AIB Group has failed in its Supreme Court bid to recoup an entire £3.3m mortgage loan from solicitors who failed to obtain a first legal charge over the property concerned.
Lord Neuberger, Lady Hale, Lord Wilson, Lord Reed and Lord Toulson unanimously upheld a ruling that, though solicitors Mark Redler & Co were in breach of trust for releasing the mortgage advance without obtaining a first legal charge, AIB Group is only entitled to recover its actual loss of £323,501, including interest.
Giving the court’s main ruling, Lord Toulson said that it would be a “backwards step” to depart from Lord Browne-Wilkinson’s fundamental analysis in the House of Lords case of Target Holdings Ltd v Redferns.
He said: “There are arguments to be made both ways, as the continuing debate among scholars has shown, but absent fraud, which might give rise to other public policy considerations that are not present in this case, it would not in my opinion 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 said that all agreed that the basic right of a beneficiary is to have the trust duly administered in accordance with the provisions of the trust instrument, if any, and the general law. Where there has been a breach of that duty, the basic purpose of any remedy will be either to put the beneficiary in the same position as if the breach had not occurred or to vest in the beneficiary any profit which the trustee may have made by reason of the breach.
He continued: “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.
“The purpose of a restitutionary order is to replace a loss to the trust fund which the trustee has brought about. To say that there has been a loss to the trust fund in the present case of £2.5m by reason of the solicitors’ conduct, when most of that sum would have been lost if the solicitors had applied the trust fund in the way that the bank had instructed them to do, is to adopt an artificial and unrealistic view of the facts.”
Lord Reed said that AIB’s claim to payment of the entire £3.3m, less £867,697 which they received on the sale of the property, was “based on three fallacies”, each of which was fatal to the claim.
He said that first, it assumes that Redler misapplied the entire £3.3m, whereas all that was misapplied, in his opinion, was the £309,000 paid to the loan applicants rather than to Barclays Bank; second it assumes that the measure of Redler’s liability was fixed as at the date of the breach of trust; and third it assumes that liability does not depend on a causal link between the breach of trust and the loss.
In February, Patten LJ at the Court of Appeal backed a March 2012 High Court ruling that AIB’s loss was restricted to actual loss and that, had the solicitors obtained the first legal charge, it would only have been £300,000 better off.
In 2006, AIB Group (UK) plc agreed to lend Dr Ravindra Sondhi and Dr Salma Sondhi £3.3m to be secured by a first legal charge over their home, valued at £4.25m. This was on the condition that the existing first legal charge in favour of Barclays, which had an outstanding loan of £1.5m, was to be redeemed on or before completion of AIB’s mortgage advance.
Mark Redler & Co Solicitors, also acting for Mr and Mrs Sondhi, were instructed on this basis and retained to act on AIB’s behalf.
Having requested AIB to forward the funds because completion was imminent, the solicitors remitted to Barclays an amount they thought was the total necessary to redeem the Barclays mortgage, and remitted the balance of the £3.3m less expenses to Mr and Mrs Sondhi.
In fact, the solicitors mistakenly remitted to Barclays an amount which was approximately £300,000 less than was necessary to redeem the Barclays mortgage. As a result, AIB did not obtain a fully enforceable first charge over the property. Subsequently, Mr and Mrs Sondhi defaulted and their property was repossessed and sold by Barclays in February 2011 for £1.2m. AIB, which by then had a second charge, received £867,697, approximately £300,000 less than it should have done if the solicitors had remitted the correct amount to Barclays.
The solicitors accepted they were negligent in failing to secure a first legal charge, but successfully argued that AIB’s loss was limited to the £300,000 in additional security that a first charge would have provided.
AIB had argued that the release of the mortgage advance was unauthorised as a result of breach of trust, and that the solicitors were liable to reconstitute the whole sum in its client account.
AIB Group (UK) plc v Mark Redler & Co Solicitors Supreme Court (Lord Neuberger, Lady Hale, Lord Wilson, Lord Reed and Lord Toulson)
Jeremy Cousins QC, Nicholas Davidson QC and John Brennan (Instructed by Moran & Co, Tamworth) for the appellant
Graeme McPherson QC, Sian Mirchandani and Nicole Sandells (Instructed by Mills and Reeve LLP) for the respondent
