AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58

AIB agreed to lend £3.3 million secured by a first legal charge over a house. Mark Redler acted as solicitor for both lender and borrowers and was required to use the advance to redeem Barclays' existing first charge. Through error, the firm paid Barclays about £300,000 too little. Barclays therefore retained its prior charge, while AIB obtained only a second-ranking security. The borrowers defaulted and the property was sold in a falling market. After Barclays was paid, AIB received substantially less than its advance. The solicitors admitted breach of trust but disputed whether they had to restore the whole advance or only the loss caused by failing fully to discharge Barclays.

Did equitable compensation require the solicitors to reconstitute the fund as if none of the loan had been paid out, or only compensate loss causally resulting from the defective redemption?

The Supreme Court dismissed AIB's appeal and limited recovery to the loss caused by the breach. Lord Toulson held that equitable compensation for breach of trust aims to restore the beneficiary to the position it would have occupied if the trustee had properly performed the relevant duty. The solicitors should have discharged Barclays completely, but most of the advance was properly applied to complete the purchase and secured lending transaction. Even with correct performance, AIB would have suffered the market-related shortfall following the borrowers' default. The compensable loss was therefore the amount by which the surviving Barclays charge reduced AIB's recovery, not the full loan. Common-law rules are not mechanically imported, but causation remains necessary.

Equitable compensation for breach of trust is measured by the loss caused by failure to perform the relevant trust obligation. The beneficiary is placed in the position proper performance would have produced; the remedy does not invariably require restoration of every sum that passed through the trustee's hands.

AIB confirms and explains the causation approach in Target Holdings Ltd v Redferns, particularly for a commercial trust forming one element of a wider transaction. It distinguishes a continuing custodial trust, where reconstitution may be the natural remedy, from a trust that has ended and where the claimed loss must be connected to the breach. The decision does not make every common-law limitation automatically applicable in equity. Its practical message is that the court identifies the duty, constructs the counterfactual of proper performance and compensates the resulting difference.