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breach of trust and relief under s.61 Trustee Act

14 January 2014
Decision of the court in Ikbal v Sterling Law [2013] EWCH 3291 (Ch)

In recent years we have seen a number of cases concerning the application of s61 of the Trustee Act 1925 such as Lloyds TSB Bank Plc v Markandan & Uddin (a firm) [2012] EWCA Civ 65 and Nationwide Building Society v Davisons [2012] EWCA Civ 1626.

Facts of the case
Ikbal v Sterling is yet another such case. The facts of this case are not dissimilar to the others. In this case the claimant retained the defendant firm to act for him in the purchase of a property in North London in 2010. The transaction proceeded in a conventional way and £315,000 was transferred to Fernando & Co (who was purporting to act for the vendor) without securing an express agreement or undertaking for the use of the Code for completion by Post (the Postal Code). Following the supposed ‘completion’ Fernando & Co failed to produce the TR1 and it transpired that Fernando & Co had not been acting for the true owners of the property. The SRA later intervened into Fernando & Co weeks later but the funds were already gone. The claimant brought a claim for the full restoration of the trust fund of £315,000 or in the alternative, damages for breach of contract/duty of care.

At trial, the claimant gave evidence that he had commenced renovation of the property which he claimed continued until 2012. His credibility was called into question as he failed to disclose documents to support the alleged works to the property. The witness for the defendant gave straightforward and reliable evidence. The defendant sought relief against the breach of trust claim under s61 Trustee Act 1925. The court had to decide three issues in relation to the trust claim namely: (a) was there a breach of trust; (b) if yes, was the claimant entitled to full restitution or some lesser amount; and (c) was the defendant entitled to relief under s61.

Decision
It will come as no surprise that the court held that the defendant had committed two breaches of trust; firstly when it sent the funds to Fernando & Co, and secondly when Fernando & Co appropriated the funds. In determining the third issue the court held that the burden was on the defendant to show that it acted “honestly and reasonably” and that it “ought fairly to be excused”. On the facts in this case it was held that the defendant acted honestly but not reasonably.

However in determining whether the defendant ought fairly to be excused it was necessary to consider whether the unreasonable conduct was connected to the loss for which relief was sought. On the facts it was held the even if the Defendant had expressly agreed to the Postal Code the outcome would have been the same as Fernando & Co would have appropriated the funds anyway. The claimant’s alternative claim was successful and he was awarded damages of £45,379.37.

Established principles
The case confirms that the application of s61 is plainly fact sensitive. However the general principles remain that a breach of trust will arise when solicitors pay away funds other than as authorised by clients and where such breach has occurred the client is initially presumed to be entitled to full reconstitution of trust funds. A defendant will benefit from the relief under s.61 if there is no causal connection between the claimant’s loss and the unreasonable conduct of the defendant.

The court granted permission to appeal, such permission being limited to the issue of relief.

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