The Court of Appeal today handed down judgment in AIB v Mark Redler & Co. The case deals with two main issues (1) when does a solicitor have authority to release the advance in a remortgage transaction (and so avoid acting in breach of trust)? And, if the solicitor does act in breach of trust, (2) what is the correct remedy?
AIB, the Bank, was lending to the Sondhis. It was committed to them with lending to support their business borrowing. This transaction was a re-mortgage of their family home for £4 million to support further business development. Mark Redler & Co, the Solicitors, were retained to act for the Sonhdis and the Bank on the re-mortgage. Their existing borrowings from Barclays arose from two accounts; one standing at around £1.2 million, the second at £280,000. In error the solicitors paid only £1.2 million to Barclays – leaving £280,000 outstanding (the balance went to the Sondhis). Barclays refused to release their charge. AIB did not get the first charge over the property it had expected. The inevitable happened: the Sondhis defaulted and the property was sold, releasing £1.2 million, leaving the Bank (after Barclays’ first charge had been paid) out of pocket by around £3 million.
The bank sued the solicitors not just for the £280,000 paid in error but for the whole of its advance, alleging that the solicitors had acted in breach of trust.
Had they acted in breach of trust? At first instance the judge said, yes, to the extent of the £280,000 that had been paid away without authority, but the balance of the re-mortgage monies had been properly paid to discharge the existing borrowing and that was in accordance with the instructions that had been given, (and so was not in breach of trust).
The Court of Appeal held the trial judge was wrong; the solicitor was only authorised to release the money on completion. The Court didn’t quite get round to saying when in fact completion occurs, but rather (on these facts) it held the solicitor had acted in breach of trust by releasing any part of the advance before he had a redemption statement from Barclays, and an unconditional commitment from Barclays or an undertaking from their solicitors (if they had instructed solicitors) to use the re-mortgage advance to discharge Barclays indebtedness and release their own charge. To be clear (as the point was argued) the breach of trust was the release of the money before completion (or before the solicitors had the documents/undertaking above), it wasn’t the failure to get a first charge, this was simply a term of the retainer (and negligence was admitted).
Moving to the second question, having found that there was a breach of trust; what then should the remedy be? The Bank claimed the entire £4 million advance (less receipts) as equitable compensation. The judge at first instance had made a finding that “but for” the error the re-mortgage would have still gone through, the bank was heavily exposed to the Sondhis and they would not (as a matter of fact) have pulled the rug from under the whole deal. It follows that while forseeability and common law rules of causation are not strictly relevant to claims for equitable compensation, the aim of that remedy is to make good the loss suffered by the beneficiaries, which using hindsight and common sense can be seen to have been caused by the breach. The Court of Appeal agreed and so the bank recovered the £280,000 by which its loan was postponed to Barclays but was not entitled to recover its entire advance of £4 million (the trust fund held by the solicitors until completion and which AIB claimed it was entitled to have reconstituted).
Lessons learnt? Clarity is still needed around what exactly is meant by "an unconditional commitment" from the previous lender to use the re-mortgage advance to redeem its indebtedness, but the decision is a good one for the profession. It shows that lenders can’t use rigid applications of archaic rules of equity to circumvent their bad lending decisions, and can’t argue that the courts are unable to reduce the measure of loss for equitable compensation by principles of causation. Perhaps, taken together with the decisions in cases such as Davison (where the solicitor was afforded section 61 Trustee Act relief), the pendulum is swinging a little more back to the middle ground and achieving a fair result after all.