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4 New Square team win in Supreme Court in Solicitors Breach of Trust claim

Date: 05/11/2014

AIB Group (UK) Limited v Mark Redler & Co Solicitors

[2014] UKSC 58.

This decision of the Supreme Court handed down on Wednesday 5 November 2014 confirms the nature and extent of equitable compensation in breach of trust and fiduciary duty claims. It is of very considerable importance in the context of lenders’ claims against solicitors, is likely to be of substantial significance (and benefit) to those defending PI claims against solicitors, and has wider ramifications for the law both in this jurisdiction and throughout the common law world:

  • The Supreme Court has confirmed that equitable compensation did not take a wrong turn in Target Holdings v Redferns [1996] AC 421 and that equitable compensation for breach of trust means just that – compensation for the loss actually caused by and flowing from the breach in question.
  •  Lenders, and other trust beneficiaries, cannot, on any basis, recover losses that would have been suffered even if the trustee had done exactly what was required under the terms of the trust – and that rationale applies to fiduciary duties and traditional trusts as much as to commercial trusts.
  • Lord Toulson and Lord Reed each gave judgments, and Lord Neuberger, Lady Hale and Lord Wilson agreed with their reasoning. The bank, which sought to recover the full amount of its advance less the proceeds of sale of the property (some £2.5m) even though it would still have made the advance on the security of the property had the solicitors not acted in breach of trust, was limited to recovering the difference between the value of the security it should have obtained under a first legal charge and what it actually got under its second legal charge (some £275,000). It would be a windfall to recover the whole advance (less recoveries) from the solicitors, when the vast majority of that loss was really caused by the decision to lend on inadequate security and the subsequent drop in the market. Both of those problems would have affected the bank, and caused it to suffer a shortfall, even if the solicitor had done exactly as required under the terms of the trust and its contractual retainer. The only loss the solicitors caused by their breach of trust was the diminution in value of the security.
  • The speech of Lord Browne Wilkinson in Target Holdings v Redferns, which has come under considerable attack from academic writers in this jurisdiction and internationally, was extensively analysed, explained and upheld as good law. Causation does have an important role to play in the law of equitable compensation, whether the trust in question is “traditional” or “commercial”. The result in Target was clearly right, but the other routes to that answer proposed extra-judicially require the application of unacceptable legal fictions. As Lord Toulson observed, “there is something wrong with a state of the law which makes it necessary to create fairy tales” to reach the right result.
  • When assessing equitable compensation, the Court should assess the loss at the date of trial, with the benefit of hindsight and looking at what has actually been suffered by the lender as a result of the breach by the solicitors, rather than as a result of any extraneous cause (such as a fall in the value of the property which the lender was always happy to accept as security until that fall) or at any earlier date (before any ameliorating factor has come into play).
  • The Supreme Court discussed the relationship of common law principles and remedies to equitable doctrines and remedies, given the importance and relevance of both in a commercial context. It was concluded that irrespective of whether the remedy pursued was equitable relief for breach of trust, or common law damages for breach of contract or negligence, in each case what had to be identified was the content of any relevant obligation, the consequences of its breach to be visited on the defendant, and the losses flowing.
  • There were often strong principle and policy reasons for the differences between the duties and remedies applicable at common law and in equity, and there was a justification for a different approach to causation, remoteness and mitigation. However, that did not mean that the different approaches would necessarily reach different results, or that equity could be used to recover losses that were not caused by the breach complained of on any common sense analysis. The fact that a trust arises in a commercial context means that the terms of the underlying contract will inform the terms of the trust and the nature of the trust duties imposed. The trust and the contract are not divorced. On the facts of this case, the cost of restoring to the bank what it had truly lost due to the breach of trust was the same as the measure of damages for the loss caused by the solicitors’ breaches of contract and negligence, which arose from the same facts (save that there was no duty to mitigate and no scope for a reduction for contributory negligence).
  • To suggest that equity could be used to grant a remedy which gave the bank more than it would have received had there been no breach of duty at all lacked justice or common sense. Equitable compensation, whether substitutive or reparative, should put the beneficiary in the position he would have been in but for the breach.
  • In the present case, but for the breach the bank would not have declined to make the advance. It would still have suffered a substantial loss. This was not a case where had it known the true facts the bank would have instructed the solicitors not to proceed. The loan would have gone ahead and the bank would have had a first legal charge over a property worth considerably less than the advance. If the solicitors had not breached their duties the charge would have been worth some £275,000 more than it was. That was the bank’s loss in equity and at common law. Equitable compensation greater than that would result in “a monetary award which reflected neither loss caused nor profit gained by the wrongdoer” and “would be penal” and against policy and principle.

Graeme McPherson QC, Nicole Sandells and Siân Mirchandani of 4 New Square acted for the successful solicitors on the Supreme Court Appeal. Graeme McPherson QC and Siân Mirchandani acted both at first instance and in the Court of Appeal. Nicholas Davidson QC acted, with others, for the bank in the Supreme Court.