Solicitors who failed to achieve a first legal charge over mortgage security subjects were liable to the lender only to the extent of the lender's loss as compared with the outcome they should have delivered, the UK Supreme Court has held.

Five judges dismissed an appeal from the Court of Appeal by AIB Group (UK) plc in an action against Stafford firm Mark Redler & Co, claiming breach of trust amongst other matters and seeking recovery of the bank's loss on a loan of £3.3m to a Mr & Mrs Sondhi.

The loan was to have been secured by a first legal charge over the Sondhis' home, which had been valued at £4.25m, by redeeming an earlier charge in favour of Barclays Bank. The solicitors mistakenly did not remit to Barclays the full amount to repay the Sondhis' borrowings from Barclays. When this came to light, an agreement was reached leaving Barclays as first secured lender to the extent of about £300,000. When the Sondhis defaulted and their property was repossessed and sold, AIB recovered only £867,697 of their loan from the proceeds.

AIB claimed that it was entitled to recover from the solicitors the full amount of its loan less the £867,697. The courts below held that it could only recover the £300,000 that should have been paid to Barclays but was not. AIB argued that where a trustee misapplied the trust fund, or part of it, he had to reconstitute the fund in full. The solicitors should have paid Barclays the additional sum necessary to redeem its charge; it was now too late to retrieve the position.

Dismissing the appeal, Lords Toulson and Reed, with whom Lord Neuberger, Lady Hale and Lord Wilson agreed, adopted similar approaches, with Lord Reed taking the broader view. Both applied and explained the decision in Target Holdings Ltd v Redferns [1996] AC 412, which required the person in breach of trust “to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach”.

Lord Toulson said that while there were arguments to be made both ways, “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”.

Lord Reed, who examined cases from across the common law jurisdictions, said that compensation for breach of an obligation generally sought to put the claimant in the position they would have been in but for the breach, and “Equitable compensation for breach of trust is no different in principle:... it aims to provide the pecuniary equivalent of performance of the trust”.

There were three fallacies, he commented, in AIB's position: it assumed that the solicitors misapplied the entire £3.3m, rather than the £300,000; it assumed that the measure of their liability was fixed as at the date of the breach of trust, which was contrary to the various authorities considered; and it assumed that liability did not depend on a causal link between the breach of trust and the loss, and sought to make the solicitors “liable for the consequences of the hopeless inadequacy of the security”, which was also contrary to the authorities.

The courts below had reached the correct conclusion and the appeal was refused.

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