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Equitable compensation – the Supreme Court reviews the position

Stuart Ritchie QC and Lydia Banerjee 

The Supreme Court recently gave judgment in the case of AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58. The decision provides an important treatment of equitable compensation within the wider scheme of remedial rules. 

The facts

A loan of £3.3 million was to be provided from AIB Group (“the Bank”) to the borrowers, to be secured by a first legal charge over their home. That property was at the time the subject of a first legal charge in favour of Barclays, securing borrowings of £1.5million on two accounts. It was a condition of the AIB loan that the existing charge was redeemed before completion. The loan sums were transferred to Mark Redler & Co Solicitors (“the Solicitors”) acting on behalf of both the lender and the borrower. The Solicitors sought a redemption figure from Barclays who gave them information concerning only one of the two accounts. The Solicitors were at fault because they should have realised this. The Solicitors remitted the sum which they wrongly believed to be required to redeem the Barclays loans. However, because of their failure to ascertain the redemption figure for the second account, there remained a shortfall of c £300,000 which was not redeemed by the sums remitted, and which remained secured by the prior Barclays charge. 

The Bank was therefore unable to obtain a first legal charge to secure their loan. Following negotiations between the Bank and Barclays, it was agreed that the Bank’s charge could registered and that Barclays’ priority would be limited to £274,000. 

When the borrowers subsequently defaulted the property was repossessed and £1.2 million was recovered with the Bank receiving £867,697. 

The proceedings below

The issue in the proceedings was how much were the Bank entitled to recover from the Solicitors. For the Bank it was argued that it was entitled to recover the full amount of the loan less the amount recovered (i.e. £3.3 million less £867,000). For the Solicitors it was argued that the loss should be limited to the amount by which the Bank suffered loss by comparison with its position if they had done as they should, i.e. redeemed the entirety of the Barclays loan and obtained the first legal charge over the property (i.e. £274,000). 

At first instance it was held that the Bank had acted in breach of trust, such breach being limited to paying over to the borrowers the sum which should have discharged the unredeemed loan to Barclays. The result of the Judge’s findings was that he gave judgment for the Bank in the sum of £274,000 plus interest. 

The Court of Appeal (Arden, Sullivan and Patten LLJ) disagreed with the Judge that the breach of trust was limited to the amount wrongly paid to the borrowers. The Court of Appeal held that the Solicitors had no authority to release any funds unless and until they had a redemption statement from Barclays and an appropriate undertaking to enable them to register a first charge over the property on completion of AIB loan. However, on the question of remedy the Court of Appeal reached the same conclusion as the Judge at first instance. The Court of Appeal held, applying Target Holdings Ltdv Redferns [1996] AC 421, that the question was what loss the beneficiary had actually suffered applying hindsight and common sense. 

The decision of the Supreme Court

The Supreme Court judgment was given in judgments by Lords Toulson and Reed; Lord Neuberger, Lady Hale and Lord Wilson agreeing with both judgments. The Court considered the issues in the context of the wider debate about the interrelationship between equitable doctrines and remedies and their common law counterparts. 

The Supreme Court confirmed the following principles:

1.The basic right of a beneficiary is to have the trust duly administered in accordance with the provisions of the trust instrument, if any, and the general law.

2.Where there is a breach of the basic right the purpose of any remedy is to require the trustee to restore the trust fund to the position it would have been in if the trustee had performed his obligation. If the trust has come to an end, the trustee can be ordered to compensate the beneficiary directly, such compensation to be assessed on the same basis.

3.Absent fraud there is no penal element to any monetary award.

4.Equitable compensation is assessed at a different time from compensation in tort or contract. Equitable compensation is assessed at the point of judgment with the benefit of hindsight. It follows that foreseeability has no part to play. Compensation in tort or contract is assessed at the date of the breach with consideration of issues of foreseeability a central question for recoverability of loss.

5.Liability is not unlimited. Causation is required. A restitution in specie claim is limited to the property under the trustee’s control and a claim for equitable compensation is limited to loss resulting from the trustee’s acts in relation to the interest which he is bound to protect.

6.The claimant is not required to mitigate loss but losses resulting from clearly unreasonable behaviour on the part of the claimant will be adjudged to flow from that behaviour and not from the breach (i.e. such behaviour will break the chain of causation).

7.A trustee’s breach that permits wrongful or negligent acts from a third party will lead to liability for loss that flows from the third parties actions. If there is no link between the trustee’s breach and the actions of the third party then the loss cannot be recovered from the trustee.[i] 

Applying these principles the loss that, at the date of judgment and with the benefit of hindsight, was caused by the Solicitors’ breach was the sum awarded by the Judge at first instance. The difference between the value of the security the Bank should have obtained but for the breach and the value of the security the Bank in fact obtained was the sum awarded by the Judge. 

General observations

The following points emerge from the judgment: 

First, there has been lively debate over the correct interpretation of Lord Browne-Wilkinson’s judgment in Target Holdings; in particular whether his Lordship was right to engage a causation consideration in assessing equitable compensation and whether his ‘guiding principles’ conflated substitutive and reparative measures of compensation. The Supreme Court decision clarifies these issues and happily bypasses the terminology of “reparative” or “substitutive” measures in equitable compensation. The Supreme Court adopted as the relevant principle the statement of Millett NPJ in Libertarian Investments Ltd v Hall [2014] 1 HKC 368 that “the amount of the award is measured by the objective value of the property lost, determined at the date when the account is taken and with the benefit of hindsight”.

 

Secondly, the Supreme Court confirmed that Target Holdings does not involve assessing equitable compensation on the same principles as common law damages. On the facts of a specific case the extent of equitable compensation may be the same as if damages for breach of contract were sought at common law. It is relevant to consider the context in which the breach of trust arises. In a case such as Target Holdings,the trust was part of the mechanism for performance of the contract. Therefore, consideration of what loss has been suffered by reason of breach of trust must involve consideration of the contractual context giving rise to the trust. In this regard the comments of Lord Browne-Wilkinson regarding differences between traditional trusts and commercial trusts are not to be taken as suggesting that different rules apply. The same equitable rules apply to all forms of trust but the duties and liabilities of the trustee may depend in part on the terms of the relationship between the parties. 

Thirdly, the focus is on the nature of the obligation breached rather than how the obligation arose. Thus a contract may give rise to contractual and fiduciary obligations on a party. Similarly a fiduciary relationship may encompass obligations which are both fiduciary and non-fiduciary in nature. When considering compensation for a breach of an obligation the focus is not on the classification of the relationship as a whole but on the nature of the obligation which has been breached. 

Finally, the drawing up of an account is part of a process for enforcement of performance of the trust. Where trust property has been misapplied entries relating to such misapplication will be disallowed from the account and the trustee required to restore such property. It may be possible to restore the property in specie but very often it will involve the payment of a financial compensation. The sum payable in equitable compensation in a claim by a beneficiary when the trust is no longer subsisting will very often be the same as the sum payable after an account but the procedure adopted is different. 

Although the case was argued and decided in the context of a claim for breach of trust, we suggest that the reasoning will be applicable to breaches of fiduciary duty (i.e. duties which are “peculiarly fiduciary” to adopt the terminology of Millett LJ in Bristol & West Building Society v Mothew [1998] Ch 1) more generally.