Gabriel v Little & ors [2012] EWHC 1193 (Ch)

WTLR Issue: April 2013 #128









The claimant (Mr Gabriel) and the first defendant (Mr Little) were businessmen and erstwhile friends who had previously collaborated in respect to a project known as Southgate street development in Gloucester. The third defendant (High Tech), the entire share capital of which was owned by Mr Little, was the building contractor. The fourth defendant (BPE), a firm of solicitors engaged by Mr Gabriel, drafted a facility letter recording the terms upon which Mr Gabriel was prepared to make a contribution by way of loan to the cost of the development. In the event, Mr Gabriel was unable to obtain adequate assurances as to the security of his investment and the proposal foundered. Instead, at a meeting held at the Red Hart in November 2007, it was proposed that Mr Gabriel should lend £200,000 repayable after 15 months at a return of £70,000 in connection with the development of a part of the former airbase at RAF Kemble known as Building 428, which had been acquired, subject to a bank charge, by High Tech. The second defendant (Whiteshore), a special purpose vehicle, had been established to implement the development. Unfortunately, the parties were not ad idem as to the purpose of the loan – Mr Gabriel thought that the loan would be used by Whiteshore for the development of Building 428; Mr Little thought that the loan would be used by Whiteshore to acquire Building 428 free of the bank charge from High Tech. Equally unfortunately, there was no written record of Mr Gabriel’s instructions to BPE, which drew up a facility letter based on the (abortive) facility letter used in connection with the proposed Southgate street development. They also drew up a legal charge over Building 428. The documents were signed at a completion meeting held in December 2007. Most of the money was used to discharge the bank’s charge and the balance was used in payment of debts, though not those of Whiteshore. In the event, little or no tangible development was carried out at Building 428 and, by the time repayment was due, it was apparent that Whiteshore could not pay anything like what was due to Mr Gabriel who, on taking legal advice, enforced his charge by selling Building 428 at auction for a mere £13,000. Legal proceedings followed in which Mr Gabriel contended, given the wording of a facility letter, that Whiteshore held the loan money on trust to be applied for the particular purpose of developing Building 428 within the requirements established by Barclays Bank v Quistclose Investments Ltd [1968] UKHL 4. In this, it was alleged that Mr Little was liable for dishonestly assisting in a breach of trust by Whiteshore in procuring the loan money to be paid to High Tech, which, it was further contended, was liable for knowing receipt of trust money. As regards BPE, it was contended by Mr Gabriel that they were primarily liable for professional negligence in that they were in breach of their duty to exercise reasonable care and skill, though they were also sought to be made liable for dishonest assistance in a breach of trust by Whiteshore.

Held (allowing the claim in part):

While the facility letter identified the purpose of the loan, that by itself was not sufficient to create a trust within the requirements of Quistclose. In particular, no use was made of a word of exclusivity such as ‘only’ to describe the purpose and there was no requirement to keep the loan monies separate such as in a special bank account. Having regard to the inherent uncertainty in the word ‘development’, it would be far from straightforward to ascertain what did or did not come within the trust if one were held to exist. It also followed that, if no trust had been created, Mr Little could not be said to have assisted in a breach of trust, nor High Tech have any liability for knowing receipt of trust money. Moreover, it was not accepted that dishonesty on the part of Mr Little had been established. Consequently, the claims against Mr Little and High Tech were dismissed.

As regards BPE, there was no doubt that a serious drafting error had been made in the facility letter’s description of the purpose for which Mr Gabriel was lending the money to Whiteshore. The use of the (abortive) facility letter in connection with the Southgate street development as a template explained, but did not excuse, the error. It followed, therefore, that BPE was in breach of its duty to exercise reasonable care and skill in the drawing up of the facility letter. This was compounded by the draftsman’s failure to provide information to which he had been made privy to his client so as to enable his client to make an informed decision about the transaction. As to the question whether a solicitor had a duty to advise his client on the commercial wisdom of a transaction, this was to be measured against the retainer and it was established that, unless instructed expressly, a solicitor did not normally have a duty so to advise, particularly where, as here, the client was an experienced businessman. Nevertheless, if in the course of carrying out the retainer, the solicitor became aware of a risk, or a potential risk, to the client, it was his duty to inform the client. Consequently, while BPE’s draftsman had no duty to advise Mr Gabriel as to the commercial risk inherent in the loan, he should have passed on to his client what he had learned from Mr Little and his solicitor (ie Mr Gabriel’s loan money was to be applied substantially for Mr Little’s benefit). As for damages, while a professional advisor was not necessarily liable for all the consequences of the client entering into a transaction, they were liable for losses falling within the scope of the duty which had been broken. The principle distinguished between a duty to provide information for the purpose of a enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action they should take. If it were the latter, and the advisor was negligent, they would be responsible for all the foreseeable loss, which was a consequence of that course of action having been taken. In this case, the draftsman was not being asked only to provide information on some discrete aspect of a proposed transaction, nor, on the other hand, was it one where his client expressly sought advice as to what he should do. BPE’s draftsman’s duty was to draw up a facility letter that reflected the proposed transaction and accurately inform his client as to the nature of the loan transaction into which he was entering and why his money was being borrowed. Despite the inherent risk of any development, it was not necessarily a doomed venture from the outset and, given the draftsman’s breach of duty, meant that the client was not able to know the true nature of the loan transaction into which he was entering. It was quite foreseeable that if BPE’s duty was broken in the way that occurred, Mr Gabriel would be unlikely to recover his loan and have to depend on recovery from the disposal of Building 428. While the fall in the property market made this disposal more problematic, it could not be said that that fall caused the loss. Subject to any questions of contributory negligence and mitigation (neither of which was substantiated), Mr Gabriel was entitled to be compensated for all his loss by BPE. The additional sum due on repayment of the loan was irrecoverable as being too remote.

JUDGMENT Introduction [1] In this case the claimant, Mr Gabriel, seeks a number of different forms of relief against the various defendants. The different ways in which the claim has been framed has led to an apparent complexity in the litigation. Furthermore, the disputes have given rise to considerable ill-feeling on all sides with accusations …
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