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United Kingdom House of Lords Decisions

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Cite as: [1996] 1 AC 421, [1995] UKHL 10, [1995] 3 All ER 785, [1996] AC 421

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    Parliamentary Archives,

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

    (Appellants) and others


    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:







    ON 20 JULY 1995

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


    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.


    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.


    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.

    - 1 -


    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

    - 2 -

    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.

    - 3 -

    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

    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

    - 4 -

    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

    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

    - 5 -

    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

    - 6 -

    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

    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

    - 7 -

    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
    [1914] A.C. 932, 952, 958, per Viscount Haldane L.C. If

    - 8 -

    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.
    (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.

    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


    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.

    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".


    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

    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.

    - 11 -

    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

    - 12 -

    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

    - 13 -

    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."

    - 14 -

    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

    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

    - 15 -

    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

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


    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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