the Philippines. Without any recourse on our part we can contact and recommend suitable local lawyers, but you will meet them directly when you visit in October.”

It is said by the claimants that this letter was, and is, a complete “sham”, its purpose being “to create the impression within Mishcons that the matter was being conducted properly in the event that anyone other than Mr Steele had occasion to consider or deal with the matter”, and thus to deceive Mr Steele’s partners. It is said that, as at 11 September 2007, there was no existing, or arguable, claim for fees for arranging funding between Mr Shephard (or any of his companies) and Mr Gore (or his companies), or no such claim which could then have been enforced by legal action. This is said to appear clearly from passages in the witness statements of both Mr Gore (at paras 112-113 (Footnote: ³)) and Mr Dyton (at para 31), upon which they were not challenged in cross examination. Mr Hantusch contends that the retainer letter bears no relationship to (1) what was proposed by Mr Shephard to Mr Steele or (2) the nature of the work that was actually carried out for Mr Shephard and his companies by Mr Steele, most of which fails to qualify as the provision of legal services. All that Mr Steele is said to have needed was a very broad and general retainer, to be recorded in a document to be placed on the firm’s file, and which would justify the receipt of moneys into Mishcons’ client account. Mr Steele is said to have been “engaged simply to act as a conduit for disbursing funds”, giving no substantive advice to Mr Shephard or to MKC.

I reject these submissions for the following reasons:

In answer to a question from the Bench, Mr Gore also advanced an alternative interpretation of the documents on Mr Steele’s file which was that Mr Shephard “was ensuring that Mr Steele had all of the documents that he needed to protect the fraud that they were perpetrating on us…. I think he was just ensuring that he had all of his ducks in a row in terms of the paper trails that he needed on [Mr Steele’s] files”: T2/108-9. This assertion (which was developed during his cross-examination of Mr Brown) has led Mr Hantusch to advance the submission (described by Mr Anderson as “an eleventh hour allegation” which the claimants’ team have adopted “at the final gasp, as a matter of last resort”) that the nature and terms of various letters and emails purporting to come from Mr Danan, but clearly composed by Mr Shephard, establish that Mr Steele was “building a file to attempt to support the manner in which the client account was operated on behalf of Mr Shephard”. Mr Hantusch skilfully developed this argument in the course of his closing oral submissions. Having carefully considered all that he has had to say, I reject this submission for the following reasons:

Mr Hantusch submits that Mr Steele’s dishonesty is further demonstrated by his conduct in relation to the alternative funding mechanism which Mr Shephard sought to put in place after Mr Danan’s email to Mr Shephard of 27 November 2007 (copied to Mr Hamilton and forwarded to Mr Steele) stating that he could not be “involved in a transaction with a Bank Guarantee”. He relies upon Mr Steele’s consistent representations to Mr Dyton, extending from just before Christmas 2007 through January until early April 2008, that this was a genuine transaction despite the fact that no documents relating to the supposed funder (which was identified as HSBC Canary Wharf) of this alternative mechanism have been found on Mr Steele’s files. I acknowledge that the absence of any such documentation is troubling. But Mr Shephard was undoubtedly a sophisticated and proficient fraudster who was able to deceive a number of experienced professional and business persons. One simply does not know what Mr Shephard was reporting to Mr Steele at the time; and I am not satisfied that Mr Steele was the only person who was not deceived by Mr Shephard at the time. Whether they are viewed in conjunction with the other matters relied upon by Mr Hantusch or (still less) in isolation, I cannot regard Mr Steele’s dealings (or lack of dealings) and statements in connection with the alternative funding mechanism as consistent only with Mr Steele being a knowing party to some dishonest scheme on the part of Mr Shephard. There are other innocent potential explanations.

I therefore conclude that there is no proper basis for finding that Mr Steele acted dishonestly in relation to the matters which are the subject of this litigation. In doing so, I bear in mind also Mr Anderson’s point (which I accept) that if this were a fraud involving Mr Steele, it was a high-risk one. The counter-party to the transactions was understood to be represented by S & S. Any payment out of Mishcons’ client account over £10,000 had to be approved by another partner in addition to Mr Steele; and this procedure was adhered to in relation to each payment out of the client account of which complaint is made. Mishcons’ two compliance officers, Mr Brown and Mr Kevin Gillon, were alerted to concerns regarding the receipt of moneys into Mishcons’ client account on 25 October 2007; and Mr Brown satisfied himself that “the matter is genuine” by speaking to Mr Steele. Mr Steele even forwarded one of Mr Dyton’s emails (of 24 October 2007) to Mr Brown (on 26 October 2007) inquiring if it was “an undertaking”. If he was a knowing party to fraud, then Mr Steele was either incredibly naïve, or ridiculously stupid, or both. Mr Hantusch rightly relies upon the fact that “it was readily apparent that none of the payments that were made from out of the $3.5 million originally received from S & S or the £224,500 paid by Mr Gore was made for the purposes of obtaining funding forming the subject of the Fund Management Agreement” (as appears from the narrative forming part of the Schedule to this judgment). Had Mr Steele been in on the fraud with Mr Shephard, they could easily have ensured that the moneys were paid out of Mishcons’ client account to one of Mr Shephard’s companies (perhaps located offshore) under the guise of a “payment to broker” rather than, for example, recording payments of £170,000 for a Maybach motor car and £31,000 for a “diamond bracelet loan”. Mr Anderson also makes the point that if there had been any fraudulent conduct, it would have been identified by the Serious Fraud Office and by Mishcons in the course of their investigations; but I attach little weight to this factor bearing in mind that there has been no criminal prosecution of Mr Shephard in relation to this matter.

I must also consider what Mr Steele understood about the sums that were being transferred into Mishcons’ client account. I attach little weight to Mr Dyton’s evidence of Mr Steele’s understanding because Mr Dyton’s email of 8 October 2007 (which stands as his attendance note of his conversation with Mr Steele on 5 October) records nothing more than Mr Steele’s confirmation that he “was aware of the transaction” without identifying precisely what “the transaction” was; and Mr Dyton’s evidence in cross-examination (at T3/166-171) takes matters no further. Mr Dyton’s understanding (that “the structure was still to provide funds to obtain a bank guarantee”: see T3/165) may not have been shared by Mr Steele. The best evidence of Mr Steele’s understanding of the purpose of the money transfers is to be found in his mis-addressed “Property Temp4” email to Mr Dyton of 15 October 2007, which stated: “I understand from Mr Shephard the further funds are to be transmitted to my firm pursuant to the Fund Management Agreement dated 5July 2007 as amended 5 October 2007” (“the FMA”). Although this email never reached Mr Dyton, it clearly represents what Mr Steele knew, and understood, at the time it was sent. That understanding is confirmed by the terms of Mr Steele’s instructions to Mr Higginson (of counsel) in his letter written on 9 April 2008 (but misdated 13 March 2008), which also shows that Mr Steele continued in this understanding up until that point in time. But, as Roth J pointed out in his judgment on the summary judgment application (at [49]), Mr Steele’s understanding makes “little sense” because the FMA “makes no provision whatever for the transmission of funds from the Allied parties to Mr Shephard or his company. On the contrary, under the FMA … payment for the benefit of Mr Shephard is to come out of the drawdown of funds under the banking facility and not by way of additional payment from outside”. As Mr Anderson points out, the FMA (even in its amended form) is entirely unrelated, and has no application, to the funds transferred to Mishcons’ client account. None of the claimants are parties to the FMA; it did not concern the property at Orange Beach in the State of Alabama, but rather the development at North Orange, Orlando in the State of Florida which ADEL was pursuing before its introduction to KC; and it was nothing to do with the provision of funds to secure a bank guarantee. As Mr Anderson also rightly observes, the FMA says nothing about the retention of any title to, or any beneficial interest in, any funds transferred by any person (let alone by any of the claimants, none of whom were even parties to the FMA). In the absence of any direct evidence, I infer from all of the documentation and evidence (including the emails and letters that were sent and copied to him, and the narrative accompanying the entries in Mishcons’ records of the payments out of client account) that Mr Steele’s true understanding of the purpose of the money transfers must have been that they represented fees due to Mr Shephard or his company (MKC), and that they were to be at his free disposal; and that Mr Steele’s reference to the FMA was intended as a loose way of expressing this. Nothing said or done by any of the claimants (or by S & S) before all the moneys had been transferred out of Mishcons’ client account (or indeed until receipt of S & S’s letter of 4 April on 8 April 2008) contradicted this understanding.

Paragraph 38 of the Chiang claimants’ statement of case asserts that “in accordance with the terms of the letter of 22 August 2007, the [$ 3.5 million transfers] were to be held as deposits until used to obtain the agreed financing and would be returned if not so used”. I am not satisfied that this letter has any relevance at all to Mr Steele’s understanding in the light of Mr Hantusch’s objection that there is no evidence that it reached Mr Steele before 9 April 2008. But if it does, Mr Anderson is right to point out that this letter has no application to the funds transferred, and that it was in any event inconsistent with the creation of any trust obligation. He relies upon what was said by Roth J at [55] (with which I entirely agree):

“This letter, of course, antedates KC's involvement and is regarding the Florida property development, which was a different project. That project was expressly the object of the FMA and I assume that the contract to which Mr Shephard refers in the letter is indeed the FMA. But even as regards the financial arrangements for that project, this letter does not assist the claimants' case for three reasons. First, it makes clear that fees were expected to be paid to Mr Shephard's company, in other words, that remuneration for the benefit of Mr Shephard apparently did not exclusively comprise the $ 22.5 million to come out of the bank funding once that was advanced. Secondly, those fees were to be paid in advance of securing the bank funding and not withheld until closing. Thirdly, MKC or Mr Shephard, once he received those fees, appears to assume an obligation to repay them, less professional expenditure incurred, if funding was not secured by reason of his or MKC's default, but not otherwise. That qualification seems to me inconsistent with a contention that the transfer of money on account of fees was not intended to give MKC ownership of the funds. If a bank guarantee was not secured for some other reason, MKC expressed the view, as set out in this letter, that it was under no obligation to make reimbursement. This supports the conclusion that the obligation which Mr Shephard and his company assumed was a personal obligation only and that there was no intention to create a trust over the fund.”

If Mr Steele received this letter, I consider that it would have reinforced Mr Steele’s inferred understanding (as stated above) as to the true purpose of the transfers into Mishcons’ client account. Nothing in the 22August 2007 letter purports to require any payments made to MKC to be used or applied exclusively to effect a particular identified payment(s) so that if the money cannot be so used or applied then it is to be returned to the payer.

There is no issue as to the sums claimed by way of loss as a result of the matters complained of in these two actions (as distinct from their recoverability). It is therefore unnecessary for me to make any findings of fact in this regard.

I now turn to the law. The legal principles applicable to Quistclose trusts are now reasonably well-established, at least at first instance level, and were not in dispute between counsel. They are most conveniently and concisely set out in the judgment of Norris J at first instance in Bieber v Teathers Ltd [2012] EWHC 190 (Ch), [2012] 2 BCLC 585 as follows:

“16.

First, the question in every case is whether the payer and the recipient intended that the money passing between them was to be at the free disposal of the recipient: Re Goldcorp Exchange [1995] 1 AC 74 and Twinsectra Ltd v Yardley [2002] 2 AC 164 at [74].

17.

Second, the mere fact that the payer has paid the money to the recipient for the recipient to use it in a particular way is not of itself enough. The recipient may have represented or warranted that he intends to use it in a particular way or have promised to use it in a particular way. Such an arrangement would give rise to personal obligations but would not of itself necessarily create fiduciary obligations or a trust: Twinsectra at [73].

18.

So, thirdly, it must be clear from the express terms of the transaction (properly construed) or must be objectively ascertained from the circumstances of the transaction that the mutual intention of payer and recipient (and the essence of their bargain) is that the funds transferred should not be part of the general assets of the recipient but should be used exclusively to effect particular identified payments, so that if the money cannot be so used then it is to be returned to the payer: Toovey v Milne (1819) 2 B & Ald 683 and Quistclose Investments [1970] AC 567 at 580B.

19.

Fourth, the mechanism by which this is achieved is a trust giving rise to fiduciary obligations on the part of the recipient which a court of equity will enforce: Twinsectra at [69]. Equity intervenes because it is unconscionable for the recipient to obtain money on terms as to its application and then to disregard the terms on which he received it from a payer who had placed trust and confidence in the recipient to ensure the proper application of the money paid: Twinsectra at [76].

20.

Fifth, such a trust is akin to a “retention of title” clause, enabling the recipient to have recourse to the payer's money for the particular purpose specified but without entrenching on the payer's property rights more than necessary to enable the purpose to be achieved. It is not as such a “purpose” trust of which the recipient is a trustee, the beneficial interest in the money reverting to the payer if the purpose is incapable of achievement. It is a resulting trust in favour of the payer with a mandate granted to the recipient to apply the money paid for the purpose stated. The key feature of the arrangement is that the recipient is precluded from misapplying the money paid to him. The recipient has no beneficial interest in the money: generally the beneficial interest remains vested in the payer subject only to the recipient's power to apply the money in accordance with the stated purpose. If the stated purpose cannot be achieved then the mandate ceases to be effective, the recipient simply holds the money paid on resulting trust for the payer, and the recipient must repay it: Twinsectra at [81], [87], [92] and [100].

21.

Sixth, the subjective intentions of payer and recipient as to the creation of a trust are irrelevant. If the properly construed terms upon which (or the objectively ascertained circumstances in which) payer and recipient enter into an arrangement have the effect of creating a trust, then it is not necessary that either payer or recipient should intend to create a trust: it is sufficient that they intend to enter into the relevant arrangement: Twinsectra at [71].

22.

Seventh, the particular purpose must be specified in terms which enable a court to say whether a given application of the money does or does not fall within its terms: Twinsectra at [16].

23.

It is in my judgment implicit in the doctrine so described in the authorities that the specified purpose is fulfilled by and at the time of the application of the money. The payer, the recipient and the ultimate beneficiary of the payment (that is, the person who benefits from the application by the recipient of the money for the particular purpose) need to know whether property has passed.”

This formulation of the law was accepted not only by both parties in that case on the subsequent appeal ([2012] EWCA Civ 1466, [2013] 1 BCLC 248) but also by the Court of Appeal with the following qualifications at paragraph [15] in the judgment of Patten L.J.:-

“Both sides accepted this as an accurate statement of the relevant principles. I would only add by way of emphasis that in deciding whether particular arrangements involve the creation of a trust and with it the retention by the paying party of beneficial control of the monies, proper account needs to be taken of the structure of the arrangements and the contractual mechanisms involved. As Lord Millett stressed in Twinsectra (at [73]) and the judge repeated in para [17] of his own judgment, payments are routinely made in advance for particular goods and services but do not constitute trust monies in the recipient’s hands. It is therefore necessary to be satisfied not merely that the money when paid was not at the free disposal of the payee but that, objectively examined, the contractual or other arrangements properly construed were intended to provide for the preservation of the payor’s rights and the control of the use of the money through the medium of a trust. Critically this involves the court being satisfied that the intention of the parties was that the monies transferred by the investors should not become the absolute property of [the recipient] (subject only to a contractual restraint on their disposal) but should continue to belong beneficially to the investors unless and until the conditions attached to their release were complied with. Although directed to a slightly different context, it is worth recalling what Mason J said in Hospital Products Ltd v United States Surgical Corporation(1984) 156 CLR 41 at 97:

“That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.”

I accept Mr Hantusch’s submission that the classic form ofQuistclose trust which has been recognised by the courts concerns moneys that have been loaned to a recipient for one particular purpose and which are to be returned if that purpose is not achieved; but provided the terms can be established by evidence, such a trust can come into existence whenever parties enter into a commercial arrangement which permits one party to have a limited use of the other's money for a stated purpose, is not free to apply it for any other purpose, and must return it if for any reason the purpose cannot be carried out. Moreover such terms need not be set out or accepted in writing.

All of this appears most clearly from the judgment of Hildyard J. in Challinor v Juliet Bellis & Co (Footnote: ⁴)[2013] EWHC 347 (Ch) at [551] and following as follows:-

“551.

. . .. As it seems to me, the lack of writing does not necessarily mean that the circumstances are not such as to give rise to a Quistclose trust, though of course the burden of demonstrating that such a trust may be inferred in such circumstances is inevitably heavier. Nor does the fact that in this case, the trustee is not the borrower make the argument "impossible to understand". The Quistclose trust analysis or doctrine is plainly capable of extending to the three-party situation in this case, as it did in Twinsectra. More generally, I consider that Counsel for the Defendant Firm adopted too restrictive a view as to what might be regarded as a form of Quistclose trust.

Trusts analogous to classic Quistclose trusts

552.

I accept that in a classic Quistclose case it is the combination of (a) the exclusiveness of the purpose, (b) the sufficient definition of the exclusive purpose to enable its satisfaction to be clearly determined, (c) the communication of that purpose to the immediate recipient of the monies and (d) the direction (express or implied) for return of the monies to the payer if the exclusive purpose is no longer capable of being satisfied that negates any intention on the part of the payer to part with the entire beneficial interest in the monies in the meantime. As Lord Millett explained, it is that retention of beneficial interest unless and until the purpose can be fulfilled that gives rise to the resulting trust in favour of the payer.

553.

Stipulation of an exclusive purpose for the loan may be the classic, but in my judgment is not the only, circumstance of which the immediate recipient is cognisant and which negates an intention on the part of the payer, to pass away beneficial ownership so as to give rise to such a resulting trust.

554.

The crucial question, as it seems to me, is as to the terms on which (objectively determined) the Defendant Firm received investors' monies into its client account, and whether such terms negate any intention that such monies should belong immediately to AFL [the client], such that the account holder is bound to hold such monies for the payer pending receipt or satisfaction of a clear direction or pre-stipulated event providing for or triggering transfer of ownership to AFL.

555.

As was discussed in argument, nomenclature, or over-rigid characterisation, has bedevilled this case. At an earlier stage, debate over the appropriateness of the term 'escrow' in any context other than deeds clouded the real issue; and at trial, rigid analysis of the characteristics of a classic Quistclose trust, as if that was the only form of resulting trust, obscured the real question I have identified.

556.

As Lord Millett emphasised in Twinsectra (at page 192F-H):

"I do not think that subtle distinctions should be made between "true" Quistclose trusts and trusts which are merely analogous to them. It depends on how widely or narrowly you choose to define the Quistclose trust. There is clearly a wide range of situations in which the parties enter into a commercial arrangement which permits one party to have a limited use of the other's money for a stated purpose, is not free to apply it for any other purpose, and must return it if for any reason the purpose cannot be carried out."

557.

In my judgment, once excessively strict characterisation is abandoned and the essential question is understood, some of the difficulties that seemed to arise in consequence of the lack of documentation, and the paucity and uncertainty as to the communications between the parties, fall away (or at least are materially attenuated).

558.

The focus then becomes not so much on whether there was a sufficient definition and shared understanding of the purpose for which loans were made, but more on

(1)

what in all the admissible circumstances can have been the objective intention of the parties in making and accepting payments into the Defendant Firm's client account before the terms of any loan had been finally agreed, if not to hold the money pending agreement or some future instruction or event;

(2)

what can have been the objective intention of the parties if the terms of the loans were never finally agreed or the future instruction or event was never given or did not occur; and

(3)

whether (objectively) there ever was, or arose, any sufficient basis for Mrs Bellis to treat the monies without enquiry of the payers as belonging to AFL.

559.

Twinsectra assists in this regard also in confirming the characterisation of monies held in a solicitor's client account. In his speech Lord Hoffmann said this (at paragraph 12):

"Money in a solicitor's client account is held on trust. The only question is the terms of that trust."

The last paragraph of that citation is also said to highlight a further important point about Quistclose trusts. If the subject matter is money in a solicitors’ client account, then there is clearly a trust in being and the key question which arises is: what are its terms? In particular, is the beneficiary of the trust of those moneys the client of the solicitor (in which case there is a bare trust for the client absolutely); or is the beneficiary a person who provided funds to be placed in the client account in the name of that client for a particular purpose, which funds are to be returned if the purpose is not achieved (in which case the trust will be a Quistclose trust)?

The Challinor case is also said by Mr Hantusch to highlight two important further points about the effect of any uncertainty that may exist as to when monies held subject to a Quistclose trust in a solicitors’ client account may be released from the trust, and the relevance of the SARs to a Quistclose trust of monies in a solicitors’ client account. The position in these respects is said to be quite clear:

Mr Hantusch relies in support upon paragraphs [567] – [568A] of the judgment in Challinor as follows: