One of the questions that the courts have been vexed with is how much loss a claimant is entitled to recover in relation to a breach of trust claim against its solicitors. In this case, solicitors acting for the claimant bank, AIB Group (UK) Plc (“AIB”) and the borrowers in connection with a remortgage advance of £3.3 million failed to fully discharge an existing mortgage in favour of Barclays Bank out of the advance from AIB. The Barclays charge secured borrowings of about £1.5 million on two accounts. On the day of completion, the solicitors telephoned Barclays to find out the redemption figure and were told that the redemption figure was £1.2 million approximately, but the solicitors failed to notice that the figure given was in relation to one of the two accounts only. The solicitors paid £1.2 million to redeem the Barclays’ charge and the remainder was paid to the borrowers. As the money sent to Barclays was insufficient to discharge its secured debt it refused to release its charge. Eventually a deed of postponement was agreed whereby Barclays allowed AIB’s charge to be registered as a second charge on the property.
The solicitors admitted negligence, but the question the court had to consider was how much could AIB recover. When the property was sold following a possession order, £300,000 was paid to Barclays in respect of the amount outstanding to them and the balance of £867,700 approximately was paid to AIB. However, the advance had been for £3.3 million and so AIB faced a significant loss. Was AIB’s claim limited to £300,000 (the amount paid to Barclays) or were the solicitors liable for all of AIB’s loss?
As the court noted the common sense view was that the loss AIB claimed was the result of the fact that either the property was never worth the amount it lent against or because of the fall in the market. AIB’s counsel considered, however, that because of the application of equitable principles, the bank would be able to recover all of its loss.
The court analysed the relationship between the solicitor and the bank in relation to the remortgage. The terms on which a solicitor is authorised to pay out monies held in his client account are to be determined by construction of his contract of retainer. However, equally a payment out of monies in breach of those terms of the retainer that govern the authority to pay would amount to a breach of trust. The court’s task, therefore, was to construe the terms of the retainer in order to ascertain what authority they confer on a solicitor to pay out of money that he holds on trust for his client.
In this case the written terms of the retainer did not deal explicitly with the precise circumstances in which the solicitor could pay out the money, so that it was necessary to fill in any gaps arising on the ordinary basis of construction. Analysing the transaction, the Judge considered that the solicitors’ instructions authorised them to pay to Barclays sufficient sums to procure a release of its charge and to pay the balance to the borrower or to their order. Had they complied with the instructions they would have paid £1.5 million to Barclays and £1.8 million to the borrower. In the event they paid £1.2 m to Barclays and £2.1 million to the borrowers. In so doing they committed a breach of trust, but it did not follow that the whole of the payment was made in breach of trust. The extent of the breach was the amount they should have retained and not the whole payment.
As a result the bank was entitled to reconstitution of the trust fund by repayment of the amount wrongly paid away. In addition, the bank was entitled to equitable compensation for the additional amounts accruing due to Barclays which had increased the amount secured in priority to the AIB’S interest, but it was ordered to give credit for the amounts paid by the borrowers to the Barclays account since these had had the effect of reducing the loss caused by the defendant’s breach of trust.
This case confirms that where there has been a breach of trust a claimant will only be entitled to claim for the amount relating to the extent of that breach rather than the whole of its loss.
AIB Group (UK) Plc v Mark Redler & Co (a firm) [2012] EWHC 35 (Ch)
