Those defending solicitors’ breach of trust cases brought by lenders will be relieved to review the Supreme Court’s judgment in AIB Group Plc -v- Mark Redler & Co Solicitors. Confirming the Court of Appeal’s decision, the Supreme Court agreed that the claimant should only be awarded damages for losses actually caused by, and flowing from, the breach, rather than more extensive damages which the claimant had argued were recoverable. Christopher Stanton and Melissa Worth explain.
- In June 2006 the Sondhis applied to AIB Group (UK) Plc (AIB) for a loan of £3.3 million secured against their home.
- AIB agreed to lend on the basis that it would obtain a first legal charge. There was already an existing charge against the home in favour of Barclays bank. That loan was to be discharged in full so that AIB’s charge could be registered with priority.
- Mark Redler & Co Solicitors (MRC) acted for both the Sondhis and AIB.
- Mr Redler of MRC sought a redemption statement from Barclays. He was expecting this to be in the region of £1.5 million.
- Instead of providing the redemption statement, Barclays gave an indication of the current balance outstanding and sent a fax explaining how a formal redemption statement could be obtained.
- During a subsequent telephone conversation with Barclays, one of Mr Redler’s colleagues noted that the amount required to redeem the loan was £1,235,785.07. A similar figure was noted on the first page of the fax from Barclays. This was less than expected.
- Mr Redler phoned the Sondhis to check the figure. Dr Sondhi confirmed that it was correct and MRC therefore remitted that sum only to Barclays. The balance of the AIB advance, after costs, was sent to the Sondhis.
- It subsequently transpired that Mr Redler had not read all of the fax from Barclays. Had he done so he would have realised that the figure he had seen related to only one of two relevant accounts. Both accounts needed to be discharged before the charge could be removed.
- Having received £300,000 less than it required, Barclays refused to discharge its security and AIB could not register its charge.
- The Sondhis initially promised that they would return the overpayment but then failed to do so. AIB only obtained a second charge, rather than the first charge it had required.
- By 2010 the Sondhis had defaulted on the loan. AIB obtained judgment against them for in excess of £3.5 million. Following a sale in possession AIB received £867,697 - about £300,000 less than it would have recovered had MRC transferred the correct amount to Barclays.
AIB brought proceedings against MRC. Having proved that there had been a breach of trust, AIB argued that its recoverable losses were not limited to the amount which was incorrectly transferred to the Sondhis. It sought to recover the full amount of its loan deducting only the £867,697 recovered.
AIB lost that argument both at trial and in the Court of Appeal. Instead it was awarded damages representing the additional amount which should have been transferred to Barclays, plus interest - approximately £300,000. It appealed.
Arguments in the Supreme Court
The parties’ arguments in the Supreme Court centred on their respective interpretations of the law arising from a 1996 House of Lords case, Target Holdings Ltd -v- Redferns. Crucially, if accepted, AIB’s argument would have had the effect of rendering MRC liable not only for the losses caused by the breach, but for losses that would have been suffered by AIB in any event, regardless of the breach.
Two key issues were considered:
(i) Completion of the underlying commercial transaction
AIB said that the transaction had not completed because the shortfall in payment needed to redeem Barclays’ charge was never paid. This was important AIB said because until the transaction completed, MRC could be required to reconstitute the trust funds in full.
MRC said that the commercial transaction had completed in the sense in which Lord Browne-Wilkinson (giving leading judgment) had intended in Target. The lender-borrower relationship had been established, notwithstanding that an insufficient amount of money had been transferred to enable Barclays to remove its charge. While AIB was entitled to have MRC’s breach of trust remedied, the appropriate remedy was for the shortfall to be made good.
(ii) Impact of the Solicitors’ Accounts Rules
AIB said that the Solicitors’ Account Rules required that MRC remedy the breach upon discovery.
MRC pointed out that the relevant rule was not prescriptive about the form of remedy. Its failure to promptly repay the money lost might open it up to disciplinary proceedings, but did not impact upon the legal analysis.
The Supreme Court dismissed AIB’s appeal agreeing with MRC on each of the above key issues. Lords Toulson and Reed each provided reasoned judgments, ultimately coming to the same conclusion. Absent fraud, a claimant in this scenario should only be awarded damages for losses actually caused by and flowing from the breach.
Where the trust duty is breached, the purpose of any remedy is to put the beneficiary into the same position as it would have been in had the breach not occurred. Any monetary award which does not reflect that loss is penal. While it is right to differentiate between equitable compensation and common law damages, as remedies based on separate legal obligations, what must be ‘identified in each case is the content of any relevant obligation and the consequences of its breach’.
Those not familiar with the subject of equity and trusts might be forgiven for asking why reaching this point has taken three courts and nine judges nearly three years. It seems like common sense. However, as Lord Toulson comments at the outset of his judgment, ‘… the stitching together of equity and common law continues to cause problems at the seams’. Applying the distinction between the two legal obligations to produce a fair result has proven difficult. This case will hopefully go some way to resolving some of those difficulties, in this context at least.
The case clarifies how to deal with the assessment of damages in a claim for breach of trust arising out of this, or similar, sets of circumstances. Going forward it will be very difficult for a claimant to pursue damages beyond what may be said to be attributable to the defendant’s actions. Claimants should receive what is fair. They should not be handed a windfall.