Breaching a 'commercial trust'

In AIB Group (UL) plc v Mark Redler & Co [2014] UKSC 58, the Supreme Court observed that the appellant bank sought to hold the respondent solicitors responsible for loss which would have occurred even if the solicitors had done what they were instructed to do. The bank duly lost. 

Along the way, the court considered the reasoning of the House of Lords in Target Holdings Ltd v Redferns [1996] AC 421 and clarified the principles of equitable compensation for breach of trust and their relationship with common law damages.

The facts of the case are well known: solicitors acting for lender and borrower on a remortgage negligently, in breach of contract and in breach of trust, failed to discharge the whole of a pre-existing loan. This resulted in the previous lender retaining its charge in respect of that part of the loan (£300,000) which had not been discharged, and prevented the new lender from taking a first legal charge. 

The key finding made by the judge at first instance was that, if the solicitors had not acted in breach of trust, the transaction would still have proceeded. Therefore, but for the solicitors’ breach of duty, the new lender would have suffered the same loss, which was much greater than £300,000 and was connected with the inadequacy of the security. 

Contrast this with other recent claims by lenders in which the transaction would not have proceeded if there had been no breach of duty, so that, but for the breach, the claimant lender would not have suffered any loss: eg Davisons Solicitors v Nationwide Building Society [2012] EWCA Civ 1626 and Lloyds TSB Bank plc v Markandan & Uddin [2012] EWCA Civ 65. 

Key points

There are several key points to note from the judgments of Lord Toulson and Lord Reed (with whom Lord Neuberger, Lady Hale and Lord Wilson agreed):

Lord Browne-Wilkinson in Target Holdings was considering the remedy for breach of trust, not the measure of liability. Thus, in the context of a “traditional trust” which is subsisting and has a number of beneficiaries, a trustee who distributes trust funds in breach of duty will be required to reconstitute the trust fund; but where the trust is no longer subsisting, or is a bare trust, this is inappropriate, and compensation can be paid directly to the beneficiary. The measure of compensation is the same in both cases: the difference between what the beneficiary ought to have received and what he has in fact received as a result of the diminution in the trust fund.

The measure of compensation should 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, ie it must flow directly from it; this is the key to determining whether causation has been interrupted by the acts of third parties. Losses flowing from unreasonable behaviour on the part of the claimant will be adjudged to flow from that behaviour, and not from the breach.

A trust imposes different obligations from a contractual or tortious relationship, and the measure of compensation reflects the nature of the obligation breached and the relationship between the parties. Where a trust relationship occurs within the context of a commercial transaction (a “commercial trust”), the scope and purpose of the trust may have a bearing on the remedy in the event of a breach.

Finally, when Lord Browne-Wilkinson said in Target Holdings that a solicitor could be required to restore to a client account monies paid away before “completion”, he was referring to the execution and completion of a commercial transaction, not “completion” within the meaning of the CML Handbook.

Common sense

Many will see this recent decision as a victory for common sense: defendants should not be expected to provide compensation for losses that they have not caused. The judgments also highlight the importance of correctly analysing the nature of the parties’ obligations and, in practice, reconstitution of the trust fund as a measure of liability is likely to be restricted to cases involving traditional, rather than commercial, trusts. We can now expect to see a series of cases testing the boundaries of the principles expounded by the Supreme Court – for example, exploring the circumstances in which causation may be interrupted by the acts of third parties, or in which losses may be held to flow from unreasonable behaviour on the part of a claimant. SJ

Christopher Stone and Alison Padfield, pictured, are barristers practising from Devereux Chambers