United Kingdom House of Lords Decisions

Parliamentary Archives,
HL/PO/JU/18/255

Target Holdings Limited (Respondents) v. Redferns (a firm)

(Appellants) and others




JUDGMENT

Die Jovis 20° Julii 1995

Upon Report from the Appellate Committee to whom was
referred the Cause Target Holdings Limited against Redferns, That
the Committee had heard Counsel as well on Monday the 20th as on
Tuesday the 21st and Wednesday the 22nd days of February last
upon the Petition and Appeal of Redferns (a firm) of 33-39 Bridge
Road, Wembley Park, Middlesex HA9 9AF, praying that the matter
of the Order set forth in the Schedule thereto, namely an Order
of Her Majesty's Court of Appeal of the 8th day of November 1993,
might be reviewed before Her Majesty the Queen in Her Court of
Parliament and that the said Order might be reversed, varied or
altered or that the Petitioners might have such other relief in
the premises as to Her Majesty the Queen in Her Court of
Parliament might seem meet; as upon the case of Target Holdings
Limited lodged in answer to the said Appeal; and due
consideration had this day of what was offered on either side in
this Cause:

It is Ordered and Adjudged, by the Lords Spiritual and
Temporal in the Court of Parliament of Her Majesty the Queen
assembled, That the said Order of Her Majesty's Court of Appeal
of the 8th day of November 1993 complained of in the said Appeal
be, and the same is hereby, Set Aside and that the Order of Mr.
Justice Warner of the 19th day of November 1992 be, and the same
is hereby, Restored: And it is further Ordered, That the
Respondents do pay or cause to be paid to the said Appellants the
Costs incurred by them in respect of the cross Appeal in the
Court of Appeal and in respect of the said Appeal to this House,
the amount of such last-mentioned costs to be certified by the
Clerk of the Parliaments if not agreed between the parties, and
that the Appellants do pay to the Respondents the Costs incurred
by them in respect of the original Appeal in the Court of Appeal:
And it is also further Ordered. That the Cause be, and the same
is hereby, remitted back to the Chancery Division of the High
Court of Justice to do therein as shall be just and consistent
with this Judgment.

Cler: Parliamentor:

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE




TARGET HOLDINGS LIMITED
(RESPONDENTS)

v.

REDFERNS (A FIRM) (APPELLANTS) AND OTHERS




ON 20 JULY 1995

Lord Keith of Kinkel
Lord Ackner
Lord Jauncey of Tullichettle
Lord Browne-Wilkinson
Lord Lloyd of Berwick




LORD KEITH OF KINKEL

My Lords,

For the reasons given in the speech to be delivered by my noble and
learned friend Lord Browne-Wilkinson, which I have read in draft and with
which I agree, I would allow this appeal.

LORD ACKNER

My Lords.

I have had the advantage of reading in draft the speech prepared by my
noble and learned friend. Lord Browne-Wilkinson. For the reasons which he
gives, I too, would allow the appeal, set aside the order of the Court of
Appeal and restore the order of Warner J.




LORD JAUNCEY OF TULLICHETTLE




My Lords,




I have had the advantage of reading in draft the speech prepared by my
noble and learned friend Lord Browne-Wilkinson. For the reasons he has
given, I too, would allow this appeal.




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LORD BROWNE-WILKINSON

My Lords,

This appeal raises a novel point on the liability of a trustee who
commits a breach of trust to compensate beneficiaries for such breach. Is the
trustee liable to compensate the beneficiary not only for losses caused by the
breach but also for losses which the beneficiary would, in any event, have
suffered even if there had been no such breach?

Prior to 15 May 1989 two adjoining plots of freehold land in
Birmingham, together known as 60-64 Great Hampton Street, Hockley ("the
property") were owned by Mirage Properties Ltd. ("Mirage"). On 15 May
1989 Mirage agreed, subject to contract, to sell the property to Crowngate
Developments Ltd. ("Crowngate") at a price of £775,000. A firm of
solicitors, the defendants Redferns, acted as Crowngate's solicitors. Draft
contracts were sent to Redferns and received on 17 May 1989.

On 9 June 1989 the plaintiff. Target Holdings Ltd. ("Target"), received
two completed loan application forms signed by a Mr. Kohli on behalf of
Crowngate. The applications were for loans totalling £1,706,000 and stated
the purchase price of the property to be £2m. The application gave no
particulars of the vendor. Target was never told that Crowngate had agreed
to buy the property for £775,000. The application was supported by a
professional valuation of the property at £2m. made by the second defendant
Alexander Stevens and Co. Ltd.

Unknown to Target, Crowngate's scheme was that Mirage would sell
the property to a Jersey company, Panther Ltd. ("Panther"), for £775,000;
Panther would then sell it to an English company, Kohli & Co. Ltd. ("Kohli
and Co.") for £1.250.000; and Kohli & Co. was then to sell the property on
to Crowngate for £2m., being the price at which Target believed Crowngate
was purchasing the property. Redferns (the relevant partner in which was Mr.
Anthony Bundy) acted for Crowngate, Panther and Kohli & Co. They took
their instructions in regard to the purchase of the property from two
individuals. Mr. Ajit Kohli and Mr. Baboo Musafir. On their instructions
Mr. Bundy caused Panther to be incorporated in Jersey by Reads Ltd., the
relevant director of which was Mr. Brian Pierce. The person beneficially
interested in Panther was stated by Mr. Kohli and Mr. Musafir to be a U.S.
resident, Mrs. Jasdeep Chadha, but it may be that Panther was in fact
incorporated for the benefit of those interested in Mirage. Kohli & Co. was
a company in which Mr. Kohli and his family were interested. Mr. Musafir
was the person who was principally beneficially interested in Crowngate,
although Kohli & Co. owned a minority sharehold.

On 15 June 1989 Target, who knew nothing of the original agreement
between Mirage and Crowngate or of the proposed sub-sale, approved loans
to Crowngate totalling £1,706,000 to be secured by a first mortgage on the



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property. Of the sum to be advanced, £1,525,000 was to be used for the
purchase of the property and the balance used to pay premiums on certain
insurance policies. On 23 June 1989 Redferns were instructed by Target to
act for them.

On 28 June 1989 Target transferred £1,525,000 to Redferns without
giving any express instructions to Redferns as to its release. It is common
ground that Redferns had implied authority to pay the money to or to the
order of Crowngate when the property had been conveyed to Crowngate and
Crowngate had executed charges in Target's favour. On 29 June, without
seeking Target's consent, Mr. Bundy transferred £1,250,000 (namely the sum
payable on the purchase by Kohli & Co. from Panther) to Panther, the bank
account of which was controlled by its directors.

Contracts for the sale of the property to Panther were signed by
Mirage on 30 June, on which date Mirage also executed transfers to Panther.
Also on that date Mr. Bundy instructed the directors of Reads to pay from
Panther's bank account sums totalling £1,072,787.42, of which the sum of
£772,787.42 was to be paid to Mirage (being the sum due on completion) and
various payments amounting to £300,000 were to be made to others (who may
have been those interested in Mirage) pursuant to Mr. Kohli's instructions.
Also on 30 June, Mr. Kohli informed Mr. Bundy that the balance of £510,000
of the purchase money payable to Kohli & Co. on the sale to Crowngate and
not being borrowed from Target had been paid by Crowngate to Kohli & Co.

A further £240,000 out of the Redferns' client account was paid out by
Redferns to Kohli & Co. on 3 July, being the balance of the £2m. payable by
Crowngate to Kohli & Co. on the purchase. That left £35,000 in Redferns'
client account: that sum was expended on stamp duty, land registry fees and
Redferns' fees.

On 4 July Mr. Bundy sent a letter dated 30 June 1989 by fax to Target
informing Target, quite untruthfully, that the purchase of the property and the
charges to Target had been completed on that day. In fact what happened was
that on 6 July Reads received various documents sent by Mr. Bundy for
execution by Panther including (a) the contract of purchase from Mirage (b)
the transfers from Mirage (c) the contract of sale to Kohli & Co. and (d) the
transfers to Crowngate. Those documents were signed and executed on behalf
of Panther and returned to Redferns by 11 July. The contracts of sale to
Kohli & Co. and to Crowngate were probably signed by those companies by
5 July. The legal charge of the property in favour of Target had also
probably been executed by Crowngate by 5 July. The contracts and transfers
were dated 30 June 1989 and the legal charges 31 July 1989.

The moneys in Panther's bank account were paid out to various
individuals and to a numbered Swiss bank account. Panther was subsequently
dissolved on Mr. Kohli's instructions on 24 May 1990.

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The situation therefore was as follows. Redferns, acting by Mr.
Bundy, was fully aware of the transaction involving Mirage, Panther, Kohli
& Co. and Crowngate. Although Redferns were also acting for Target as
lender, they never informed Target of the facts. In the course of acting as
Target's solicitors Redferns had paid away the mortgage money in its client
account to a stranger who had no contractual relationship with Crowngate and
before completion of the purchase by Crowngate or the mortgages by
Crowngate to Target. Such payments out of client account were otherwise
than in accordance with Redferns' instructions from Target. It is common
ground that the payments constituted a breach of trust by Redferns. On the
other hand. Target had obtained exactly what it had originally intended to
obtain, that is to say a loan to Crowngate secured by valid charges over the
property.

Crowngate was wound up as insolvent on 25 September 1991. Target
has sold the property as mortgagee for £500,000.

Target believes itself to have been the victim of a fraud perpetrated by
Messrs. Kohli and Musafir. It commenced these proceedings against Redferns
and against the valuers, the second defendant, which it alleged had negligently
valued the property. Judgment has been obtained in default against the second
defendant, which is in insolvent liquidation.

Target's case against Redferns is put in two ways. First, it is alleged
that Redferns was in breach of its duty of care as Target's solicitors in failing
to alert Target to the suspicious circumstances which indicated a fraud.
Secondly, and of direct relevance in the present appeal. Target alleges breach
of trust by Redferns in parting with the mortgage moneys without authority.
On 3 August 1992 Target issued a summons seeking summary judgment on
its claims pursuant to R.S.C., Ord. 14, with an alternative claim for an
interim payment under R.S.C., Ord. 29, r. 10.

On 19 November 1992 the summons came before Warner J. It has at
all times been common ground that Redferns committed a breach of trust
when, on 29 June and 3 July 1989, Redferns paid away Target's money
otherwise than in accordance with Target's instructions. Counsel for Target
submitted to Warner J. that Redferns came under an immediate duty to restore
the whole of the money paid away in breach of trust, that common law
principles of causation of damage did not apply to such a claim and that it was
irrelevant that Target had received exactly the security that it was intending
to obtain. Target further submitted, in the alternative, that if Target's money
had not been made wrongly available to pay the purchase price to Mirage on
30 June the whole transaction would have fallen through. If that had
happened, even on ordinary principles of causation the loss to Target caused
by the breach of trust was the total amount wrongly paid away since, if there
had been no breach of trust, the money would never have been paid away at
all. Warner J. held that the claim based on breach of trust was "very nearly
strong enough" to justify a summary judgment. However he gave leave to



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defend the breach of trust claim conditional upon the payment into court of
£lm. He did not expressly decide whether there was a triable issue as to
whether the whole transaction would have fallen through had it not been for
the breach of trust. As to Target's claim based on negligence, Warner J. gave
unconditional leave to defend on the grounds that there were triable issues of
fact, including the issue whether Target, if it had been informed by Redferns
of the chain of sales of the property, would have withdrawn from the
transaction or would have continued in reliance on the valuation made by the
second defendants.

Redferns appealed to the Court of Appeal against the refusal to give
them unconditional leave to defend the breach of trust claim and against the
order for the payment into court of £lm. Target cross-appealed against the
refusal to give summary judgment on the breach of trust claim. On 8
November 1993 the Court of Appeal (Ralph Gibson, Hirst and Peter Gibson
L.JJ.) [1994] 1 W.L.R. 1089, dismissed Redferns' appeal and (Ralph Gibson
L.J. dissenting) allowed Target's cross-appeal. They gave final judgment for
£1,490,000 less the net sum realised by Target on the subsequent sale of the
property. Shortly stated, Peter Gibson L.J. (with whom Hirst L.J. agreed)
held that the basic liability of a trustee in breach of trust is not to pay damages
but to restore to the trust fund that which it has been lost to it or to pay
compensation to the beneficiary for what he has lost. He held that, in
assessing the compensation payable to the beneficiary, causation is not
irrelevant but common law rules of causation, as such, do not apply: the
beneficiary is to be put back in the position he would have been in but for the
breach of trust. He held that in cases where the breach of trust does not
involve paying away trust money to a stranger (e.g. making an unauthorised
investment), the answer to the question whether any loss has been thereby
caused and the quantification of such loss will depend upon events subsequent
to the commission of the breach of trust. But he held that in cases, such as
the present, where the trustee has paid away trust moneys to a stranger, there
is an immediate loss to the trust fund and the causal connection between the
breach and the loss is obvious: the trustee comes under an immediate duty to
restore the moneys to the trust fund. He held that the remedies of Equity are
sufficiently flexible to require Target (as it has always accepted) to give credit
for the moneys received on the subsequent realisation of its security. But
otherwise Redferns liability was to pay to Target the whole of the moneys
wrongly paid away.

Redferns appeal to your Lordships against the decision of the Court of
Appeal.

Before considering the technical issues of law which arise, it is
appropriate to look at the case more generally. Target allege, and it is
probably the case, that they were defrauded by third parties (Mr. Kohli and
Mr. Musafir and possibly their associates) to advance money on the security
of the property. If there had been no breach by Redferns of their instructions
and the transaction had gone through, Target would have suffered a loss in



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round figures of £1.2m. (i.e. £1.7m. advanced less £500,000 recovered on the
realisation of the security). Such loss would have been wholly caused by the
fraud of the third parties. The breach of trust committed by Redferns left
Target in exactly the same position as it would have been if there had been no
such breach: Target advanced the same amount of money, obtained the same
security and received the same amount on the realisation of that security. In
any ordinary use of words, the breach of trust by Redferns cannot be said to
have caused the actual loss ultimately suffered by Target unless it can be
shown that, but for the breach of trust, the transaction would not have gone
through e.g. if Panther could not have obtained a conveyance from Mirage
otherwise than by paying the purchase money to Mirage out of the moneys
paid out, in breach of trust, by Redferns to Panther on 29 June. If that fact
can be demonstrated, it can be said that Redferns' breach of trust was a cause
of Target's loss: if the transaction had not gone through, Target would not
have advanced the money at all and therefore Target would not have suffered
any loss. But the Court of Appeal decided (see Ralph Gibson L.J. 1100B-C:
Peter Gibson L.J. 1104B) and it is common ground before your Lordships that
there is a triable issue as to whether, had it not been for the breach of trust,
the transaction would have gone through. Therefore the decision of the Court
of Appeal in this case can only be maintained on the basis that, even if there
is no causal link between the breach of trust and the actual loss eventually
suffered by Target (i.e. the sum advanced less the sum recovered) the trustee
in breach is liable to bear (at least in part) the loss suffered by Target.

The transaction in the present case is redolent of fraud and negligence.
But. in considering the principles involved, suspicions of such wrongdoing
must be put on one side. If the law as stated by the Court of Appeal is
correct, it applies to cases where the breach of trust involves no suspicion of
fraud or negligence. For example, say an advance is made by a lender to an
honest borrower in reliance on an entirely honest and accurate valuation. The
sum to be advanced is paid into the client account of the lender's solicitors.
Due to an honest and non-negligent error (e.g. an unforeseeable failure in the
solicitors' computer) the moneys in client account are transferred by the
solicitors to the borrower one day before the mortgage is executed. That is
a breach of trust. Then the property market collapses and when the lender
realises his security by sale he recovers only half the sum advanced. As I
understand the Court of Appeal decision, the solicitors would bear the loss
flowing from the collapse in the market value: subject to the court's
discretionary power to relieve a trustee from liability under section 61 of the
Trustee Act, 1925, the solicitors would be bound to repay the total amount
wrongly paid out of the client account in breach of trust receiving credit only
for the sum received on the sale of the security.

To my mind in the case of an unimpeachable transaction this would be
an unjust and surprising conclusion. 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



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wrong for which he is now getting his compensation or reparation":
Livingstone v. Rawyards Coal Company (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 at
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 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. On the assumptions that had to be made in the present case until the
factual issues are resolved (i.e. that the transaction would have gone through
even if there had been no breach of trust), the result reached by the Court of
Appeal does not accord with those principles. Redferns as trustees have been
held liable to compensate Target for a loss caused otherwise than by the
breach of trust. I approach the consideration of the relevant rules of equity
with a strong predisposition against such a conclusion.

The considerations urged before your Lordships, although presented
as a single argument leading to the conclusion that the views of the majority
in the Court of Appeal are correct, on analysis comprise two separate lines of
reasoning, viz.

1. an argument developed by Mr. Patten (but not reflected in the reasons
   of the Court of Appeal) that Target is now (i.e. at the date of
   judgment) entitled to have the "trust fund" restored by an order that
   Redferns reconstitute the trust fund by paying back into client account
   the moneys paid away in breach of trust. Once the trust fund is so
   reconstituted, Redferns as bare trustee for Target will have no answer
   to a claim by Target for the payment over of the moneys in the
   reconstituted "trust fund". Therefore, Mr. Patten says, it is proper
   now to order payment direct to Target of the whole sum improperly
   paid away, less the sum which Target has received on the sale of
   property;

2. the argument accepted by the majority of the Court of Appeal that,
   because immediately after the moneys were paid away by Redferns in
   breach of trust there was an immediate right to have the "trust fund"
   reconstituted, there was then an immediate loss to the trust fund for
   which loss Redferns are now liable to compensate Target direct.

The critical distinction between the two arguments is that argument (A)
depends upon Target being entitled now to an order for restitution to the trust
fund whereas argument (B) quantifies the compensation payable to Target as
beneficiary by reference to a right to restitution to the trust fund at an earlier



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date and is not dependent upon Target having any right to have the client
account reconstituted now.

Before dealing with these two lines of argument, it is desirable to say
something about the approach to the principles under discussion. The
argument both before the Court of Appeal and your Lordships concentrated
on the equitable rules establishing the extent and quantification of the
compensation payable by a trustee who is in breach of trust. In my judgment
this approach is liable to lead to the wrong conclusions in the present case
because it ignores an earlier and crucial question, viz., is the trustee who has
committed a breach under any liability at all to the beneficiary complaining
of the breach? There can be cases where, although there is an undoubted
breach of trust, the trustee is under no liability at all to a beneficiary. For
example, if a trustee commits a breach of trust with the acquiescence of one
beneficiary, that beneficiary has no right to complain and an action for breach
of trust brought by him would fail completely. Again there may be cases
where the breach gives rise to no right to compensation. Say, as often occurs,
a trustee commits a judicious breach of trust by investing in an unauthorised
investment which proves to be very profitable to the trust. A carping
beneficiary could insist that the unauthorised investment be sold and the
proceeds invested in authorised investments: but the trustee would be under
no liability to pay compensation either to the trust fund or to the beneficiary
because the breach has caused no loss to the trust fund. Therefore, in each
case the first question is to ask what are the rights of the beneficiary: only
if some relevant right has been infringed so as to give rise to a loss is it
necessary to consider the extent of the trustee's liability to compensate for
such loss.

The basic right of a beneficiary is to have the trust duly administered
in accordance with the provisions of the trust instrument, if any, and the
general law. Thus, in relation to a traditional trust where the fund is held in
trust for a number of beneficiaries having different, usually successive,
equitable interests, (e.g. A for life with remainder to B), the right of each
beneficiary is to have the whole fund vested in the trustees so as to be
available to satisfy his equitable interest when, and if, it falls into possession.
Accordingly, in the case of a breach of such a trust involving the wrongful
paying away of trust assets, the liability of the trustee is to restore to the trust
fund, often called "the trust estate", what ought to have been there.

The equitable rules of compensation for breach of trust have been
largely developed in relation to such traditional trusts, where the only way in
which all the beneficiaries' rights can be protected is to restore to the trust
fund what ought to be there. In such a case the basic rule is 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 Nocton v. Lord
Ashburton [1914] AC 932, 952, 958, per Viscount Haldane L.C. If



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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: Caffrey v.
Darby (1801) 6 Ves. 488; Clough v. Bond (1838) 3 My. and Cr. 490. Even
if the immediate cause of the loss is the dishonesty or failure of a third party,
the trustee is liable to make good that loss to the trust estate if. but for the
breach, such loss would not have occurred: see Underhill and Hayton, Law
of Trusts and Trustees 14th ed. (1987) pp. 734-736; In re Dawson decd.;
Union Fidelity Trustee Co. Ltd. v. Perpetual Trustee Co. Ltd. [1966] 2
N.S.W.R. 211; Bartlett v. Barclays Bank Trust Co. Ltd. (Nos. 1 and 2)
[1980] Ch. 515. 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: see also In re Miller's Deed Trusts (1978)
75 L.S.G. 454; Nestle v. National Westminster Bank Plc. [1993] 1 W.L.R.
1260.

Hitherto I have been considering the rights of beneficiaries under
traditional trusts where the trusts are still subsisting and therefore the right of
each beneficiary, and his only right, is to have the trust fund reconstituted as
it should be. But what if at the time of the action claiming compensation for
breach of trust those trusts have come to an end. Take as an example again
the trust for A for life with remainder to B. During A's lifetime B's only
right is to have the trust duly administered and, in the event of a breach, to
have the trust fund restored. After A's death, B becomes absolutely entitled.
He of course has the right to have the trust assets retained by the trustees until
they have fully accounted for them to him. But if the trustees commit a
breach of trust, there is no reason for compensating the breach of trust by way
of an order for restitution and compensation to the trust fund as opposed to the
beneficiary himself. The beneficiary's right is no longer simply to have the
trust duly administered: he is, in equity, the sole owner of the trust estate.
Nor, for the same reason, is restitution to the trust fund necessary to protect
other beneficiaries. Therefore, although I do not wholly rule out the
possibility that even in those circumstances an order to reconstitute the fund
may be appropriate, in the ordinary case where a beneficiary becomes
absolutely entitled to the trust fund the court orders, not restitution to the trust
estate, but the payment of compensation directly to the beneficiary. The
measure of such compensation is the same i.e. the difference between what the
beneficiary has in fact received and the amount he would have received but
for the breach of trust.

Thus in Bartlett v. Barclays Bank Trust Co. Ltd. (Nos. 1 and 2) [1980]
Ch. 515 by the date of judgment some of the shares settled by the trust deed
had become absolutely vested in possession: see at p. 543A. The
compensation for breach of trust, though quantified by reference to what the
fund would have been but for the breach of trust, was payable directly to the



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persons who were absolutely entitled to their shares of the trust fund: see at
p. 544. Accordingly, in traditional trusts for persons by way of succession,
in my judgment once those trusts have been exhausted and the fund has
become absolutely vested in possession, the beneficiary is not normally
entitled to have the exhausted trust reconstituted. His right is to be
compensated for the loss he has suffered by reason of the breach.

I turn then to the two arguments urged before your Lordships.
ARGUMENT A

As I have said, the critical step in this argument is that Target is now
entitled to an order for reconstitution of the trust fund by the repayment into
client account of the moneys wrongly paid away, so that Target can now
demand immediate repayment of the whole of such moneys without regard to
the real loss it has suffered by reason of the breach.

Even if the equitable rules developed in relation to traditional trusts
were directly applicable to such a case as this, as I have sought to show a
beneficiary becoming absolutely entitled to a trust fund has no automatic right
to have the fund reconstituted in all circumstances. Thus, even applying the
strict rules so developed in relation to tradition trusts, it seems to me very
doubtful whether Target is now entitled to have the trust fund reconstituted.
But in my judgment it is in any event wrong to lift wholesale the detailed rules
developed in the context of traditional trusts and then seek to apply them to
trusts of quite a different kind. In the modern world the trust has become a
valuable device in commercial and financial dealings. The fundamental
principles of equity apply as much to such trusts as they do to the traditional
trusts in relation to which those principles were originally formulated. But in
my judgment it is important, if the trust is not to be rendered commercially
useless, to distinguish between the basic principles of trust law and those
specialist rules developed in relation to traditional trusts which are applicable
only to such trusts and the rationale of which has no application to trusts of
quite a different kind.

This case is concerned with a trust which has at all times been a bare
trust. Bare trusts arise in a number of different contexts: e.g. by the ultimate
vesting of the property under a traditional trust, nominee shareholdings and,
as in the present case, as but one incident of a wider commercial transaction
involving agency. In the case of moneys paid to a solicitor by a client as part
of a conveyancing transaction, the purpose of that transaction is to achieve the
commercial objective of the client, be it the acquisition of property or the
lending of money on security. The depositing of money with the solicitor is
but one aspect of the arrangements between the parties, such arrangements
being for the most part contractual. Thus, the circumstances under which the
solicitor can part with money from client account are regulated by the
instructions given by the client: they are not part of the trusts on which the
property is held. I do not intend to cast any doubt on the fact that moneys

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held by solicitors on client account are trust moneys or that the basic equitable
principles apply to any breach of such trust by solicitors. But the basic
equitable principle applicable to breach of trust is that the beneficiary is
entitled to be compensated for any loss he would not have suffered but for the
breach. I have no doubt that, until the underlying commercial transaction has
been completed, the solicitor can be required to restore to client account
moneys wrongly paid away. But to import into such trust an obligation to
restore the trust fund once the transaction has been completed would be
entirely artificial. The obligation to reconstitute the trust fund applicable in
the case of traditional trusts reflects the fact that no one beneficiary is entitled
to the trust property and the need to compensate all beneficiaries for the
breach. That rationale has no application to a case such as the present. To
impose such an obligation in order to enable the beneficiary solely entitled
(i.e. the client) to recover from the solicitor more than the client has in fact
lost flies in the face of common sense and is in direct conflict with the basic
principles of equitable compensation. In my judgment, once a conveyancing
transaction has been completed the client has no right to have the solicitor's
client account reconstituted as a "trust fund".

ARGUMENT B

I have already summarised the reasons of the majority in the Court of
Appeal for holding that Redferns were liable to pay to Target, by way of
compensation, the whole sum paid away in breach of trust, less the sum
recovered by Target. Mr. Patten supported this argument before your
Lordships.

The key point in the reasoning of the Court of Appeal is that where
moneys are paid away to a stranger in breach of trust, an immediate loss is
suffered by the trust estate: as a result, subsequent events reducing that loss
are irrelevant. They drew a distinction between the case in which the breach
of trust consisted of some failure in the administration of the trust and the case
where a trustee has actually paid away trust moneys to a stranger. There is
no doubt that in the former case, one waits to see what loss is in fact suffered
by reason of the breach i.e. the restitution or compensation payable is assessed
at the date of trial, not of breach. However, the Court of Appeal considered
that where the breach consisted of paying away the trust moneys to a stranger
it made no sense to wait: it seemed to Peter Gibson L.J. [1994] 1 W.L.R.
1089, 1103G-H obvious that in such a case "there is an immediate loss,
placing the trustee under an immediate duty to restore the moneys to the trust
fund". The majority of the Court of Appeal therefore considered that
subsequent events which diminished the loss in fact suffered were irrelevant,
save for imposing on the compensated beneficiary an obligation to give credit
for any benefit he subsequently received. In effect, in the view of the Court
of Appeal one "stops the clock" at the date the moneys are paid away: events
which occur between the date of breach and the date of trial are irrelevant in
assessing the loss suffered by reason of the breach.

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A trustee who wrongly pays away trust money, like a trustee who
makes an unauthorised investment, commits a breach of trust and comes under
an immediate duty to remedy such breach. If immediate proceedings are
brought, the court will make an immediate order requiring restoration to the
trust fund of the assets wrongly distributed or, in the case of an unauthorised
investment, will order the sale of the unauthorised investment and the payment
of compensation for any loss suffered. But the fact that there is an accrued
cause of action as soon as the breach is committed does not in my judgment
mean that the quantum of the compensation payable is ultimately fixed as at
the date when the breach occurred. The quantum is fixed at the date of
judgment at which date, according to the circumstances then pertaining, the
compensation is assessed at the figure then necessary to put the trust estate or
the beneficiary back into the position it would have been in had there been no
breach. I can see no justification for "stopping the clock" immediately in
some cases but not in others: to do so may, as in this case, lead to
compensating the trust estate or the beneficiary for a loss which, on the facts
known at trial, it has never suffered.

Moreover, in my judgment the distinction is not consistent with the
decision in In re Dawson decd. [1966] 2 N.S.W.R. 211. In that case a
testator had established separate executors for his New Zealand and his
Australian estates. In 1939 the New Zealand estate was under the
administration of attorneys for, amongst others, P.S.D. P.S.D. arranged that
N.Z. £4,700 should be withdrawn from the New Zealand estate and paid away
to a stranger. X. who in turn was supposed to lend the moneys to an
Australian company in which P.S.D. was interested. X absconded with
money. In that case, therefore, the trust money had been paid away to a
stranger. Street J. had to decide whether the liability of P.S.D to compensate
the estate was to be satisfied by paying sufficient Australian pounds to buy
N.Z. £4,700 at the rate of exchange at the date of breach (when there was
parity between the two currencies) or at the date of judgment (when the
Australian pound had depreciated against the New Zealand pound). He held
that the rate of exchange was to be taken as at the date of judgment.
Although, contrary to the present case, this decision favoured the beneficiaries
at the expense of the defaulting trustee, the principle is of general application
whether operating to the benefit or the detriment of the beneficiaries. The
equitable compensation for breach of trust has to be assessed as at the date of
judgment and not at an earlier date.

In Canson Enterprises Ltd. v. Boughton and Co. (1991) 85 D.L.R.
(4th) 129 the plaintiffs had bought some property in a transaction in which
they were advised by the defendant, a solicitor. To the knowledge of the
solicitor, but not of the plaintiffs, there was an improper profit being made by
the vendors. If the plaintiffs had known that fact, they would not have
completed the purchase. The defendant's solicitor was in breach of his
fiduciary duties to the plaintiffs. After completion the plaintiffs built a
warehouse on the property, which due to the negligence of engineers and
builders, was defective. The question was whether the defendant solicitor was



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liable to compensate the plaintiffs for the defective building, the plaintiffs
contending that "but for" the defendant's breach of fiduciary duty they would
not have bought the property and therefore would not have built the
warehouse. Although the Supreme Court of Canada were unanimous in
dismissing the claim, they reached their conclusions by two differing routes.
The majority considered that damages for breach of fiduciary duty fell to be
measured by analogy with common law rules of remoteness, whereas the
minority considered that the equitable principles of compensation applied.
Your Lordships are not required to choose between those two views. But the
judgment of McLachlin J. (expressing the minority view) contains an
illuminating exposition of the rules applicable to equitable compensation for
breach of trust. Although the whole judgment deserves study, I extract the
following statements (at pp. 160C, 162E and 163E):

"While foreseeability of loss does not enter into the calculation of
compensation for breach of fiduciary duty, liability is not unlimited.
Just as restitution in specie is limited to the property under the
trustee's control, so equitable compensation must be limited to loss
flowing from the trustee's acts in relation to the interest he undertook
to protect. Thus, Davidson states 'It is imperative to ascertain the loss
resulting from breach of the relevant equitable duty'" (at p. 354,
emphasis added)

. . .

"A related question which must be addressed is the time of assessment
of the loss. In this area tort and contract law are of little help. . . .
The basis of compensation at equity, by contrast, is the restoration of
the actual value of the thing lost through the breach. The foreseeable
value of the items is not in issue. As a result, the losses are to be
assessed as at the time of trial, using the full benefit of hindsight."
(emphasis added).

. . .

"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
plaintiffs loss of opportunity. The plaintiffs 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).

In my view this is good law. Equitable compensation for breach of trust is
designed to achieve exactly what the word compensation suggests: to make



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good a loss in fact suffered by the beneficiaries and which, using hindsight
and common sense, can be seen to have been caused by the breach.

The Court of Appeal relied on two authorities in support of the "stop
the clock" approach. Alliance & Leicester Building Society v. Edgestop Ltd.
(unreported), 18 January 1991, Hoffmann J. was another case of mortgage
fraud very similar to the present. The plaintiff building society had paid
moneys to solicitors in circumstances similar to the present case and the
solicitors had wrongly paid them away in breach of their instructions. The
building society obtained orders for interim payment against the solicitors on
the grounds that they were liable for breach of trust. The case however is
distinguishable because of one crucial difference viz. the judge found that if
the building society had known the true facts it would not have made the
advance i.e. one of the facts that has to be assumed to the contrary in the
present case. In that case therefore at the date of judgment a certain loss had
been demonstrated in that the breach of trust had caused the building society
to enter into a transaction in which they would not have participated had there
been no breach of trust.

In Bishopsgate Investment Management Ltd. v. Maxwell (No. 2) [1994]
1 All E.R. 261 the plaintiff company was a trustee of a pension fund. It
brought proceedings for breach of fiduciary duty against a director who had
improperly transferred to a stranger shares held by the plaintiff company as
such trustee. The Court of Appeal held that the judge had properly given
summary judgment for an assessment of damages for breach of fiduciary duty
and ordered an interim payment of £500,000. In that case, apart from one
possibility, there was no doubt the shares were irretrievably lost and that the
value of the shares so lost was in excess of £500,000. The only possibility
of reducing that loss was that the plaintiff might have a claim to recover the
shares from the transferee on the grounds that the transferee had notice of the
impropriety. In the context of the claim for an interim payment, Hoffmann
L.J. said, at p. 267b-d:

"Secondly, [counsel] says it does not follow that the company's loss
would be the full value of the shares. It might be able to get
something back from Credit Suisse. But the company held the shares
as trustee for the pension fund and its liability as trustee was to restore
the fund. Prima facie, therefore, its loss was its liability to make good
the value of the shares. Credit Suisse appears to have taken the shares
on the basis that they were registered in the name of Robert Maxwell
Group Plc. who claimed to be bona fide pledgees. I do not think that
the judge was required to speculate on the possibility that the company
might be able to defeat this plea. It has no duty to engage in doubtful
litigation for the purpose of minimising the loss for which Mr. Ian
Maxwell is liable. In my judgment therefore the judge was acting
within his discretion in deciding that £500,000 was a reasonable
proportion of the damages which the company was likely to recover."



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In my judgment these remarks provide no basis for holding that final judgment
can be given when on the facts known at the date of judgment the plaintiff has
eventually suffered no loss. First, Hoffmann L.J. was only considering the
amount of the interim payment: the order for final judgment was for damages
to be assessed. Secondly, it is sound law that a plaintiff is not required to
engage in hazardous litigation in order to mitigate his loss. The only way in
which the plaintiff company's loss could be less than the value of the shares
wrongly transferred was if such hazardous litigation should be successfully
pursued to judgment. It did not lie in the mouth of the wrongdoing director
to seek to reduce the quantum of his liability by relying on the plaintiff
company to take steps it was under no legal duty to take. The position is
wholly different in the instant case where, on the facts to be assumed, it is
demonstrated that no loss has in fact been incurred by reason of the breach of
trust.

Mr. Patten (for Target) relied on Nant-y-Glo and Blaina Ironworks
Company v. Grave (1878) 12 Ch. D. 738 as showing that a trustee can be
held liable to recoup to the trust fund the value of shares at the highest value
between the date of breach and the date of judgment. In my view that case
has no relevance. The claim there was not for breach of trust but for account
of profits made by a fiduciary (a company director) from shares which he had
improperly received in breach of his duty. The amount recoverable in an
action claiming an account of profits is dependent upon the profit made by the
fiduciary, not the loss suffered by the beneficiary.

Mr. Patten also relied on Jaffray v. Marshall [1993] 1 W.L.R. 1285
where the principles applicable in an action for an account of profits were, to
my mind wrongly, applied to a claim for compensation for breach of trust.
In my judgment that case was wrongly decided not only because the wrong
principle was applied but also because the judge awarded compensation by
assessing the quantum on an assumption (viz. that the house in question would
have been sold at a particular date) when he found as a fact that such sale
would not have taken place even if there had been no breach of trust.

For these reasons I reach the conclusion that, on the facts which must
currently be assumed, Target has not demonstrated that it is entitled to any
compensation for breach of trust. Assuming that moneys would have been
forthcoming from some other source to complete the purchase from Mirage
if the moneys had not been wrongly provided by Redferns in breach of trust,
Target obtained exactly what it would have obtained had no breach occurred
i.e. a valid security for the sum advanced. Therefore, on the assumption
made, Target has suffered no compensatable loss. Redferns are entitled to
leave to defend the breach of trust claim.

However, I find it very difficult to make that assumption of fact.
There must be a high probability that, at trial, it will emerge that the use of
Target's money to pay for the purchase from Mirage and the other
intermediate transactions was a vital feature of the transaction. The



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circumstances of the present case are clouded by suspicion, which suspicion
is not dissipated by Mr. Bundy's untruthful letter dated 30 June informing
Target that the purchase of the property and the charges to Target had been
completed. If the moneys made available by Redferns' breach of trust were
essential to enable the transaction to go through, but for Redferns' breach of
trust Target would not have advanced any money. In that case the loss
suffered by Target by reason of the breach of trust will be the total sum
advanced to Crowngate less the proceeds of the security. It is not surprising
that Mr. Sumption was rather muted in his submission that Redferns should
have had unconditional leave to defend and that the order for payment into
court of £lm. should be set aside. In my judgment such an order was fully
justified.

I would therefore allow the appeal, set aside the order of the Court of
Appeal and restore the order of Warner J.

LORD LLOYD OF BERWICK

My Lords,

I have had the advantage of reading in draft the speech prepared by my
noble and learned friend. Lord Browne-Wilkinson. For the reasons which he
has given. I too. would allow the appeal.

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