The Connaught Income Fund, Series 1 (in liquidation) v Hewetts Solicitors (a firm) provides a detailed examination of the relevant principles in lender litigation, while also addressing the application of those principles to a slightly unusual factual background as compared with typical claims in this area.

The facts

The Claimant, Connaught, was an unregulated collective investment scheme which pooled investors' money for the purpose of onward lending. In this particular claim Connaught advanced a loan of around £1.1m to Tiuta International Limited (TIL), which in turn advanced funds to a limited company, Mansfield Road Freehold Limited (the Borrower), to purchase a large commercial property in Liverpool city centre (the Property) which had planning permission for re-development. TIL was a short term lender and any exit strategy was necessarily based on the refinancing of the Borrower's loan rather than the development and onward sale of the Property.

The Borrower defaulted on the loan and the Property was repossessed and sold at a substantial loss, meaning a significant shortfall on the loan accounts of both TIL and the funder, Connaught.

The claim

A claim was pursued by Connaught against the solicitors instructed on behalf of TIL, on the basis that in preparing the certificate of title (COT) in respect of the Borrower's purchase of the Property, the solicitors had breached a number of the duties owed to it. Interestingly, TIL was originally a co-claimant but their involvement was terminated before proceedings were served.

Relationship to Connaught

The solicitors accepted that they owed a duty to Connaught in tort despite not acting directly for it (as the COT addressed to TIL specifically referred to the fact that it would be provided to Connaught), but denied that such duty was as wide as that which it owed to its client, TIL. The solicitors maintained that their duty was not a duty to speak to Connaught along the lines of the duty set out in Mortgage Express v Bowerman[1], which would require the solicitors to report to Connaught any material factors that had a bearing on the security of its lending but, rather, that it was limited to a duty to exercise due skill and care when speaking (in the form of the COT). The solicitors argued that the duty was further qualified by the fact the solicitors' instructions came from TIL, that TIL acted as a form of agent for Connaught, and that the solicitors were not asked to, nor given any means to, communicate with the fund directly.

The judge agreed with the solicitors on both points. He considered the solicitors could only assume a responsibility to do competently that which was expected of him or her by Connaught, namely to act competently in speaking to Connaught through completing the COT but being under no obligation to speak beyond that. In relation to agency, he set out a number of factors which he felt pointed to the relationship between Connaught and the lender being more than that of just creditor/debtor, but involving a form of agency. The judge rejected a parallel to the "Coral Rose" case[2], which said that the two relationships could not co-exist, distinguishing it on the facts.

Specific allegations

Connaught had alleged nine specific allegations arising out of completion of the COT but breach of duty was only established on the second allegation which related to the failure to complete a section in the COT in respect of a recent higher valuation of the Property. However, in case he should be wrong on those findings of breach, the judge assessed reliance and causation against each of the nine allegations.

The judgment addressed in some detail the correct application of the law on reliance, causation and the burden of proof, after which he concluded that the onus would be on Connaught, having established that the solicitors acted in breach of duty in any of the ways alleged, to then demonstrate, in respect of each breach of duty, why and in what way different advice would have led Connaught to decline to advance the loan.

The judge was satisfied on the facts that Connaught had relied on the COT in deciding to advance the funds, so reliance was proved.

Turning to the causation aspect, on the one allegation where a breach was established the judge held that the breach caused no loss or damage on the basis that even if the solicitor had done that which he ought to have done, the transaction would have proceeded in any event because it would not have caused the loan application to be rejected. The judge made similar findings in respect of each of the other allegations of breach (in the event that he was wrong to find that there was no breach) that the alleged breach had no causal effect.

Recoverable loss and damage

In case the judge was wrong as to the issues of liability, reliance and causation, he considered various issues concerning the loss and damage. These included:

  • Whether the damages were subject to a “SAAMCO cap”;
  • Whether Connaught was guilty of contributory negligence; and
  • Whether Connaught was entitled to recover interest on damages at a rate that reflected its own liability to pay interest to investors at a rate in excess of 8%.

The judge concluded that the SAAMCO cap did apply because the solicitors' duty of care was limited to the provision of information, and did not extend to a duty to advise. Any damages recoverable by Connaught would therefore be limited to the consequences of that information being incorrect (if it was). Applied to the facts this amounted to potential damages of only £70k, rather than the £800k[3] claimed.

It was agreed that contributory negligence does not apply where the SAAMCO cap applies, but if he were wrong on his SAAMCO cap finding, the judge would have concluded that a case of contributory negligence had not been made out by the solicitors.

On the question of whether Connaught would have been able to recover interest at a rate in excess of 8% per annum, the judge decided this was not too remote a loss as the solicitors had sufficient notice that they were dealing with an investment fund entity of some kind. However, once the fund had entered into liquidation, and the investors were left to prove in the liquidation with a mere entitlement to statutory interest different principles might have applied.

Practical points

As well as providing a useful run-through of causation and loss elements in lender/solicitor claims, this case is of particular interest because of the relationship between the claimant and the solicitors, where it was the funder of the lender who was bringing the claim, whereas more often it would be the lender itself. On the facts of this case an agency relationship was found to co-exist with that of the creditor/lender relationship. However, the claim failed in any event on breach and causation. Permission to appeal was refused at first instance.

[1] Mortgage Express Ltd v Bowerman Partners Ltd [1996] 2 All ER 836

[2] Atlas Maritime Co SA v Avalon Maritime Limited (“the Coral Rose”) [1991] 1 Lloyd’s Rep 563

[3] Reduced from c £1.1m plus interest shortly before trial. 

This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice.