Equity and Trust

Equity and Trust

Introduction

Equity is a moral virtue that qualifies, moderates, and reforms the hardness and fairness of the law. The term equity refers to an ethical jurisdiction that is associated with notions of justice, fairness, and morality. Trust refers to a relationship whereby property is vested in trustees who are required to hold it, such as to benefit other persons (beneficiaries). Equity has the ability to restrain injustice by restricting the unconscionable act of individuals. Lord Browne-Wilkinson in Westdeutsche Landesbank v Islington explains that trust often results when an individual who is identified by law as the actual property owner gets their conscience aBected in different ways. First, it could be by the knowledge that they have that particular property on trust for the benefit of other people. It could also be that one has acquired the property through unconscionable methods such as theft. In the above-stated property, the defendant local authority was not aware that they had made a mistake together with the claimant bank about the contract’s validity after the defendant spent the money it had obtained under the aforementioned. In this case, it was determined by Lord Brown-Wilkinson that the defendant’s contract was null and void and was thus not subject to any form of equitable obligations to the bank (the claimant). Trust and equity exist in inherent fluidity such as to promote equitable compensation for the breach of trust such as to ensure the achievement of compensation by making good the loss that has been suffered by the beneficiaries, which can be verified to have been caused by the breach through the use of common sense and hindsight.

Nature of Equity

Equity refers to the system of law that balances the need for certainty in making rules with the need to attain fair results in individual circumstances. One commonly used phrase is that equity often mitigates the objectivity of common law. It is the part of the law that attempts to prevent benefits that accrue to a defendant due to unconscionable conduct or compensate the loss that is suffered by claimants and often results from some form of unconscionable conduct. It is also that which seeks to ensure that all statutory rules and common law are not subjected to unconscionable manipulation. In its broadest form, equity is that which appears to permeate the court with a general form of discretion to disapply common or statutory law rules whenever it is required by good conscience. However, equity in practice is often comprised of procedural and substantive principles that allow the courts to have a limited amount of discretion.

Westdeutsche Landesbank v Islington LBC,

Trust and equity are interesting subjects whose inherent fluidity enables them to regenerate themselves continuously with time and have technical sophistication that provides lawyers with a wide range of techniques to achieve the client’s goals in various circumstances. As explained by Lord Browne-Wilkinson in the case Westdeutsche Landesbank v Islington LBC, the main aim of the court of Equity is to consider whether the individual defendant has operated in good conscience. Trust is interpreted as the most essential equitable doctrine that is well illustrated in the above-mentioned case where Lord Browne-Wilkinson set his concern on the notion of trust and equity as the core of English trusts law.

Westdeutsche Landesbank v Islington LBC is one of the cases that are known to end with a surprising anticlimax. The plaintiff bank claimed the restitution of money that had been paid under a void contract. The case entailed two issues in the law of restitution: compound interest and proprietary claims. The manner in which the case was argued by the court revealed that the case received the ultimate degree of attention. The Westdeutsch case entailed an agreement on interest-rate swap where the parties involved made reciprocal loans to one another of £25 million, one at a floating rate and the other one at a fixed rate of interest. The House of Lords however discovered that the agreement between the parties was ultra vires the council in that the bank had brought an action on the council in a bid to recover the difference that existed between the £1.35m that was paid by the council and the £2.5 million that was paid by the bank during the agreement’s supposed validity. The court of Appeal ruled that the council was liable (at common law) for the money that had been received together with additional simple interest under section 35A of the Supreme Court. It was held – as it was declared in Sinclair v Brougharn,4 – that the bank was entitled to the compound interest (in equity) in that it had an equitable proprietary claim to the financial assets (money).

However, the Law Lords indicated in a surprise move that they were willing to take another consideration of the Sinclair case, after which the argument revolved on the validity of the decision made. The members of the Appellate Committee were of the belief that the Sinclair case was inapplicable or incorrect and that the bank was not right to have any proprietary claim to the paid amount of money. The majority – Lord Goff among others – believed that the bank had the entitlement only to the simple statutory interest

In this case, Lord Browne-Wilkinson addressed the appeal before him differently from the rest and dealt with two main issues. To begin with, he established his version of the core principles in the law of trusts and identified the re-establishment of traditional notions of equity as the core of English trusts law. His foundation was in opposition to the determination that was determined by Lord Goff, among other academics who were centered in Oxford. Lord Browne-Wilkison re-asserted that trust was based on the conscience of the individual who acts as a trustee. In the case Westdeutsche Landesbank v Islington LBC, Lord Browne went back to the essential principles of the trust law.

The judgment made by Lord Browne-Wilkison was essential to the development of equity and the present interpretation of the law. This judgment determined that equity and trust operated on the conscience of an individual’s legal interest. The case illustrated that the legal owner’s conscience requires him to execute the purpose that the property was vested in them – implied or express trust – by the manner in which the law imposed on him by an aspect of unconscionable conduct or constructive trust. This judgment shows that the main basis of trust and equity is to regulate an individual conscience whereby the common law could otherwise permit that individual to act unconscionably in alignment with the code of law. For instance, a statutory provision or rule of common law permits a defendant to receive a promised sum of money for being red-headed, if the defendant fools a payer by wearing a red wig to make the payer think that he/she is dealing with a red-headed people. In such a scenario, common law permits the defendants to keep the payments according to the literal interpretation of the rule. However, equity would prevent the defendant from engaging in the manipulation of the statute for fraudulent gains in that allowing such practices would be considered unconscionable. In the case of Westdeutsche Landesbank v Islington LBC, Lord Browne-Wilkison reasserts the importance of the principle of individual conscience.

Target Holdings Ltd v Redferns

Case Facts

In this case, Target Holdings Ltd gave Redferns solicitors approximately £1,525,000 to which was to be loaned to the Crowngate developments Ltd to assist them in the purchase of property in Great Hampton Street, Hockley. Target Holding ltd had planned to get a mortgage on the property that was bought ad Redferns were not allowed to release the money until the completion of the purchase. The solicitors were required to hold on trust the money for Target Holdings. However, Crowngate coordinated a scheme that made fraudulent profits on the aforementioned property, which was bought at £775,000 but reported a higher purchase price of £2m. Redferns breached the contract and released £1,490,000 to Panther Ltd before the stipulated completion of the purchase. Although the sale was successful, the venture was declared fail in that Crowngate failed to make the loan repayment, and instead, it went into liquidation. As a result, Target Holdings recovered a portion of £500,000 from the property sale. This caused Target Holdings to sue Redfern’s solicitors stating that it was their duty to account for the money that had been paid away wrongfully. In defend, Redferns stated that – even if they breached the initially established trust – their breach was not connected to the loss incurred by target Holding.

Judgment

The main issue in this court was whether the solicitor was to be held liable for the profits. It was held that after receiving the money, the solicitor acted as an agent of the lending institution and was a bare trustee for the institution that was lending. In such a case, the trustee who acted in breach of the case was only liable for the damages that flew from the breach only. Trustee was not to be held liable for the loss of a beneficiary as long as the loss was not as a result of the breach. In such a case, the damages that were payable for the cash paid in breach of trust could be reduced by unavoidable losses that are likely to happen in any event. It was determined that although a breach of fiduciary duty had occurred, the breach would not have changed the claimant’s financial position had it not happened.

An aspect of Equity and Trust according to Lord Browne-Wilkinson

Lord Browne-Wilkinson acted according to the basic rule which he stated that the trustee in breach of the trust must pay or restore the true estate – the assets that were lost as a result of the breach or for the compensation of such a loss. Although the courts of Equity failed to award damages – acting in personam – required the defaulting trustee in the case to restore or repay the trust estate. If it was impossible to restitute the property, then the trustee has a liability to pay compensation (sufficient) to the trust estate, such as to restore it to its original position had the breach not occurred. Equitable compensation for the breach of trust was designed, such as to achieve what was meant by the word “compensation.” The solicitor should ensure that they make up for the loss suffered by the beneficiaries, which, using common sense and hindsight, appears to be caused ultimately by the breach.

The importance of this judgment is relevant to the development of equity in the modern world. In the current world, equity and trust have become recognized as valuable devices in commercial and financial dealings. This scenario showcases the application of fundamental principles of equity in modern society in a similar aspect as in traditional trusts. The ruling shows that the only way in which the beneficiaries rights can be protected is by ensuring the restoration of trust find to its original status by paying the trust estate or through compensation of such losses as was happened in Nocton v Lord Ashburton to restore the trust estate o what it would be had the breach not occurred.

                                     AIB Group (UK) Plc v Mark Redler & Co Solicitors      

Case Facts

This raise resulted from a standard arrangement of re-mortgaging of a residential property after a customer (Mr & Mrs. Sondhi) applied for a loan of £3.3m at the AIB that would be secured over the family’s home as a first charge. The family had an existent mortgage with the Barclays, which was to redeemed using AIB’s loan. The solicitors, Mark Redler & Co mistook a redemption amount from Barclays though it related to the entire amount while in fact in related to one of the accounts that were secured. The solicitors thus underpaid the Barclays bank by £309,000 and overpaid the owners of the property, Sondhi’s, by a similar amount. This caused Barclay’s charge to remain in charge while AIB’s was secured by a second charge on the property.

AIB Group was required to provide a loan amounting to £3.3 to borrowers, an amount that was to be secured through a legal charge on their home. The issue in the case was about the amount that should have been recovered from the solicitors. The bank argued it had the entitlement to recover in full the total amount of the loan after deducting the amount that was recovered (£867,000). The solicitors stated that the loss should only be limited to the amount suffered by the bank in comparison with the position they would be if the loss had not occurred.  After the first ruling, it was argued that that Bank was in breach of trust, a breach that was limited to paying the borrowers the total sum that should have discharged the loan to the bank (Barclays). The Judge’s findings concluded that judgment for the Bank to the tune of £274,000 with interest. The Court of Appeal stated that the breach of trust was only limited to the money that was paid to the borrowers wrongly. The court held that the Solicitors did not have any authority to release funds unless they were issued with a redemption statement by the Barclays bank with an effective undertaking to register a first charge on the property upon the completion of the AIB loan.

The ruling made by the Supreme Court was determined by Lord Browne-Wilkinson’s judgment that was made in the Target Holdings case. The case was founded on the fundamental principle that the award of equitable compensation as a result of a breach of trust should be founded on the profits made by the wrongdoer or the loss caused. The beneficiary has a right to expect proper administration of the trust to their benefit whenever there is a breach of trust in that, equity requires the restoration of trust fund to its original position had the breach not occurred.

However, Lord Browne-Wilkinson was not satisfied with the ruling saying that the judgment failed to recognize the different distinctions that existed between varying obligations that were owed by the trustee and the remedies that were available. Lord Browne believed that that trustee has the duty of custodial stewardship duty to preserve various assets of trust, a duty to ensure efficient management of trust property. They also had the duty to prohibit the trustee from benefiting from the relationship by taking advantage of his/her position without obtaining fully informed consent from the beneficiaries.

Equity is a means through which English law ensures that stringent application of a statutory or common law does not result in any form of unfairness when it is applied in a particular case. Equity is a type of natural justice that shows that it has a moral basis. The moral purpose of equity in the justice system has been described by many people, including Lord Ellesmere in the Earl of Oxford’s Case, where it is explained as a means of correcting the consciences of frauds, oppressions, and wrongs while modifying and softening the extremity of law. Its main role is to prevent a defendant from benefiting from the unconscionable advantage of a particular situation and also prevents the law from permitting the undertaking of any unconscionable results inadvertently.

Comparison

Westdeutsche Landesbank v Islington LBC, AIB Group (UK) Plc v Mark Redler & Co Solicitors, and Target Holdings Ltd v Redferns cases involve a scenario where equitable compensation for breach of trust is necessary to achieve compensation. In all the instances, it is a requirement to make good for the losses suffered by the beneficiaries, which can be ascertained to have resulted from breach using common sense and hindsight. The cases showcase equity as a formal sense that constitutes the collection of various substantive principles that were developed by the court of Chancery and Courts of Equity to judge individual’ consciences. Equity in all the instances is identified as a code of different substantive and technical rules that are aimed at promoting good conscience.