Target Holdings Limited v Redferns (a firm)

This appeal concerned the extent of a trustee's liability to compensate a beneficiary for a breach of trust where the beneficiary would, on the facts assumed, have suffered the same financial loss even in the absence of the breach. The House of Lords held that a trustee in breach of trust is liable only for losses caused by the breach and that equitable compensation is to be assessed at the date of judgment with the benefit of hindsight. The court rejected the proposition that a trustee must automatically reconstitute a client account (or "trust fund") after completion of the underlying commercial transaction so as to expose the trustee to loss which was not caused by his breach.

This case arose out of a conveyancing and lending transaction in which the solicitors Redferns, acting both for the purchaser companies and for the lender Target Holdings Limited, paid away mortgage funds from their client account in breach of Target's instructions. Target alleged breach of trust and negligence and sought summary judgment or an interim payment of the sums advanced. At first instance Warner J granted conditional leave to defend the breach of trust claim subject to payment into court; the Court of Appeal allowed Target's cross-appeal and assessed damages largely by reference to the sums wrongly paid away. Redferns appealed to the House of Lords.

The key legal questions framed were:

• Whether a trustee who has paid trust money to a stranger is immediately liable to restore the trust fund such that the beneficiary can recover the whole sum wrongly paid away even if, on the facts at trial, the beneficiary has suffered no loss caused by the trustee's breach;
• Whether equitable compensation for breach of trust is to be assessed as at the date of the breach (the "stop the clock" approach) or at the date of judgment with the benefit of hindsight;
• Whether an order to reconstitute a client account is an appropriate remedy after completion of the underlying commercial transaction.

The House of Lords analysed the fundamental equitable principles and causation rules. The court emphasised that equitable compensation is intended to make good loss caused by the breach and that the basic questions are whether the beneficiary has any right infringed and, if so, what loss flowed from that infringement. The court rejected the Court of Appeal's approach which would "stop the clock" at the date of breach and make the trustee liable for losses not caused by his breach. It held that the beneficiary was not entitled to reconstitution of the client account once the commercial transaction had been completed and that compensation should be assessed at the date of judgment. Applying those principles, and on the facts which had to be assumed for present purposes, the court held that Target had not demonstrated a compensatable loss caused by Redferns' breach and accordingly restored the order of Warner J permitting Redferns to defend the breach of trust claim.

Appeal allowed. The House of Lords held that a trustee in breach of trust is liable to make good only the loss caused by the breach; equitable compensation is to be assessed at the date of judgment with the benefit of hindsight; a beneficiary is not automatically entitled to reconstitution of a client account after completion of the commercial transaction so as to recover sums equal to money wrongly paid away where, on the assumed facts, the beneficiary suffered no loss caused by the breach. Warner J's order (conditional leave to defend and payment into court) was restored.

Chancery Division (Warner J) – 19 November 1992: conditional leave to defend and order for payment into court; Court of Appeal – 8 November 1993, [1994] 1 W.L.R. 1089: allowed Target's cross-appeal and assessed damages for sums paid away; House of Lords – 20 July 1995, [1995] UKHL 10: appeal allowed and Court of Appeal order set aside; Warner J order restored.