In AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58, 5 November 2014, AIB sought to recover damages for breach of trust from its solicitors who had negligently acted on a secured lending transaction for AIB. The Supreme Court examined the principles applicable to equitable compensation as a remedy for breach of trust and, applying the decision of the House of Lords in Target Holdings v Redferns [1996] AC 421, confirmed that trustees are liable only for losses which directly flow from their breach.
Mark Redler & Co Solicitors (Mark Redler) acted for both the claimant bank, AIB Group (UK) Plc (AIB), and the borrowers on a GBP 3.3 million loan. In return for the loan, AIB was supposed to secure a first legal charge over the borrowers’ property which was valued at GBP 4.25 million. The property was already subject to a first legal charge in favour of Barclays Bank plc (Barclays) for borrowings of GBP 1.5 million on two accounts. It was a condition of the AIB loan that the existing Barclays charge be redeemed on or before the advance. Barclays informed Mark Redler of a redemption figure for one of the accounts which Mark Redler mistakenly took to be the total figure necessary to redeem the Barclays charge. Due to Mark Redler’s error, a debt of approximately GBP 300,000 was left secured by the Barclays charge. As a result, the amount which should have been passed on to Barclays went to the borrowers, who received GBP 300,000 more than they otherwise would have.
Subsequently, Barclays and AIB entered into a deed of postponement which recognised the primacy of the Barclays charge and agreed to the registration of AIB’s charge as a second charge. Subsequently, the borrowers defaulted and the property was sold by Barclays for GBP 1.2 million (considerably lower than the valuation of the property). Out of this, AIB received GBP 867,697.78.
AIB brought proceedings against Mark Redler for, inter alia, negligence, breach of contract and breach of trust. It claimed that it was entitled to recover approximately GBP 2.4 million, the full amount of its loan minus the recovery from the sale of the property. Mark Redler contended that AIB was entitled to recover only the amount by which it had suffered a loss as compared to a situation where Mark Redler had ascertained and remitted the full amount of the Barclays debt to redeem the charge. According to Mark Redler, this amounted to around GBP 275,000.
At first instance, as preliminary issues, Cooke J had to decide whether Mark Redler had acted in breach of trust and what remedy (if any) AIB was entitled to. He held that Mark Redler was liable to AIB for the amount obtained by Barclays from the sale of the property which would otherwise have gone to AIB. The judge looked at what would have happened but for the breach of trust. He also noted that it was apparent that AIB was keen to lend to the borrowers and AIB would not have withdrawn from the transaction because of Mark Redler’s failure to redeem the Barclays charge. Both the Court of Appeal and the Supreme Court agreed that Mark Redler was liable for the lower amount.
What losses are to be compensated?
The main issue in the present case was whether Mark Redler was liable to compensate AIB not only for losses caused by its breach but also for losses which AIB would have suffered in any event, irrespective of the breach. The Supreme Court confirmed the basic principle was that AIB should be compensated for any loss it would not have suffered but for the breach. Lord Reed explained that according to this principle, he understood “loss” to mean “what the beneficiary has been deprived of as a result of the breach”. It was concluded that, in the absence of fraud, it would not be right to compensate AIB for a loss which it would have suffered even if Mark Redler had properly performed its duties. Any remedy which reflected neither a loss caused nor a profit gained would be penal in nature.
On the facts of this case, Lord Toulson commented that AIB had taken the risk of a default by the borrowers and the fault of the solicitors lay in increasing the bank’s exposure by releasing the loan funds to the borrower without ensuring that AIB had received the full security. Lord Reed said that AIB’s case suffered from three fallacies. First, it assumed Mark Redler had misapplied the entire sum of GBP 3.3 million while only approximately GBP 309,000 had been misapplied. However, this was not a point of appeal and was not further discussed. Second, AIB assumed that the liability was fixed as on the date of the breach. This was incorrect and the liability was to be determined at the time of trial. Third, AIB’s argument wrongly supposed that Mark Redler’s liability did not depend on a causal link between the breach of trust and the loss.
The law relating to equitable compensation was succinctly summed up by Lord Reed: “[t]he measure of compensation should therefore normally be assessed at the date of trial, with the benefit of hindsight. The foreseeability of loss is generally irrelevant, but the loss must be caused by the breach of trust, in the sense that it must flow directly from it”.
Equitable compensation and common law damages are different remedies with different rules
Lord Reed inspected the relationship between equitable compensation and common law principles. His Lordship commented that the loss resulting from a breach of duty has to be measured according to the legal rules applicable to the breach of that specific duty. In a similar tone, Lord Toulson stated that equitable compensation and common law damages are remedies which are based on separate legal obligations. The rules appropriate to a breach of duty by a trustee therefore had to be determined in light of the characteristics of the duty in question.
Primary remedy for breach of trust
Traditionally, the primary remedy for breach of trust has been reconstitution of the trust fund. In the present case, this would mean holding Mark Redler liable for about GBP 2.4 million to reconstitute the trust fund (GBP 3.3 million minus approximately GBP 868,000 that AIB recovered from the sale of the secured property). However, as per Lord Browne-Wilkinson in Target Holdings, in a situation where a beneficiary of a trust had become absolutely entitled to it, the normal order would be for compensation to be paid directly to that beneficiary. An obligation to reconstitute the trust fund once the transaction had been completed would be artificial. This view was reiterated by Lord Reed. AIB contended that in the present case, the “underlying commercial transaction” had never been completed because the shortfall required to redeem the Barclays charge had not been paid. However, the Supreme Court did not agree and stated that since the trust had come to an end, Mark Redler could be ordered to compensate AIB directly.
Comment
This decision confirms the principles laid down by the House of Lords in Target Holdings and clarifies the law relating to the liability for breach of trust and equitable compensation as a remedy. It is only fair that a trustee be held liable for the loss actually caused by its breach and not a loss which the beneficiary would have suffered in any case. The main proposition extends this instinctive understanding of loss and causation from the domain of common law to equitable compensation. It appears that in calculating the loss resulting from a breach of trust, the scope of the trustee’s obligation, contractual or otherwise, would be considered.
In cases where they cannot proceed against borrowers (as in this case where the borrowers were bankrupt), lenders might turn to equity and breach of trust to attempt to recover more than they would have from valuers and solicitors if they proceeded solely on negligence and breach of contract. This decision puts into doubt the viability of such a strategy in situations where the loss suffered does not directly flow from a breach by the valuer or solicitor.
This case will be of interest to solicitors who act, as is often expected in such transactions, for both lenders and borrowers and for the clients of such solicitors. It will also be of interest to practitioners for the clarity it provides regarding the assessment of equitable compensation as well as for the detailed examination of the relationship between common law principles and equity.
