Swindle v Harrison & Anor [1997] EWCA Civ 1339 (25th March, 1997)

LORD JUSTICE EVANS: The plaintiffs are a firm of solicitors, Alsters, practising in Leamington Spa. The defendants, who are mother and son, were their clients from about April 1991. The second defendant, who is the mother, has three other children, one of whom, Mark, plays a leading part in the story although he is not a party to the action. It is the tale of two properties, one the mother's home and the other a restaurant which the family planned to buy.

Mark, her oldest son, had the idea of purchasing a restaurant in Warwick known as The Aylesford where he and the rest of the family could carry on the business. The intended price for the property and the business was £240000. In short, he persuaded his mother to mortgage her home to secure a loan of £180,000 (more than what it is now agreed was its value) from the National Home Loans Corporation, which could be used to pay part of the price and other costs associated with the venture. A further £100,000 was proposed to be raised by a loan from Banks Brewery, to be secured by a first charge on the restaurant premises.

The mortgage was completed and the loan of £180000 was duly received. Contracts of purchase and sale were exchanged for The Aylesford at a reduced price of £220,000, but the second defendant as purchaser was required to pay a 20% deposit, £44,000, which she duly did when contracts were exchanged on 1 July. There was no confirmation then that the proposed further loan from the Brewery would be forthcoming.

The agreed completion date for the purchase and sale of The Aylesford was 5 August but it was extended to 2 p.m. on August 8. The events of those few days give rise to the second defendant's first and primary claim against the plaintiffs. The Brewery loan was not received, and no form of bridging finance was available from Barclays, the second defendant's bank, or from any other source. She could not complete the purchase of The Aylesford without a further advance of £75000. Mr Swindle on behalf of the plaintiffs offered to lend this sum to her for a two-month period and on terms which are not and cannot be criticised as uncommercial or unduly onerous for her (interest at 5% over base rate, with an "arrangement fee" of £1000), to be secured by a first charge on The Aylesford when it was purchased. She accepted this offer. £75000 was made available by the Royal Bank of Scotland, with whom the plaintiffs had the loan facility which they utilised, and the second defendant became the owner of The Aylesford, subject to the charge in the plaintiff's favour.

The results of proceeding with the purchase of The Aylesford proved to be disastrous for her. The restaurant business did not prosper and she had no other source of income or assets with which to pay interest on the substantial (£180,000) mortgage loan which was secured on her home. The amount due to NHL increased by October 1992 to £199000 and they took possession of the house. Its market value by then was considerably less than this figure. The shortfall was estimated by the judge as £55000 though it is not clear how he calculated it. So her equity in the property was extinguished, whereas on 7 August 1991 before completing the purchase of The Aylesford its value could be assessed as follows :-

The second defendant claims that she lost the value of her equity in consequence of the plaintiffs having enabled her, by making the loan of £75000, to complete the restaurant purchase. Mr Bannister Q.C. submits on her behalf that the plaintiffs were in breach of their fiduciary duties towards her and that she is entitled to recover as equitable compensation the amount of the asset, namely the then value of her equity in her home, which she has lost.

Her second claim is made in the alternative and is for a lesser amount, namely the value of her equity in The Aylesford in December 1992 when a further transaction was embarked upon, although not formally completed until many months later, in September 1993. This involved the transfer by the second defendant of her freehold interest in The Aylesford to Miles, her son who is the first defendant. The transfer was subject to the first charge in favour of the plaintiffs, which secured their £75000 loan, and to a second charge in favour of RBS. The price was £140000 in accordance with a valuation which Mr Swindle obtained from a local valuer. The balance payable by the first defendant as purchaser to the second defendant as seller, after taking account of the securities for which he assumed responsibility and certain other sums, was £24,185, but the payment obligation was spread over ten years.

In March 1994 the plaintiffs claimed possession of The Aylesford pursuant to their charge. The proceedings were brought against the first defendant as the current owner of the freehold. He asserted in his Defence as he did at the trial that the transfer to him from his mother was void or voidable, and in consequence of this she was made the second defendant. Her claims, as summarised above, were made by way of counterclaim. The proceedings came on for trial before Recorder Sir Andrew Watson at the Warwick County Court in November 1995.

The judge made detailed findings as to the history of events from 1 July, when contracts for the purchase and sale of The Aylesford were exchanged, until completion which finally took place on 8 August. The completion date originally fixed was 5 August. Mr Swindle informed the second defendant by letter dated 22 July that he would require to be put in funds by Friday 2 August at the latest. The second defendant and her son Mark had their own financial advisers, who changed from time to time. In July it was Peter Davis, but by 7/8 August a Mr Stuffins was also on the scene. The further funds which they required were expected to be provided by the hoped-for Brewery Loan. On the morning of 7 August Mark Harrison went to the Brewery at Wolverhampton in order to collect the loan offer himself. This was forthcoming, its terms being set out in a letter "subject to contract" dated 7 August, addressed to Mark. The offer was expressly made subject to a "satisfactory bank reference", presumably for him.

There had been much concern as to whether funds would become available from the Brewery or, if they did so, whether they would be received in time. According to Mr Swindle's witness statement, the second defendant telephoned him a number of times and by 7 August she was desperate for finance. There was talk of a bridging loan which could be made available by a contact of Mr Davis' at the rate of 1 per cent per day . Apparently, however, even if this offer was acceptable, the proposed lender was away on holiday by 7 August and this source could not be pursued. The second defendant's bankers, Barclays (Bedworth branch), were asked to provide a bridging loan, but on the morning of 7 August, according to his evidence, or 8 August, according to his attendance note, Mr Swindle was informed that no offer would be made - the bank was "unhappy with the client", presumably referring to Mark Harrison, although this is not clear. Who gave Mr Swindle this information is also unclear. His attendance note refers to Mr Stussins, who was the manager of the Barclays branch, whereas the judge's finding was that he spoke to Mr Stuffins, the defendants' financial adviser. The difference could be important, because Mr Stussins was an independent third party whereas Mr Stuffins might be regarded as the second defendant's agent whose knowledge of these matters could be attributed to her, but ultimately, in my judgment, it is not. What is clear is that Mr Swindle knew then, if not before, that no bridging loan would be offered by the bank and that Barclays, who were the second defendant's and Mark Harrison's bankers, would apparently be unwilling to give the satisfactory reference which the Brewery required.

It was in these circumstances that Mr Swindle indicated to the second defendant that a bridging loan could be made available to her by the plaintiffs themselves. He said in his witness statement that she asked him if he had any other source of funds. This led to him discussing the matter with his partner, Mr Fillmore (whom the judge found "a compelling witness"), on 7 August, when "Mr Swindle was confident the brewery loan would be forthcoming". The judgment continues :-

"The plaintiffs had bridging facilities with the Royal Bank of Scotland up to a limit of £50,000. He, Mr Swindle, was confident that as in fact proved to be the case, his bank would enlarge the facility for a 1% arrangement fee which was to be split between them. In due course that same day, the 7th, bridging facilities were offered. An arrangement fee of £1,000 with interest at 5% above base rate was offered. They were not over-generous terms and it was not a purely philanthropic gesture but nobody suggests that a better offer was obtainable elsewhere.

So far as the partnership of Alsters was concerned, it was an act of extreme indiscretion. Mr Swindle never bothered to enquire at Barclays as to their reservations over their client. He either did not know of Mark's creditworthiness or chose to disregard what he did know. Mr Fillmore was extremely reluctant, and the junior partners were not even consulted. He knew the brewery loan depended upon satisfactory references from the bank and he knew by now that they were unlikely to be forthcoming. But is his offer actionable at the suit of the apparent beneficiary, Mrs Harrison? There was now a self-evident conflict of interest between the plaintiffs and Mrs Harrison. She was advised to seek independent advice but there was in reality very little time in which to obtain it."

Secondly, I believe the solicitors were also negligent in failing to advise the second defendant that Banks Brewery might not make the loan. After speaking to Mr Sharples [of the Brewery] . . . . that Mark Harrison's creditworthiness was a critical issue, yet he plainly did not, and did not take any steps to, ascertain the risk or warn the second defendant of the nature of the risk. The plaintiffs should have ensured separate representation".

"Realistically, she had no choice. There is certainly no evidence before me, even with the benefit of hindsight, that Mrs Harrison has necessarily been worse off. She was in fact, and possibly correctly, extremely grateful, as she conceded in evidence. Accordingly, in my judgment no damages flow from these breaches. The terms were duly accepted. A note from Mr Fillmore indicated that the terms were discussed with Mr Stuffins which satisfied Mr Fillmore that Mrs Harrison had taken professional, if not legal, independent advice.

Another of the judge's findings should be noted, although it is not challenged by the second defendant in her appeal. This related to her decision to purchase The Aylesford in June, when contracts were exchanged. The mortgage of her home was then agreed, but no finance was available to fund the balance of the purchase price, and Mr Swindle was clearly under a duty to warn her of the possible consequences of doing so, and that she should exercise caution. He gave this advice, but as the judge found the second defendant was determined to proceed with the purchase, being content with the financial projections that had been prepared by Mr Stuffins, and "She seemed happy with financial arrangements made by Peter Davis". He also found :-

She alleged at the trial that the plaintiffs should have advised her not to proceed and that they were negligent in failing to do so. Mr Swindle accepted that he did not go so far as to give her that advice, but he denied that that was negligent or in breach of duty in the circumstances, where she was receiving separate professional advice on the financial implications. The judge rejected the second defendant's allegation, and he added :-

The subsequent history, shortly, was as follows. The family took over the restaurant and café business, though with limited success. This was partly, perhaps largely, due to the fact that they failed to obtain a full restaurant licence. Money ran short and the second defendant defaulted in her mortgage obligations to NHL, who took possession of her house. She had other creditors and it was feared that bankrupt proceedings might be started against her. Her remaining asset was her equity interest in The Aylesford property, where she now lived. This would be at risk of being realised if she was made bankrupt, and if that occurred she would lose her home and the family would lose the business. Mr Swindle was consulted. He advised that The Aylesford should be sold at a proper market value to her son Miles, the first defendant, subject to the first charge in favour of the plaintiffs and a further charge held by the Royal Bank of Scotland. A valuation was obtained from a reputable local estate agent, Mr Hawkesford, but at £140,000 the judge found that it was "an extremely low valuation, some 10 to 15%, in my judgment, below the true open market value".

By this means, the second defendant's remaining equity interest in the Aylesford was replaced by the debt owed to her by the first defendant, which has to be regarded as worthless. The second defendant alleges that Mr Swindle acted negligently towards her in relation to this transaction also and that her loss should be assessed as the value of her lost equity, say £55000. The judge rejected this contention. He said :-

"At the time the agreement was signed I suppose in an ideal Chancery world each member of the family should have been separately represented but in the circumstances prevailing this would have been totally impracticable. The vultures were circling. There was, I believe, a united -- save for Guy who was not consulted -- family desire to preserve the building and the business by whatever means they could".

(1) The second defendant, as appellant, submits that the judge was wrong to hold that no damages flowed from the plaintiffs' breaches of duty and negligence which he held had occurred in relation to the making of the loan. Mr Bannister Q.C. on her behalf does not dispute the correctness of the finding that "realistically, she had no choice" but to complete the purchase, nor does he suggest that the judge was wrong to find that the second defendant, both in June and in August, was determined to make the purchase if she possibly could, acting on the financial advice received from other professional advisers. He submits that these findings are irrelevant as a matter of law. It is sufficient, he says, that the plaintiffs' breach of duty in making the loan enabled her to proceed to completion ; "but for" the loan, she would not have been able to do so. He accepts that this question of law was not raised, or at least was not formulated in this way, at the trial.

The issue here is the amount of damages or compensation which the second defendant is entitled to recover from the plaintiffs on the basis of the judge's findings that they were in breach of the fiduciary duties which they owed her when they offered to make the bridging loan. The breach essentially was their failure to inform her of two material facts - first, that Barclays apparently was unwilling to provide a reference for Mark, which could mean that the Brewery loan would not be forthcoming, and secondly, that they would themselves profit from the loan transaction.

The best starting point in my view is the historical fact that the courts in certain circumstances have awarded damages sufficient to restore the plaintiff, in financial terms, to the position in which he was when the defendant committed a legal wrong against him. This measure of damages might appear to be the same as the general measure, which is the "sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation" (per Lord Blackburn in Livingstone v. Rawyards Coal Co. (1880) 5 App. Car. 25 at 39), but it is not. The difference arises because the position "he would have been in if he had not sustained the wrong" is not necessarily the same as his situation when the wrong occurred. It might have deteriorated, or for that matter improved, during the same period, by reason of independent, extraneous events.

The same basic example shows that the difference can be expressed in terms of causation. The value of the plaintiff's property has fallen, due to a general decline in market values. That fall would have occurred in any event, regardless of any injury inflicted by the defendant, and so it cannot be said to have been caused by anything that the defendant did or failed to do - unless the defendant in some way caused him to acquire the property in question, in which case he can say that he did suffer a loss representing the fall in market value in consequence of the defendant's wrong. In such circumstances, he would not have suffered that loss, "but for" whatever the defendant, in breach of duty, did or failed to do.

But then, suppose that the plaintiff, if he had not acquired that property, would have bought some other property, in any event? This is the usual situation with a mortgage lender, because he hopes to make loans in the course of his business to the full extent of the available funds, and a general fall in property values will affect him, regardless of its effect in any individual case. Should this factor be taken into account when deciding what were the legal consequences of, say, the careless provision of inaccurate information or wrong advice in relation to the particular acquisition which in the result has shown a loss?

There is also a temporal aspect. To restore a person to the position that he was in when the wrong was committed against him involves present financial restitution to that former state of affairs. Compensation, on the other hand, which is necessary to put him to the position he would have been in, if he had not sustained the wrong, is not strictly restitution at all. It is a measure of the difference between his present situation and what his situation would have been.

These different concepts have surfaced in different areas of the law, and the inquiry is complicated by the fact that it is still necessary to take account of the distinction between common law and equity, even though the procedural reforms introduced by the Judicature Acts 1873-5 are now well over a century old. The reason is, of course, that the origins of both common law and equitable rules are always relevant to their scope, although we should endeavour now to identify the underlying common principles. As Denning J. said in a different context in Nelson v. Larholt [1948] 1 K.B. 339 :-

Not surprisingly, the abrupt fall in property values during the past decade has led to a spate of authorities in which these principles or rules for assessing damages have been explored, pre-eminently the House of Lords judgments referred to below (though Smith New Court arose out of a fall in the value of shares). The language used may be that of causation, or of remoteness of damage, or of the scope of duty, but as was observed in the Note on South Australia in the Law Quarterly Review (by Jane Stapleton, Vol.113 p.1 at p.7) :-

At common law, damages on what may be called the restitutionary basis are awarded when the plaintiff was induced to enter into a transaction by the defendant's fraud. This is the rule in Doyle v. Olby (Ironmongers) Ltd [1969] 2 QB 158, now approved and re-stated by the House of Lords in Smith New Court v. Scrimgeour Vickers [1996] 3 WLR 1051. In cases where the breach of duty consists of negligence rather than fraud, the defendant is liable to pay compensation for the consequences of the breach, and this makes it necessary to define the breach, or rather the scope of the duty which was broken : South Australia Asset Man. Co. ( Banque Bruxelle Lambert S.A.) v. Eagle Star Ins Co. [1996] 3 WLR 87. If the plaintiff seeks compensation for the consequences of entering into a transaction, then he must prove that he would not have done so, if the breach had not occurred, and that the breach was a cause of his doing so.

Regarding this solely as a question of causation, the same approach was adopted in Galoo Ltd v. Bright Grahame Murray [1994] 1 WLR 1360 and in Alexander v. Cambridge Credit Corporation (1987) 9 NSWLR 310 (C.A., N.S.W.). The defendant's breach may have afforded an opportunity for the loss suffered by the plaintiff to occur, but the breach, having regard to the scope of the duty, cannot be said to have been the cause of the loss. Negligent advice given by a company's auditors may result in the company continuing to trade, but this does not mean that the negligence was the cause of all subsequent trading losses - unless perhaps the auditors were in breach of a duty to advise the company whether to continue trading, or not.

Similar principles have been developed by the courts of equity, and the authorities show that similar results have been achieved. When the breach of duty falls within the rather wider category of inequitable conduct which equity regards as fraud, then the defendant's liability in damages is measured in the same way as if fraud was proved at common law. He is liable to restore the plaintiff to the situation he was in when the defendant did him wrong. Thus,

"Actual undue influence is a species of fraud. Like any other victim of fraud, a person who has been induced by undue influence to carry out a transaction which he did not freely and knowingly enter into is entitled to have that transaction set aside as of right. No case decided before Morgan was cited (nor am I aware of any) in which a transaction proved to have been obtained by actual undue influence has been upheld nor is there any case in which a court has even considered whether the transaction was, or was not advantageous. A man guilty of fraud is no more entitled to argue that the transaction was beneficial to the person defrauded than is a man who has procured a transaction by misrepresentation. The effect of the wrongdoer's conduct is to prevent the wronged party from bringing a free will and properly informed mind to bear on the proposed transaction which accordingly must be set aside in equity as a matter of justice."

"When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent's action would be solely determined by some other fact, such as the valuation by another party of the property proposed to be mortgaged. Once the court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure, would have taken is not relevant."

Equity has also recognised duties going beyond the common law duties of skill and care which may be undertaken by individuals, depending on "the circumstances in which they were acting" (per Lord Browne-Wilkinson in Henderson v. Merrett Syndicates at 205G). These are the duties of fidelity and loyalty which are described as "fiduciary" and which exist independently of, though often in conjunction with, a duty of care. There is no doubt that a solicitor owes his client these duties also.

"The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith : he must not make a profit out of his trust ; he must not place himself in a position where his duty and his interest may conflict ; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list . . . "

In the present case, Mr Bannister Q.C. submits that because the plaintiffs were in breach of duty, therefore, applying Brickenden (supra), they are liable to restore the second defendant financially to the position she was in when their breach of duty occurred. It is not relevant, he says, to inquire whether or not she would have completed the purchase in any event. It is enough that she did in fact do so, and was enabled to do so by the plaintiffs' loan.

I would reject this argument, because the authorities also show, in my judgment, that what I have called the stringent rule of causation or measure or damages does not apply as regards breaches of equitable duties unless the breach can properly be regarded as the equivalent of fraud. In other cases the plaintiff is entitled to be placed in the same position financially as he would have been in if the breach of duty had not occurred - not necessarily the same as he was in before it occurred.

These propositions seem to me to be established by Bristol and West of England B.S. v. Mothew (supra). The defendant had not breached his duties of loyalty and fidelity to his principal and so he could not be held to be liable for losses suffered as the result of entering into the transaction, as distinct from the consequences of the particular breach. Those were likely to be minimal (because, in short, the principal would have made the mortgage loan in any event) and they did not include the intervening market loss. The consequent need to identify the scope of the particular duty which has been breached is entirely consistent, in my view, with the approach to common law damages set out in Lord Hoffmann's South Australia speech.

It is also consistent, in my judgment, with the House of Lords' decision in Target Holdings Ltd v. Redferns [1996] AC 421. The defendants had committed a breach of trust, but the default was remedied and therefore they were not liable to "reconstitute the fund". They remained liable to pay compensation, but the amount had to be assessed at the date of judgment rather than the date of breach. The plaintiffs had obtained precisely what they would have acquired had no breach occurred, and therefore they appeared to have suffered no compensatable loss.

Lord Browne-Wilkinson noted "the basic rule .. that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate : see Norton v. Lord Ashburton 1914 AC 932 per Lord Haldane L.C. If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed ...... thus the common law rules of remoteness of damage and causation do not apply. However, there does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable, viz. the fact that the loss would not have occurred but for the breach ...." (p.434).

This summarises, in my judgment, what is essentially the common law rule, in the absence of fraud. Moreover, Lord Browne-Wilkinson approved the view of the majority of the Supreme Court of Canada in Canson Enterprises Ltd. v. Boughton & Co. 1991 85 D.L.R. (4th.) 129 which held that "damages for breach of fiduciary duty fall to be measured by analogy with common law rules of remoteness" [1996] 1 A.C. at 438C). Even when the stringent test applies, the chain of causation can be broken by some independent and untoward event, as in Canson Enterprises Ltd. (supra). The test of causation remains one of common sense (see p. 439A), on whatever basis it has to be applied.

The concept of compensation which has the effect of restoring the plaintiff to the position he occupied before the wrong was done to him, rather than place him in the same present situation as if the breach had not occurred, appears consistent with the basic principle that equity permitted the innocent party to rescind a contract when sufficient grounds e.g. misrepresentation were shown, but it would be beyond the scope of this judgment to pursue that aspect further. Similarly, it is unnecessary to consider whether a plaintiff who proves that he entered into a contract in reliance on negligent advice, or on wrong information negligently given, can recover damages on the same stringent basis as if he was induced to enter into it by fraud : see Downes v. Chappell [1996] 4 A.E.R. 344 and Bristol & West of England B.S. v. Mothew [1996] 4 A.E.R. 698 at 705.

I return therefore to Mr Bannister's submission in the present case. There is no finding and no allegation of fraud or of any breach of fiduciary duty which might be regarded as the equitable equivalent of fraud. Nor was the plaintiffs' loan itself inconsistent with the duties which they owed her. Their breach of duty consisted in failing to disclose material facts to the second defendant, as the judge held, and it can be assumed that she would be entitled to claim rescission of the loan agreement, if recission was possible, and that she is now entitled to recover damages, or compensation, for the consequences of that breach. But the prima facie measure of such loss is the amount by which she is worse off now than she would have been if those breaches had not occurred. The failure to disclose cannot be said to have led to the making of the loan, even on a "but for" basis, precisely because disclosure of the true facts would not have affected her decision to accept it. Since she would have accepted the loan and completed the purchase, even if full disclosure had been made to her, she would have lost the value of the equity in her home in any event. She cannot recover damages or compensation for that loss, in my judgment, except on proof either that the plaintiffs acted fraudulently or in a manner equivalent to fraud or that she would not have completed the purchase if full disclosure had been made i.e. if the breach of duty had not occurred. She can do neither, and in my judgment her claim for damages must fail.

In August 1991 Mr Swindle was acting as the solicitor of Mrs Harrison. His retainer was not specifically limited. It is the fact that Mrs Harrison and her sons had also been receiving advice from a succession of financial advisers, at the material time in August from a chartered accountant Mr Stuffins. Mr Swindle was retained generally in relation to the purchase of the Aylesford Hotel. It was undoubtedly part of his retainer that he should advise her about the legal implications of any transactions which she should enter into. At the time of the exchange of contracts in June he had advised her of the lack of prudence in so doing and required her to sign the letter of disclaimer dated 21st June 1991. She had nevertheless entered into a contractual commitment to buy the hotel by a contract which required a deposit of 20% and made time of the essence when she did not have the funds to enable her to complete nor any firm assurance that such funds would be forthcoming.

By 7th August, after a one week extension of the time for completion the anticipated situation had come about. She had to complete the following day. She had to have £180,830 to enable her to do so but all she had was about £110,000, being the remaining balance from the £180,000 which she had raised in June by taking out a second mortgage of her home at 13 Warwick Place to National Home Loans. She did not have the balance of about £71,000 necessary to enable her to complete and she and her sons had failed to obtain any binding commitment from anyone willing to lend them that sum. She was about to lose her deposit of £44,000 and be exposed to a liability for breach of contract (though there was no evidence that the vendors' losses would have exceeded the £44,000). She believed that she would be losing the benefit of a contract that would be advantageous to her and her sons; in addition, she had already spent a further £13,500 or thereabouts carrying out improvements to the hotel with the consent of the vendors in anticipation of completion. It was in these circumstances that Mr Swindle offered to step into the breach and provide a bridging loan of £75,000. By so doing he came under additional responsibilities and obligations to Mrs Harrison, his client.

"The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith: he must not make a profit out of his trust: he must not place himself in a position where his duty and his interests may conflict: he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. ......

(In this survey I have left out of account the situation where the fiduciary deals with his principal. In such a case he must prove affirmatively that the transaction is fair and that in the course of negotiations he made full disclosure of all facts material to the transaction. Even inadvertent failure to disclose will entitle the principal to rescind the transaction. The rule is the same whether the fiduciary is acting on his own behalf or on behalf of another. .....)"

By offering to lend money to Mrs Harrison and then making with her the loan contract evidenced by the letter of 7th August 1991, Mr Swindle was dealing with his principal. He therefore was under an additional fiduciary duty to prove affirmatively that the transaction was fair and that, prior to the making of the contract, he made "full disclosure of all facts material to the transaction". This fiduciary duty is additional to his contractual duty to exercise skill and care in advising Mrs Harrison and, within the scope of his retainer, protecting her interests.

The Judge held that both the fiduciary and the contractual obligations were broken. He implicitly found, in terms which I will quote below, that the loan transaction was fair. But he also found that, in breach of his fiduciary obligation to make full disclosure, he did not disclose that his firm were making a "hidden profit" in that on the arrangement fee of £1,000 the firm were making a profit of £625 and on the interest rate they were making a profit of 2½%. He also found that Mr Swindle was in breach of his fiduciary duty in not disclosing to Mrs Harrison that he knew that the brewery loan depended upon satisfactory references from the bank and that they were unlikely to be forthcoming and that he was in breach of his contractual duty in negligently failing to advise her that the brewery might not make the loan. I do not consider that it is right to reject these findings of the Trial Judge. But it must be observed that on any view the breaches were marginal.

As regards the element of profit to Mr Swindle's firm, it was clear from the offer letter dated 7th August which Mr Swindle gave to Mrs Harrison at the time and which set out the terms of the offered loan that although the offer emanated from discussions which Mr Swindle had had with the firm's bankers it was a bridging facility which was being offered to her by the firm. It therefore was a situation where the firm were entering into contractual relations as principals with Mrs Harrison and where on the face of the contract the firm was to receive financial benefit from the transaction - the payment of the £1,000 arrangement fee, the payment of interest at the bank's base rate plus 5%. It was made clear to her that the firm were dealing with her as principals and that they were obtaining contractual rights against her. The element of non-disclosure was confined to the failure to disclose the terms on which the firm had borrowed from the bank.

Similarly, as regards the state of the negotiations between her son and the brewery for the brewery loan, Mrs Harrison had other more obvious sources of information, namely her son and the accountant who was also involved, and she did not have to rely, nor is it clear that she was relying, upon Mr Swindle to keep her informed about those negotiations. There was no evidence which would have supported a finding that she believed that Mr Swindle was better informed than she was.

Thus, although there were breaches of both classes of obligation, the breaches are ones which might well not (and in the event did not) have any impact on the events that followed although they were material to a fully informed decision by Mrs Harrison whether or not to accept the offer of the loan by Mr Swindle's firm. It is to be noted that the breaches relate to the loan transaction and not to the purchase transaction. The Judge having rejected Mrs Harrison's allegations and claim in respect of what had happened in June and July, there was no claim that in August he should have advised her to resile from her contract to purchase the hotel.

There is a further related aspect, that of neutralizing the influence which Mr Swindle had over Mrs Harrison by reason of his being her solicitor. Mr Swindle did arrange that Mrs Harrison should see his partner Mr Fillmore and he formally advised her to take independent legal advice. But they all knew that this was not a practical proposition. A decision whether or not to accept the loan had to be made then and there. She had no prospect of obtaining informed legal advice from any independent source within the time that was available to her. Therefore the transaction was one which was entered into between parties in a fiduciary relationship where the one had influence over the other and that influence was not neutralized or nullified by Mrs Harrison receiving any independent legal advice.

"What, if any, damages flow from these breaches? To answer this question I feel I must endeavour to place myself in the position of another solicitor consulted to advise Mrs Harrison assuming one could have been found to advise in the available time, which effectively was 9am to 2pm the following day. I can only imagine that they would have been astounded at the offer being made by the Plaintiff in the circumstances and that with full knowledge of the circumstances they would have said "Grab it". It was, after all, a lifeline for them. There is no evidence that a better offer could have been obtained elsewhere. The alternative was to forfeit the deposit. As Mr Bannister [for Mrs Harrison] conceded in argument, together with the building works already undertaken and other expenditure, having to place the property on what we now know to have been a falling property market, Mrs Harrison would have been facing an immediate and certain loss of at least £66,000. In addition, she would not have had the means from the restaurant proceeds to service the loan on her own home. Realistically she had no choice. There is certainly no evidence before me, even with the benefit of hindsight, that Mrs Harrison would necessarily have been worse off. She was in fact, and possibly correctly, extremely grateful as she conceded in evidence. Accordingly, in my judgment no damages flow from these breaches. The terms were duly accepted."

On this appeal we are not concerned with any question of the rescission of the obligation of Mrs Harrison to repay the loan to the firm nor of the discharge of the security. By reason of what took place in 1993 she was released from all personal liability in respect of the loan. The property which secured the loan (the freehold title to the hotel) was transferred to her son Miles. She does not challenge the validity of that charge or the right of the firm to enforce it against the property and obtain possession of the property from Miles. Whether or not she might have had grounds for doing so is not a matter which has been raised on this appeal. Nor was the action concerned with any claim to recover any profits, secret or otherwise, made by the firm. Therefore the direct equitable remedies for breach of fiduciary duty - rescission, account and restitution - are not claimed. The claim which we have to consider is a claim for damages or 'equitable compensation' of the character of damages for breach of duty.

Insofar as the claim is a contractual one, Mrs Harrison is unable to prove any loss flowing from any breach of contract at this point in the story. The finding of the Judge is that even if Mr Swindle had told her all that he knew about the status of the brewery's offer it would not have made any difference to Mrs Harrison's decision to accept the loan from Mr Swindle's firm nor to her intention to complete the purchase of the hotel. Further, if she had been able to take independent advice from another solicitor, in addition to the financial advice which she was already receiving from Mr Stuffins, this again would have made no difference. It would have merely confirmed her decision to accept the loan and complete the purchase. She did not act in reliance on Mr Swindle in relation to any respect in which he was in breach.

Similarly, the Judge's finding, by necessary implication, finds that the offer was a fair one which Mrs Harrison would properly have been advised to accept. The terms were fair and reasonable notwithstanding that they involved an element of profit to Mr Swindle's firm. Mr Swindle's firm were accepting the risk of the transaction with Mrs Harrison. The credit-worthiness of Mrs Harrison was not the same as that of Mr Swindle's firm. The terms were appropriate for somebody lending to Mrs Harrison. The only element which might have been negotiated differently is the arrangement fee which potentially involved an element of double charging by Mr Swindle's firm and which it could be said should have been confined to the firm's disbursement (the fee paid to the bank) and a proper charge at the appropriate rate for solicitors' work for the actual work done by Mr Swindle's firm in arranging the loan and preparing the relevant documents. To what extent (if at all) this would have resulted in a net saving to Mrs Harrison is not covered by the evidence and is in any event in the context of the relevant transactions very marginal.

The submission advanced by Mr Bannister QC on behalf of Mrs Harrison and developed more fully in this Court than it was before the Judge at the trial is that for a breach of a fiduciary duty it is not necessary for the claimant to prove a causal relationship between the breach and the loss. The claimant is entitled to say that the transaction with him was one which the fiduciary was not entitled to enter into without having first fully performed his fiduciary duty: if the fiduciary nevertheless enters into the transaction, he then becomes liable to the claimant for all the consequences of the transaction which would not have occurred if the claimant had not entered into it in the same way as if he, the fiduciary, had induced that transaction by his express fraud. He submits that the Judge applied the wrong test. He was wrong to say that Mrs Harrison was not worse off. He submits that as a result of entering into the loan transaction with Mr Swindle's firm she was indeed financially worse off and suffered a loss.

This loss, he submits, came about in the following way. Mrs Harrison had on 21st June mortgaged her own house in which she was living at 13 Warwick Place to National Home Loans. They had lent her £180,000 on a second mortgage. She had used £44,000 to fund the payment of the deposit on the contract for the purchase of the hotel, £8,500 to pay off other liabilities and £13,500 on funding the improvements which her son was carrying out at the hotel prior to completion. She was intending to, and did in the event, use the balance of £110,000 as part of the sum to be paid to the vendors of the hotel on completion. It had been hoped that the brewery loan would provide the balance. As it was, failing any other source of finance, the loan from Mr Swindle's firm was used in conjunction with the £110,000. If Mr Swindle's firm had not lent Mrs Harrison £75,000 she would not have been able to complete and would not have done so. She would therefore not have been in a position to spend the £110,000 on the purchase of the hotel and would have been able to repay that sum to National Home Loans. This would have reduced her liability under the mortgage and increased her equity in 13 Warwick Place. Contrary to what the Judge said she would have been better off. It is this difference of £110,000 which Mrs Harrison seeks to recover from Mr Swindle and his firm as damages for breach of fiduciary duty.

Mr Bannister's legal submissions are based upon combining two lines of reasoning. The first line is founded upon the case Nocton v Lord Ashburton [1914] AC 932. He submits that a breach of a fiduciary duty is, in equity, the equivalent of fraud. The breach of a fiduciary duty is therefore to be equated with the tort of deceit. The tort of deceit is actionable and damages may be recovered notwithstanding that it cannot be shown that if the plaintiff had known the truth he would have acted differently. In support of this proposition he cites Doyle v Olby [1969] 2 QB 158 and Smith New Court v Scrimagour Vickers [1996] 3 WLR 1051. Therefore he submits that it is not necessary for him to prove that Mrs Harrison would have acted differently. All the losses which she would not have suffered if she had not entered into the loan transaction are recoverable as damages.

The second line of reasoning is that where a breach of fiduciary duty has occurred the plaintiff is entitled to set aside the transaction. It is not open to the fiduciary to say that his breach of duty did not cause the plaintiff to enter into the transaction. It follows, he submits, that the plaintiff may recover as damages for breach of a fiduciary duty all losses which the plaintiff has suffered as a result of entering into the transaction. In support of this line of reasoning he cites what was said by Lord Thankerton in giving the opinion of the Privy Council in Brickenden v London Loan and Savings Company [1934] 3 DLR 465 at 469:

"When a party holding a fiduciary relationship commits a breach of his duty by non-disclosure of material facts which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction because the constituent's action would be solely determined by some other factor such as the valuation by another party of the property proposed to be mortgaged. Once the Court has determined that the non-disclosed facts were material, speculation as to what caused the constituent, on disclosure, would have taken is not relevant."

Nocton v Lord Ashburton involved a dispute between a solicitor and his client in relation to a benefit which the solicitor had gained to the detriment of his client when, on the advice of the solicitor, the client released a security that he held in respect of the liability of a third party. The relevant property was also charged with a liability to the solicitor and the effect of the release was not only to deprive the client of adequate security but also to advance and increase the value of the security held by the solicitor. The action was started in the Chancery Division of the High Court. The statement of claim alleged fraud and claimed damages. At the trial the action was treated as action in the tort of deceit and the claim was dismissed for want of proof of actual dishonesty on the part of the solicitor. The Court of Appeal reversed that decision on the facts. It gave judgment in favour of the client. In the House of Lords a different approach was adopted. The House decided that when fraud was pleaded in an action in the Chancery Division it should be understood to be an allegation of equitable fraud (sometimes called constructive fraud) not fraud as understood by the common law (sometimes called express fraud). The House considered that the Court of Appeal should not have reversed the judge's finding on fact that express fraud had not been proved. But they concluded that both the trial judge and the Court of Appeal had been mistaken in their approach. The allegation was an allegation of equitable fraud. This had been proved and judgment should be given for the client Lord Ashburton against the solicitor Mr Nocton.

"My lords, it is known that in cases of actual fraud the Courts of Chancery and of Common Law exercised a concurrent jurisdiction from the earliest times. For some of these cases the greater freedom which, in early days, the Court of Chancery exercised in admitting the testimony of parties to the proceedings made it a more suitable tribunal. Moreover, its remedies were more elastic. Operating in personam as a court of conscience it could order the defendant, not, indeed, in those days, to pay damages as such, but to make restitution, or to compensate the plaintiff by putting him in as good a position pecuniarily as that in which he was before the injury.

But in addition to this concurrent jurisdiction, the Court of Chancery exercised an exclusive jurisdiction in cases which although classified in that Court as cases of fraud, yet did not necessarily import the element of dolus malus. The Court took upon itself to prevent a man from acting against the dictates of conscience as defined by the Court, and to grant injunctions in anticipation of injury, as well as relief where injury had been done. Common instances of this exclusive jurisdiction are cases arising out of breach of duty by a person standing in a fiduciary relation, such as the solicitor to the client, illustrated by Lord Hardwick's judgment in Chesterfield v Jansen (2 Ves Sen 125)."

He was referring to what he described as the ordinary jurisdiction of the Chancery courts to deal with transactions "in which the Court is of opinion that it is unconscientious for a person to avail himself of a legal advantage which he has obtained". He recognised that it must be taken to be settled that "nothing short of proof of a fraudulent intention in the strict sense will suffice for an action of deceit": he contrasted that with the exclusively Chancery jurisdiction.

"A man may misconceive the extent of the obligation which a Court of Equity imposes on him. His fault is that he has violated, however innocently because of his ignorance, an obligation which he must be taken by the Court to have known and his conduct has in that sense always been called fraudulent, even in such a case as technical fraud on a power. It was thus that the expression "constructive fraud" came into existence. The trustee who purchases the trust estate, the solicitor who makes a bargain with his client that cannot stand, have all for several centuries run the risk of the word fraudulent being applied to them. What it really means in this connection is, not moral fraud in the ordinary sense, but breach of the sort of obligation which is enforced by a Court that from the beginning regarded itself as a Court of conscience." (p.954)

"It did not matter that the client would have had a remedy in damages for breach of contract. Courts of Equity had jurisdiction to direct accounts to be taken and in proper cases to order the solicitor to replace property improperly acquired from the client, or to make compensation if he had lost it by acting in breach of a duty which arose out of his confidential relationship to the man who had trusted him."

The proper mode of giving relief might have been to order Mr Nocton to restore to the mortgage security what he had procured to be taken out of it in addition to making good the amount of interest lost by what he did. A measure of damages may not always be the same as in an action of deceit or for negligence. But in this case the question is of form only and is not one which it is necessary to decide. I am not sure that such an order would have been more merciful to Mr Nocton than the order for an inquiry as to damages which was actually made. At all events Mr Nocton's advisers did not at any time object or ask for the other alternative and it is too late to ask for it now."

Nocton v Lord Ashburton does not establish the proposition for which Mr Bannister contends. Breach of fiduciary duty is not to be equated with common law deceit. It simply gives rise to a personal equity which is to be recognised by a Court having Chancery jurisdiction so as to lead to a grant of an equitable remedy. It does not itself give rise to a right to damages. It relates to the transaction between the fiduciary and the person to whom he owes the duty. The remedy is essentially restitutionary in its character. The fiduciary may be restrained from enforcing the transaction. It may be rescinded. Accounts and restitution may be ordered. But, if a plaintiff seeks to recover common law damages, he must discharge the same burden of proof as would be required by a court applying the common law.

This leads on to the reliance by Mr Bannister upon what Lord Thankerton said in the Brickenden case. Once there has been a breach of a fiduciary duty in relation to a transaction, the fiduciary is not allowed to enforce that transaction. Equity does not allow him to benefit from the improper transaction and can require him to rescind the transaction and make restitution. ( Armstrong v Jackson [1917] 2 KB 822) It is no answer for the fiduciary to say that the other party would still have entered into the transaction had he made full disclosure. One can see the same reasoning being adopted in relation to the doctrine of uberrimae fidei (eg s.17 of the Marine Insurance Act 1906); the transaction is voidable. The principle is not a principle relating to the recovery of damages nor does it give rise to common law rights. It is essentially a principle which precludes the fiduciary from enforcing his common law rights. It will thus be seen that this principle cannot be used to enable a claimant to recover common law damages without establishing a causal connection between the relevant loss and the relevant wrong. (See also Bristol & West v May May & Merrimans [1996] 2 AER 801.)

The two ways in which Mr Bannister puts the claim of Mrs Harrison are both mistaken. She cannot combine a mere breach of fiduciary duty with a claim to common law damages. She cannot use a breach of fiduciary duty to obtain a remedy in respect of a transaction other than that in relation to which the fiduciary was dealing with his client. Mrs Harrison is not making any complaint as such about any loss in relation to the loan transaction. That transaction has been rescinded by agreement. She is under no further liability in respect of it. She does not seek an account from Mr Swindle's firm. She does not seek to recover any sums which she paid to Mr Swindle's firm pursuant to that transaction. What she seeks to do is something different. She says that "If I had not entered into the loan transaction with Mr Swindle I would not have spent the money I thereby obtained and other money which I already had on a different and distinct transaction (the purchase of the Hotel) in respect of which Mr Swindle owed me no relevant fiduciary duty and which has turned out to be a loss-making transaction." This is not reasoning which equity recognises. It is not restitutionary. It does not relate to the breach of fiduciary duty complained of. It elides a remedy in respect of the relevant transaction with a remedy in respect of a different transaction which involved no breach of duty by Mr Swindle. Further, the reasoning provides a clear example of the failure to distinguish between an event which has merely provided an opportunity for a loss and one which has caused a loss.

This conclusion is confirmed by the other authorities to which we have been referred. Smith New Court reviewed the right to recover damages in the tort of deceit. The starting point is that the plaintiff must prove that his participation in the relevant transaction was induced by the fraudulent misrepresentation. ( Downs v Chappell [1996] 3 AER 344) This proved, the fraudulent defendant "is bound to make reparation for all the damage directly flowing from the transaction". (per Lord Browne-Wilkinson [1996] 3 WLR at 1060: see also per Lord Steyn at pp.1077-8) Thus two successive causative criteria have to be applied. The first is that the fraud induced the transaction. The second is that the loss complained of must have directly flowed from that transaction. Neither of these criteria was Mrs Harrison able to satisfy. On the findings of the Judge, she was not induced to enter into the loan transaction by any misrepresentation or nondisclosure by Mr Swindle or his firm, nor did the loss which she now seeks to recover directly flow from that transaction.

"At common law there are two principles fundamental to the award of damages. First, that the defendant's wrongful act must cause the damage complained of. Second, that the plaintiff is to be put "in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation:" Livingstone v Rawyards Coal Co. (1880) 5 App.Cas. 25, 39 per Lord Blackburn. Although, as will appear, in many ways equity approaches liability for making good a breach of trust from a different starting point, in my judgment those two principles are applicable as much in equity as in common law. Under both systems liability is fault-based: the defendant is only liable for the consequences of the legal wrong he has done to the plaintiff and to make good the damage caused by such a wrong. He is not responsible for damage not caused by his wrong or to pay by way of compensation more than the loss suffered from such wrong. The detailed rules of equity as to causation and the quantification of loss differ, at least ostensibly, from those applicable at common law. But the principles underlying both systems are the same."

Although he uses the but for test, he specifically relates it to the actual breach of trust. This is inconsistent with the argument of Mr Bannister seeking to recover as damages for breaches of duty losses which would have occurred whether or not there had been such breaches. Mrs Harrison would have borrowed the money from Mr Swindle's firm even if he had fully discharged his duty of disclosure to her. An honest breach of a fiduciary duty is certainly not to be viewed any more seriously than an honest breach of trust.

"'In summary, compensation is an equitable monetary remedy which is available when the equitable remedies of restitution and account are not appropriate. By analogy with restitution, it attempts to restore to the plaintiff what has been lost as a result of the breach, i.e., the plaintiff's loss of opportunity. The plaintiff's actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight. Foreseeability is not a concern in assessing compensation, but it is essential that the losses made good are only those which, on a common sense view of causation , were caused by the breach.' (Emphasis added.)

The Canson case is in my judgment unhelpful to Mr Bannister whether one looks at the majority or minority reasons for the decision of the court; on either view the causative relevance of the breach to the loss had to be shown. (The helpful discussion of this case and the related problems concerning remedies against fiduciaries in chapter 6 of Glover: 'Commercial Equity, Fiduciary Relationships' also confirms the views which I have expressed.)

In conclusion, I would add a footnote about the statement in Bristol & West v Mothew [1996] 4 AER 698 at pp.705-6 that Downs v Chappell was authority for the proposition, and bound them to hold, that it was sufficient to succeed in the tort of negligence for a plaintiff to prove that the defendant had made a negligent misrepresentation upon which he, the plaintiff, had relied and that it was irrelevant what representation the defendant would have made if he had been careful. This was not in fact the decision in Downs v Chappell . In that case the negligent accountant had purported to verify figures for a business at a time when he had no basis to confirm any figures at all. ([1996] 3 AER at 349) The accurate figures were then unknown and the accountant should have said so. If he had said so, the plaintiff would not have purchased the business. The figures used by the Judge were not produced for at least another 16 months, by which time the plaintiff had long since bought the business and become committed to the losses which formed the subject matter of the action. The court in Downs v Chappell reversed the judge on this point because he had had based his decision on the later, irrelevant, figures. (pp.351h-352a)

Mrs Harrison, a widow since 1977, lived at and owned 13 Warwick Place, Leamington Spa. She was not in good health. On the 21st June 1991 she mortgaged her home to the National Home Loans Corporation in order to raise £180,000. A small part of that sum was used to redeem existing mortgages (£8,500). The balance was used to finance the purchase of and to pay the cost of repairs and alterations to the Aylesford Hotel, 1, High Street, Warwick. Since January 1991 Mark, her eldest son, who had some catering experience, had been negotiating with receivers of the previous owners for the purchase of the Aylesford Hotel, which he planned to run as a restaurant. But his attempts, assisted by an independent financial advisor, Mr Peter Davis of County Brokers, to raise the necessary finance were unsuccessful. Mrs Harrison agreed to re-mortgage her home to assist in the purchase of the hotel in her own name as an investment. She saw it as a family enterprise. An application to National Home Loans made on the 24th May 1991 resulted in an offer of a mortgage on the 29th May 1991. It was hoped that the projected income from the restaurant would cover the mortgage repayments.

Alsters, whose practice is based in Leamington Spa, were instructed by Mrs Harrison in April 1991 to act for her and Mark in the conveyancing aspects of the transaction. Mrs Harrison and Mark hoped to raise the rest of the purchase price by a loan of £100,000 from Banks Brewery. They obtained financial and commercial advice from other quarters: Mr Davis of County Brokers and Mr Peter Stuffins, a Chartered Accountant. Alsters were not retained to advise on the prudence of the enterprise.

On the 1st July 1991 contracts for the purchase of the Aylesford Hotel for £220,000 were exchanged. A non-refundable deposit of 20% of the purchase price (£44,000) was paid on exchange. Completion was fixed for the 5th August 1991. Time was to be of the essence. Access was given to the hotel for making alterations and carrying out repairs. Mrs Harrison had signed a "disclaimer" letter on 21 June 1991, stating that she instructed Alsters " to proceed and exchange contracts notwithstanding the fact that:-

It was necessary to raise over £70,000 for the balance of the purchase price in time for the completion date. Efforts to raise money from various sources were unsuccessful. The brewery money was not forthcoming. Under threat of forfeiture of the deposit, Alsters negotiated a postponement of the completion date till 2pm on the 8th August 1991. On the day before postponed completion, Wolverhampton & Dudley's Brewery made a loan offer of £100,000, but it was subject to contract and to bank references which were unlikely to be provided. Other attempts to obtain bridging finance from Mr Peter Davis and from Barclay's Bank (Bedworth Branch) failed.

In those circumstances Alsters offered a bridging loan to Mrs Harrison on 7th August to enable completion to take place as arranged. The loan was for £75,000, repayable on the 8th October 1991, secured by a first charge on the Aylesford Hotel. The agreed rate of interest was 5% above the base rate of the Royal Bank of Scotland. Alsters borrowed the necessary money from that bank at a rate of 2.5% above base rate. The £75,000 covered not only the balance needed to pay the purchase price, but also the legal costs amounting to £5,000 and a £1,000 arrangement fee. The Royal Bank of Scotland, who charged an arrangement fee of £750 (1%), agreed to split the fee with Alsters. Mrs Harrison was advised by Alsters of her right to take independent legal advice, but there was no time for that to be done.

Completion took place on the 8th August 1991. Later events explain why litigation arose between Mrs Harrison, her younger son, Miles Harrison, and Alsters, though the details are not directly relevant to the claim by Mrs Harrison against Alsters for breach of fiduciary duty. It is, however, necessary to complete the history in order to understand the arguments advanced on the claim for equitable compensation.

The restaurant and tea room business carried on at the Aylesford Hotel failed. Mark Harrison faded from the picture in mid-1992, when his youngest brother, Miles, took over the running of the business. The repayments under the mortgage of 13, Warwick Place fell into arrears in 1992. National Home Loans obtained a possession order on the 15th December 1992. They sold the property in 1993, leaving about £30,000 owing under that mortgage. Mrs Harrison moved into the Aylesford Hotel. On the 13th March 1993 she transferred the hotel to her son Miles for the sum of £24,185. The transfer was subject to the first charge in favour of Alsters, who had not been repaid, and to a second charge made in favour of the Royal Bank of Scotland on the 30th September 1991 to raise working capital. Payments promised by Miles to Alsters were not kept up. They started proceedings for possession and repayment against Miles in January 1994. Mrs Harrison was joined as a defendant in March 1994. Both Mrs Harrison and Miles Harrison raised counterclaims against Alsters. Mrs. Harrison's counterclaim was for breach of the duty of care and for breach of fiduciary duty.

The Recorder held that (a) Alsters were not in breach of their duty of care to Mrs Harrison in relation to her entering into the contract for the purchase of the Aylesford hotel (there is no appeal on this point); but that (b) they were in breach of their duty of care and (c) in breach of fiduciary duty in relation to the bridging loan and charge. Mrs Harrison had not, however, suffered any recoverable loss in respect of those breaches of duty. No loss flowed from those breaches: another solicitor would have advised Mrs Harrison to take the offer of the bridging loan. She had no choice. There was no evidence of a better offer elsewhere. The alternative was to forfeit the deposit and place the property on a falling market.

(1) The Recorder had rightly held that Alsters were in breach of their duty of care and in breach of fiduciary duty. Alsters were in a fiduciary relationship with Mrs Harrison. They were her solicitors. They had not disclosed to her all the material facts which they should have disclosed, namely the split of the arrangement fee with the bank from whom they raised the money to lend Mrs Harrison, the differential in the rate of interest which they were charging Mrs Harrison and information possessed by them that the brewery were unlikely to make a loan, because the bank would not provide the references required by the brewery. Alsters had placed themselves in a position where their duty to Mrs Harrison, as a client, conflicted with their own interests. They were making an undisclosed profit from the loan transaction with her. She had entered into a bridging loan with them without full information and without independent legal advice.Alsters should have insisted on Mrs Harrison taking separate advice. They were under a fiduciary duty not to lend money to Mrs Harrison. They had acted in breach of that duty on 8 August 1991.

(2) But for that breach of duty, Mrs Harrison would have been unable to complete the purchase of the Aylesford Hotel. There was no other source of finance available. She would not have incurred a liability to repay them £75,000. More important, she would not have applied the balance of the advance from the National Home Loans Corporation in the purchase of the Aylesford Hotel. Although inability to complete the contract through lack of finance would have meant that she lost the £44,000 deposit and the money already spent on repairs and alterations to the Aylesford Hotel, she would have retained her equity in 13, Warwick Place. That was worth over £100,000. Instead, she lost her home and she still owes a substantial sum to National Home Loans.

(3) Alsters were liable to pay her equitable compensation for breach of duty. As a result of that breach of duty she had lost the opportunity to say " no " to the bridging loan after receiving the independent legal advice she should have received. Alsters had made the choice for her. That was a breach of fiduciary duty for which she was entitled to a restitutionary remedy. The loss of her equity in her home flowed directly from that breach of duty. Alsters were liable for all the consequences of whatever decision Mrs Harrison took without the benefit of independent legal advice. It is irrelevant to the quantum of equitable compensation that her loss was unforeseeable; or that she would not have acted differently on being fully informed of all material facts known to Alsters and after taking separate advice and would still have said " Yes " to the offer of the bridging loan; or that another firm of solicitors would have advised her to proceed with the loan from Alsters. No other solicitor knew as much as Alsters did about the circumstances of the transaction. In brief, Mrs Harrison had suffered losses which she would not have suffered but for Alsters' breach of duty. Those losses were a direct consequence of their breach of duty in making the loan to her.

The decision of the House of Lords in Nocton v.Ashburton is the seminal case, although,as Lord Devlin observed in Hedley Byrne & Co v. Heller & Partners [1964] AC 465 at 520 "....it is not at all easy to determine exactly what it decided." That is a common characteristic of pathbreaking cases: it may take a generation or more to work out the ramifications of broad statements of legal principle. It is possible to extract from the speeches the following principles relevant to this appeal:-

4. The equitable remedies available for breach of fiduciary duty are "more elastic" than the sanction of damages attached to common law fraud and negligence. (Remedies include rescission where restitutio in integrum is possible; replacement of property improperly acquired from the person to whom the duty is owed; accounting for profits and benefits acquired in breach of duty.) Payment of compensation may be ordered to put the plaintiff "in as good a position pecuniarily as that to which he was in before the injury."(p.952). The measure "...may not always be the same as in an action for deceit or for negligence."(p.958).It is instructive to examine the remedy granted by the House of Lords in Nocton v. Ashburton. The claim against the solicitor alleged fraud.The trial judge found that fraud was not proved and dismissed the action. The Court of Appeal, in what Lord Haldane described as a "rash proceeding"(p.945), reversed the judge,found fraud and directed an inquiry as to what damage,if any, had been sustained by the plaintiff " by reason of " the defendant's wrongdoing, as identified in the terms of the inquiry. Although the House of Lords held that the Court of Appeal were wrong to reverse the judge, they upheld the order for an inquiry as to damages on the basis that the defendant, though not fraudulent, was liable to pay compensation for breach of fiduciary duty. The terms of that inquiry already quoted made it clear that a causal link had to be established between the defendant's wrongdoing and the loss suffered by the plaintiff.

As solicitors for Mrs Harrison, Alsters owed her, in addition to a common law duty of care, fiduciary duties in equity. In making the bridging loan to her, while she was still their client, Alsters had placed themselves in an actual conflict situation: they were under a duty to disclose to her all material facts known to them in connection with the bridging loan. They were under a duty not to prefer their own interests and make a profit for themselves out of the transaction. They were bound to act towards her with loyalty and good faith in their dealings with her.

The Recorder was entitled to hold, on the facts found by him, that Alsters were not only negligent in failing to advise Mrs Harrison that the brewery might not make the loan and of the nature of the risk, but had also acted in breach of their fiduciary duties. They continued to act for Mrs Harrison in a situation of actual conflict of duty and interest. Mrs Harrison had not had the benefit of independent legal advice on the bridging loan. Alsters had not disclosed to her the fact that the rate of interest they were charging was 2.5% higher than the rate of interest that the Royal Bank of Scotland were charging them for the loan of the money; and they had not disclosed the fact that the arrangement fee was equally split between them and the Royal Bank of Scotland. They did not disclose the fact that they knew that the Brewery loan was not likely to be forthcoming, as the bank would not provide the necessary references.

"when a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the court has determined that the non disclosed facts were material, speculation as to what course the constituent, on disclosure, would have taken is not relevant."

In considering the extent of liability for breach of fiduciary duty, it is not always necessary to consider all the matters which may be relevant in determining the extent of liability to pay damages for negligence. Foreseeability and remoteness of damage are, in general, irrelevant to restitutionary remedies for breach of trust or breach of fiduciary duty. The liability is to make good the loss suffered by the beneficiary of the duty. It is, however, necessary to address the issue of causation. Although equitable compensation, whether awarded in lieu of rescission or specific restitution or whether simply awarded as monetary compensation, is not damages, it is still necessary for Mrs Harrision to show that the loss suffered has been caused by the relevant breach of fiduciary duty. Liability is not unlimited.There is no equitable by-pass of the need to establish causation. As was said by Lord Browne - Wilkinson in Target Holdings ( Supra) at 439A

Lord Browne-Wilkinson approved as good law passages in the minority judgment of McLachlin J in Canson Enterprises Ltd -v Boughton and Co [1991] 85 DLR (4th) 129 to the effect that, although foreseeability of loss is not a concern in assessing equitable compensation, compensation is limited to the loss flowing from the breach of the relevant equitable duty. The exercise is one of restoration to the plaintiff of the value of what has been lost " through the breach " or " as a result of the breach ".

In questions of causation it is important to focus on the relevant equitable duty. The recent decision of the House of Lords in Banque Bruxelles (supra) is in point. That was a case on the measure of damages for breach of contract and tort (negligent over-valuation). It explains the correct approach for determining whether the loss suffered is attributable to the relevant breach of duty. As appears from Lord Browne-Wilkinson's comments in Target Holdings at 432 G, the same principles ought to be adopted in cases of breach of fiduciary duty: "....the defendant is only liable for the consequences of the legal wrong he had done to the plaintiff and to make good the damage caused by such wrong. He is not responsible for damage not caused by his wrong or to pay by way of compensation more than the loss suffered from such wrong." He added that, although equity and common law differ in their detailed rules, the underlying principles are the same.

In one sense it true that, "but for" the acquisition of the Aylesford Hotel, Mrs Harrison would not have mortgaged her home and she would not have subsequently suffered the loss of her equity in it. The Recorder held that there was no breach of duty of care by Alsters to Mrs Harrison in relation to the acquisition of the hotel. There is no appeal on that point. Further, it was never alleged that there was any breach of fiduciary duty by Alsters to Mrs Harrision in connection with the acquisition of the hotel. The fiduciary duties which have been held to have been breached were solely in connection with the bridging loan. What loss has Mrs Harrison suffered as a result of breach of fiduciary duty in connection with the bridging loan? It is asserted by Mr Bannister QC, on Mrs Harrison's behalf, that she has suffered substantial loss as a result of that breach of duty. She could not have acquired Aylesford hotel without Alsters' bridging loan; Alsters were in breach of fiduciary in making that loan; they are liable for the loss of her equity in her home, even it that was unforeseeable and even if another firm of solicitors would have advised Mrs Harrision to take up Alsters' offer of assistance.

That argument is flawed by the fallacy identified by Lord Hoffmann in Banque Bruxelles ie not starting from the correct point. The correct starting point is to identify the relevant cause of action i.e. the relevant wrong.That involves identifying the scope of the duty breached and the purpose of the rule imposing the duty. In Banque Bruxelles , for example, Lord Hoffmann drew a distinction, in the context of a negligent valuation, between a duty to provide information for the purpose of enabling someone else to make a decision on a course of action and, on the other hand, a duty to advise someone as to what course of action he should take. The extent of liability for loss suffered would not be the same in each case. A wrongdoer is only liable for the consequences of his being wrong and not for all the consequences of a course of action. In the present case, there was no fiduciary duty on Alsters to abstain from lending money to Mrs Harrision in all circumstances or to prevent her from completing the purchase of Aylesford Hotel in accordance with the contract to purchase. Alsters' duty was to make full disclosure of material facts relevant to the bridging loan to enable her to make a fully informed decision about it. They were in breach of that duty; but, as found by the judge, the probabilities are that Mrs Harrison would still have entered into the bridging loan, even it that breach of duty had not occurred, because she was intent on completing the purchase of the Aylesford Hotel, whatever independent legal advice she received. The loss which she suffered did not flow from that breach of fiduciary duty. It flowed from her own decision to take the risk involved in mortgaging her own home to finance her son's restaurant business at the hotel. Alsters were not under a duty to decline to act for Mrs Harrison on the purchase or to stop her from going ahead with the purchase,if that is what she wanted to do.

In brief, the loss of the equity in 13, Warwick Place was not a result of Alsters' breach of fiduciary duty in relation to the bridging loan which enabled Mrs Harrison to complete the contract for the acquisition of the Aylesford Hotel. It would be contrary to common sense and fairness to put upon Alsters the whole risk of the purchase transaction on the basis that they had failed to make full disclosure in a related loan transaction, when disclosure would not have affected the client's decision to proceed with the purchase. Mrs Harrison's position would have been the same even if there had been no breach of duty.

Mr Bannister QC submitted that, as an alternative to compensation for loss of the equity in her home, Mrs Harrision should have been awarded the value of the loss of her equity in the Aylesford Hotel, which was between £44,000 and £55,000. He argued that she had suffered loss as a result of the transfer, which had been presented to her for signature and by which, for a stated price of £24,185, she had parted with her only remaining asset of significance at a deliberate under-value to another client of Alsters, Miles, who was unable to pay (and did not in fact pay) the purchase price, payable by half yearly instalments over 10 years. He emphasised that the calculation of that sale price was based on a figure (£140,000) reached by Mr Malcolm Hawkesford F.R.I.C.S., instructed by Alsters, on the basis of a forced sale.His report is dated 17 December 1992. The result was a valuation 10 to 15% below the open market value. Mrs Harrision was not, as she ought to have been, advised independently of Miles and of Alsters, who were negligent in advising her to transfer the hotel to Miles.

The Recorder was right to reject Mrs Harrision's claim on this point. The facts were that Mrs Harrision was faced with a severe crisis at the end of 1992. National Home Loans had obtained an order for possession of her home. About £200,000 was secured by their charge on 13, Warwick Place. Bailiffs had entered into walking possession of the furniture in the Aylesford Hotel on 13 December 1992. There was a real risk of bankruptcy to Mrs Harrison and a real threat that she would lose her home through a forced sale of the hotel. She was suffering from ill-health. The price for the transfer of the hotel was fixed as on an arm's length sale. It was found as a fact that she would not have accepted independent legal advice to place the hotel on the open market for sale. There was, therefore, no need for independent advice and there was no breach of a duty of care by Alsters.

I would add that I do not agree with the Recorder that the evidence established a "tacit agreement" between Mr Hawkesford and Alsters to mislead as to the value of the Aylesford Hotel. Mr Hawkesford agreed to make a valuation on the instructions of Alsters after a discussion about the seriousness of the situation with Mrs Harrison. That valuation was not an undervalue. The fact was that,if the hotel was not transferred to Miles, Mrs Harrision would lose the property to her creditors. The transfer was of benefit to her,as she was released from her personal liability under the two mortgages.

It was submitted by Mr Matheson QC, on behalf of Alsters, that it was in consequence of the counterclaim by Miles to set aside the transfer that Alsters joined Mrs Harrision as a defendant. If the transfer was set aside, as Miles sought, Mrs Harrision would not have been released from her liability under the bridging loan charge. The rescission of the transfer would have resulted in the Aylesford Hotel and the burden of Alsters' mortgage on it reverting to Mrs Harrision. The fact that Miles had failed in his claim for rescission meant that he, rather than Alsters, ought to pay the costs of the unsuccessful claim against Mrs Harrision.

England and Wales Court of Appeal (Civil Division) Decisions

STEPHEN SWINDLE TIMOTHY MILLARD FILLMORE TONY CHARLES COX ROSALIND HELEN ROWETT v. MILES JUSTIN HARRISON MARY AGNES HARRISON [1997] EWCA Civ 1339 (25th March, 1997)

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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Swindle v Harrison & Anor [1997] EWCA Civ 1339 (25th March, 1997) URL: http://www.bailii.org/ew/cases/EWCA/Civ/1997/1339.html Cite as: [1997] 4 All ER 705, [1997] PNLR 641, [1997] EWCA Civ 1339