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Lloyd's Maritime and Commercial Law Quarterly

AGENTS’ DISBURSAL OF FUNDS IN BREACH OF INSTRUCTIONS Peter Watts * This article argues that, where an agent disburses a principal’s funds in breach of instructions, the principal is prima facie entitled at common law to bring a restitutionary claim against the agent for a refund of the moneys so disbursed. Such a claim is merely a manifestation of a general inference at common law of a right to a refund where the recipient of a payment (or other transfer) has failed to meet the undertakings attached to the payment. The right to a refund is quite independent of any implied promise there may also be on the part of the payee to put the payer in the position it would have been in had the undertakings been met. It is therefore no defence that, had the undertakings been met, the claimant would have suffered a loss. But the refund right is fragile in other respects. It must be asserted promptly after the claimant knows the conditions have been broken; and, even where the claimant does not know of the breach it may, for a range of reasons, become too late to invoke it. In so far as agents are subject to parallel duties to account at equity for misapplied funds, the relevant principles are not markedly different. These principles of the common law were not addressed in Target Holdings Ltd v Redferns and AIB Group (UK) Plc v Mark Redler & Co Solicitors. In the result, the reasoning in these cases was seriously flawed, even though the ultimate outcome in each can be justified. Not only does the reasoning deployed in them damage the law of agency, it threatens serious and unjustified constriction of the law’s responses to breaches of contract in general. In 2014, the United Kingdom Supreme Court gave its much anticipated decision in AIB Group (UK) Plc v Mark Redler & Co Solicitors . 1 The court had been asked to consider the correctness of the decision and reasoning of the House of Lords in Target Holdings Ltd v Redferns , 2 15 years earlier. Target Holdings was affirmed both in its result and in its reasoning. Both cases involved the simple problem of a firm of solicitors disbursing client funds, those of a commercial lender, to a third party in breach of the client’s instructions. That there could be liability to the client in such circumstances was uncontested. It was the form * QC, Professor of Law, University of Auckland. I am grateful for the comments of Richard Nolan and James Penner on a draft of this paper, and for the support of the University of Hong Kong, which hosted the symposium at which this paper was first aired. All shortcomings remain the author’s. 1. [2014] UKSC 58; [2014] 3 WLR 1367. See the contrasting positions of L Ho, “Equitable Compensation on the Road to Damascus” (2015) 131 LQR 213; and R Lee, “Substitutive Compensation for Breach of Trust: An Irrelevant Fairy Tale?” (2015) 9 J Eq 94. See too P Turner, “The New Fundamental Norm of Recovery for Losses to Express Trusts” [2015] CLJ 188; and P Davies, “Remedies for Breach of Trust” (2015) 78 MLR 681. 2. [1996] AC 421. AGENTS’ DISBURSAL OF FUNDS IN BREACH OF INSTRUCTIONS 119

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