“Hitting the Target” - equitable compensation for breach of trust

The Supreme Court has given judgment in AIB v Redler, where Mills & Reeve acted for the defendant law firm. It has taken the opportunity to clarify the remedy available for breach of trust, with particular reference to commercial trusts such as those seen between lenders and solicitors. The decision is a very good one for solicitors, in particular for those dealing with conveyancing transactions where a bank’s monies are held on trust.

AIB v Redler

Mark Redler & Co Solicitors (Redler) acted for AIB Group (UK) Plc (the bank) on a remortgage transaction. The sum being advanced was £3.3 million against existing borrowings of £1.5 million. In error, but in good faith, Redler failed to pay off approximately £300,000 of the existing charge, releasing those monies to the borrowers. The issue came to light when the bank wasn’t able to obtain a first charge over the borrowers’ property, and instead they had to make do with a second charge, fixed in the sum of £300,000.

The borrowers defaulted, the property was sold and the bank suffered a loss on the sale of around £2.5 million.

The bank sued Redler for its entire advance, not just the £300,000 paid in error, alleging breach of trust and basing its claim (amongst other points) on the term in the CML Handbook that said “you will hold the loan on trust for us until completion”.

The judge at first instance made certain findings of fact that were important to the later decision in the Supreme Court, namely that “but for” the breach of trust the transaction would still have proceeded as the bank was anxious to lend to the borrowers, due to other connected business loans.

The issue before the Supreme Court

Ultimately the question to be decided by the Supreme Court was: what is the remedy available to a bank for a solicitor’s breach of trust in circumstances such as these?

The main authority under the spotlight in the appeal was the 1996 House of Lords judgment in Target Holdings Ltd v Redferns (Target).

Completion?

The bank argued throughout that completion had not occurred, relying on Lord Browne-Wilkinson’s statement in Target that “until the underlying commercial transaction has been completed, the solicitor can be required to restore to the client account the monies wrongly paid away”. It said therefore that completion had not occurred in relation to the bank’s loan to its borrowers – it had not got the first charge it had bargained for and Target could therefore be distinguished. The bank’s position was that the court should order Redler to reconstitute the trust fund and make a payment equal to the whole of the amount advanced (less the amount received on sale) – approximately £2.5 million.

The court dealt with this “completion” point relatively swiftly. Lord Toulson concluded that what had been meant by Lord Browne-Wilkinson was “completion of the underlying commercial transaction”, not completion in terms of the CML. Completion in that sense took place when the loan monies were released to the borrowers. At that moment the relationship between the borrowers and the bank became one of contractual borrower and lender.

Remedy?

Having concluded that the Court of Appeal was right to understand and apply the reasoning in Target as it did, it was necessary for the court to look at how (and if at all) the remedy of equitable compensation was to be applied – in particular what was meant when Lord Browne-Wilkinson said in Target “equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests : to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach”.

The question of causation?

As the Supreme Court noted, an awful lot has been written on the question of whether (and how) common law principles and remedies (especially in a commercial context) interact with equitable doctrines and remedies. Lord Toulson recognised this in his very opening observations about the Judicature Act of 1873 and the stitching together of the two doctrines. The main point arising in Redler was what type of causation test should be applied in this sort of case. Was it causation at its simplest of levels – a “but for” test - or was it necessary to examine more closely the duty owed before coming to a conclusion, with causation being tested in a more detailed way?

The bank argued for a “but for” test at its simplest. Indeed it went further, suggesting that in fact the unauthorised payment of the trust monies created an immediate debt between the solicitor and the bank for the whole sum.

Redler argued (and the court agreed) that the correct analysis starts from the basic right of a beneficiary to have the trust administered in accordance with the general law. Where there has been a breach of that duty, the basic purpose of any remedy will be to put the beneficiary in the same position as if the breach had not occurred. This may involve restoring the value of something lost by the breach or making good financial damage caused by the breach. But, it was argued, a monetary award which reflected neither the loss caused nor any profit gained would be penal.

It should be noted however that this is not to say that the remedy of equitable compensation is to be treated as being directly analogous to the remedies for breach of contract or tort – rather the correct approach is to look at the scope of the duty owed.

This concept of the scope and the purpose of the trust was key to the court, particularly when looking at trusts like this and their commercial nature. The “but for” test should be applied by reference to what the solicitors were instructed to do and if there is no loss arising from this, because proper performance of the duties would have produced the same end result, then that has to be the right answer.

Is there still a relevance to the trust in commercial transactions?

The effect of this decision is not to dismiss the relevance of the trust in commercial transactions. A commercial trust differs from a typical traditional trust in that it arises out of a contract rather than the transfer of property by way of gift - the trust is “part of the machinery” for the performance of the contract. The scope and purpose of a commercial trust may vary, and this may have a bearing on the appropriate relief in the event of a breach. It is in that context that the trust is relevant when looking at what loss was suffered by the bank.

Take away points

• There is a link to be drawn between liability and remedy on claims for breach of trust.
• The loss resulting from the breach has to be measured by the scope of the obligation that is in question – compensation for the breach of an obligation (equitable or otherwise) generally will put the claimant into the position he would have been in if the obligation had been performed.
• Equitable compensation should normally be measured as at the date of trial with the benefit of hindsight (as distinct from a claim in contract/tort). Foreseeability of the loss is generally irrelevant but the loss must be caused by the breach of trust – it must flow directly from it and (in commercial trusts at least) it is necessary to look at the full surrounding facts and circumstances to determine this.
• Solicitors who act negligently but who still achieve the underlying commercial objective or transaction will be able to argue that a common sense approach to causation ought to be applied. Those that don’t, for example those solicitors in cases where no charge is ever obtained due to the underlying fraud of third parties, may not be as well-placed.

> Read the transcript of the judgment here.