We welcome again Anis Waiz, solicitor and head of commercial litigation at
Curtis Law Solicitors, as he continues his critical review of current case law.
Readers may recall this case and will note the case summary 30th January 2012, available
here.
Whilst this judgment follows on from a number of high profile claims against solicitors for breach of trust (see Santander UK Plc v R.A. Legal Solicitors [2014]; Lloyds TSB PLC v Markandan & Uddin [2012]; Davisons Solicitors v Nationwide [2012]) the main issue here concerned equitable compensation and common law damages.
The Supreme Court reconsidered the seminal case of Target Holdings Ltd v Redferns [1996] AC 421 where Lord Browne-Wilkinson observed:
“Is the trustee liable to compensate the beneficiary not only for losses caused by the breach but also for losses which the beneficiary would, in any event, have suffered even if there had been no such breach?"
Background The bank's borrowers sought a remortgage advance of circa £3 million on their home. There was a first charge in favour of Barclays Bank to be redeemed from the advance. Barclays were owed circa £1.5 million on two accounts. Before completion the solicitors were given a redemption figure circa £1.23m. They paid that to Barclays and the remainder of the advance to the borrowers.
The solicitors failed to notice that the redemption figure related to only one of the two accounts and was insufficient to redeem the Barclays mortgage. The Solicitors mistakenly remitted to Barclays approximately £300,000 less than was necessary to redeem the Barclays mortgage. As a result, the bank did not obtain a fully enforceable first charge over the property.
Subsequently, the borrowers defaulted and their property was repossessed and sold by Barclays in February 2011 for £1.2m. The bank received £867,697, approximately £300,000 less than it should have done if the Solicitors had remitted the correct amount.
The bank alleged that the solicitors acted in breach of trust, breach of fiduciary duty, breach of contract and negligence. It sought:
Reconstitution of the fund paid away in breach of trust and in breach of fiduciary duty;
Equitable compensation for breach of trust and breach of fiduciary duty;
Damages for breach of contract and negligence.
The solicitors admitted that they acted negligently and in breach of contract and claimed relief under section 61 of the Trustee Act 1925 if found to have acted in breach of trust. The reader is referred to the judgment for the full background and history of the proceedings. However of note is the following:
At first instance the judge found that the solicitors acted in breach of trust. The solicitor's instructions authorised them to pay to Barclays such sum as was required to procure a release of its charge, and pay the balance to the borrowers. Had they complied with their instructions, the solicitors would have paid £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 so doing they committed a breach of trust in so far as payment was made contrary to the authority they had been given.
However, that did not mean the whole of the payment of £3.3m was made in breach of trust. The difference between what the solicitors 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.
The extent of the breach of trust committed 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.
Accordingly the bank was awarded judgment in the sum of £273,777. It was not necessary in the circumstances to deal with the issue of relief under section 61 of the Trustee Act, which would have arisen if the bank was prima facie entitled to recover the entire amount of the loan.
On Appeal, the Court of Appeal held that the judge was wrong to treat the breach of trust as limited to that part of the mortgage advance which was paid to the borrowers instead of being used to discharge their liability to Barclays on the second account.
Citing earlier authorities and the provisions of the CML Handbook, the Court of Appeal held that the solicitors had no authority to release any part of the funds advanced by the bank unless and until they had a redemption statement from Barclays coupled with an appropriate undertaking which enabled them to be sure that they would be able on completion to register the bank's charge as a first charge over the property.
However, the Court of Appeal upheld the judge's decision regarding the relief to which the bank was entitled and dismissed the bank's appeal. That was on the basis of Target, where the House of Lords held that where a breach of trust occurred in the context of a commercial transaction, equitable principles of compensation (whilst not applying precisely the same causation and remoteness as the common law) did recognise what loss the beneficiary has actually suffered from the breach of trust and to allow compensation on a causal connection between the breach and the eventual loss.
Grounds of the Appeal to the Supreme Court The bank's appeal was on two grounds:
“The Completion Issue” - In contrast with Target Holdings, the "underlying commercial transaction" was never completed because the shortfall in the payment needed to redeem the Barclays charge was never paid.
“The Accounts Issue” - By reference to the Solicitors Accounts Rules 2011. The payment out of the bank's money to the borrowers in August 2006 was unauthorised by the bank and so was a breach of rule 22 of the then 1998 Rules regarding the operation of a solicitor's client account. Rule 7 obliged the solicitors to remedy the breach on its discovery. Thus the present case was different from Target on the basis that the solicitors failed on discovering their mistake to pay Barclays the additional sum necessary to redeem its charge. They could and should have done so, in which case their position would have been indistinguishable from that of Target but it was now too late. That was the correct analysis of Target Holdings.
Target Holdings Ltd v Redferns [1996] AC 421 By way of very brief resume, Target concerned a claim against a firm of solicitors, sued for its involvement in a mortgage fraud. The solicitors had parted with the mortgage advance to the wrong person, prior to the completion of the transaction and without obtaining the security. The transaction was however subsequently completed and the security was obtained. It later proved hopelessly inadequate.
The claimant sought summary judgment on the basis of the unauthorised payment. They argued that the solicitors came under an immediate duty to restore the money paid away in breach of trust, and that it was irrelevant that the claimant had subsequently received exactly the security that it was intending to obtain. This was described by Lord Browne-Wilkinson as argument (B). It was also argued that the claimant remained entitled at the date of judgment to have the solicitors reconstitute the trust fund (argument (A)).
The Court of Appeal gave judgment in favour of the claimant. An appeal was allowed by the House of Lords. Argument (A) was dismissed on a procedural ground as the wrong remedy had been sought. As to argument (B) the claimant obtained exactly what it ought to have obtained, namely a valid security for the sum advanced, and therefore suffered no compensatable loss.
Accordingly the mortgage advance had been paid out prematurely and to the wrong person, with the consequence that at that point the trustee did not have the charges which he ought to have had. That deficiency was however remedied when the charges were obtained some weeks later. The assets under the control of the trustee were then exactly what they ought to have been. There was nothing missing from the trust fund, and therefore no basis for a claim for restoration. For the same reason, there was no basis for a claim to compensation by the lender.
In Target, the House of Lords was dealing with a bare trust which may arise in a number of different contexts. In this case, it was one incident of a commercial transaction involving agency. The purpose of the solicitors' retainer was to achieve the bank's commercial objective.
The Issues on Appeal The Supreme Court noted that the determination of the appeal involved two essential questions. First, whether Lord Browne-Wilkinson's fundamental principles in Target Holdings should be affirmed, qualified or (as the bank argued) reinterpreted. Secondly, whether the Court of Appeal properly applied the correct principles to the facts of the case.
The primary criticism was that Lord Browne-Wilkinson failed to recognise the proper distinctions between different obligations owed by a trustee and the remedies available in respect of them. A trustee's range of duties would include: a duty to preserve the assets of the trust save where the terms of the trust permit the trustee to do otherwise; and, a duty to manage the trust property with proper care.
Historically the remedies available took the form of orders made after a process of accounting. The basis of the accounting would reflect the nature of the obligation. Thus in the case of a breach of duty to preserve the trust the court would disallow the unauthorised disposal and either require the trust fund to be reconstituted or order the trustee to make good the loss in monetary terms. In a case of breach of a trustee's management duty, a court could similarly require the trustee to make good the loss resulting from the breach.
As to equitable compensation, the Supreme Court noted that the relevant principle was that in a case of unauthorised dissipation of trust funds "the amount of the award is measured by the objective value of the property lost, determined at the date when the account is taken and with the benefit of hindsight" (see Millett NPJ in Libertarian Investments Ltd v Hall [2014] 1 HKC 368, para 168).
In determining the value of what has been lost, the court must take into account any offsetting benefits received, but it is not relevant to consider what the trustee ought to have done. The court is concerned only with the net value of the lost asset.
Lord Toulson noted the bank sought to hold the solicitors responsible for loss which it would have suffered on the judge's findings if they had done what they were instructed to do. This involves effectively treating the unauthorised application of trust funds as creating an immediate debt between the trustee and the beneficiary, rather than conduct equitable compensation for any loss thereby caused.
However, it is one thing to speak of an "equitable debt or liability in the nature of a debt" in a case where a breach of trust has caused a loss; it is another thing for equity to impose or recognise an equitable debt in circumstances where the financial position of the beneficiaries, actual or potential, would have been the same if the trustee had properly performed its duties.
Accordingly Lord Toulson held that it would not be right to impose or maintain a rule that gives redress to a beneficiary for loss which would have been suffered if the trustee had properly performed its duties. He observed:
“Placing the beneficiary in the same position as he would have been in but for the breach may involve restoring the value of something lost by the breach or making good financial damage caused by the breach. But a monetary award which reflected neither loss caused nor profit gained by the wrongdoer would be penal.”
When Lord Browne-Wilkinson spoke of completion he was talking about a commercial transaction. The solicitors did not "complete" the transaction in compliance with the requirements of the CML Handbook. But as a commercial matter the transaction was executed or "completed" when the loan monies were released to the borrowers. At that moment the relationship between the borrowers and the bank became one of contractual borrower and lender, and that was a fait accompli. The Court of Appeal was right in the present case to understand and apply the reasoning in Target Holdings as it did.
Decision The bank's appeal was dismissed. Lord Toulson held that equitable compensation and common law damages were remedies based on separate legal obligations. It was necessary to identify in each case the content of any relevant obligation and the consequences of its breach.
On the facts of the present case, the cost of restoring what the bank lost as a result of the solicitors' breach of trust came to the same as the loss caused by the solicitors' breach of contract and negligence.
As to the Completion Issue it was held that the solicitors did not "complete" the transaction in compliance with the requirements of the CML Handbook. As a commercial matter the transaction was executed or "completed" when the loan monies were released to the borrowers. The Court of Appeal was right to apply the reasoning in Target.
As to the Accounts Issue, the arguments raised by the bank as to the Solicitors' Accounts Rules took the matter no further. First the solicitors were at fault in not reporting to the bank their error and in failing at that stage to remedy their breach of trust by ensuring that the shortfall was paid to Barclays. Their failure to do so was a breach of the rules, which could have disciplinary consequences. However, that did not affect the outcome in the appeal. There was no reason why the question of the solicitors' liability to provide redress to the bank for a loss which it would have suffered in any event should turn on their compliance or non-compliance with their obligations under rule 7 of the Solicitors' Accounts Rules.
Thus the Supreme Court held the loss to the trust estate as a result of the solicitors breach of trust was £273,777.42: being the difference between a first charge and one which was postponed to Barclays. That was also the loss to the bank who were absolutely entitled to the trust estate. The trust no longer being on foot, the appropriate order was for the solicitors to pay the bank £273,777.42.
Conclusion At its root this case concerned the correct remedies for equitable compensation Lord Toulson observed that 140 years after the Judicature Act 1873, the joining of equity and the common law continued to cause problems. The issue here was the remedy available to the bank against the solicitors, for breach of the solicitors' duties in respect of money entrusted to them for the purpose of completing a loan to be secured by a first charge over property. An everyday occurrence.
As will be noted from the facts there was no issue of fraud in this case. It was an error.
Lord Toulson noted that equitable compensation and common law damages were remedies based on separate legal obligations. What has to be identified in each case is the content of any relevant obligation and the consequences of its breach. On the facts of the present case, the cost of restoring what the bank lost as a result of the solicitors' breach of trust came to the same as the loss caused by the solicitors' breach of contract and negligence.
Lord Reed referring to Redfern did not consider that Lord Browne-Wilkinson was rejecting the traditional view that the equitable obligation arising from a breach of trust affecting the trust fund is to restore the fund to the position it would have been in but for the breach, and that the measure of compensation, whether it is payable into the trust fund or directly to a beneficiary, should be assessed on that basis.
Whilst liability of a trustee for breach of trust, even where the trust arises in the context of a commercial transaction which is otherwise regulated by contract, is not generally the same as a liability in damages for tort or breach of contract. Of course, the aim of equitable compensation is to compensate i.e provide a monetary equivalent of what has been lost as a result of a breach of duty.
However a trust imposes different obligations from a contractual or tortious relationship, The law responds to those differences by allowing a measure of compensation for breach of trust causing loss to the trust fund which reflects the nature of the obligation breached and the relationship between the parties.
Clearly Target remains good law and importantly the Supreme Court have provided clarity and reasoning on the basis that the traditional analysis of assessing loss for breach of trust flows alongside the common law.
For the sake of fullness one point is of great importance in the context of breach of trust claims against solicitors namely the issue of Completion. Readers are referred to Santander UK Plc v R.A. Legal Solicitors [2014] Lloyds TSB PLC v Markandan & Uddin [2012], Davisons Solicitors v Nationwide [2012] and will note the helpful analysis in this case of Completion.
