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What losses can be recovered for breach of trust?

Posted on Dec 01, 2014 by Liina Tulk  | Tags: losses, AIB, UK Supreme Court, breach of trust, negligence  | 0 Comments

By Liina Tulk, Solicitor, Dispute Resolution

Introduction

Pursuers often seek to recover all of their losses. Defenders, on the other hand, seek to limit losses to those directly flowing from their negligence or breach of contract. The UK Supreme Court recently delivered a judgment on the recoverability of total losses.

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

Earlier this month the UK Supreme Court delivered its judgment in the case of AIB Group (UK) plc v Mark Redler & Co Solicitors. The case involved a re-mortgage transaction where Mark Redler & Co (the “Solicitors”) acted for both the lending Bank, AIB, and the Borrowers.

Factual Background

AIB had agreed to provide the Borrowers with a £3.3 million business loan. The loan was to be secured against the Borrower’s home which was already subject to an existing first ranking security in favour of Barclays Bank plc due to a pre-existing mortgage the Borrowers had with Barclays. AIB made it a condition of lending that Barclays’ charge was to be redeemed on or before the mortgage advance and that AIB would be granted first ranking security over the property.

AIB transferred the loan funds to the Solicitors who were told to hold them on trust pending completion. Although the Solicitors were made aware of the amount of the Barclays security that had to be redeemed, due to a misunderstanding, the Solicitors ended up accidentally redeeming only part of Barclays’ mortgage, leaving around £300,000 outstanding. The Solicitors then remitted the rest of AIB’s loan to the Borrowers. As the Solicitors had failed to redeem the Barclays’ mortgage in full, they ended up remitting about £300,000 more to the Borrowers than the correct amount had they paid the Barclays loan in full from the AIB loan funds.

Due to the shortfall of £300,000 Barclays refused to release its first ranking security over the property. AIB sought repayment of the erroneously advanced £300,000 from the Borrowers but the Borrowers failed to return the excess funds. As a result, AIB had to register a second ranking security over the property, with Barclays having a first ranking security.

The Borrowers consequently defaulted and the property was repossessed and sold for £1.2 million. Once Barclays had been repaid the £300,000 due from the Borrowers under the first ranking security, AIB received £867,697. AIB then commenced an action against the Solicitors for professional negligence, breach of contract and breach of trust.

Legal Argument

The solicitors accepted that they had been negligent. The issue in dispute between the parties was the quantum of the losses that AIB should be entitled to recover from the Solicitors due to their negligence. In particular, should AIB be entitled to recover its total losses (approximately £2.5 million) or only the amount AIB lost due to not having a first ranking security over the property (approximately £300,000).

It was clear that due to the Solicitors’ negligence AIB had lost £300,000, this being the sum AIB lost out on due to not having a first ranking security over the property. AIB however claimed it was entitled to a greater measure of relief under the breach of trust head, arguing that all of the funds sent to the Solicitors (referred to as “trust fund”) should be reinstated in full.

AIB was not able to convince the lower courts that it should be entitled to recover its total losses (£2.5 million) from the Solicitors and appealed to the UK Supreme Court.

UK Supreme Court Decision

The Supreme Court’s upheld the decisions of the courts below in unanimously dismissing AIB’s appeal. The Supreme Court commented that the purpose of a restitutionary order was to replace the loss to the trust fund which the Solicitors, as trustees, had brought about. The Supreme Court said that it would be artificial and unrealistic to say that there has been a loss to the trust fund of £2.5 million due to the Solicitor’s conduct, when most of that sum would have been lost even if the Solicitors had applied the trust fund in the way that AIB had instructed them to. It was therefore held that the extent of the Solicitors’ breach of trust was limited to the misapplied £300,000.

Conclusion

The UK Supreme Court’s decision affirms that any compensation payable by someone who is in breach of trust should be limited to the loss actually caused by his breach. The AIB case should be kept in mind when considering the recoverable losses. Often the economic downturn has a part to play in the banks’ total losses with the security subjects’ values having substantially decreased.

While the banks’ total losses can be fairly substantial, in most cases the banks are only entitled to the specific sums they have lost out due to the solicitors’ negligence. In the AIB case that was £300,000. Before commencing costly and time consuming court litigation, it is worth calculating the likely recoverable losses and seeing whether settlement can be reached.

Contact Us

 If you have any queries arising from this article, please contact our Dispute Resolution team on 0131 226 8200.

Disclaimer: While every effort has been made to ensure the accuracy of this blog post, it is not intended to provide legal advice as individual situations will differ. No recipients of content in this blog post should act or refrain from acting on the basis of the blog post without seeking the appropriate legal advice on the particular facts and circumstances at issue from a qualified solicitor in their jurisdiction. The blog post is for general information only and is not legal advice.

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