AIB Group (UK) Plc v Mark Redler & Company Solicitors
| Jurisdiction | England & Wales |
| Judge | Lord Toulson,Lord Reed,Lord Neuberger,Lady Hale,Lord Wilson |
| Judgment Date | 05 November 2014 |
| Neutral Citation | [2014] UKSC 58 |
| Court | Supreme Court |
| Date | 05 November 2014 |
[2014] UKSC 58
Lord Neuberger, President
Lady Hale, Deputy President
Lord Wilson
Lord Reed
Lord Toulson
Appellant
Jeremy Cousins QC Nicholas Davidson QC John Brennan
(Instructed by Moran & Co, Tamworth)
Respondent
Graeme McPherson QC Sian Mirchandani Nicole Sandells
(Instructed by Mills and Reeve LLP)
Heard on 5 June 2014
140 years after the Judicature Act 1873, the stitching together of equity and the common law continues to cause problems at the seams. The present appeal concerns the remedy available to the appellant bank against the respondent, a firm of solicitors, for breach of the solicitors' custodial duties in respect of money entrusted to them for the purpose of completing a loan which was to be secured by a first charge over the borrowers' property. As is customary in such transactions, the solicitors acted for both the bank and the borrowers.
In June 2006 Mr and Mrs Sondhi applied to borrow £3.3m from the appellant ("the bank"). The loan was to be secured by a first legal charge over the borrowers' home, which had been valued at £4.25m. The property was at that time the subject of a first legal charge in favour of Barclays Bank plc ("Barclays"). The Barclays charge secured borrowings on two accounts amounting to about £1.5m.
The bank agreed to the borrowers' proposal and made a formal offer on terms which included a condition that the existing mortgage was to be redeemed on or before completion of the mortgage advance. The bank retained the respondents ("the solicitors") to act for it by a letter of instruction dated 5 July 2006.
The letter of instruction stated that the solicitors were instructed in accordance with Council of Mortgage Lenders' ("CML") Handbook for England and Wales, 2 nd edition. The handbook stated among other things that on completion the mortgage lender required a fully enforceable first charge over the property by way of legal mortgage, and that all existing charges must be redeemed on or before completion. The handbook also stated:
"You must hold the loan on trust for us until completion. If completion is delayed, you must return it to us when and how we tell you".
The letter of instruction included copies of the bank's offer to the borrowers and its conditions of offer.
The solicitors were told by the borrowers that the property was mortgaged to Barclays. On 31 July Barclays provided them with information about the two accounts, which showed the total balance due as a little over £1.5m, but this was not a redemption statement. Meanwhile the solicitors asked the bank to forward the funds because completion was imminent. The bank did so on 1 August, and the solicitors telephoned Barclays for a redemption figure. Unfortunately there was then a misunderstanding. The solicitors were given a redemption figure for one of the two Barclays accounts which they mistakenly took to be the total figure. They were at fault because they should have realised from the information supplied by Barclays that the figure related only to one account. However, on 1 August the solicitors remitted to Barclays the figure which they wrongly believed was the total necessary to redeem the Barclays mortgage and remitted the balance of the £3.3m less expenses to the borrowers. The borrowers had executed what was intended to be a first charge over the property in favour of the bank, but there remained due to Barclays a debt of approximately £309,000 secured by the prior Barclays charge.
Barclays naturally refused to release its charge unless the outstanding debt was paid in full. At first the borrowers promised to pay the necessary sum to Barclays but they failed to keep their word. The solicitors did not immediately tell the bank of their error, as they should, because they hoped to be able to resolve it. When eventually they informed the bank there were negotiations between the bank and Barclays with the result that the bank executed a deed of postponement acknowledging the primacy of the Barclays charge and Barclays consented to the registration of the appellant bank's charge as a second charge.
Subsequently the borrowers defaulted, and the property was repossessed and sold by Barclays in February 2011 for £1.2m, of which the bank received £867,697.
The issue is how much the bank is entitled to recover from the solicitors. The bank claims that it is entitled to the full amount of its loan less the amount recovered by it. The solicitors contend that their liability is limited to the amount by which the bank suffered loss by comparison with its position if the solicitors had done as they should, which was to have paid Barclays the full amount of the Barclays debt so as to redeem the Barclays charge. The difference, leaving interest aside, is between £2.5m and £275,000 in round figures.
The bank alleged that the solicitors acted in breach of trust, breach of fiduciary duty, breach of contract and negligence. It claimed relief in the forms of (i) reconstitution of the fund paid away in breach of trust and in breach of fiduciary duty, (ii) equitable compensation for breach of trust and breach of fiduciary duty, and (iii) damages for breach of contract and negligence, in each case with interest. The solicitors admitted that they acted negligently and in breach of contract but denied the other allegations and they claimed relief under section 61 of the Trustee Act 1925 if found to have acted in breach of trust.
At the trial, before His Honour Judge Cooke, the bank accepted that the solicitors had acted in good faith.
The judge found that the solicitors acted in breach of trust, which he analysed as follows:
"23. In the present case, … what the defendant's instructions authorised them to do with the funds paid to them was to pay to Barclays (or to its account) such sum as was required to procure a release of its charge, and pay the balance to the borrowers or to their order. Had they complied with their instructions they would have paid (taking all the figures in round terms) £1.5m to Barclays and £1.8m to the borrowers. In the event they paid £1.2m to Barclays and £2.1m to the borrowers. In my judgment, in so doing they committed a breach of trust in so far as payment was made contrary to the authority they had been given.
24. It does not however in my judgment necessarily follow that the whole of the payment of £3.3m was made in breach of trust. The difference between what the defendant did and what it ought to have done if it had complied with its instructions was the £300,000 that should have been paid to Barclays but was instead paid to the borrowers. That in my judgment was the extent of the breach of trust committed. It was not a breach of trust to pay £1.2m to Barclays; that payment was made as partial performance of the authority and obligation to discharge Barclays' secured debt. It was not a breach of trust to pay £1.8m to the borrowers, as that was the sum to which they were entitled. The breach consisted of the failure to retain an additional £300,000 and apply that to the discharge of the Barclays debt."
As to the remedy, the judge held that prima facie the bank was entitled to reconstitution of the trust fund by repayment of the amount wrongly paid away. As to the bank's alternative claim for equitable compensation or damages, he said that where the breach consisted of failure to discharge a prior mortgage, with the result that the bank's interest had been postponed to the Barclays charge, the bank was entitled to equitable compensation for the additional amounts due to Barclays for which Barclays had security in priority to the bank. The solicitors were therefore liable to the bank for the additional amount ultimately obtained by Barclays by reason of its prior security.
The judge added that in those circumstances he did not intend to venture into the argument as to the appropriate remedy if the solicitors committed a breach of trust in paying out any part of the advance, except to find as a fact what would have happened but for the breach of trust.
That question, he said, could be approached on one of two bases, namely what would the outcome have been if the solicitors had either (i) dealt with the funds held in the manner they were authorised to do or (ii) instead of making the unauthorised payment they did, had asked the bank for instructions at that point, disclosing the reasons why the payment was outside their existing authority. He concluded that on either approach the answer would be the same on the facts of the case. There would have been a short delay while the solicitors obtained a redemption figure in a form that bound Barclays to release its charge; they would then have paid that amount to Barclays; they would in due course have received a release and they would have registered the bank's charge as a first charge. He added that, on the implausible scenario that the solicitors realising that they did not have a valid redemption quotation had approached the bank for further instructions, the bank would not have withdrawn from the transaction but would have instructed the solicitors to carry on with it, complying with their existing instructions. The judge added that it was clear from the evidence that the bank was anxious to lend to the borrowers and that the domestic re-mortgage was driven by the need to facilitate business lending which the bank was very keen to make.
The judge therefore gave judgment for the bank in the sum of £273,777 plus interest. It was not necessary in the circumstances for him to deal with the issue of relief under section 61 of the Trustee Act, which would have arisen if he had held that the bank was prima facie entitled...
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