Target Holdings Ltd v Redferns

Equitable compensation for breach of trust makes good loss caused by the breach. Although equity’s detailed rules differ from common law rules, compensation cannot exceed the loss which, viewed with hindsight and common sense, would not have occurred but for the breach.

The amount is assessed at judgment, rather than fixed when the breach occurs. Where client money is held on a bare trust as part of a conveyancing transaction, the client cannot ordinarily require reconstitution of the client account after completion merely to recover more than the breach caused.

A lender advanced money to solicitors for a loan secured on land. The solicitors paid the money away before the conveyance and charge were completed, contrary to their authority and in breach of trust. The lender nevertheless obtained the intended valid security and later suffered loss when the borrower became insolvent and the security realised substantially less than the advance.

Warner J gave the solicitors leave to defend the trust claim conditional upon paying £1 million into court. The Court of Appeal, by a majority, allowed the lender’s cross-appeal and entered final judgment for the money wrongly paid away, less the net proceeds of the security: [1994] 1 W.L.R. 1089. The central issue was whether a trustee must compensate a beneficiary for loss which would have occurred even without the breach.

1. Appeal allowed unanimously. Lord Browne-Wilkinson delivered the leading speech. Lord Keith of Kinkel, Lord Ackner, Lord Jauncey of Tullichettle and Lord Lloyd of Berwick agreed. The Court of Appeal’s order was set aside and Warner J’s order restored.
2. Per Lord Browne-Wilkinson, equitable compensation for breach of trust makes good loss caused by the breach. Equity may differ from the common law in its detailed rules, including remoteness and quantification, but a trustee does not compensate loss which the breach did not cause. The first inquiry is whether an infringed beneficial right produced loss.
3. Per Lord Browne-Wilkinson, wrongful disposal under a subsisting traditional trust ordinarily requires restoration of the trust estate because that protects beneficiaries with successive interests. If specific restitution is impossible, compensation restores the estate to the position it would have occupied without the breach. Once the trust is exhausted and a beneficiary is absolutely entitled, compensation is ordinarily paid directly and equals the difference between what was received and what would have been received but for the breach.
4. Per Lord Browne-Wilkinson, a commercial bare trust forming one incident of a conveyancing transaction must be considered in its commercial setting. The client may require wrongly paid money to be restored before completion. After completion, however, there is ordinarily no right to reconstitute the solicitor’s client account merely to recover more than the client actually lost.
5. Per Lord Browne-Wilkinson, equitable compensation is assessed at judgment with the benefit of hindsight. It is not fixed by stopping the clock when money is paid away. Foreseeability is not the controlling concern, but common-sense causation and the but-for connection remain essential.
6. Per Lord Browne-Wilkinson, on the assumption required at the summary stage that the transaction would have proceeded anyway, the lender received the same valid security it would have received without the breach and proved no compensatable trust loss. If trial showed that the unauthorised use of the money was essential to completion, the recoverable loss would be the amount advanced less the security proceeds. That issue was triable, so conditional leave to defend and the £1 million payment into court were justified.

1. House of Lords: Allowed the solicitors’ appeal unanimously, set aside the Court of Appeal’s order and restored Warner J’s order. The cause was remitted to the Chancery Division.
2. Court of Appeal: Ralph Gibson, Hirst and Peter Gibson LJJ dismissed the solicitors’ appeal and, Ralph Gibson LJ dissenting, allowed the lender’s cross-appeal. It entered final judgment for £1,490,000 less the net proceeds of the security: [1994] 1 W.L.R. 1089.
3. High Court, Chancery Division: Warner J gave unconditional leave to defend the negligence claim and conditional leave to defend the breach of trust claim upon payment of £1 million into court.