AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58

Analysis

The appellant bank instructed the respondent solicitors to act in relation to a £3.3m re-mortgage on behalf of themselves and the borrowers. The borrowers’ property (the property) was already subject to a first charge in favour of Barclays. A part of the respondent’s instructions was to redeem the outstanding Barclays mortgage and to secure a first charge against the property in the appellant’s favour.

Due to an oversight, the respondents paid only £1,23m of the outstanding £1.5m Barclays loan and then transferred the balance to the borrowers. Having realised their error, the respondents attempted to rectify their mistake but were ultimately unable to secure the first charge the appellants desired. A second charge in favour of the appellants was placed over the property.

The borrowers defaulted and Barclays sold the property for approximately £1.2m, discharging the £274,000 owing to them under their charge and paying the balance over to the appellants. The appellants received £868,000 from the sale resulting in a shortfall of just over £2.4m.

The appellants brought a claim against the respondents arguing that the respondents had acted in negligence, breach of contract, breach of fiduciary duty and, most importantly, breach of trust and therefore the trust fund should be reconstituted. They sought to distinguish the key case in this area of Target Holdings Ltd v Redferns [1995] UKHL 10 by arguing that completion of the transaction had not occurred as the first charge they desired was never registered.

The parties agreed that the correct measure of damages in contract or negligence would be the £274,000 which the respondents had failed to pay to Barclays at the point of redeeming the Barclays mortgages. The appellant argued that in equity it was entitled to equitable compensation for the whole of the losses, namely £2.4m.

Both the judge at first instance and the Court of Appeal found in favour of the respondents and held that although the respondents had acted in breach of trust, the actual loss to the appellants was the £274,000, which the respondents had failed to pay to Barclays. If the first charge had been discharged then the property would still have been sold for £1.2m and the appellants would still have lost £2.1m.

The Supreme Court was asked to consider the Court of Appeal’s findings and unanimously dismissed the appeal.

Held:

1. 1) Target Holdings Ltd v Redferns [1995] UKHL 10 continues to be good law. The ‘completion’ referred to in Target was the completion of the underlying commercial transaction not completion under the CML Handbook (the handbook which sets out process and obligations in lending transactions). In this sense, completion took place when the monies were released to the borrowers.
2. 2) A beneficiary has a basic right to have the trust properly administered. Where there is a breach of duty by the trustees, a beneficiary is entitled to a remedy. In the absence of fraud, the key purpose of any remedy is to put the beneficiary back into the position he was in prior to the breach occurring. Any monetary award over and above this would be penal.
3. 3) A beneficiary is not entitled to redress for a loss which he would have suffered even if the trustee had properly performed his duties.
4. 4) Causation is important and any loss must flow directly from the breach. Hindsight can be applied when assessing the cause of the breach.
5. 5) Traditional trusts and commercial trusts must be viewed differently as the obligations and relationships under each are not the same. Traditional trusts involve a transfer of property to the trust as a gift. Commercial trusts arise out of contract and the contract sets out the parameters of the trust. Any loss resulting from the breach of a commercial trust needs to be measured by the scope of the obligations under the contract. The type of trust is therefore relevant in determining the level of compensation due. It would be artificial to consider the trust without considering the contract with its obligations which created it.
6. 6) Appeal dismissed.

JUDGMENT LORD TOULSON: Introduction [1] 140 years after the Judicature Act 1873, the stitching together of equity and the common law continues to cause problems at the seams. The present appeal concerns the remedy available to the appellant bank against the respondent, a firm of solicitors, for breach of the solicitors’ custodial duties in respect …

Continue reading "AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58"