This matter was heard at first instance in November 2012.  For the background and analysis of that judgment, please click on this link. The Claimant appealed the decision and the Court of Appeal has now handed down its judgment.

Brief Summary of Background

Mark Redler & Co (the “Solicitors”) acted for the lender, AIB Group (“AIB”) and the borrowers in respect of a remortgage for £3.3m. The Solicitors were instructed to discharge an existing mortgage in favour of Barclays, amounting to £1.5m across 2 accounts. However, the Solicitors inadvertently only obtained the redemption figure for one of the two accounts and paid £1.23m to Barclays and the balance of the monies to the borrowers. This effectively meant that the borrowers were paid about £300,000 too much while the sum of £300,000 remaining outstanding on Barclays’ charge.

As the sum sent to Barclays was insufficient to discharge its secured debt, AIB’s charge was not registered until nearly two years later, and only once the parties had independently agreed that AIB would rank as a second charge holder with the Barclays charge ranking in first priority.

AIB claimed against the Solicitors for breach of trust, based upon the Solicitors paying away the loan advance, which was held as trust money, without obtaining a first charge. The Solicitors admitted that their conduct amounted to negligence, however they asserted that payment of the loan advance was not a breach of trust. The Solicitors further asserted that should the Court find there to be a breach of trust, then their liability was limited to the loss in value of the AIB’s security (i.e. their liability was limited to the £300,000 plus interest).

Decision at First Instance

The Court held that whilst the Solicitors had committed a breach of trust by paying out the loan advance in contravention of AIB’s express and implied authority, AIB was not entitled to full reconstitution of the trust fund (of £3.3m). AIB was only entitled to equitable compensation for the amount due to Barclays that was needed to discharge their secured debt, which with interest amounted to £323,501.38.

AIB challenged this decision on the basis that the Solicitors had no authority to pay away any of the mortgage advance before completion, which could only have occurred once the Solicitors had received the relevant undertaking and/or the documents required to register the new charge. AIB argued that completion had never occurred and it was entitled to equitable compensation which would restore it to its original position before the breach occurred.

Appeal Judgment

The Court of Appeal considered two main issues:

(1)  Whether the Solicitors had been in breach of trust; and if so, whether this was limited to the amount of £300,000 plus interest (which should have been used to redeem Barclay’s charge) as found by the judge; and

(2)  Whether AIB had been entitled to equitable compensation to the entire amount of the advance (£3.3.m less recoveries).

In relation to the first issue, the Court considered s10.3 of the CML Handbook and held that it was settled law that solicitors had no authority to disburse the advance monies, other than on the express direction of the lender, except upon completion of the transaction.

Therefore, the release of the mortgage funds had been a vital element of completion and the Solicitor’s authority to do so had depended on their undertakings, without which completion could not have occurred. The Appeal Court held that the decision at first instance had therefore been erroneous in that it had been wrong to treat the breach of trust as limited to that part of the mortgage advance which had been paid to the borrowers instead of being used to discharge Barclays’ charge.

However, in relation to the second issue, the Court held that the AIB’s loss was based on obtaining less security than would have been the case otherwise. AIB had obtained a valid mortgage which it was able to register as a second charge. The Court held that the fact that the breach was never made good was irrelevant when considering the loss that AIB had consequently suffered.  The breach of trust had comprised the unauthorised release of the advance pre-completion, and not the failure by the Solicitors to obtain a first charge. Therefore, the Court had to consider the beneficial effect of what security the AIB had eventually been able to obtain. Accordingly, the decision at first instance which calculated equitable compensation in the sum of £323,501.38, was upheld.

Comment

The case affirms the Court’s common-sense approach to equitable compensation. The Court clarified that equitable compensation for breach of trust is designed to make good a loss suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach.

In this case, even though the breach was never made good because AIB never obtained a first charge over the security, the Court took into account the beneficial effect of the security AIB had been able to obtain – regardless of the breach of trust.

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