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The Supreme Court unanimously dismisses the appeal in a breach of trust case

AIB Group (UK) Plc (Appellant) v Mark Redler & Co Solicitors (Respondent)
Supreme Court
5 November 2014

The long awaited Supreme Court decision in AIB Group (UK) Plc (AIB) v Mark Redler & Co Solicitors (Redlers) [2014] UKSC 58 clarifies the appropriate measure of damages in breach of trust claims. Philippa Bayes and Lidia McCarthy consider the main points which arise from this landmark judgment which is of particular interest to defendant solicitors/trustees and their professional indemnity insurers.

Facts

In 2006, Redlers acted for AIB and its borrowers in a re-mortgage transaction involving a loan of £3.3m. AIB transferred the monies to Redlers on condition that the existing charge over the borrowers’ property ( the Property)  in favour of Barclays Bank plc was to be redeemed and AIB’s loan was to be secured by way of a first legal charge.

Redlers erroneously paid around £1,230,000 to Barclays Bank from AIB’s loan. This was approximately £300,000 less than was necessary to redeem the existing charge. The balance of the loan monies was paid to the borrowers. As a result, Barclays refused to discharge its security and Redlers could not register AIB’s charge as a first legal charge, although it did register it as a second charge.

The borrowers subsequently defaulted on the loan and were declared bankrupt. AIB sold the Property for £1,200,000 and after discharging the amount owing under Barclays’ charge, received approximately £868,000 from the sale.

AIB brought a claim against Redlers, arguing that the disbursement of the entire sum of £3.3m against instruction had been a breach of trust. AIB claimed reconstitution of the trust fund, allowing credit for the £868,000 already recovered, i.e. a total of around £2.5m.

HHJ Cooke, at first instance, found that although Redlers had acted in breach of trust, AIB was only entitled to recover the additional £300,000 Redlers should have paid to Barclays and not the whole of the payment. The Court of Appeal agreed with the judge’s assessment of loss on the basis that had  Redlers acted as they had been instructed and in accordance with their duties under the trust of the monies in their client account, AIB’s monies would have been used to discharge Barclays’ charge and AIB would have received a first legal charge over the Property. Once the borrowers defaulted, the Property would still have been sold for £1,200,000, but AIB would have been £300,000 better off. The actual loss was therefore £300,000. AIB appealed this decision. 

Findings

The Supreme Court was asked to consider whether AIB was entitled to compensation for the whole loan or whether the Court of Appeal’s analysis was correct and it was only entitled to recover the amount by which it was worse off, i.e. approximately £300,000.

The Supreme Court unanimously dismissed the appeal and agreed with the two previous decisions providing the following reasons: (1) a monetary award which reflects neither the loss caused nor profit gained by the wrongdoer, such as the one argued by AIB, would be penal, and (2) to argue that AIB had suffered a loss of £2.5m in this case, when most of this sum would have been lost had Redlers not been in breach, would be to adopt an artificial and unrealistic view of the facts.The rationale of the monetary remedy for breach of trust must be borne in mind. Given that the beneficiary of a trust is entitled to have it properly administered, he is entitled to recover losses caused by the breach of duty. In this case, AIB’s loss was the approximately £300,000 of its loan which it failed to obtain security for.

The Supreme Court commented that despite structural similarities when assessing equitable compensation and common law damages, liability of a trustee for breach of trust is not generally the same as liability in damages for tort or breach of contract as a trust imposes different obligations in the setting of a different kind of relationship. The nature of the obligation breached and the relationship between the parties affect the measure of compensation. In the present case, AIB’s argument was based on the following three assumptions: (i) that Redlers had misapplied the entire £3.3m as opposed to approximately £300,000, (ii) that the measure of Redlers’ liability was fixed at the date of the breach of trust and (iii) that liability did not depend on a causal link between breach of trust and loss. As AIB’s arguments had been rightly rejected in previous case law (Target Holdings Ltd v Redferns [1996]), AIB could only recover its actual loss which was approximately £300,000.

Comment

The decision represents a victory for common sense. The damages awarded in this case and upheld by the Supreme Court were those which actually flowed from the breach of duty after the Property had been sold. The case analyses and clarifies the established principles of equitable compensation and the correct measure of damages in breach of trust claims and is of particular interest to defendant solicitors/trustees.It confirms that where trust property has been misapplied in cases like this, the claimant is only entitled to recover its actual loss rather than to try to reconstitute the entire trust fund. The judgment should diminish any enthusiasm for breach of trust claims on the part of lenders and reduce the amount of claimed damages.

Contact

For further information please contact Philippa Bayes, Trainee Solicitor on 020 7280 5258 or Lidia McCarthy, Solicitor on 020 7280 8968.

 

By Philippa Bayes and Lidia McCarthy

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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