Stakeholders who released funds outside the express terms of an agreement had not acted in breach of contract as they did so on the instruction of a company set up to protect the depositors.
In Yee Shi Yin and others v 174 Law Solicitors Ltd [2023] EWCA Civ 13; [2023] PLSCS 12 the developer purchased land in Liverpool with the aim of building residential and live-work units. A fractional sales model was adopted whereby the buyers, who were the appellants, paid larger than average deposits to fund the development. Under the terms of the sale agreements, a company was set up to protect the interests of the buyers.
The deposits were paid by the buyers to the developer’s solicitors who were the respondents. Although not a party to the sale agreements, the respondents held the deposits as stakeholders.
Clause 5.1 of each sale agreement provided the deposit was to be held by the respondents as stakeholders “to the order of the company” and released only as prescribed under clause 5. Clause 5.2 provided that any payment was subject to evidence of the registration of a first legal charge or a pending registration of the same to the buyer, his solicitor or agent.
A first legal charge was secured against the land as security for a loan obtained by the developer. Accordingly, only a second legal charge could be executed in favour of the company. Under the terms of a “work-around” agreed between the company and the developer, the company agreed, notwithstanding that its charge would be a second charge, it would authorise the release of the deposits if the terms of the “work-around” were met. The development failed and the buyers lost their deposits. They sued the respondents for breach of contract in releasing the deposits save in accordance with clause 5.2.
At first instance, the court found the respondents were not in breach. The responsibility for ensuring that the registration of the company’s first legal charge was satisfactorily evidenced lay with the buyers’ solicitors. The “work-around” evidenced the same. The Court of Appeal rejected this finding. On the evidence, the parties knew that only a second legal charge could be executed in favour of the company. The terms of the agreed “work-around” expressly noted the same.
Relying on the words “to the order of the company” in clause 5.1, the respondents contended, in the alternative, that the company could sanction the release of the deposits otherwise than in accordance with clause 5. The Court of Appeal agreed. Joint depositors could instruct a stakeholder to release funds. The buyers had appointed the company to perform that role. The company acting alone or in conjunction with the developer could authorise the release of the deposits. Both had sanctioned the same under the “work-around”. Appeal dismissed.
Elizabeth Dwomoh is a barrister at Lamb Chambers
