The U.K. Supreme Court Revisits Equitable Compensation In Commercial Transactions

Trusts are widely used in commercial transactions. But, as creatures of equity, trusts raise issues that may not be immediately familiar to everyone who relies on them in the commercial world. Indeed, the interrelationship between equitable doctrines and remedies and common law principles and remedies is complicated. Fortunately, the U.K. Supreme Court has revisited the issue in its recent decision in AIB Group (UK) Plc v. Mark Redler & Co Solicitors, [2014] UKSC 58.

Background

The case arose out of a commercial loan transaction. A bank, AIB, lent £3.3m to Mr. and Ms. Sondhi (the "Borrowers"). AIB was to be secured by a first charge over the Borrowers' home, which was valued at £4.25m. There was an existing £1.5m charge over the home in favour of Barclays Bank that was to be redeemed before AIB's advance was completed.

Mark Redler & Co (the "Solicitors") were the solicitors for AIB and the Borrowers. The Solicitors received the loan funds in trust from AIB and remitted, what they thought was, the amount owing to Barclays and then the balance to the Borrowers. In fact, the Solicitors remitted to Barclays £300,000 less than the amount of its charge.

The Borrowers refused to repay the "extra" £300,000. Subsequently, the Borrowers defaulted and their property was sold by Barclays for £1.2m. AIB received £300,000 less than it would have if the Solicitors had remitted the correct amount to Barclays.

AIB sued the Solicitors for, among other things, breach of trust.

At trial, Judge Cooke held that the Solicitors were guilty of breach of trust but only to the extent of the £300,000 that was inappropriately paid to the Borrowers. For that reason, the appropriate remedy was a repayment of £300,000. AIB appealed.

The Court of Appeal concurred with the judge's remedy but for different reasons. The Court held that the breach of trust occurred with respect to the entire amount advanced (as it was advanced prior to the conditions for advancement being met). The Court, however, applied the principles of equitable compensation in commercial transactions, established by Target Holdings v. Redferns, [1996] 1 AC 421, that say that equity will look to what loss the beneficiary of a trust has actually suffered from the breach of trust to determine the appropriate remedy. In this case, that amount was approximately £300,000. AIB appealed.

The Decision

The bulk of the decision addresses the Target Holdings decision and provides confirmation and clarification of the...