The following article won second prize in the Property Bar Association’s student essay competition 2015
If you could reverse any decision of the House of Lords or Supreme Court in the fields of landlord and tenant or property law which would you choose and why?
The importance of a right can be measured by the protection given to its holder in the event of breach. The Supreme Court decision in AIB Group (UK) plc v Mark Redler & Co (a firm) [2014] UKSC 58; [2015] EGLR 34 on equitable compensation for breach of trust should be reversed. It creates difficulties in practice and in theory, notably by undermining the very nature of fiduciary duties and the respect given to ‘vulnerable’ beneficiaries’ property rights in the trust (see Lewin on Trusts (2014), 1-003 and Snell’s Equity (2015), 2-002).
AIB
Contrary to AIB’s instructions, solicitors Mark Redler & Co (“Redler”) released £3.3m mortgage funds to borrowers of AIB without acquiring a first charge over the property. Barclays thus retained the first legal charge for £300,000; AIB received a second charge. The borrowers became insolvent. The property was sold for £1.2m. AIB received £900,000; the first £300,000 going to Barclays. AIB claimed Redler should reconstitute £2.4m (£3.3m less £900,000) to the fund for breach of trust. The Supreme Court limited AIB’s claim to £300,000.
Practical difficulties
AIB required Redler to obtain a first legal charge as a condition of releasing the funds [3]. Redler never obtained a first legal charge for AIB, thus they never performed the trust’s terms. Hence, the Court of Appeal held that all money paid out was in breach of trust, not merely the £300,000 [16]. The Supreme Court’s decision is therefore inconsistent with this unchallenged factual finding [140].
The Supreme Court gave two problematic justifications for this. First, that only £300,000 could be causatively linked to Redler’s breach. This will be considered below. Second, Redler’s liability was quantified at trial [135]. Reconstitution was inapplicable because this was a “commercial trust”, not a “typical traditional trust”, completed “as a commercial matter” once the funds were released by Redler [70] and [74]. Extra-judicially, at a professional negligence bar association lecture on 27 January 2015 (Reflections on the Supreme Court decision in AIB v Redler), Lord Millett similarly argued that the second charge was an “authorised substitute” for the first, subject to a £300,000 payment to AIB.
This creates two difficulties. First, what constitutes a “commercially completed” trust or an “authorised substitute” is never explained; nor is the difference between “traditional” and “commercial” trusts. How far AIB applies throughout property law is left unclear. Second, as explained below, trustees act on the beneficiary’s behalf, so should not be allowed to force substitutes onto them nor end the trust early when in breach, particularly where the beneficiary explicitly stipulates what constitutes acceptable completion, as in AIB.
Theoretical difficulties
Trustees owe two relevant duties to beneficiaries: (1) to preserve the trust assets, except as the trust permits (“the custodial duty”); and (2) to manage the trust fund with proper care (“the management duty”) AIB [51]. Breaching either can make a trustee personally liable. Breaching the management duty renders the trustee liable for “reparative damages” for loss caused by the mismanagement (phrasing from S Elliott, Compensatory Claims Against Trustees (DPhil, 2002), adopted by, eg, Snell’s Equity (n 2). However, breaching the custodial duty renders the trustee liable for “substitutive damages” in lieu of specific performance of the primary trust duties – so no causation or loss need to be proved. It is therefore more accurate to compare substitutive damages with debt claims rather than loss-based claims (eg Ex parte Adamson (1878) 8 Ch D 807 at 819 (James LJ). Sometimes both can lie – for example, a trustee making an unauthorised (custodial) and negligent (mismanagement) investment – however, they are crucially different in function.
The Supreme Court, however, rejected this distinction, claiming all types of monetary awards are “intended to make good a loss” [73], and damages reflecting “neither loss caused nor profit gained… would be penal” [64]. Three responses may be made. First, this conflates the value of (substitutive) performance of the trust duties with quantum of loss resulting from mismanagement. As explained, substitutive and reparative damages have different functions. Second, reparative damages can be greater than substitutive damages (for example where the trustee makes a grossly negligent unauthorised trust investment) so suggesting substitutive damages are always penal is inaccurate. Third, this would incorrectly treat debt claims, the most common legal claim, as penal, as they are not based either on the claimant’s loss or the defendant’s gain; rather they enforce the primary duty to pay.
Specifically, the Supreme Court held that AIB could only recover for loss which would not have occurred anyway: the £300,000 that went to Barclays. However, AIB was not a case about loss – it was a substitutive damages claim for Redler’s failure to perform their primary duty to obtain a first legal charge before releasing the funds. Causation and loss were irrelevant.
Fiduciary duties
Trustees hold a unique position of superiority over beneficiaries, giving rise to significant potential for abuse. Equity thus imposes its strictest duties on trustees: fiduciary duties “to act for or on behalf of” the beneficiary (Bristol & West Building Society v Mothew (t/a Stapely & co) [1996] EWCA Civ 533; [1996] EGCS 136, [18] (Millett LJ)). These duties are prophylactic – their strictness deters breaches (M Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ (2005) 121 LQR 452) and helps protect the (legally) ‘vulnerable’ beneficiary. However, by relaxing the rules of equitable compensation, seemingly to achieve the same result on the facts as under professional negligence rules (AIB [9] and [76]), AIB undermines this strictness, leaving vulnerable beneficiaries more susceptible to the actions of recalcitrant trustees.
If the Supreme Court believed Redler did not ‘deserve’ to pay the full £2.4m, it could have relieved them wholly or partially of personal liability under section 61 Trustee Act 1925 if Redler “acted honestly and reasonably, and ought fairly to be excused for the breach of trust”. The Supreme Court gave this section inadequate consideration, calling it “a deus ex machina” and moving on [69]. Section 61 would have achieved their desired end without doing violence to general property law principles.
Conclusion
AIB confuses the law of equitable compensation and renders beneficiaries’ property rights overly vulnerable. It should be reversed.
Matthew Mills is a student at City University
