Challinor & ors v Juliet Bellis & Co & anr
Challinor & ors v Juliet Bellis & Co & anr  EWHC 620 (Ch)
In case of investment losses, the appropriate rate of interest on damages was 3% over the base rate of the Bank of England. Historically two approaches were considered by the leading authorities (minimum investment rate or cost of borrowing), which were not considered as appropriate to individual sophisticated investors who were not likely to borrow money to replace their loss. It was recognized that interest rates were considered as an “art, not a science” the proxy rate of 3% over the base rate depended on the cost of borrowing for the claimant's who were sophisticated investors, borrowing in order to fund a gear investment strategy that was off fairly speculative nature, able to borrow and good standing, having under realizable investments that may provide comfort, but that was not likely to be accepted as security. This case may interest a person who is involved with investment claims made by individuals or groups.
The case of the claimants was clear-cut. They claim to have put in money into this scheme to take equity participation. They have physically deposited the money into the client account of the defendants. It was however expected that the funds were going to be held until the entire equity fund raising was completed. According to the claimants, there were two legal ways to characterize the funds:
- As being held in escrow (contractual commitment);
- As being held on Quistclose trust (equity commitment).
Therefore in Challinor & ors v Juliet Bellis & Co & anr , 21 claimants obtained a judgment in February 2013 against the defendant for GBP 2,280,000. These claimants were a group of investors who had paid money into the law firm of the first defendant client account regarding a property investment concerning a land development. However, the first defendant had improperly paid the money, in breach of trust to a special purpose vehicle owning the land without the consent of the claimants. In this way the application was related with several outstanding issues, which included costs and interest. The inquiry conducted by the court did not focus on evaluating the profit to the defendant regarding the use of money. The inquiry was related with an estimation of the cost to the claimant was deprived of the money. Due to practical reasons, the court does not go into the issue of the actual loss of the claimant and similarly it is not inquire or speculate regarding what needs to be done by the claimant with the money if the claimant was not deprived of such money. Almost immediately, it is adopted by the court as a measure that would have cost the person in widely similar position as the claimant to borrow money from which they claimed was deprived.
In this case, it was claimed by the claimants that from the date that the defendants had the notice regarding the claims of the claimants, they need to be awarded interest of 5% above the base rate. This amounted to GBP 750,000. In support of their claim, evidence was provided by the claimant that was based on publicly available information. This evidence revealed that a person willing to borrow six-figure amount for five years would, if required an authorized overdraft or unsecured personal loan to pay more than the base rate and 5%.
On the other hand, it was the contention of the defendants that the rate of interest that has been solved by the claimant was inappropriate, as it had not been suggested in this case that the claimants had borrow any money. As a result the case was distinguished from commercial claims made by the businesses where a degree of borrowing is the norm for funding the business. Therefore the defendants argued that it was this long, which can be seen in the leading reported decisions related with interest. The award of interest at the rate is suggested, will be like providing a “windfall profit”. Under particular circumstances of the case, the defendants argued that it would be more appropriate to apply investment rate, generally as earned on deposit. Because Howard acknowledged that generally such rates are low, a more appropriate rate will be the rate applied on the client account of the first defendant or not more than 1% over the base rate.
Traditional approach to interest: in this case it was recognized by Hildyard J. That the present case did not fit properly in the two categories of cases related with interest rates that have been identified by the earlier authorities in this regard. Therefore (a) there were cases dealing with the money lost in or regarding the conduct of a business they can be generally assumed that the money detained or lost needs to be replaced by the money that has been borrowed in order to maintain the business or (b) there were the cases where the award is the accretion to the funds of the claimant instead of being the replacement of the money that was previously with the claimant and put to use (and where the rate applicable is generally based on minimum investment rate).
A New Third Category: Therefore in this case, it was identified by Hildyard J. that this case falls in the third category. This is where business is not being run by the claimant that depends upon credit, but the loss of money may result in depriving the event of further opportunities and where there is only a weak ordinary presumption regarding the need for credit or it is non-existent. In cases related with his third category, a minimum investment raises or proxy borrowing cost bases cannot be considered as a logical proxy. This means one suspects, a reasonable comparable. It is also not likely the claimants, as they were sophisticated investors, would have left the money in their bank deposit at such low interest rates. At the same time, it is also not very likely that any of these investors would have borrowed at 5% over the base rate in order to make further investments.
Therefore, according to the view of Hildyard J., the appropriate rate was the rate that can be reasonably assumed that an individual in place of the claimants would have to be for the money for geared investment.
Escrow agreement: In this case, the judge rejected the contention of the defendants according to which an instantaneous loan was planned. Instead, the judge favored the claimants, other objectively considering the provision by the defendants regarding their client account and the instructive use of the money by the claimants for the transaction was, under the situation, can be clearly referred to a common intention that the money paid need to be retained distinctly from the money of AFL. The payment made to AFL should await further evens or instruction, and during this time funds should have been held safe for the claimants.
On these grounds, it was stated that the obligations assumed by the defendants towards the claimants according to which they had to keep funds invested by them in the client account of the defendants until and unless the terms were clarified on which the monies paid in and defend regulatory conditions were also fulfill. In this regard, different circumstances were mentioned by the judge, which were considered him as being particularly relevant in arriving at the conclusion. These circumstances included the following:
The fact according to which all the money present in the account of the client was held conditional on the solicitors accounting rules, and the inference that can be drawn under the circumstances that the solicitors' firm had accepted mandatory obligations regarding any person who pays money in the client account not to apply the money until and unless it became totally clear that the application would be according to the function for which and the circumstances according to which the payment has been made in the client account.
Being an experienced solicitor, it can be expected that Bellis should have been aware that the terms of paying the money into the client account of the defendants was unclear and therefore it need to be cleaned before accepting any instructions from AFL regarding the use of such monies.
Therefore, the judge was to consider if the responsibilities imposed on the defendant’s firm could have created and amounted to a contract. It was discovered by the judge that the contractual escrow terms that have been alleged by the claimants have not been made out on the basis of the evidence available before the court. The terms that have been suggested were excessively unclear in order to safely imply or infer and to give contractual consequences. The result was that the claim made by the claimants in contract failed.
After it was discovered that it was not the intention of the claimants that the money paid by them in the line account of the defendants should belong to AFL and they trusted Bellis that the money should be kept safely until they secured their objectives, the judge also considered the issue if under the circumstances of the claim resulted in giving rise to a Quistclose or comparable type of trust. In this regard was taken by the judge that what was mentioned by him as the “classic” Quistclose trust (the name was taken from the House of Lords decision in Quistclose Investments Limited v Rolls Razor Ltd, 1970 arose when the money has been lent by one party to the other regarding an exclusive purpose and the purpose has been defined sufficiently to allow satisfaction to be decided clearly and had been communicated to the immediate receiver of money and any express or implied, direction has been given regarding the return of the money to the payer in case the exclusive purpose cannot be satisfied anymore. Due to this combination, any intention of the paying party was negated to part with the beneficial interest in the money meanwhile and the retention of beneficial interest creating a resulting trust favoring the payer.
While it was acknowledged by the defendants that the money present in the client account of the solicitors was held on first, but they stated that it was not correct that each payment by the person who was not a client into the required the retention of beneficial interest on part of the payer. In support of a retention here, the claimants mentioned several background facts. These included:
The lack of a sensible explanation concerning the requirement to be into a client account apart from: (i) to prevent the money being available to the ultimate intended recipient if some further event or instructions were not given and (ii) to establish that meanwhile, the money was to be kept under the charge of the solicitors.
The fact that as the solicitors and keeping inducing the beginning experience, it can be expected that Bellis would have known that (i) the directors of AFL were formally required to approve borrowing according to specified in formal documentation before receiving the money and (ii) Bellis was not allowed to accept and applied the money received from the investors until and unless different regulatory conditions have been complied with.
Under these circumstances, it was the inclusion of the judge that can be inferred in the present case from the above facts that if the scheme failed or if no definitive agreement could be made regarding the terms of the loan then the money has to be returned to the claimants.
The money that has been paid into the client account of the defendants was impressed with the trust and Bellis and her firm acted as trustees. As a result, the defendants were under an obligation to establish with sufficient clarity, who was going to be the beneficiary and after it has been clearly established, to act only on the basis of the directions given by such beneficiary. As a result, it was stated by the church that on account of the evidence available in the case, Bellis could not (and did not have) established it with any certainty.
Due to these reasons, it can be stated that by being the funds of the claimants to AFL, there has been a breach of trust by the defendants.
In this way, even if this case was quite complex, the questions that were raised in this case are relevant for everyday situations. It was clearly stated in this case that a solicitors is under an obligation to satisfy himself prior to making any payment from the account of the client that the solicitors has the proper authority for doing so. At the same time, the solicitors should also make sure that any funds that have been held by them for a particular purpose should not be wrongly paid away under the circumstances where it is established that the purpose was incapable of satisfaction. Therefore, for example, where the solicitors was acting on behalf of the purchaser of a property and had received money from the patent of the client to be deposited, but the purchase falls through, the solicitors should not release the money to the client if a clear authority has not been given to the solicitors by the parent.
This case has a number of interesting points that need to be noted. First of all, a category of cases was recognized by the court, falling beyond the normal approach to interest rates that have traditionally reflected commercial unsecured borrowing costs. Consequently, in cases where a claimant or a group of claimants had to undergo loss on investments, particularly with the investments were treated as “sophisticated”, it appears that the court is willing to adopt a different approach if it feels that it is not very probable that funds would have been borrowed by the claimants in order to replace the loss. This can be relevant for all types of investment claims. Another point that needs to be noted in this case is the emphasis laid by the court that in case of a group of claimants, a broad bush approach would be adopted by the court for the purpose of discovering a “proxy” without looking into the individual financial condition of each claimant. For example it may be relevant, if settlement negotiations occur with the persons who are a part of wider class of claimants. It is also interesting to note the tide and the range of comparable interest rates that have been considered by the court. Evidence regarding past unsecured, secured and saving rates were adduced. However no evidence was presented before the court in this case for gearing lending. Perhaps this point may be dead with in future claims of this nature.