Docsity
Docsity

Prepare for your exams
Prepare for your exams

Study with the several resources on Docsity


Earn points to download
Earn points to download

Earn points by helping other students or get them with a premium plan


Guidelines and tips
Guidelines and tips

AIB Group (UK) v Mark Redler and the Perils Facing Equity, Study Guides, Projects, Research of Law

Redler admitted liability for breach of contract and in negligence, but not breach of trust, and argued that they could only be liable to the contractual or ...

Typology: Study Guides, Projects, Research

2021/2022

Uploaded on 09/12/2022

fuller
fuller 🇬🇧

4.8

(6)

241 documents

1 / 16

Toggle sidebar

This page cannot be seen from the preview

Don't miss anything!

bg1
!
OXFORD UNIVERSITY!
UNDERGRADUATE LAW JOURNAL
! ! !
22
‘Where there is discord, may we bring harmony’:
AIB Group (UK) v Mark Redler
and the Perils Facing Equity
Matthew Hoyle*
Introduction
hough the quote in the title is often (wrongly) attributed to St Francis of Assisi, it has
now become synonymous not with harmony but with the immense conflicts of the
1980s and a controversial legacy that persists to the present day. In
AIB Group (UK)
plc v Mark Redler & Co Solicitors
(‘
AIB
’)1 the Supreme Court has, in what their Lordships
viewed as a common-sense attempt to harmonize basic elements of common law and equity,
instead taken a step down a worrying and conflict-ridden path. As noted below, the law in
this area was hardly dispute-free before the decision, but the judgments delivered in this case
suggest that, on this matter, the Supreme Court will not be moved. This step will likely be
locked into the law of trusts for a long time to come and its implications should not be
understated.
This essay will argue that while the decision may represent the authoritative statement
on the law for now, normatively it cannot be justified by the reasoning given by their
Lordships when one takes account of the differences between the equitable obligations at play
in this case and contractual principles that were applied. Equally, it will note the failure to
observe those differences and the resulting erosion of the separation between common law
and equity represent a significant attack on the very foundation of the law of trusts. While it
is unlikely to be overruled in the immediate future, it should be confined as narrowly as
possible.
1.
The law on wrongful disbursement before
AIB
The traditional remedy for breach of trust by wrongful disbursement was that the beneficiary
could view the accounts and falsify any unauthorised transactions under the supervision of a
Chancery Master. This meant the court would regard any such debits as nullities, and thus
the actual value of the trust capital would then be below the amount that the ledger stated
should be in the trust. The trustee would then have to restore the property
in specie
or make
good the loss in money equivalent. There was no room for causative inquiry, even if that
meant money that had been lost regardless of any breach was recoverable.2 Over time, the
viewing of the accounts and the falsification of the disbursement became mere fictions, as
parties pursued their claims directly in court for the missing sum. However, the underlying
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
* St John’s College, Oxford. I am grateful to Professor Luke Rostill for his support and for his
comments on the earlier drafts of this essay. I would also like to thank Professor Joshua Getzler for
providing his insight into the case law, and to the editors of the Journal for all their work on this essay.
All errors of course remain my own.
1 [2014] UKSC 58, [2015] AC 1503.
2 For a particularly clear example, see
Cocker v Quayle
(1830) 1 Russ & M 535, 39 ER 206, which
followed
Brice v Stokes
(1805) 11 Ves Jr 319, 32 ER 1111.
T
pf3
pf4
pf5
pf8
pf9
pfa
pfd
pfe
pff

Partial preview of the text

Download AIB Group (UK) v Mark Redler and the Perils Facing Equity and more Study Guides, Projects, Research Law in PDF only on Docsity!

OXFORD UNIVERSITY 22

‘Where there is discord, may we bring harmony’:

AIB Group (UK) v Mark Redler and the Perils Facing Equity

Matthew Hoyle*

Introduction

hough the quote in the title is often (wrongly) attributed to St Francis of Assisi, it has

now become synonymous not with harmony but with the immense conflicts of the

1980s and a controversial legacy that persists to the present day. In AIB Group (UK)

plc v Mark Redler & Co Solicitors (‘ AIB’)

1

the Supreme Court has, in what their Lordships

viewed as a common-sense attempt to harmonize basic elements of common law and equity,

instead taken a step down a worrying and conflict-ridden path. As noted below, the law in

this area was hardly dispute-free before the decision, but the judgments delivered in this case

suggest that, on this matter, the Supreme Court will not be moved. This step will likely be

locked into the law of trusts for a long time to come and its implications should not be

understated.

This essay will argue that while the decision may represent the authoritative statement

on the law for now, normatively it cannot be justified by the reasoning given by their

Lordships when one takes account of the differences between the equitable obligations at play

in this case and contractual principles that were applied. Equally, it will note the failure to

observe those differences and the resulting erosion of the separation between common law

and equity represent a significant attack on the very foundation of the law of trusts. While it

is unlikely to be overruled in the immediate future, it should be confined as narrowly as

possible.

1. The law on wrongful disbursement before AIB

The traditional remedy for breach of trust by wrongful disbursement was that the beneficiary

could view the accounts and falsify any unauthorised transactions under the supervision of a

Chancery Master. This meant the court would regard any such debits as nullities, and thus

the actual value of the trust capital would then be below the amount that the ledger stated

should be in the trust. The trustee would then have to restore the property in specie or make

good the loss in money equivalent. There was no room for causative inquiry, even if that

meant money that had been lost regardless of any breach was recoverable.

2

Over time, the

viewing of the accounts and the falsification of the disbursement became mere fictions, as

parties pursued their claims directly in court for the missing sum. However, the underlying

  • St John’s College, Oxford. I am grateful to Professor Luke Rostill for his support and for his

comments on the earlier drafts of this essay. I would also like to thank Professor Joshua Getzler for

providing his insight into the case law, and to the editors of the Journal for all their work on this essay.

All errors of course remain my own.

1

[2014] UKSC 58, [2015] AC 1503.

2

For a particularly clear example, see Cocker v Quayle (1830) 1 Russ & M 535, 39 ER 206, which

followed Brice v Stokes (1805) 11 Ves Jr 319, 32 ER 1111.

T

OXFORD UNIVERSITY 23

basis of the remedy was left untouched until the case of Target Holdings Ltd v Redferns

(‘Target’).

3

In Target, a lender had required its solicitors, Redferns, to acquire mortgage

documentation before it lent money to a client. The solicitors failed to do so, but still paid out

the loan – held on bare trust – at the insistence of the client. The client was later revealed to

be part of an enrichment scheme of, at best, questionable legality, which caused substantial

losses to the lender. The lender brought an action for breach of trust, claiming that the entire

loan was paid in breach, and that accordingly they were entitled to have Redferns make up the

full sum, most of which they would have lost irrespective of the breach. Lord Browne-

Wilkinson, giving the only reasoned judgment, held that the liability of Redferns to provide

equitable compensation was limited to the loss caused by their breach.

4

He also suggested that

the commercial nature of the trust had affected the remedy available,

5

though not in a manner

clear enough to form a distinctive doctrine of ‘commercial trusts’.

The legal analysis in this case is complicated by the fact that the mortgage

documentation was acquired by the solicitors after the wrongful disbursement and so when

the correct asset was received, the ‘value’ (used loosely) paid into the account fell into line with

the amount initially disbursed – loss being assessed in equity at the date of trial rather than

the date of breach. As a result, the only loss suffered was the fall in market value of the asset

paid into the account, which was not caused by Redferns. In the opinion of several

commentators, most notably the then Millett LJ in an extrajudicial publication, the amount

Redferns was held liable to pay in equitable compensation by Lord Browne-Wilkinson was

the same as it would have been on traditional accounting principles. The reasoning employed

by Lord Browne-Wilkinson to reach that position was however significantly flawed

6

  • Millett

LJ also went further and argued that any outcome based on ‘compensation’ rather than

enforcing performance was completely wrong.

7

Indeed, this issue comes back to haunt the

decision in AIB. The controversy cast a shadow over the case and left the exact nature and

operation of the law in real need of clarification or even an entire reworking. It is against this

background that we arrive at the decision in AIB, the Supreme Court’s first chance to

properly revisit the decision in Target.

2. The facts of AIB and the case at first instance

The Sondhi family wished to borrow £3.3m from AIB against a property then worth £4.25m.

The bank agreed, provided that they could have first legal charge over the property. However,

Barclays Bank held the first charge, worth £1.5m split over two accounts of £1.2m and

£300,000. AIB therefore instructed the solicitors, Mark Redler & Co (acting for both sides)

to hold the loan on bare trust, and to pay it out once the solicitors had redeemed the Barclays

charge and established a first charge for AIB. Redler redeemed the £1.2m charge, but failed

to redeem the £300,000 charge, leaving AIB without the requisite first charge. They then

paid out the unapplied trust capital, with the £300,000 that should have been used to redeem

the charge, to the Sondhis.

The value of the property subsequently collapsed and the Sondhis defaulted. Barclays

then exercised their charge on the property, selling it for around £1.2m. AIB was left with the

remainder once the £300,000 had been recovered, i.e. some £800,000. Finding themselves

substantially out of pocket, they sued Redler, claiming that by failing to redeem both charges

3

[1995] UKHL 10, [1996] AC 421.

4

Target (n 3) 439, 440 (Lord Browne-Wilkinson).

5

ibid 435-436.

6

PJ Millett, ‘Equity’s Place in the Law of Commerce’ (1998) 114 LQR 214, 227.

7

ibid 225. For further analysis see Paul Davies, ‘Remedies for Breach of Trust’ [2015] 78 MLR 681.

OXFORD UNIVERSITY 25

legal purgatory.

14

Indeed, while Target may have laid the groundwork for the new legal

paradigm, it lacked clarity and was mired in controversy. Whatever one thinks of it merits, in

resolutely defending and comprehensively restating the new basis of recovery, AIB represents

a significant case which will play a central role in the law of equitable compensation and

remedies for breach of trust in the years to come.

5. The Supreme Court’s reasoning

A. Precedent

Their Lordships appeared to assume that the foundations on which they decided the case

were now thoroughly established in the law.

15

But this arguably overlooks a substantial

quantity of academic commentary questioning the soundness of the reasoning in Target and a

line of authorities going back to 1801 providing for a very distinct and separate basis of

recovery to that expounded in Target and now AIB.

16

The vast weight of legal history goes

against the approach taken in these cases.

Of course, an argument from tradition alone is not enough to justify taking a

‘backwards step’

17

to a previous rule. But the case law relied upon is not limited to Georgian

precedents. For example, shortly before AIB was decided, Lord Sumption used the

assumption that accounting was the enforcement of a primary and not a secondary obligation

to underpin the distinction between ‘types’ of constructive trustee.

18

It is not merely a matter

of defunct tradition but a well embedded part of the framework of English equity. This is

perhaps why besides Target, their Lordships were forced to look to precedents from other

common law jurisdictions.

B. Precedents from other common law jurisdictions

Much emphasis was placed by their Lordships on the development of equitable compensation

in other jurisdictions,

19

particularly McLachlin J’s judgment in Canson Enterprises Ltd v

Boughton & Co,

20

(‘ Canson’) which was also a key influence on Lord Browne-Wilkinson in

Target.

Arguably, Canson was not the strongest precedent for their Lordships to rely on at all,

much less the extent that they did. As noted in Hayton and Mitchell on the Law of Trusts &

Equitable Remedies,

21

it did not concern a trust relationship, merely a fiduciary one. As will

be argued below, the traditional remedy is of paramount importance in a trust relationship,

given the nature of a trust, and the same is not necessarily true for other company or contract-

based applications of fiduciary law. Even McLachlin J conceded that ‘equity is concerned, not

only to compensate the plaintiff, but to enforce the trust which is at its heart’,

22

and this

principle would seem to go against the conclusions their Lordships in both Target and AIB

drew from the case.

14

Davies (n 7) 681, noting even Lord Toulson ( AIB (n 1) [20]) acknowledged Target to be largely

unloved.

15

AIB (n 1) [63] (Lord Toulson).

16

ibid [47] (Lord Toulson).

17

ibid [63] (Lord Toulson).

18

Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] 2 WLR 355, [13].

19

AIB (n 1) [66] (Lord Toulson).

20

[1991] 3 SCR 534 (Supreme Court of Canada).

21

Ben McFarlane and Charles Mitchell, Hayton and Mitchell on the Law of Trusts and Equitable

Remedies: Text, Cases & Materials (

th

edn, Sweet & Maxwell 2015), 10 - 057.

22

Canson (n 20) [61].

OXFORD UNIVERSITY 26

If that was the principle she was aiming to apply, the result in McLachlin J’s arguably

misunderstood the dichotomy between substitutive and reparative compensation.

23

Per the

analysis by Elliot and Mitchell

24

the latter is a secondary remedy, repairing the pecuniary loss

suffered by the claimant due to the breach of primary duty. The former however is a primary

remedy, which provides a monetary substitute for the performance of the duty, in this case the

trustee’s stewardship obligation. As Elliot and Edelman noted,

25

McLachlin J’s reasoning

confusingly mixes together ideas of substitutive compensation and restitution of trust property

as if what is being substituted is the reconstitution of the fund, not the performance of the

stewardship obligation.

26

Given performance of the latter is not causal based, a case which

does not recognise this characteristic of the substitutive remedy does not provide a solid

foundation for a court to declare that compensation must be causal based. It is perhaps this

misunderstanding spreading from Canson into English law through Target that led Lord

Toulson in AIB to declare that the aim of reparative and substitutive compensation is the

same: to ‘make good any loss suffered’.

27

To repair losses is the aim of reparative

compensation. However, as noted above, substitutive compensation is a substitute for the

performance of the primary obligation, i.e. to not wrongfully disburse the trust capital. The

breach is in the disbursement and not in the loss suffered, and so the trustee must provide a

money substitute for the level of disbursement. If this is not the distinction between the two,

then it is hard to understand what distinction there is beyond their name, even if logically

they cannot be the same.

As a result, it is highly questionable to suggest that a weak precedent from another

common law jurisdiction is sufficient to displace the numerous historical and current

precedents detailing the accounting process for falsification.

C. ‘Fairy tales’

Moving beyond precedent in his search for support for his view that the traditional

accounting principle ought to be abandoned, Lord Toulson set his sights on the legal fictions

present in accounting. It is true that there is no longer any examination of the trust ledger by

a Chancery Master, where the beneficiary scores through and thus falsifies disbursements.

This to him was unacceptable: the law was ‘wrong’ when it relied on ‘fairy tales’.

28

He may

have a point insofar as there is no reason to preserve legal fictions for their own sake.

However, where legal fictions were previously present, the solution has usually been to get rid

of them while maintaining the underlying mechanism,

29

not to change the whole mechanism,

and throw the metaphorical baby out with the bathwater. The presence of a legal fiction alone,

where it does not make the law practically unworkable or difficult, is not sufficient grounds to

dispense with the underlying mechanism, especially if it is well established in the law, as is the

case here.

23

McFarlane and Mitchell (n 21) 10-057.

24

Steven B Elliot and Charles Mitchell, ‘Remedies for Dishonest Assistance’ (2004) 67 MLR 16, 23-

25

Charles Mitchell, ‘Equitable Compensation for Breach of Fiduciary Duty’ (2013) 66 CLP 307, 19-

26

For further analysis, see McFarlane and Mitchell (n 21) 10-057, 13-049.

27

AIB (n 1) [54] and [66]-[67] (Lord Toulson).

28

ibid [69] (Lord Toulson).

29

See, for example, the action for Detinue, which was based on losing and finding of property, even

though they became mere fictions long before the action was abolished: W.E. Peel and J. Goudkamp,

Winfield and Jolowicz on Tort (

th

edn, Sweet and Maxwell) at 18-006. Further, see unjust

enrichment replacing ‘quasi-contract’: Peter Birks, The Roman Law of Obligations (Ed. Eric

Descheemaeker, 1

st

edn, OUP 2014 ) 258-9; or ‘implied’ or ‘constructive’ contract: Peter Birks, Unjust

Enrichment (

nd

edn, OUP 2015 ) 4, 267-270, 271.

OXFORD UNIVERSITY 28

obligation, primary or secondary. He is simply accounting for the amount that should have

been there if he had not disbursed capital in breach of trust. Therefore, Redler should have

produced, upon request, the full amount minus offsets, i.e. some £1.3m.

39

Even if one disagrees with this analysis and believes there is breach that should entail

‘equitable’ compensation, why must we then adopt contractual principles of recovery that state

that breach of the obligation to perform leads to an obligation to make good loss caused? The

answer is that we need (and indeed must) not. The reason lies in the differing interests of the

parties and natures of the relationship in trusts and contract cases, which will be dealt with in

Section E.

This leads to the second problem: that the Court’s notion of compensation in AIB is

not the only type of equitable compensation. As noted above, reparative compensation is only

one form of compensation, and often may not protect the beneficiaries’ interest adequately.

As the Supreme Court has observed in Cavendish Square Holdings BV v Talal El Makdessi

Cavendish Square ’), ‘[reparative] compensation is not necessarily the only legitimate interest

that the innocent party may have in the performance of the defaulter's primary obligations’.

40

Indeed, the nature of the primary obligation in a trust relationship has lead equity to prefer a

primary remedy: an enforcement of the stewardship obligation. Compensation of this kind is

substitutive compensation

41

(which is not, by its nature, causal based) – as a substitute for

performance – and this is consistent with the traditional remedy provided by falsification. As

recognised by Millett LJ in Bristol v Mothew,

42

when the trustee has breached his primary

stewardship obligation, he is compelled by the court to provide a substitute for the capital lost

due to his wrongful disbursement. The quantum of that substitute is the difference between

the capital actually in the fund and the value that should be in the fund, assessed from the

time of trial. There is no need to engage in a causal inquiry to set the level of compensation.

Perhaps as the court had determined that compensation, whatever name it went by,

should be reparative,

43

neither of these arguments were accepted by the court in AIB, but they

are arguably superior in terms of conformity to the principles of equity outlined below and are

more consistent with precedent on substitutive compensation.

Even if one does reject the court’s analysis of why the traditional remedy is

inappropriate, there can be no doubt that liability for breach of trust, on such a basis, is

swingeing. Lord Toulson, however, went a step further and labelled it ‘penal’.

44

While it may

not be a specific reference to the contractual doctrine, it taps into the same principle as that in

contracts: payment of a disproportionate sum for breach of an obligation, one unrelated to

loss incurred by the breach.

45

However, this analysis must be rejected.

Enforcement of a primary obligation rather than a secondary obligation may often lead

to liability in excess of loss ‘caused’.

46

The Supreme Court noted in Cavendish Square that a

primary obligation and thus its direct enforcement, no matter how burdensome, cannot be

39

This being the amount disbursed (£3.3m) minus the £1.2m rightfully applied, and the £800,

recovered from the exercise of the charge.

40

[2015] UKSC 67, [2015] 3 WLR 1373 at [32] (Lords Neuberger and Sumption), though in the

context of contract.

41

Elliot and Mitchell (n 24) 23-25.

42

Mothew n 38.

43

AIB (n 1) [64] and [70] (Lord Toulson).

44

ibid [64] (Lord Toulson).

45

Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1, [1915] AC 79;

Cavendish Square Holdings BV (n 40).

46

See the discussion of White & Carter (Councils) Ltd v McGregor [1961] UKHL 5, [1962] AC 413,

especially Lord Reid at 431.

OXFORD UNIVERSITY 29

‘penal’ at common law.

47

Indeed, the contractual remedies enforcing primary obligations –

specific performance and the action for the price – may entail a financial burden on the

defendant well in excess of the loss he ‘caused’. The action for the price may, as Ho argued,

48

be a pre-agreed sum, but so is a penalty clause. Its validity is not derived from the time when

it is agreed, but on what the liability enforces. One cannot, by tacit reference to the principles

underlying contract law, judge the accounting remedy penal, without setting oneself against a

significant body of that same law. Suffice to say, something more than establishing that the

traditional principles of recovery may seem harsh upon trustees (though not even necessarily,

by common law standards) is needed to establish why those principles ought to be abandoned.

This is especially true if equity is pursuing a different objective to contract law, which is a

matter that their Lordships did not sufficiently consider.

E. Misunderstanding of the nature of and policy underlying equitable relationships

Their Lordships in this case treat one set of principles of recovery as applying generally across

common law and equity and, in doing so, have begun to generalize the principles behind very

distinct legal obligations.

49

In aligning the general principles of recovery at common law and

in equity,

50

they are blurring the boundary between an equitable relationship and a contractual

one, each a very different beast. As Lord Millett noted,

51

trusts law is not the mirror image of

contract that simply arose in the equitable jurisdiction for historical reasons. The two are

underpinned by very different legal policies, and this should not be forgotten. In scrapping the

traditional remedy and moving towards a model of compensation roughly analogous to

contract, the Court arguably has made a significant and worrying misstep.

The English law of contract (setting aside covenants) is predicated on the notion of a

‘bargain’, where parties of equal bargaining power act for their own financial interest. There is

no general notion of ‘good faith’ in our law of contract,

52

and any suggestion there should be

has been repeatedly rejected – parties should not be required to look after each other’s

interests. In contrast to this, trust relationships are not predicated on consideration, even

those arising from contract. The relationship between the parties is one of a fiduciary nature,

where one party must act in the others best interest. He has ‘subordinated his own interests to

those of the beneficiary’,

53

and this subordination has consequences.

The primary obligations attaching to contracts are self-interested and bilateral; the

principle of quid pro quo underpins the relationship. The parties definitively do not have a

specific right to what they have contracted for,

54

and arguably freedom of contract demands

that parties be free to breach contracts provided they bear the loss caused.

55

The primary

obligation in a trust on the other hand is one of stewardship: to look after the beneficiary’s

47

Cavendish Square (n 40) [13] (Lords Neuberger and Sumption).

48

Ho (n 34) 217-218.

49

AIB (n 1) [93], [136] (Lord Reed).

50

ibid [64] (Lord Toulson): ‘all agree’ that ‘the basic purpose of any remedy (my emphasis) will be

either to put the beneficiary in the same position as if the breach had not occurred (…) Placing the

beneficiary in the same position as he would have been in but for the breach may involve restoring the

value of something lost by the breach or making good financial damage caused by the breach.’ This is

the accepted basic common law principles recovery, treated as a general principle.

51

Millett (n 6) 225.

52

General duties of good faith, being contrary to the nature of contract, cannot even be contracted for:

see Walford v Miles [1992] 2 AC 128 (HL).

53

Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908, [2015] QB 499, [68].

54

At least not at common law, though certain specifically enforceable contracts may create property

rights through a constructive trust. Even here, however, the right does not arise directly from the

contractual obligation but the imposition of a trust.

55

Printing and Numerical Registering Co v Sampson (1875) 19 Eq 462.

OXFORD UNIVERSITY 31

apart. Indeed, the Court of Appeal has recognized

71

that in the reverse situation (when

utilising s 61 of the Trustee Act 1925 to relieve liability), when determining which actions

leading to the breach could be assessed for unreasonableness, direct causation is not an

appropriate test. Instead, in line with the underlying policy of trust law being the protection

of the beneficiary, the courts have taken a liberal approach to the connection required between

the wrongful conduct and loss complained.

72

An even more expansive approach was outlined in Cavendish Square: the Supreme

Court noted that in certain contexts, even purely contractual ones, the innocent party

definitively possesses ‘a legitimate interest in performance extending beyond the prospect of

pecuniary compensation flowing directly from the breach in question’.

73

There is no reason

why the general analysis does not apply even more pressingly in trust cases, and it is submitted

in light of what has been argued that the nature of the relationship between trustee and

beneficiary is so different from that between mere contracting parties that the legitimate

interest of the beneficiary in enforcing the primary obligation far exceeds that of a contracting

party. If commercial parties do not want such a relationship, they may remain in a purely

contractual one, but they should not expect the rules protecting beneficiaries to be scaled back

to suit them if they have chosen a trust relationship. Therefore, in answer to the question

posed earlier,

74

the vast dichotomy between contractual and trust relationships and the much

greater legitimacy of the beneficiary’s interest in performance of the primary obligation of

stewardship is why we should not follow the contractual model of making good only loss

directly caused.

Even if one does not accept that the court should enforce the primary obligation

through the remedy given, and instead should respond to secondary obligations generated by

breach by awarding equitable compensation, it does not necessarily follow that that

compensation must be linked to loss ‘caused’ in a strict sense. As noted above, other areas of

the law of trusts, such as that in Santander v RA,

75

understand causation to extend much

further than is suggested in AIB. The heightened standard of the primary obligation and the

more serious potential consequences of its breach require us to widen the scope of the

secondary obligation (liability in damages) to include not only losses directly ‘caused’ but also

to the monies wrongfully disbursed in breach of trust. These are, after all, monies which the

beneficiary has a paramount interest in protecting and having correctly administered, and an

interest which goes much further than simply recovering only money that would not have

been lost anyway.

To suggest that basic contractual principles be followed over basic equitable ones is to

treat the trust relationship as something very different to the creature devised over hundreds

of years by the chancery courts. It is not a mere contractual obligation to look after money,

which would lend itself to rules of causation and remoteness. The blurring of the lines here

clashes with the legal policy underpinning the remedies for breach, and this may cause issues

across the law of trusts if it is carried any further.

71

Santander UK v RA Legal Solicitors [2014] EWCA Civ 183, [2014] PNLR 20, Briggs LJ at [29]: ‘I

would, finally, caution against an over-mechanistic application of the requirement to show the

necessary connection between the conduct complained of and the lender's loss. There may be highly

unreasonable conduct which lies at the fringe of materiality in terms of causation, and only slightly

unreasonable conduct which goes to the heart of a causation analysis. It would be wrong in my view to

allow this purely mechanistic application of a causation-based test for the identification of relevant

conduct to exclude the former from any consideration under s 61.’ (emphasis added)

72

ibid.

73

Cavendish Square Holdings (n 40) [28].

74

See the question posed at the beginning of Part 5, Section D, above.

75

Santander (n 71).

OXFORD UNIVERSITY 32

Perhaps the most damning implication of this false equivalency in AIB is that a party

can breach a trust (committing a wrong) without consequence, provided he does not cause

loss. Of course, in many cases there will be loss ‘caused’ and thus some recovery, but cases like

Target show this is not always the case - the actual loss to the beneficiary in cases like Target

and AIB is always larger than the loss ‘caused’. Indeed, this (often large) discrepancy is the

very basis of the dispute. The beneficiary, vulnerable to the trustee and often reliant solely

upon equity to ensure that his instructions are followed to the letter, must bear the loss when

he has likely committed no wrong at all. A breach of trust not ‘causing’ loss should not be

treated like a breach of contract causing no loss. Doing so fundamentally undermines the

trustee-beneficiary fiduciary relationship.

Lord Reed even noted that different remedies are available because of the differing

relationships in law and equity,

76

not merely because of historical coincidence: remedies

should ‘reflect the characteristics of the obligation’.

77

This supports having separate remedies.

He then proceeds to say, however, that ‘transparency’ demands that where the principles are

the same across equity and common law, the remedies should be made consistent, and where

the principles are different, they should be kept different. For him, the underlying principles

of equitable compensation in commercial trust cases are the same as those of common law

damages, and so they should be harmonised and applied consistently. However, this reasoning

is predicated on the assumption that the principles are the same in these cases, which, it has

been noted, they are not. It fails to justify the assault on the nature of the trust obligation

present in this case.

E. Conclusions on the Court’s reasoning

This leaves little to be said for the Court’s justifications. Of course, now that the change has

been committed to, asserting the something different should have been decided is arguably

not sufficient argument for the law to do a volte-face, in light of the importance of stability in

the law. However, it is submitted that the very troubling implications for equity in the

reasoning underpinning this decision and these potential detriments are a positive argument

against standing by the now established post- Target approach.

6. What should have been decided?

A major problem for those who disapprove of AIB is that, while there are numerous

criticisms to be made of their Lordships’ judgments, those critics lack a coherent view of what

the traditional remedy demands in this case. Whatever one may make of the court’s reasoning,

if the old model does not provide a useful answer, then simply as a matter of pragmatism we

must accept the new one. This argument will be addressed below.

A. Possible alternative analyses

There appears to be a number of alternatives presented. As with Target, Lord Millett

has (extrajudicially) suggested a means by which the substantive outcome of AIB may be

correct even if the reasoning, in his opinion, is not.

78

He argues that though the disbursal of

£3.3 million was in breach of trust, and therefore had to be restored by Redler, they could be

discharged from this duty by producing an ‘authorised substitute’. In this case, that would be

the second charge which was acquired, less the amount by which it was subordinated to

76

AIB (n 1) [92]-[93], [138].

77

ibid [138] (Lord Reed).

78

Lord Millett, ‘Reflections on the Decision of the Supreme Court in AIB v Redler’, lecture to the

Professional Negligence Bar Association, 27 Jan 2015. Noted in McFarlane and Mitchell (n 21) 10-

OXFORD UNIVERSITY 34

If he has, the court will acknowledge the receipt of the asset now in the fund

81

and (if it

has not depreciated in value in the interim) there would be nothing for the court to compel

and no possibility of substitutive compensation; the trial would be moot. In this scenario, it

matters not whether the trustee sold the incorrectly acquired asset or used new monies in the

purchase as the primary duty has been performed.

If he does not acquire the correct asset in the interim, then the analysis runs differently.

If the beneficiary opted for the accounting remedy, the traditional view would be that the

beneficiary would falsify the disbursement and the court would expect the trustee to provide

substitutive compensation for all the monies that should have been in the fund. The trustee

would either get credit for the asset or sell it and pay the money back. If the asset has fallen in

value, the trustee would then have to reach into his own pocket to fully account.

82

This is the

Mothew

83

approach to enforcing the stewardship, noted above.

But this begs a question: if the asset is materially identical in all respects, does enforcing

the primary remedy mean he must sell it and acquire an identical asset? If a beneficiary opts to

enforce the duty by bringing an action for equitable compensation and gets credit for the asset,

then the asset need not be sold – monetary substitute will suffice.

84

This is the nature of

equitable compensation, being a substitute for performance after a breach, rather than

enforcing the performance in itself. Specific performance, rather than accounting, is the

remedy that should be sought by a beneficiary seeking the asset in specie, and that is a matter

for a different paper.

As a side note, in the opposite case where an acquired asset has become more valuable

than the required asset, the beneficiary is unlikely to bring an action for account as he gets to

keep the asset. If the trustee has sold it anyway, the beneficiary could trace the uplift into the

proceeds – this is the orthodox position in the law of tracing and claiming.

85

C. The final outcome

Irrespective of how one treats wrongly acquired assets, it is clear that on the basis of the

submissions made to the Supreme Court, Redler would be liable for £2.5 million. This is

despite the fact that half of that sum would have been lost even if Redler had not committed a

breach of trust. In accordance with the reasons laid out above, the principles of equity demand

that Redler account for the entirety of their breach of trust. This is true regardless of whether

Redler needed to reconstitute the fund or pay the sum directly, a matter which Lord Toulson

regarded as ‘mere procedure’.

86

This is the approach which the Supreme Court ought to have

taken if it wished to act consistently with the established accounting remedy argued for above.

Despite this being the correct outcome of the case, it does change the fact that the Supreme

Court is unlikely to revert to the traditional remedy any time in the near future. The post-

AIB landscape is the one equity practitioners will have to become accustomed to, and the

exact limits of the decision must be ascertained quickly if parties are to enter into trust

relationships with any degree of certainty.

81

Target Holdings Ltd v Redferns [1994] 1 WLR. 1089 (CA), 1105 - 1106 (Peter Gibson LJ).

82

Glister and Lee (n 59) 24-014.

83

Mothew (n 39).

84

Glister and Lee (n 59) 24-007.

85

Wright v Morgan [1926] AC 788 (PC), 798.

86

AIB (n 1) [91] (Lord Toulson).

OXFORD UNIVERSITY 35

7. The law post-AIB

A. Scope of the decision

To prevent a hard case from making bad law, a number of academics

87

have suggested that

AIB is limited to its facts, displacing accounting and substitutive compensation in cases where

the trust arises out of a contract for a contractual purpose, and that the traditional remedy still

exists for trusts outside this scope. However, it is very difficult to square this narrow approach

with their Lordships’ speeches.

Lord Toulson notes, with a large degree of generality, that ‘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.’

88

His subsequent

statements do not in any way qualify or contradict this position. Quite the contrary, he then

argues that accounting cannot exist alongside equitable compensation at all, and that

compensation without reference to loss caused or gain made is ‘penal’.

89

If one cannot have

both in cases concerning traditional trusts, then there must either be equitable compensation

requiring loss to be caused, or a remedy that is ‘penal’. It is difficult to see how Lord Toulson

intended to leave such a dichotomy open for other types of trust given his views on the

traditional remedy. Lord Reed is less unequivocal, but while his judgment does draw some

distinctions between the facts of AIB and the traditional remedy cases, he still states ‘the aim

of equitable compensation is to compensate: that is to say, to provide a monetary equivalent of

what has been lost as a result of a breach of duty (emphasis added)’.

90

More fundamentally, the suggested dichotomy is problematic, as was noted

91

after it

was first mooted in Target.

92

If the distinction is based upon Lord Toulson’s brief comment

that that trusts ‘[arising] out of a contract’

93

demand different remedies than those arising

gratuitously, then its scope is highly unclear. One may find trusts in traditional family settings

that arise from agreement supported by consideration, and equally numerous commercial

transactions are deliberately made by deed without consideration. If one includes deeds, then

what of trust deeds used in the family trust context?

If the distinction is rooted in the commercial nature of the transaction rather than by

its means of creation, then the boundaries of a commercial trust must be at least capable of

being clear. But it is submitted this boundary is in no way clear: dividing the private and

commercial is not conceptually straightforward and apt to cause confusion. The courts have

arguably only done so with a simpler dichotomy in contract - between ‘dealing as a consumer’

and ‘business’

94

  • because it was necessitated by legislation.

95

Defining the boundary of

‘commerce’ is not a task the court should attempt to impose on itself without very good reason,

and arguably their Lordships had avoided doing so.

Lord Toulson did opine that ‘[t]he contract defines the parameters of the trust’, but

this is not sufficient to prove that such contracts have differing rules of remedy without a

substantial change to our understanding of contemporaneous liability. The underlying

87

Ho (n 34); James Penner, ‘Distinguishing Fiduciary, Trust, and Accounting Relationships’ (2014) 8 J

Eq 202, 225; McFarlane and Mitchell (n 21) 10 - 097.

88

AIB (n 1) [62] (Lord Toulson).

89

ibid [64] (Lord Toulson) discussed above in Part 5 Section D.

90

ibid [138] (Lord Reed).

91

Millett (n 6) 224-5; Davies (n 7) 687.

92

Target (n 3 ) 435 - 6.

93

AIB (n 1) [70] (Lord Toulson).

94

Edwin Peel, Treitel on The Law of Contract (

th

Ed, Sweet & Maxwell 2015) 7-052 to 7-054.

95

Unfair Contract Terms Act 1977, s 1(3).

OXFORD UNIVERSITY 37

approach,

102

but this could hardly be less helpful to trustees, beneficiaries or the lower courts

alike going forward.

The failure of the court to provide clear rules with regards to causation and remoteness

have dismayed even those who otherwise support this decision and Lord Browne-Wilkinson’s

judgment,

103

and it will suffice to say here that the uncertainty that accompanies it will no

doubt generate many headaches for the courts going forward, especially as the Supreme Court

applied only basic contractual principles, refusing to adopt the fully developed contractual or

tortious rules of damages.

104

Future courts will have to determine what exactly ‘causation’

entails,

105

whether rules of remoteness are to apply, and if so, how.

106

C. Commercial implications

The drawback, as with the restriction of any duty, is the diminution of the rights of the party

to whom the duty is owed. The extent of accounting liability had acted as a prophylactic

against such breaches. Now, however, provided the trustee gets lucky and outside

circumstances render the loss following his wrongful disbursement inevitable, the trustee may

escape liability for the breach of trust. As a result, beneficiaries can no longer be as certain

that their property will not be negligently misapplied, which, as seen in Target, can involve

behaviour that encompasses quite flagrant and egregious breaches. Contractual remedies may

remain, depending on the terms of the settlement, but they are constrained by rules of

causation and remoteness

107

and will not always be available. The exact commercial

implications have been written about extensively

108

and are outside the scope of this article,

whose focus is on the doctrinal implications for the law of trusts.

8. Conclusion

Overall, then, the decision in AIB v Mark Redler is not one that can be easily justified by

normative reasons or on grounds of precedent. Further to this, its attack on the nature of the

law of trusts is a worrying and misguided step. The obiter commentary of their Lordships on

the boundary between equity and the common law should also be subject to strict scrutiny,

and the courts should consider very carefully before adopting their reasoning.

This author concedes, nevertheless, that this case represents the judgment of the

highest court in the land, and a departure from the decision in the immediate future is very

unlikely. For now, the remedy for breach of trust by wrongful disbursement is left with a

number of contractual principles shoehorned into it, despite their clash with fundamental

principles of equity. Contrary to the analysis of numerous academics, most notably McFarlane

and Mitchell,

109

it is unlikely that the decision will be confined to cases of commercial trusts

given the generality expressed by their Lordships. However, due to the worrying implications

of this decision, it is submitted that the courts should confine the decision to its facts as far as

it is possible to do so, and that the issue should be revisited by the Supreme Court in the

future.

102

Target (n 3) 439 (Lord Browne-Wilkinson).

103

Andreas Televantos and Lorenzo Maniscalco, ‘Stay on Target: Compensation and Causation in

Breach of Trust Claims’ [2015] Conv 348, 349-351.

104

AIB (n 1) [115]-[116], [136]-[137] (Lord Reed).

105

ibid [136] (Lord Reed).

106

ibid.

107

See the application of the ‘but for’ test in contract in South Australia Asset Management

Corporation Respondents v. York Montague Ltd [1996] UKHL 10, [1997] AC 191, 214 (Lord

Hoffman).

108

See, for example, Davies (n 7) 693-694.

109

McFarlane and Mitchell (n 21) 10-097.