AIB Bank made a claim against a firm of solicitors for failing to protect its interests when the bank lent purchase monies to the purchaser of a property. The solicitors acted for both the purchaser and the bank.
The purchasers had a pre-existing mortgage with Barclays Bank and it was a condition of AIB’s loan that they would have a first charge over the property. The solicitors were, therefore, required to ensure that the Barclay’s mortgage was repaid in full prior to AIB’s money being lent to the purchaser.
The bank only obtained mortgage valuation statements, rather than a final redemption statement, and after receipt of the loan monies from AIB the solicitors paid to Barclays what they believed was the amount required to redeem the mortgage. The balance of monies was paid to the borrowers. Unfortunately, the monies paid to Barclays were not sufficient to discharge the mortgage and so it refused to remove its charge over the property. This meant that AIB was registered as the second charge holder (behind Barclays) and when it sought possession of the property after the borrower had defaulted on payments, there was a shortfall from the proceeds of sale on what was owed to AIB.
In a claim that ultimately ended up in the Supreme Court, AIB claimed the shortfall from the solicitors. The original High Court decision only awarded AIB the amount that it had wrongly paid to the purchasers and not the whole shortfall in the monies lent. AIB appealed on the basis that the solicitors had been acting as its Trustee and that it should be compensated on the basis of restitution so as to make good the entire loss it suffered on the loan. The Supreme Court decided that whilst the claim for restitution (or equitable compensation) and damages following from breach of contract/negligence were based on separate legal obligations, in this instance the solicitors’ breach of trust resulted in the same loss as that caused by their breach of contract in negligence, i.e. but for their breach of the trust, what losses would the bank have suffered?
The outcome was, therefore, the same, namely the bank was awarded a sum equivalent to the difference between what AIB’s position would have been had Barclays’ debt been discharged in full at the time when AIB made the loan and its position after the possession claim. A similar “but for” test was applied, namely that the loss was limited to what should have been paid to Barclays to discharge its debt, rather than the total shortfall on the monies lent.
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