This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.

No more fairy tales: AIB Group (UK) Plc v Mark Redler & Co Solicitors
25 November 2014

No more fairy tales: AIB Group (UK) Plc v Mark Redler & Co Solicitors

When a legal transaction goes wrong, in this case a re-mortgage, someone has to pay. A couple borrowed £3.3m as a new loan on their house. This money was supposed to go to pay off an old loan. In error, the solicitors who were acting for both the new lenders and the borrowers sent money directly to the borrowers. The property was eventually repossessed and the new lenders sued the solicitors for compensation over and above their real loss of £300,000. They lost both the original claim and the appeal.

Mark Redler & Co, acting for both the claimant bank, AIB, and the borrowers, mistakenly released some of AIB's funds to the borrowers rather than to the previous lender (with the consequence that the existing mortgage was not discharged). The borrowers subsequently defaulted and the property was sold at a significant loss.  It was common ground that, although the solicitors had acted in good faith, they had broken their contract with AIB and acted in breach of trust.

AIB brought a claim against Mark Redler & Co, seeking to recover £2.5 million plus interest on the basis that the solicitors' liability for breach of trust was not limited by causation or remoteness, principles which would limit contract or tort claims.  The Supreme Court rejected this argument and held that Mark Redler & Co's liability was limited to what AIB would have lost if they had complied with AIB's instructions, namely £275,000 (the amount mistakenly released to the borrowers).

The Supreme Court noted that the trial judge had observed that if Mark Redler & Co had noticed at the time that they had made a mistake, and pointed it out, AIB would not have withdrawn from the transaction.  It was clear from the evidence that AIB had been anxious to lend to the borrowers.

Academic criticism of a previous and factually similar House of Lords decision, Target Holdings Ltd v Redferns [1996] AC 421 had argued that the law was incoherent as it did not recognise the proper distinction between the various trustee obligations, including a "custodial stewardship" duty, a "management stewardship" duty and a duty of undivided loyalty, and the different remedies available in respect of them. Furthermore, to prevent the law being distorted, section 61 of the Trustee Act 1925 should have been used to relieve the solicitors of some, or all, of their liability.  Section 61 gives the court discretion to relieve a trustee from liability if they have acted honestly and reasonably and ought fairly to be excused for the breach of trust.  

The Supreme Court has dealt with this by highlighting the differences between traditional and commercial trusts. Whilst traditional trusts will govern the ownership-management of property for a group of beneficiaries over a number of years, a commercial trust arises out of a contract rather than the transfer of property by way of a gift.  With commercial trusts, the contract defines the parameters of the trust.

In this case, the fact that the trust was part of the machinery for the performance of a contract was relevant. In looking at the losses suffered by AIB, it would have been artificial and unreal to look at the trust in isolation from the obligations that had brought it into being.  As Lord Toulson observed in his leading judgment "There is something wrong with a state of the law which makes it necessary to create fairy tales".

As a result of this case, commercial trusts will be treated differently from traditional trusts for the purposes of assessing the amount that can be recovered by a beneficiary for a breach of trust. Liability for breach of trust in a commercial context, and where there is no fraud, is likely to be roughly the same as if the claim were brought in contract or tort.