Solicitor – Mortgage redemption – Breach of trust – Claimant instructing defendant solicitor firm in connection with remortgage – Defendant only partially redeeming prior mortgage contrary to claimant’s instructions – Defendant admitting negligence – Whether defendant making excessive payment to borrowers in breach of trust – Whether breach of trust extending to whole amount of loan – Preliminary issues determined.
The defendant firm of solicitors acted for the claimant bank and its borrowers in connection with a remortgage advance of £3.3m on their home, valued at £4.25m. Their instructions from the claimant required the discharge of the existing mortgage with another bank (B) out of the advance. B’s charge secured borrowings of about £1.5m on two accounts. On the day of completion, the defendant telephoned B and was given a redemption figure of approximately £1.23m. They paid that amount to B and the remainder of the advance to the borrowers. The defendant failed to notice that the redemption figure related to only one of the two accounts and so was insufficient to redeem the mortgage. The defendant admitted that it had been negligent. The claimant’s charge was not registered until almost two years later as a second charge with B’s consent. The borrowers defaulted on the loan and the claimant obtained judgment against them for the then balance of some £3.5m, together with an order for possession. The property was sold for £1.2m, from which the claimant as second chargee received £867,697. The borrowers were now bankrupt.
The claimant brought proceedings against the defendant for the losses arising from the remortgage transaction. The claimant contended, inter alia, that the defendant had acted in breach of trust by paying away the advance, which it was admitted was held as trust money, without obtaining a first charge, and that in consequence it was liable to reconstitute the trust fund of £3.3m with interest, credit being given only for the £867,697 actually recovered. The defendant argued that the payment was not a breach of trust or, if it was, its liability was limited to the loss in the value of the claimant’s security caused by the failure to pay off the whole of the secured debt, being about £300,000 paid to B from the sale proceeds.
The court was asked to determine as preliminary issues: (i) whether the payment by the defendant to the borrowers was in breach of trust; and, if so, (ii) the appropriate remedy.
Held: The preliminary issues were determined.
The terms on which a solicitor was authorised to pay out monies held in his client account were to be determined by construction of his contract of retainer. However, not all the terms of the solicitor’s retainer related to the circumstances in which he was authorised to pay out monies from client account. A payment of money when the solicitor was in breach of one of those other terms would not necessarily amount to a breach of trust. Further, not all the terms relating to payment were necessarily preconditions to the authority to pay: Target Holdings Ltd v Redferns [1996] AC 421 and Bristol & West Building Society v Mothew (t/a Stapley & Co) [1998] Ch 1 considered.
The court’s task was to construe the terms of the retainer to ascertain what authority they conferred on the solicitor to pay out money that he held on trust for his client. That required the court not only to construe any express terms but also to take account of any implications that might properly be made as to the authority which the solicitor was being given, arising from the circumstances of the instruction, the nature of the transaction involved and the way in which such transactions were ordinarily dealt with.
In the present case, the defendant’s instructions authorised it to pay to B, or to its account, such sum as was required to procure a release of its charge, and to pay the balance to the borrowers. Had it complied with those instructions it would have paid £1.5m to B and £1.8m to the borrowers. In the event it paid £1.2m to B and £2.1m to the borrowers. In so doing it had committed a breach of trust insofar as payment was made contrary to its authority. However, it did not necessarily follow that the whole of the payment out of £3.3m was made in breach of trust. The difference between what the defendant 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 B, but was instead paid to the borrowers. That was the extent of the breach of trust.
Accordingly, the only precondition to the release of any funds was the receipt of a valid form of charge. Having received that, the defendant was authorised to disburse the advance by paying sufficient to B to secure redemption of its charge, and the balance to the order of the borrower. It failed to do so, to the extent of the shortfall in the amount paid to B. Payment of that amount to the borrowers was in breach of trust, and the defendant was liable to reconstitute the trust to that extent.
In all the circumstances, the claimant was entitled to reconstitution of the trust fund by repayment of the amount wrongly paid away and to equitable compensation for the additional amounts accruing due to B which had increased the amount secured in priority to the claimant’s interest. However, the claimant had to give credit for the amounts paid by the borrowers to their B account, since they had the effect of reducing the loss caused by the defendant’s breach of trust. All such amounts took effect as adjustments to the trustee’s account to the beneficiary.
Jeremy Cousins QC and John Brennan (instructed by Moran & Co) appeared for the claimant; Graeme McPherson QC and Sian Mirchandani (instructed by Mills & Reeve LLP) appeared for the defendant.
Eileen O’Grady, barrister