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,  UKSC 58.
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,  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 bulk of the decision addresses the Target Holdings decision and provides confirmation and clarification of the principles that it sets out. In particular, the Supreme Court confirmed that:
1. The liability of a trustee for breach of trust, even where the trust arises in the context of a commercial transaction which is otherwise regulated by contract, is not generally the same as a liability in damages for tort or breach of contract. (para 136)
2. The basic right of a beneficiary is to have the trust duly administered in accordance with the provisions of the trust instrument, if any, and the general law. (para 64)
3. Where there has been a breach of that duty, the basic purpose of any remedy will be either to put the beneficiary in the same position as if the breach had not occurred or to vest in the beneficiary any profit which the trustee may have made by reason of the breach. (para 64)
4. A monetary award that reflected neither loss caused nor profit gained by the wrongdoer would be penal. (para 64)
5. The measure of compensation will be assessed at the date of trial with the benefit of hindsight. The foreseeability of loss is generally irrelevant, but the loss must be caused by the breach of trust, in the sense that it must flow directly from it. (para 135)
AIB attempted to distinguish its case from that of Target Holdings in two ways. First, because the underlying transaction in this case was never properly completed (because the Barclays charge was never fully redeemed). The Supreme Court rejected this argument as it ignored the principle “that the beneficiary is entitled to be compensated for any loss he would not have suffered but for the breach.” Further, the Supreme Court held that the transaction was executed or “completed”, from a commercial perspective, when the loan monies were released to the Borrowers. (paras 35 and 73-74)
Second, the Solicitors had breached Rule 7 of the Solicitors Accounts Rules by failing to remedy their breach as soon as it was discovered. Therefore, AIB said, it was entitled to recover the full amount of the loan as the monies should never have been advanced. The Supreme Court rejected this argument as well. The Solicitors’ breach of the rules might result in disciplinary consequences but did not affect the outcome of the appeal. (para 75)
On the basis of the above, the Supreme Court dismissed AIB’s appeal.
The result in AIB confirms the continued applicability of Target Holdings and provides useful clarification and confirmation of the principles that must be applied to determine the proper quantification of equitable compensation in commercial transactions.
From a Canadian perspective, the ruling in Target Holdings is based in large part on the minority judgment of Justice McLachlin in Canson Enterprises Ltd. v. Boughton & Co.,  3 SCR 534. That judgement, although a minority concurrence, is regularly followed in Canada and the principles set out in AIB will likely be followed by Canadian courts or, at a minimum, ought to be highly persuasive.
As discussed by Lord Reed writing in concurrence, Justice McLachlin’s decision in Canson has also been followed in most other Commonwealth jurisdictions including in the Australian High Court (Pilmer v. Duke Group Ltd,  HCA 31), the New Zealand Supreme Court (Premium Real Estate Ltd. v. Stevens,  NZSC 15), and the Hong Kong Final Court of Appeal (Akai Holdings Ltd. v. Kasikornbank PCL  1 HKC 357 and Libertarian Investments Ltd v. Hall,  1 HKC 368).
Docket: UKSC 2013/0052
Date of Decision: November 5, 2014
commercial transactions equitable doctrines Trusts