5 November 2014
 UKSC 58
Subject: Trusts—Breach of trust—Re-mortgage of property—Solicitors holding funds on trust for completion—Solicitors in breach of trust by discharging part of existing mortgage debt and paying remainder over to borrowers—Lender later suffering loss—Whether obligation to restore trust fund—Whether loss to be compensated by equitable compensation—Measure of equitable compensation
Summary: The beneficiary under a trust has the right to have that trust properly administered. What that will mean in any given case will depend upon the facts. In the present case, it would not have been realistic or equitable to look at a trust over the completion monies for a remortgage loan in isolation from the commercial transaction of which it formed part. If the respondent solicitor had performed its retainer properly, it would have paid over an additional sum of c.£300,000 to a prior charge-holder, and the appellant bank would have received a first legal charge rather than a second legal charge to secure its lending on the remortgage. In equity, the bank was entitled to be put into the same position as if that had been done. That required the solicitor to pay to the bank the sum that had been awarded by the trial judge, and not the totality of the appellant bank’s loss on the lending. The appeal was thus dismissed.
This was an appeal by the appellant bank (“AIB”). The claim arose out of the bank’s retainer of Mark Redler & Co (“Redler”) to act on its behalf in connection with a remortgage loan. Redler were also retained to act for the borrowers.
AIB provided a remortgage advance of £3.3M to the borrowers. It was a condition of that loan that a prior charge in favour of Barclays Bank plc (“Barclays”) was to be redeemed on or before completion of the loan, using part of the advance.
AIB paid the moneys over to Redler to be held on trust for the purposes of completing the transaction. Through Redler’s admitted negligence, only £1.2M of the borrowers’ total indebtedness to Barclays (of around £1.5M) was paid off, and accordingly the prior Barclays charge was not redeemed. The balance of the advance was paid to the borrowers.
AIB therefore could not register a first charge. It entered into discussions with Barclays and AIB’s charge was registered as a second charge. However, in due course the borrowers defaulted on the remortgage. Bankruptcy and a sale of the property ensued, and AIB suffered total losses of around £2.4M, being the total amount of the advance less credit for the proceeds of sale after costs.
The question of law was whether AIB was entitled to recover the whole of its c.£2.4M losses from Redler, or whether the amount for which Redler was liable was limited to the c.£300,000 representing the amount by which AIB’s security was less than it would have been if Redler had performed its retainer competently.
AIB brought its claim in breach of contract, negligence, breach of fiduciary duty and breach of trust. The measure of damages for breach of contract and negligence was agreed by both parties to be the c.£300,000 differential in the value of the security. However, AIB contended that in equity, it was entitled to equitable compensation for breach of trust for the whole of its losses.
This argument (and others by which AIB sought to recover its full loss) was dismissed by Judge Cooke at first instance, and by the Court of Appeal (Arden, Sullivan and Patten LJJ). The Supreme Court then dismissed AIB’s appeal. Lord Toulson and Lord Reed each gave reasoned judgments. Lord Neuberger, Lord Wilson and Lady Hale agreed with both judgments. It was held that on the facts of this case, the value of the remedy for breach of trust was the same as the remedy for breach of contract and negligence.
Both Lords Toulson and Reed devoted substantial portions of their judgment to analysing the reasoning of Lord Browne-Wilkinson in Target Holdings Limited v Redferns  AC 421. Lord Toulson stated that the resolution of AIB’s appeal:
“…involves two essential questions. The more important question in the appeal is whether Lord Browne-Wilkinson’s statement in Target Holdings of the fundamental principles which guided him in that case should be affirmed, qualified or (as the bank would put it) reinterpreted. Depending on the answer to that question, the second is whether the Court of Appeal properly applied the correct principles to the facts of the case.”
Lord Toulson and Lord Reed also both acknowledged that there had been considerable academic and judicial debate about the reasoning in Target Holdings. For Lord Toulson, this was:
“…part of a wider debate, or series of debates, about equitable doctrines and remedies and their inter-relationship with common law principles and remedies, particularly in a commercial context….”
Lord Reed described his reasoning as considering the relationship between equitable compensation and common law damages “on a somewhat broader basis” than Lord Toulson. His Lordship began with certain propositions of first principle:
- The loss resulting from a breach of duty has to be measured according to legal rules, and different rules apply to the breach of different obligations .
- The rules appropriate to a breach of duty by a trustee similarly have to be determined in the light of the characteristics of the obligation in question .
Against the backdrop of these observations, his Lordship addressed the much-discussed dicta of Lord Browne-Wilkinson in Target Holdings distinguishing ‘commercial’ trusts from ‘traditional’ trusts. For Lord Reed, Lord Browne-Wilkinson was seeking:
“… not to say that there is a categorical distinction between trusts in commercial and non-commercial relationships, or to assert that there are trusts to which the fundamental principles of equity do not apply….[but rather] to recognise that the duties and liabilities of trustees may depend, in some respects, on the terms of the trust in question and the relationship between the relevant parties …”
Lord Toulson similarly observed that although it was a fact that 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, nonetheless:
“…Lord Browne-Wilkinson did not suggest that the principles of equity differ according to the nature of the trust, but rather that the scope and purpose of the trust may vary, and this may have a bearing on the appropriate relief in the event of a breach…. the solicitors should not be required to pay restitutive monetary compensation when there has in fact been no loss resulting from their breach. That is not because special rules apply to solicitors, but because proper performance of the trustee’s obligations to the beneficiary would have produced the same end result.”
Their Lordships were thus unanimous that Lord Browne-Wilkinson had not drawn a hard and fast distinction between commercial and traditional trusts. The position was rather that the proper remedy by way of equitable compensation for a breach of trust would be influenced in any given case by the origins of the trust, the nature of the trust obligation breached, and the wider relationship between the parties. This meant that the detailed rules relating to equitable compensation developed in respect of traditional trusts were not necessarily applicable to a bare trust arising in the context of a commercial contract, such as the present.
Another key theme in the appeal judgments was the underscoring of the fundamentally compensatory nature of the remedy of equitable compensation for breach of trust. At para  of his judgment, Lord Toulson identified the analysis which he considered lay at the heart of the outcome in Target Holdings. This comprised the propositions that:
- Where a trust was subsisting, the basic right of a beneficiary was to have the trust duly administered and to have the fund reconstituted as it should be;
- Whereas if at the time of the action the trust had come to an end, the normal order would be for the payment of compensation directly to the beneficiary; and
- The measure of compensation in the latter case would be the difference between what the beneficiary had in fact received and the amount which he would have received but for the breach of trust.
Lord Toulson referred to this analysis as Lord Browne-Wilkinson’s ‘fundamental analysis’ which “provided the foundation for all that followed” in Target Holdings.
Lord Toulson felt that these fundamental principles were correct and should be affirmed. It appears that his Lordship viewed AIB’s appeal as an attack upon the core principle that the remedy of equitable compensation should do just that: compensate the beneficiary for his losses. At page 439 of Target Holdings, Lord Browne-Wilkinson had held that:
“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.”
In AIB, Lord Toulson held that:
“… it would not in my opinion be right to impose or maintain a rule that gives redress to a beneficiary for loss which would have been suffered if the trustee had properly performed its duties. … I consider that it would be a backward step for this court to depart from Lord Browne-Wilkinson’s fundamental analysis in Target Holdings or to “re-interpret” the decision in the manner for which the bank contends…… a monetary award which reflected neither loss caused nor profit gained by the wrongdoer would be penal.”
Lord Reed agreed that it was “a fallacy” in AIB’s claim that it sought to make Redler liable for the consequences of the inadequacy of the security accepted by AIB before Redler’s involvement, when Redler’s breach of trust had not affected that security except to the extent, initially, of the c.£300,000.
Their Lordships were thus unanimous that on the facts of this case, the compensatory nature of the remedy required the Court to have regard to what losses were causally connected to Redler’s breach.
As to Lord Toulson’s, second question, namely whether the Court of Appeal had properly applied the reasoning in Target Holdings to the facts of the present case, the Supreme Court upheld the decision below. AIB had argued that its case fell within Lord Browne-Wilkinson’s statement in Target Holdings, that:
“until the underlying commercial transaction has been completed, the solicitor can be required to restore to the client account moneys wrongly paid away.”
It might have been thought that by this statement, Lord Browne-Wilkinson was preserving the role of the traditional remedies of restoring the trust account in the conveyancing context where completion under the mortgagee’s retainer has not taken place. However, Lord Toulson rejected AIB’s argument, holding that when Lord Browne-Wilkinson had spoken of ‘completion’ in that part of his judgment, he had been talking about completion of the commercial transaction. Although Redler did not ‘complete’ the transaction in compliance with the requirements of their retainer under the CML Handbook, as a commercial matter the loan transaction was executed or ‘completed’ when the loan moneys were released to the borrowers. The Court of Appeal had been right in the present case to understand and apply this aspect of the reasoning in Target Holdings as it did.
Finally Lord Toulson dealt with AIB’s argument (developed in the Supreme Court) based upon the obligation of a solicitor to reconstitute moneys misapplied from its client account under what was at the material time rule 7 of the 1998 Solicitors Accounts Rules. His Lordship held that although there was a breach of rule 7 by Redler which could have disciplinary consequences for the firm, this could not affect the proper approach to Redler’s liability to provide redress to AIB for a loss which AIB would have suffered in any event.
The Supreme Court’s decision affirms the fundamental principles and reasoning of Target Holdings and confirms that that decision did not require revision or reinterpretation. To critics of the earlier decision, this will be a disappointment.
On the other hand, there is perhaps an instinctive justice about an outcome that the compensation payable by a trustee in breach of trust should be limited to the loss actually caused by his breach. The judges who considered AIB’s case at all levels all came to the same conclusion in terms of outcome, albeit that their reasoning differed.
The Supreme Court’s decision further confirms that although the principles which apply to compensatory remedies for breach of contract/negligence and breach of trust are not the same, nonetheless the origins of the trust, the nature of the trust obligation breached, and the wider relationship between the parties will all inform the proper equitable remedy. If the purpose of a trust, and the obligations to which it gives rise, are formatively shaped by the context of a commercial contract, the Court is very likely to require the claimant to demonstrate a causal link between his losses and the breach. To that extent, the common law attitude to damages for loss will loom large in such a case.
Leading Counsel for AIB, Nicholas Davidson QC, reports that Lord Neuberger wryly observed during argument that “only one thing was certain. Whatever we decide, it will be criticised”. No doubt that was true: the decision will certainly spawn further academic and judicial debate. For practitioners, further case law will be necessary to explore the boundaries of the decision. When a given set of facts points away from the commercial context of AIB, and towards a more traditional trust situation, it will be interesting to see how AIB is interpreted and applied by the Courts.
4 New Square