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common sense and causation

10 November 2014

On 5 November 2014 the Supreme Court handed down its long-awaited decision in AIB v Redler & Co.

Brief facts

Mr and Mrs Sondhi (the Borrowers) applied to borrow £3.3m from AIB Group (UK) Plc (the Bank). The loan was to be secured by a first legal charge over the Borrowers home, valued at £4.25m. An existing legal charge in favour of Barclays Bank (Barclays), securing a loan of £1.5m, was to be redeemed on or before completion of the mortgage advance. Mark Redler & Co (the Solicitors), acting for the Borrowers, were also retained to act on the Banks behalf. Having received the funds from the Bank, the Solicitors (i) sent Barclays the amount they thought was needed to release their mortgage, and (ii) sent the balance to the Borrowers. However, the Solicitors had mistakenly sent Barclays approximately £300,000 less than they should have done. Barclays therefore refused to release their charge, resulting in the Bank having only a second charge over the property. The Borrowers defaulted, and the property was repossessed and sold by Barclays for £1.2m. The Bank ultimately recovered £867,697, approximately £300,000 less than it would have done if the Solicitors had remitted the correct amount to Barclays.

The Bank sued the Solicitors, not just for the £300,000 paid in error but for the whole of its advance less what it had received, i.e. close to £2.5m, alleging that this was a consequence of the Solicitors having acted in breach of trust.

Had they acted in breach of trust?

At first instance HHJ Cooke found that, although the Solicitors had acted in breach of trust, the Bank could only recover the £300,000 which the Solicitors had mistakenly paid to the Borrowers rather than to Barclays. The Court of Appeal agreed with HHJ Cooke. In doing so, it applied what it understood to be the reasoning of Target Holdings Ltd v Redferns [1996] AC 412 in relation to equitable principles of compensation.

The Supreme Courts judgment

The Bank appealed to the Supreme Court which held that the Banks argument was based on three fallacies:

  1. It assumed the Solicitors had misapplied the entire £3.3m advance as opposed to only £300,000;
  2. It assumed that the measure of the Solicitors liability was fixed at the date of the breach of trust; and
  3. It assumed that liability did not depend on a causal link between breach of the trust and the loss.

More specifically the Supreme Court held as follows:

  1. It would have been a backward step to depart from, or re-interpret, Lord Browne-Wilkinsons fundamental analysis of the principle of equitable compensation set out in the House of Lords decision in Target Holdings.
  2. Where a breach of trust occurs, an equitable obligation arises to restore the trust fund to the position it would have been in but for the breach and the measure of compensation should be assessed on that basis.
  3. To argue that the Bank had suffered loss of £2.5m was to adopt an artificial and unrealistic view of the facts. Here the real loss was the £300,000 of the Banks loan over which it failed to gain security.
  4. A monetary award which reflects neither loss caused nor profit gained by the wrongdoer, as contended for by the Bank, would be penal.
  5. The Banks argument construed too narrowly Lord Browne-Wilkinsons essential reasoning. Although the Solicitors did not complete the transaction in the manner in which it was required, the transaction was, nevertheless, complete from a commercial perspective when the loan monies were released.

Comment

The decision, whilst largely expected, is nevertheless welcome confirmation that the courts continue to reject attempts by claimants, and particularly lenders, to overcome conventional principles of causation by relying on technical or artificial applications of equitable principles.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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