The recent Supreme Court decision in AIB Group (UK) Plc v Mark Redler & Co Solicitors clarifies the equitable compensation available for breach of trust, with particular regard to commercial trusts seen between lenders and their solicitors.

Background

Mark Redler & Co Solicitors acted for AIB Group (UK) Plc and its borrowers in connection with a remortgage advance of £3.3 million on a property, which was valued at £4.25 million. The solicitors were instructed to hold the loan monies on trust for AIB and to discharge the borrowers’ two pre-existing loans by Barclays Bank plc (Barclays) before paying the remainder to the borrower to ensure that AIB had a good first legal charge over the property. In error, the solicitors only discharged one of the borrowers’ two accounts and paid Barclays £1.2 million, rather than £1.5 million. The solicitors incorrectly paid the remaining £300,000 to the borrowers. AIB’s charge was not registered until two years later as a second charge, rather than as a first charge in accordance with their instructions to the firm. The borrowers defaulted on the loan and the property was sold for £1.2 million, of which AIB received £867,697 (approximately £2.4 million less than AIB’s original loan), after Barclays' secured interest was repaid.  AIB brought breach of trust proceedings against the solicitors for this £2.4 million sum.

The High Court held that the firm’s actions were in breach of trust. However it also held the claimant was only entitled to reconstitution of the trust fund by repayment of the amount wrongly paid away to the borrowers. This amounted to just under £300,000 (after adjustments). AIB appealed.

The Court of Appeal held that the solicitors had committed a breach of trust in respect of the whole mortgage advance, because AIB had not given the firm authority to release the monies.  However, it held that, in the case of a commercial trust, Target Holdings Ltd v Redferns (a firm) established that equitable compensation could be based on the link between the breach and the loss actually suffered by the beneficiary. It therefore agreed with the High Court’s calculation of the compensation payable to AIB, given that, had the remortgage been properly completed, AIB would still have been exposed to the losses caused by the borrowers’ default. AIB appealed to the Supreme Court.

Supreme Court’s decision

The Supreme Court has rejected AIB’s appeal because, as set out by Lord Toulson:

  • there was consensus across a range of common law jurisdictions that Target Holdings provided the correct approach to assessing equitable compensation for breach of trust and it would be a “backward step” for the Supreme Court to reinterpret this approach;   
  • where there is a breach of trust, the purpose of any remedy is either to:    
    • put the beneficiary in the same position as if the breach had not occurred; or
    • provide the beneficiary with any profit the trustee made via the breach;
  • a monetary award that reflected neither loss caused nor profit gained by the solicitors “would be penal”; and   
  • to say the solicitors caused a loss of £2.4 million, despite the fact that most of that sum would have been lost had the firm properly applied the monies in the way AIB had instructed, would be “to adopt an artificial and unrealistic view of the facts”; although the language of some historical case-law referred to the breach of trust entailing a “debt” obligation of the trustee (fixed at the time of the breach), this was not the correct legal analysis.  Proper application would have resulted in the solicitors paying Barclays the full amount to redeem the two accounts and AIB therefore obtaining security for an extra £300,000 of its £3.3 million advance.

Comment

The case is clearly a good result for solicitors and their insurers. Lord Reed, agreeing with Lord Toulson, made the point that to uphold AIB’s claim for £2.4 million would be to make Mark Redler & Co Solicitors wrongly “liable for the consequences of the hopeless inadequacy of the security accepted by AIB before Redler’s involvement”.   More broadly, the case provides clear guidance (and settles some academic debate) on how equitable compensation resulting from a breach of trust or fiduciary duty is to be measured and how, in commercial trusts, it is essential to look at the background facts to assess whether or not the loss claimed flows from the breach (although foreseeability of that loss is irrelevant).

Further reading: AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58 Target Holdings Ltd v Redferns (a firm) [1995] 3 All ER 785