JUDGMENT
AIB Group (UK) Plc (Appellant)
v
Mark Redler & Co Solicitors (Respondent)
before
Lord Neuberger, President
Lady Hale, Deputy President
Lord Wilson
Lord Reed
Lord Toulson
JUDGMENT GIVEN ON
5 November 2014
Heard on 5 June 2014
Appellant Respondent
Jeremy Cousins QC Graeme McPherson QC
Nicholas Davidson QC
John Brennan
Sian Mirchandani
Nicole Sandells
(Instructed by Moran &
Co, Tamworth
)
(Instructed by Mills and
Reeve LLP
)
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LORD TOULSON
Introduction
1. 140 years after the Judicature Act 1873, the stitching together of equity and
the common law continues to cause problems at the seams. The present
appeal concerns the remedy available to the appellant bank against the
respondent, a firm of solicitors, for breach of the solicitors’ custodial duties
in respect of money entrusted to them for the purpose of completing a loan
which was to be secured by a first charge over the borrowers’ property. As is
customary in such transactions, the solicitors acted for both the bank and the
borrowers.
Facts
2. In June 2006 Mr and Mrs Sondhi applied to borrow £3.3m from the appellant
(“the bank”). The loan was to be secured by a first legal charge over the
borrowers’ home, which had been valued at £4.25m. The property was at that
time the subject of a first legal charge in favour of Barclays Bank plc
(“Barclays”). The Barclays charge secured borrowings on two accounts
amounting to about £1.5m.
3. The bank agreed to the borrowers’ proposal and made a formal offer on terms
which included a condition that the existing mortgage was to be redeemed on
or before completion of the mortgage advance. The bank retained the
respondents (“the solicitors”) to act for it by a letter of instruction dated 5
July 2006.
4. The letter of instruction stated that the solicitors were instructed in
accordance with Council of Mortgage Lenders’ (“CML”) Handbook for
England and Wales, 2nd edition. The handbook stated among other things that
on completion the mortgage lender required a fully enforceable first charge
over the property by way of legal mortgage, and that all existing charges must
be redeemed on or before completion. The handbook also stated:
“You must hold the loan on trust for us until completion. If
completion is delayed, you must return it to us when and how
we tell you”.
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The letter of instruction included copies of the bank’s offer to the borrowers
and its conditions of offer.
5. The solicitors were told by the borrowers that the property was mortgaged to
Barclays. On 31 July Barclays provided them with information about the two
accounts, which showed the total balance due as a little over £1.5m, but this
was not a redemption statement. Meanwhile the solicitors asked the bank to
forward the funds because completion was imminent. The bank did so on 1
August, and the solicitors telephoned Barclays for a redemption figure.
Unfortunately there was then a misunderstanding. The solicitors were given
a redemption figure for one of the two Barclays accounts which they
mistakenly took to be the total figure. They were at fault because they should
have realised from the information supplied by Barclays that the figure
related only to one account. However, on 1 August the solicitors remitted to
Barclays the figure which they wrongly believed was the total necessary to
redeem the Barclays mortgage and remitted the balance of the £3.3m less
expenses to the borrowers. The borrowers had executed what was intended
to be a first charge over the property in favour of the bank, but there remained
due to Barclays a debt of approximately £309,000 secured by the prior
Barclays charge.
6. Barclays naturally refused to release its charge unless the outstanding debt
was paid in full. At first the borrowers promised to pay the necessary sum to
Barclays but they failed to keep their word. The solicitors did not
immediately tell the bank of their error, as they should, because they hoped
to be able to resolve it. When eventually they informed the bank there were
negotiations between the bank and Barclays with the result that the bank
executed a deed of postponement acknowledging the primacy of the Barclays
charge and Barclays consented to the registration of the appellant bank’s
charge as a second charge.
7. Subsequently the borrowers defaulted, and the property was repossessed and
sold by Barclays in February 2011 for £1.2m, of which the bank received
£867,697.
8. The issue is how much the bank is entitled to recover from the solicitors. The
bank claims that it is entitled to the full amount of its loan less the amount
recovered by it. The solicitors contend that their liability is limited to the
amount by which the bank suffered loss by comparison with its position if
the solicitors had done as they should, which was to have paid Barclays the
full amount of the Barclays debt so as to redeem the Barclays charge. The
difference, leaving interest aside, is between £2.5m and £275,000 in round
figures.
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The action
9. The bank alleged that the solicitors acted in breach of trust, breach of
fiduciary duty, breach of contract and negligence. It claimed relief in the
forms of (i) reconstitution of the fund paid away in breach of trust and in
breach of fiduciary duty, (ii) equitable compensation for breach of trust and
breach of fiduciary duty, and (iii) damages for breach of contract and
negligence, in each case with interest. The solicitors admitted that they acted
negligently and in breach of contract but denied the other allegations and they
claimed relief under section 61 of the Trustee Act 1925 if found to have acted
in breach of trust.
10. At the trial, before His Honour Judge Cooke, the bank accepted that the
solicitors had acted in good faith.
11. The judge found that the solicitors acted in breach of trust, which he analysed
as follows:
“23. In the present case, . . . what the defendant’s instructions
authorised them to do with the funds paid to them was to pay
to Barclays (or to its account) such sum as was required to
procure a release of its charge, and pay the balance to the
borrowers or to their order. Had they complied with their
instructions they would have paid (taking all the figures in
round terms) £1.5m to Barclays and £1.8m to the borrowers. In
the event they paid £1.2m to Barclays and £2.1m to the
borrowers. In my judgment, in so doing they committed a
breach of trust in so far as payment was made contrary to the
authority they had been given.
24. It does not however in my judgment necessarily follow that
the whole of the payment of £3.3m was made in breach of trust.
The difference between what the defendant did and what it
ought to have done if it had complied with its instructions was
the £300,000 that should have been paid to Barclays but was
instead paid to the borrowers. That in my judgment was the
extent of the breach of trust committed. It was not a breach of
trust to pay £1.2m to Barclays; that payment was made as
partial performance of the authority and obligation to discharge
Barclays’ secured debt. It was not a breach of trust to pay £1.8m
to the borrowers, as that was the sum to which they were
entitled. The breach consisted of the failure to retain an
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additional £300,000 and apply that to the discharge of the
Barclays debt.”
12. As to the remedy, the judge held that prima facie the bank was entitled to
reconstitution of the trust fund by repayment of the amount wrongly paid
away. As to the bank’s alternative claim for equitable compensation or
damages, he said that where the breach consisted of failure to discharge a
prior mortgage, with the result that the bank’s interest had been postponed to
the Barclays charge, the bank was entitled to equitable compensation for the
additional amounts due to Barclays for which Barclays had security in
priority to the bank. The solicitors were therefore liable to the bank for the
additional amount ultimately obtained by Barclays by reason of its prior
security.
13. The judge added that in those circumstances he did not intend to venture into
the argument as to the appropriate remedy if the solicitors committed a breach
of trust in paying out any part of the advance, except to find as a fact what
would have happened but for the breach of trust.
14. That question, he said, could be approached on one of two bases, namely
what would the outcome have been if the solicitors had either (i) dealt with
the funds held in the manner they were authorised to do or (ii) instead of
making the unauthorised payment they did, had asked the bank for
instructions at that point, disclosing the reasons why the payment was outside
their existing authority. He concluded that on either approach the answer
would be the same on the facts of the case. There would have been a short
delay while the solicitors obtained a redemption figure in a form that bound
Barclays to release its charge; they would then have paid that amount to
Barclays; they would in due course have received a release and they would
have registered the bank’s charge as a first charge. He added that, on the
implausible scenario that the solicitors realising that they did not have a valid
redemption quotation had approached the bank for further instructions, the
bank would not have withdrawn from the transaction but would have
instructed the solicitors to carry on with it, complying with their existing
instructions. The judge added that it was clear from the evidence that the bank
was anxious to lend to the borrowers and that the domestic re-mortgage was
driven by the need to facilitate business lending which the bank was very
keen to make.
15. The judge therefore gave judgment for the bank in the sum of £273,777 plus
interest. It was not necessary in the circumstances for him to deal with the
issue of relief under section 61 of the Trustee Act, which would have arisen
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if he had held that the bank was prima facie entitled to recover the entire
amount of the loan.
16. The Court of Appeal (Arden, Sullivan and Patten LJJ) held that the judge was
wrong to treat the breach of trust as limited to that part of the mortgage
advance which was paid to the borrowers instead of being used to discharge
their liability to Barclays on the second account. The judgment of the court
was given by Patten LJ. Citing earlier authorities and the provisions of the
CML Handbook, he held that the solicitors had no authority to release any
part of the funds advanced by the bank unless and until they had a redemption
statement from Barclays coupled with an appropriate undertaking which
enabled them to be sure that they would be able on completion to register the
bank’s charge as a first charge over the property. The solicitors have not
challenged the Court of Appeal’s reasoning on that point. However, the Court
of Appeal upheld the judge’s decision regarding the relief to which the bank
was entitled and dismissed the bank’s appeal.
17. In reaching its conclusion the Court of Appeal applied what it understood to
be the reasoning of the House of Lords in Target Holdings Ltd v Redferns
[1996] AC 421. It held that where the breach of trust occurred in the context
of a commercial transaction such as the present, Target Holdings established
that equitable principles of compensation “although not employing precisely
the same rules of causation and remoteness as the common law, do have the
capacity to recognise what loss the beneficiary has actually suffered from the
breach of trust and to base the compensation recoverable on a proper causal
connection between the breach and the eventual loss” (per Patten LJ at para
47).
18. Applying that principle to the facts found by the judge, Patten LJ said at para
49:
“If one asks as at the date of trial and with the benefit of
hindsight what loss AIB has suffered then the answer is that it
has enjoyed less security for its loan than would have been the
case had there been no breach of trust. If [the solicitors] had
obtained from Barclays a proper redemption statement,
coupled with an undertaking to apply the sums specified in the
statement in satisfaction of the existing mortgage, then the
transaction would have proceeded to complete and AIB could
have obtained a first legal mortgage over the Sondhis’ property.
But although that did not happen, AIB did obtain a valid
mortgage from the Sondhis which they were eventually able to
register as a second charge and use to recover part of their loan
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from the proceeds of the security in priority to the Sondhis’
other creditors. Even had there been no such mortgage they
would have been subrogated to Barclays’ first charge insofar as
they discharged part of the Sondhis’ indebtedness by the
payment of the £1.2m. In my view all of these are matters to be
taken into account in considering what loss has ultimately been
caused by the solicitors’ breach of trust. In the light of the
judge’s findings it is not open to AIB to contend that but for the
breach of trust it simply would have asked for its money back.”
19. As to the point made by the bank that in the present case the breach of trust
was never made good because the bank never obtained a first charge over the
intended security (by contrast with the position in Target Holdings), Patten
LJ considered this irrelevant to the question of principle about how the bank’s
equitable compensation was to be calculated. Target Holdings stood as
authority for the broad principle identified by Lord Browne-Wilkinson as
follows:
“Equitable compensation for breach of trust is designed to
achieve exactly what the word compensation suggests: to make
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.”
Like the trial judge, the Court of Appeal did not find it necessary to express
any views about section 61 of the Trustee Act.
Target Holdings
20. The present case bears a close similarity to Target Holdings, but there is one
factual difference which the bank submits is of critical importance. Both
parties rely on Target Holdings in support of their respective cases. Neither
party has expressly asked this court to depart from its reasoning, but part of
the bank’s argument involves a re-interpretation of the reasoning in Target
Holdings which is in truth a dressed up attack on it. The reasoning in Target
Holdings has attracted a considerable amount of commentary, partly
supportive but mostly critical. There was only one speech, given by Lord
Browne-Wilkinson. In view of the arguments to which it has led, it is
necessary to look at his speech in some detail.
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21. The facts of Target Holdings were described by Lord Browne-Wilkinson as
redolent of fraud, but the murky aspects did not affect the decision of the
House of Lords. The matter reached the House of Lords on an appeal by the
defendant solicitors against an order for summary judgment. The undisputed
facts were that the plaintiff finance company agreed to make loans to a
company called Crowngate on the security of commercial property, for which
Crowngate provided a professional valuation at £2m. The solicitors acted
both for the finance company and for Crowngate. For the purposes of the
transaction the finance company transferred about £1.5m to the solicitors
without any express instructions as to its release. It was common ground that
the solicitors had implied authority to pay the money to or to the order of
Crowngate on completion of the conveyance of the land to Crowngate,
provided that Crowngate had executed a charge in favour of the finance
company. The solicitors wrongly released the bulk of the money to
Crowngate before completion of the conveyance or the execution of a charge
by Crowngate. The conveyance of the property to Crowngate and its
execution of a legal charge in favour of the finance company took place some
days later. Crowngate later defaulted on repayment of the loans and was
wound up as insolvent. The finance company sold the property as mortgagee
for £500,000.
22. The finance company sued the solicitors for breach of trust and negligence in
releasing funds to Crowngate at a time when they had no authority to do so.
On an application for summary judgment, the judge at first instance gave the
solicitors unconditional leave to defend the claim in negligence, and there
was no appeal against that part of his order. On the claim for breach of trust
he gave the solicitors conditional leave to defend, but the Court of Appeal by
a majority gave summary judgment to the finance company for the amount
which the solicitors had advanced prematurely to Crowngate, less the amount
recovered by the finance company.
23. Peter Gibson LJ (with whom Hirst LJ agreed) held that the basic liability of
a trustee in breach of trust was not to pay damages, but to restore to the trust
fund that which had been lost to it or to pay compensation to the beneficiary
for what he had lost. If a trustee wrongly paid away trust monies to a stranger,
there was an immediate loss to the trust fund and the trustee came under an
immediate duty to restore the monies to the trust fund. The remedies of equity
were sufficiently flexible to require the finance company to give credit for
monies received on the subsequent realisation of its security, but otherwise
the solicitors’ liability was to pay the whole of the monies wrongly paid
away.
24. In a dissenting judgment Ralph Gibson LJ held that it was necessary for the
court to examine the nature of the relationship between the parties out of
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which the solicitors’ equitable duty arose. If, having regard to the relationship
and its purpose, the obligations of the parties, its purpose and the obligations
of the parties within it, it appeared just to regard the breaches as having
caused no loss, because the loss would have happened if there had been no
breach, the court should so hold.
25. Lord Browne-Wilkinson began his speech by saying that the appeal raised a
novel point on the liability of a trustee who commits a breach of trust to
compensate beneficiaries for such breach. He framed the issue in this way:
“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?”
26. He observed that at common law there are two principles fundamental to an
award of damages. First, the defendant’s wrongful act must cause the damage
of which complaint is made. Second, the plaintiff is to be put “in the same
position as he would have been in if he had not suffered the wrong for which
he is now getting his compensation or reparation” (Livingstone v Rawyards
Coal Co (1880) 5 App Cas 25, 39, per Lord Blackburn). Equity, he said,
approaches liability for making good a breach of trust from a different
starting point, but the same 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 therefore
approached the consideration of the rules of equity relevant to the appeal with
a “strong predisposition” against holding that Redferns should be held liable
to compensate Target for a loss caused otherwise than by the breach of trust.
27. Lord Browne-Wilkinson examined two arguments made on behalf of the
finance company. First, he considered whether Redferns were under a
continuing duty to reconstitute the trust fund by paying back into client
account the monies paid away in breach of trust (argument A). Secondly, he
considered the argument accepted by the majority of the Court of Appeal that
there was an immediate right to have the trust fund reconstituted at the
moment of the breach of trust, which gave rise to a cause of action regardless
of later events (argument B).
28. Lord Browne-Wilkinson prefaced his consideration of the arguments by
some important observations about the nature of a beneficiary’s rights under
a trust. His starting point was that the basic right of a beneficiary is to have
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the trust duly administered in accordance with the provisions of the trust
instrument, if any, and the general law. It followed that in relation to a
traditional trust where a fund is held in trust for a number of beneficiaries
having different, usually successive equitable interests, the right of each
beneficiary is to have the whole fund vested in the trustees so as to be able to
satisfy his equitable interest.
29. The “equitable rules of compensation for breach of trust”, he said, 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. (As will be seen, some commentators have
criticised his use of the term “compensation for breach of trust” in this
context. They say that it confuses compensation with the primary accounting
responsibility of a trustee.)
30. In such a case, according to Lord Browne-Wilkinson, the basic rule is that a
trustee in breach of trust must either restore to the trust the assets which have
been lost by reason of the breach of trust or pay monetary compensation to
the trust estate. In so doing, courts of equity did not award “damages” but
would make an in personam order for the payment of equitable
compensation: Nocton v Lord Ashburton [1914] AC 932, at paras 952, 958,
per Viscount Haldane LC.
31. Having thus considered how courts of equity would enforce the basic right of
a beneficiary to have the trust duly administered in a case where the trust was
subsisting and where the only right of each beneficiary was to have the trust
fund reconstituted as it should be, Lord Browne-Wilkinson went on to
consider the position if at the time of the action the trust had come to an end,
for example by the beneficiary becoming absolutely entitled to the trust fund.
In such a case, there was no need for restitution to the trust fund in order to
protect other beneficiaries. The normal order would therefore be for the
payment of compensation directly to the beneficiary. The measure of
compensation would be the difference between what the beneficiary had in
fact received and the amount which he would have received but for the breach
of trust.
32. That analysis (which I will refer to as Lord Browne-Wilkinson’s fundamental
analysis) provided the foundation for all that followed.
33. Lord Browne-Wilkinson rejected the argument that a beneficiary had
automatically a continuing right to the reconstitution of the trust fund
(argument A). He repeated that in relation to a “traditional trust”, a
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beneficiary who was absolutely entitled to a trust fund had no automatic right
to have the fund reconstituted. Moreover, while the fundamental principles
of equity apply to all trusts, certain detailed rules applicable to one form of
trust (a traditional trust) do not necessarily have to be applied to other forms
of trust (a commercial trust) if the rationale does not sensibly apply to the
latter.
34. The House of Lords was concerned with a bare trust. Bare trusts may arise
in a number of different contexts. In the case under consideration, it was one
incident of a commercial transaction involving agency. The purpose of the
solicitors’ retainer was to achieve the bank’s commercial objective. It was
one aspect of arrangements between the parties which were mostly
contractual. He said at p 436:
“I do not intend to cast any doubt on the fact that monies held
by solicitors on client account are trust monies 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 monies 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.” (My emphasis).
He added that, once a conveyancing transaction has been completed, the
client has no right to have the solicitor’s client account reconstituted as a trust
fund.
35. To anticipate the argument discussed below, the bank relied on the second
italicised sentence in this passage. It was submitted that in this case, in
contrast with Target Holdings, the “underlying commercial transaction” was
never completed because the shortfall in the payment needed to redeem the
Barclays charge was never paid.
36. To return to Lord Browne-Wilkinson’s analysis, argument B was the
rationale of the judgments of the majority in the Court of Appeal. In rejecting
it Lord Browne-Wilkinson cited the (dissenting) judgment of McLachlin J in
Canson Enterprises Ltd v Boughton & Co. (1991) 85 DLR (4th) 129 and, in
particular, the following passage at p 163:
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“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, ie, the plaintiff’s loss of opportunity. The
plaintiff’s 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.”
Lord Browne-Wilkinson 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 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.”
On that approach Lord Browne-Wilkinson held that Target was not entitled
to the summary judgment which the Court of Appeal had ordered.
The arguments
37. There were two branches to the arguments advanced on behalf of the bank
by Mr Jeremy Cousins QC and Mr Nicholas Davidson QC. I have referred to
the first in para 35.
38. The second was advanced partly by Mr Cousins but in greater detail by Mr
Davidson, who reinforced his argument by reference to the Solicitors’
Accounts Rules.
39. Mr Davidson adopted in his argument the views expressed by Lord Millett
(then Sir Peter Millett) in his article “Equity’s Place in The Law of
Commerce” (1998) 114 LQR 214 and more recently in his judgment in
Libertarian Investments Ltd v Hall [2013] HKCFA 93; [2014] 1 HKC 368.
A trustee owes a duty to hold trust funds and apply them for the purposes of
the trust (a stewardship or custodial duty). He is bound to answer for his
stewardship when called on by the beneficiary to do so. If for any reason he
misapplies the trust fund, or part of it, he must immediately reconstitute the
trust fund in full. If he fails to do so, the court will order him to reconstitute
Page 13
the fund in specie, if that is possible, or pay the equivalent sum in money so
as to produce the same result in financial terms. So in Target Holdings, where
the solicitor wrongly paid out the funds before obtaining an executed
mortgage, he remained liable to restore the fund; but he was deemed
notionally to have done so and to have paid out the money properly at the
moment when the preconditions for an authorised disposal of the fund were
met.
40. The present case is different, it was submitted, because the solicitors failed
on discovering their mistake to pay Barclays the additional sum necessary to
redeem its charge. They could and should have done so, in which case their
position would have been indistinguishable from that of Redferns. But it was
now too late. This, Mr Davidson submitted, is the correct analysis of Target
Holdings.
41. Solicitors’ Accounts Rules are made under section 32 of the Solicitors Act
1974 (amended by the Legal Services Act 2007). At the material time the
relevant Rules were the 1998 Rules. (On 6 October 2011 the Solicitors
Regulation Authority made the SRA Accounts Rules 2011, which replaced
the 1998 Rules.)
42. The payment out of the bank’s money to the borrowers on 1 August 2006
was unauthorised by the bank and so was a breach of rule 22 of the 1998 Rules
regarding the operation of a solicitor’s client account. Rule 7 obliged the solicitors
to remedy the breach on its discovery. The rule provided:
“(1) Any breach of the rules must be remedied promptly upon
discovery. This includes the replacement of any money improperly
withheld or withdrawn from a client account.
(2) In a private practice, the duty to remedy breaches rests not only on
the person causing the breach, but also on all the principals in the
practice. This duty extends to replacing missing client money or
controlled trust money from the principals’ own resources, even if the
money has been misappropriated by an employee or fellow principal,
and whether or not a claim is subsequently made on the Solicitors’
Indemnity or Compensation Funds.”
43. Mr Graeme McPherson QC submitted on behalf of the solicitors that the
Court of Appeal was right to see the case in terms of causation of loss, and it
was also right in concluding that the proper measure of the bank’s loss was
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the difference between its actual financial position and the position in which
it would have been if the solicitors had not acted in breach of trust. On the
findings of the trial judge, the loss to the bank (excluding interest) was the
amount by which the value of its security was less than it should have been,
which was the same as the amount of the overpayment to the borrowers and
underpayment to Barclays.
44. Mr McPherson submitted that the Court of Appeal correctly applied the
fundamental principles stated by Lord Browne-Wilkinson. The commercial
transaction in which the solicitors were instructed was completed in the sense
that Lord Browne-Wilkinson used that expression when the loan monies were
advanced to the borrowers, thereby creating the relationship of lender and
borrower between the bank and the borrowers, notwithstanding that the
solicitors had wrongly failed to see that a sufficient part of the loan money
was paid to Barclays on completion of the loan for the redemption of the
Barclays mortgage. The bank was entitled to have the solicitors’ breach of
trust remedied, but the appropriate remedy was for the solicitors to make
good the shortfall. That remedy was provided by the judgment of Judge
Cooke.
45. The bank was right, he submitted, to concede that if the shortfall had been
made good before Barclays enforced its charge by selling the land, the bank
would not have been entitled to recover the additional amount claimed by it.
The argument that since the solicitors failed to do so, they were liable
additionally for the loss which the bank would still have suffered if the
shortfall had been made good, lacked justice or common sense. Whether the
amount for which Barclays had superior security was paid by the solicitors
before or after the sale of land made no difference to the bank’s financial
position and ought not to affect the legal result.
46. As to the Solicitors’ Accounts Rules, rule 7 was not prescriptive about the
form of remedy or how money improperly withdrawn from a client account
should be replaced. In this case, Mr McPherson submitted, a proper form of
replacement would have been to pay to Barclays the amount which had been
wrongly paid to the borrowers rather than to Barclays. The solicitors’ failure
to do so promptly might expose them to a risk of disciplinary proceedings,
but did not affect the legal analysis.
Discussion
47. The debate which has followed Target Holdings is part of a wider debate, or
series of debates, about equitable doctrines and remedies and their inter-
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relationship with common law principles and remedies, particularly in a
commercial context. The parties have provided the court with nearly 900
pages of academic writing. Much of it has been helpful, but to attempt even
to summarise the many threads of argument which run through it,
acknowledging the individual authors, would be a lengthy task and, more
importantly, would not improve the clarity of the judgment. Nor is it
necessary to set out a full historical account of all the case law cited in the
literature reaching back to Caffrey v Darby (1801) 6 Ves Jun 488.
48. In the present case the solicitors owed a compendium of duties to the bank.
Their relationship was governed by a contract but they held the money
advanced by the bank on trust for the purpose of performing their contractual
obligations. They broke their contract and acted in breach of trust when they
released to the borrowers the money advanced by the bank, less a part of the
sum required to redeem the Barclays mortgage, when they should have paid
to Barclays the full amount required for that purpose, in return for an
undertaking to issue a redemption certificate, and should have released the
diminished balance to the borrowers.
49. The determination of this appeal involves two essential questions. The more
important question in the appeal is whether Lord Browne-Wilkinson’s
statement in Target Holdings of the fundamental principles which guided him
in that case should be affirmed, qualified or (as the bank would put it)
reinterpreted. Depending on the answer to that question, the second is
whether the Court of Appeal properly applied the correct principles to the
facts of the case.
50. Two main criticisms have been made of Lord Browne-Wilkinson’s approach.
They have been made by a number of scholars, most recently by Professor
Charles Mitchell in a lecture on “Stewardship of Property and Liability to
Account” delivered to the Chancery Bar Association on 17 January 2014, in
which he described the Court of Appeal’s reasoning in this case as incoherent.
He expressed the hope that “if the case reaches the Supreme Court their
Lordships will recognise that Lord Browne-Wilkinson took a false step in
Target when he introduced an inapt causation requirement into the law
governing … substitutive performance claims.” He added that if it is thought
too harsh to fix the solicitors in this case with liability to restore the full
amount of the loan (subject only to a deduction for the amount received by
the sale of the property), the best way to achieve this is “not to bend the rules
governing substitutive performance claims out of shape”, but to use the
Trustee Act 1925, section 61, to relieve them from some or all of their
liability.
Page 16
51. The primary criticism is that Lord Browne-Wilkinson failed to recognise the
proper distinctions between different obligations owed by a trustee and the
remedies available in respect of them. The range of duties owed by a trustee
include:
(1) a custodial stewardship duty, that is, a duty to preserve the assets
of the trust except insofar as the terms of the trust permit the trustee
to do otherwise;
(2) a management stewardship duty, that is, a duty to manage the trust
property with proper care;
(3) a duty of undivided loyalty, which prohibits the trustee from
taking any advantage from his position without the fully informed
consent of the beneficiary or beneficiaries.
52. Historically the remedies took the form of orders made after a process of
accounting. The basis of the accounting would reflect the nature of the
obligation. The operation of the process involved the court having a power,
where appropriate, to “falsify” and to “surcharge”.
53. According to legal scholars whose scholarship I have no reason to doubt, in
the case of a breach of the custodial stewardship duty, through the process of
an account of administration in common form, the court would disallow (or
falsify) the unauthorised disposal and either require the trust fund to be
reconstituted in specie or order the trustee to make good the loss in monetary
terms. The term “substitutive compensation” has come to be used by some to
refer to a claim for the value of a trust asset dissipated without authority. (See
the erudite judgment in Agricultural Land Management Ltd v Jackson (No 2)
[2014] WASC 102 of Edelman J, who attributes authorship of the term to Dr
Steven Elliott.)
54. In a case of breach of a trustee’s management stewardship duty, through the
process of an action on the basis of wilful default, a court could similarly
falsify or surcharge so as to require the trustee to make good the loss resulting
from the breach. The phrase “wilful default” is misleading because, as
Brightman LJ explained in Bartlett v Barclays Bank Trust Co Ltd (Nos 1 and
2) [1980] Ch 515, 546, conscious wrongdoing is not required. In this type of
case the order for payment by the trustee of the amount of loss is referred to
by some as “reparative compensation”, to differentiate it from “substitutive
Page 17
compensation”, although in a practical sense both are reparative
compensation.
55. In a case of breach of the duty of undivided loyalty, there are possible
alternative remedies. If the trustee has benefited from it, the court will order
him to account for it on the application of the beneficiary. In Bristol and West
Building Society v Mothew [1998] Ch 1 Millett LJ described such relief as
“primarily restitutionary or restorative rather than compensatory”.
Alternatively, the beneficiary may seek compensation in respect of his loss.
56. The history of the account of profits is more complex than this summary
might suggest, and the whole concept of equitable compensation has
developed and become far more prominent in the law since Nocton v Lord
Ashburton. However, what I have said is sufficient to identify the main
criticism advanced against Lord Browne-Wilkinson’s approach in Target
Holdings. It is said that he treated equitable compensation in too broad-brush
a fashion, muddling claims for restitutive compensation with claims for
reparative compensation.
57. The relevant principle, it is suggested, in a case of unauthorised dissipation
of trust funds is that “the amount of the award is measured by the objective
value of the property lost, determined at the date when the account is taken
and with the benefit of hindsight”, per Millett NPJ in Libertarian Investments
Ltd v Hall [2014] 1 HKC 368, para 168. In determining the value of what has
been lost, the court must take into account any offsetting benefits received,
but it is not relevant to consider what the trustee ought to have done. The
court is concerned only with the net value of the lost asset.
58. This argument has the approval of Edelman J in Agricultural Land
Management Ltd v Jackson (No2), and there are statements in the authorities
cited by him which support that approach, for example, by Lord Halsbury LC
in Magnus v Queensland National Bank (1888) 37 Ch D, at paras 466, 472,
although the issue in that case was different. The defendant advanced an
argument which Bowen LJ, at para 480, likened to a case where “A man
knocks me down in Pall Mall, and when I complain that my purse has been
taken, the man says, ‘Oh, but if I had handed it back again, you would have
been robbed over again by somebody else in the adjoining street.’” It is good
sense and good law that if a trustee makes an unauthorised disbursement of
trust funds, it is no defence to a claim by the beneficiary for the trustee to say
that if he had not misapplied the funds they would have been stolen by a
stranger. In such a case the actual loss has been caused by the trustee. The
hypothetical loss which would have otherwise have occurred through the
stranger’s intervention would have been a differently caused loss, for which
Page 18
that other person would have been liable. Bowen LJ’s example is far removed
in terms of causation of loss from the present case, where the loan agreement
involved the bank taking the risk of the borrowers defaulting, and the fault of
the solicitors lay in releasing the funds without ensuring that the bank
received the full security which it required, with the consequence that the
amount of the bank’s exposure was greater than it should have been.
59. In Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1
NZLR 664 Tipping J rightly observed that while historically the law has
tended to place emphasis on the legal characterisation of the relationship
between the parties in delineating the remedies available for breach of an
obligation, the nature of the duty which has been breached can often be more
important, when considering issues of causation and remoteness, than the
classification or historical source of the obligation.
60. Tipping J identified three broad categories of breach by a trustee. First, there
are breaches of duty leading directly to damage or to loss of trust property.
Secondly, there are breaches involving an element of infidelity. Thirdly, there
are breaches involving a lack of appropriate skill and care. He continued at
para 687:
“In the first kind of case the allegation is that a breach of duty
by a trustee has directly caused loss of or damage to the trust
property. The relief sought by the beneficiary is usually in such
circumstances of a restitutionary kind. The trustee is asked to
restore the trust estate, either in specie or by value. The policy
of the law in these circumstances is generally to hold the trustee
responsible if, but for the breach, the loss or damage would not
have occurred. This approach is designed to encourage trustees
to observe to the full their duties in relation to trust property by
imposing on them a stringent concept of causation [ie a test by
which a “but for” connection is sufficient]. Questions of
foreseeability and remoteness do not come into such an
assessment.”
61. According to the bank’s argument, the responsibility of the solicitors is still
more stringent. It seeks to hold them responsible for loss which it would have
suffered on the judge’s findings if they had done what they were instructed
to do. This involves effectively treating the unauthorised application of trust
funds as creating an immediate debt between the trustee and the beneficiary,
rather than conduct meriting equitable compensation for any loss thereby
caused. I recognise that there are statements in the authorities which use that
language to describe the trustee’s liability. For example, in Ex p Adamson; In
Page 19
re Collie (1878) 8 Ch D, at paras 807, 819, James and Baggallay LJJ said that
the Court of Chancery never entertained a suit for damages occasioned by
fraudulent conduct or for breach of trust, and that the suit was always for “an
equitable debt, or liability in the nature of a debt”. This was long before the
expression “equitable compensation” entered the vocabulary. Equitable
monetary compensation for what in that case was straightforward fraud was
clothed by the court in the literary costume of equitable debt, the debt being
for the amount of the loss caused by the fraud. Whatever label is used, the
question of substance is what gives rise to or is the measure of the “equitable
debt or liability in the nature of a debt”, or entitlement to monetary
compensation, and what kind of “but for” test is involved. It is one thing to
speak of an “equitable debt or liability in the nature of a debt” in a case where
a breach of trust has caused a loss; it is another thing for equity to impose or
recognise an equitable debt in circumstances where the financial position of
the beneficiaries, actual or potential, would have been the same if the trustee
had properly performed its duties.
Conclusion
62. There are arguments to be made both ways, as the continuing debate among
scholars has shown, but absent fraud, which might give rise to other public
policy considerations that are not present in this case, it would not in my
opinion be right to impose or maintain a rule that gives redress to a
beneficiary for loss which would have been suffered if the trustee had
properly performed its duties.
63. The same view was expressed by Professor Andrew Burrows in Burrows and
Peel (eds.), Commercial Remedies, 2003, pp 46-47, where he applauded
Target Holdings for impliedly rejecting older cases that may have supported
the view that the accounting remedy can operate differently from the remedy
of equitable compensation. Despite the powerful arguments advanced by
Lord Millett and others, I consider that it would be a backward step for this
court to depart from Lord Browne-Wilkinson’s fundamental analysis in
Target Holdings or to “re-interpret” the decision in the manner for which the
bank contends.
64. All agree that 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. Where there has been a breach of that duty, the basic
purpose of any remedy will be either to put the beneficiary in the same
position as if the breach had not occurred or to vest in the beneficiary any
profit which the trustee may have made by reason of the breach (and which
ought therefore properly to be held on behalf of the beneficiary). Placing the
Page 20
beneficiary in the same position as he would have been in but for the breach
may involve restoring the value of something lost by the breach or making
good financial damage caused by the breach. But a monetary award which
reflected neither loss caused nor profit gained by the wrongdoer would be
penal.
65. The purpose of a restitutionary order is to replace a loss to the trust fund
which the trustee has brought about. To say that there has been a loss to the
trust fund in the present case of £2.5m by reason of the solicitors’ conduct,
when most of that sum would have been lost if the solicitors had applied the
trust fund in the way that the bank had instructed them to do, is to adopt an
artificial and unrealistic view of the facts.
66. I would reiterate Lord Browne-Wilkinson’s statement, echoing McLachlin
J’s judgment in Canson, about the object of an equitable monetary remedy
for breach of trust, whether it be sub-classified as substitutive or reparative.
As the beneficiary is entitled to have the trust properly administered, so he is
entitled to have made good any loss suffered by reason of a breach of the
duty.
67. A traditional trust will typically govern the ownership-management of
property for a group of potential beneficiaries over a lengthy number of years.
If the trustee makes an unauthorised disposal of the trust property, the
obvious remedy is to require him to restore the assets or their monetary value.
It is likely to be the only way to put the beneficiaries in the same position as
if the breach had not occurred. It is a real loss which is being made good. By
contrast, in Target Holdings the finance company was seeking to be put in a
better position on the facts (as agreed or assumed for the purposes of the
summary judgment claim) than if the solicitors had done as they ought to
have done.
68. Other considerations reinforce my view that the House of Lords did not take
a wrong step in Target Holdings.
69. Most critics accept that on the assumed facts of Target Holdings the solicitors
should have escaped liability. But if causation of loss was not required for
them to be liable, some other way had to be found for exonerating them from
liability (unless the court was to use section 61 of the 1925 Act as a deus ex
machina). The solution suggested by the bank is that the solicitors in Target
Holdings should be treated as if the moneys which had been wrongly paid
out had remained in or been restored to the solicitors’ client account and had
then been properly applied after the solicitors had obtained the necessary
Page 21
paperwork. There is something wrong with a state of the law which makes it
necessary to create fairy tales.
70. As to the criticism of the passage in Target Holdings where Lord BrowneWilkinson said that it would be “wrong to lift wholesale the detailed rules
developed in the context of traditional trusts” and apply them to a bare trust
which was “but one incident of a wider commercial transaction involving
agency”, it is a fact that a commercial trust differs from a typical traditional
trust in that it arises out of a contract rather than the transfer of property by
way of gift. The contract defines the parameters of the trust. Trusts are now
commonly part of the machinery used in many commercial transactions, for
example across the spectrum of wholesale financial markets, where they
serve a useful bridging role between the parties involved. Commercial trusts
may differ widely in their purpose and content, but they have in common that
the trustee’s duties are likely to be closely defined and may be of limited
duration. Lord Browne-Wilkinson did not suggest that the principles of
equity differ according to the nature of the trust, but rather that the scope and
purpose of the trust may vary, and this may have a bearing on the appropriate
relief in the event of a breach. Specifically, Lord Browne-Wilkinson stated
that he did not cast doubt on the fact that monies held by solicitors on client
account are trust monies, or that basic equitable principles apply to any
breach of such trust by solicitors. What he did was to identify the basic
equitable principles. In their application, the terms of the contract may be
highly relevant to the question of fact whether there has been a loss applying
a “but for” test, that is, by reference to what the solicitors were instructed to
do. If the answer is negative, the solicitors should not be required to pay
restitutive monetary compensation when there has in fact been no loss
resulting from their breach. That is not because special rules apply to
solicitors, but because proper performance of the trustee’s obligations to the
beneficiary would have produced the same end result.
71. I agree with the view of Professor David Hayton, in his chapter “Unique
Rules for the Unique Institution, the Trust” in Degeling & Edelman (eds),
Equity in Commercial Law (2005), pp 279-308, that in circumstances such as
those in Target Holdings the extent of equitable compensation should be the
same as if damages for breach of contract were sought at common law. That
is not because there should be a departure in such a case from the basic
equitable principles applicable to a breach of trust, whether by a solicitor or
anyone else. (If there were a conflict between the rules of equity and the rules
of the common law, the rules of equity would prevail by reason of section
49(1) of the Senior Courts Act 1981, derived from the provisions of the
Judicature Act 1875.) Rather, the fact that the trust was part of the machinery
for the performance of a contract is relevant as a fact in looking at what loss
the bank suffered by reason of the breach of trust, because it would be
Page 22
artificial and unreal to look at the trust in isolation from the obligations for
which it was brought into being. I do not believe that this requires any
departure from proper principles.
72. There remains the question whether the Court of Appeal properly applied the
reasoning in Target Holdings to the facts of the present case. It was argued
on behalf of the bank that this case falls within Lord Browne-Wilkinson’s
statement that “[u]ntil the underlying commercial transaction has been
completed, the solicitor can be required to restore to the client account monies
wrongly paid away.”
73. This argument constricts too narrowly Lord Browne-Wilkinson’s essential
reasoning. Monetary compensation, whether classified as restitutive or
reparative, is intended to make good a loss. The basic equitable principle
applicable to breach of trust, as Lord Browne-Wilkinson stated, is that the
beneficiary is entitled to be compensated for any loss he would not have
suffered but for the breach. In this case, proper performance of the
obligations of which the trust formed part would have resulted in the
solicitors paying to Barclays the full amount required to redeem the Barclays
mortgage, and, as Patten LJ said, the bank would have had security for an
extra £300,000 or thereabouts of its loan.
74. When Lord Browne-Wilkinson spoke of completion he was talking about a
commercial transaction. The solicitors did not “complete” the transaction in
compliance with the requirements of the CML Handbook. But as a
commercial matter the transaction was executed or “completed” when the
loan monies were released to the borrowers. At that moment the relationship
between the borrowers and the bank became one of contractual borrower and
lender, and that was a fait accompli. The Court of Appeal was right in the
present case to understand and apply the reasoning in Target Holdings as it
did.
75. The further argument advanced on behalf of the bank in this court about the
Solicitors’ Accounts Rules takes matters no further, for the reasons which Mr
McPherson gave in his response to it. The solicitors were at fault in not
reporting to the bank what they had done and in failing at that stage to remedy
their breach of trust by ensuring that the shortfall was paid to Barclays. Their
failure to do so was a breach of the rules, which could have disciplinary
consequences but it does not affect the outcome in the present appeal. There
is, as Mr McPherson submitted, no satisfactory logical reason why the
question of the solicitors’ liability to provide redress to the bank for a loss
which it would have suffered in any event should turn on their compliance or
non-compliance with their obligations under rule 7.
Page 23
76. My analysis accords with the reasoning of Lord Reed and with his general
conclusions at paragraphs 133 to 138. Equitable compensation and common
law damages are remedies based on separate legal obligations. What has to
be identified in each case is the content of any relevant obligation and the
consequences of its breach. On the facts of the present case, the cost of
restoring what the bank lost as a result of the solicitors’ breach of trust comes
to the same as the loss caused by the solicitors’ breach of contract and
negligence.
77. For those reasons I would dismiss the appeal.
LORD REED
78. I agree that this appeal should be dismissed. I have reached that conclusion
for reasons which are substantially the same as those of Lord Toulson. Given
the importance of the case, I have thought it right to set out my own
reasoning, which considers the relationship between equitable compensation
and common law damages on a somewhat broader basis.
79. In his speech in Target Holdings Ltd v Redferns [1996] AC 421, Lord
Browne-Wilkinson drew upon the minority judgment of McLachlin J in
Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129. It may
be helpful to begin by considering that case before turning to Target Holdings
itself, not only because of the influence of McLachlin J’s judgment upon the
reasoning in that case, and in other cases in common law jurisdictions around
the world, but also because the judgments in the case illustrate two
approaches to equitable compensation: approaches which differ in respect of
the relationship which they postulate between equitable compensation and
common law damages. That issue lies at the heart of the arguments in this
appeal.
Canson Enterprises Ltd v Boughton & Co
80. The Canson Enterprises case was not concerned with a breach of trust, but
with a breach of fiduciary duty by an agent. The claim was brought by
developers of land against the lawyers who had acted for them in the purchase
of the land. The lawyers acted in breach of their fiduciary duty by failing to
disclose their knowledge that a third party was making a secret profit from
the purchase. The development proved to be a failure as a result of the
negligence of the engineers and contractors involved. The appellants sought
to recover the loss incurred on the development from the lawyers, on the basis
Page 24
that they would not have proceeded with the purchase if they had known of
the secret profit. Recognising that the loss would not be recoverable in an
action founded on breach of contract, negligence or deceit, the appellants
instead sought equitable compensation for breach of fiduciary duty, arguing
that such compensation was unlimited by principles of causation, remoteness
or intervening acts.
81. La Forest J, giving the judgment of the majority of the Supreme Court of
Canada, distinguished at p 146 between the breach of a trustee’s obligation
to hold the object of the trust, where “on breach the concern of equity is that
it be restored … or, if that cannot be done, to afford compensation for what
the object would be worth”, and on the other hand “a mere breach of duty”,
where “the concern of equity is to ascertain the loss resulting from the
particular breach of duty.” In the former situation the difference between
restoration and damages was abundantly clear, but in the latter situation “the
difference in practical result between compensation and damages is by no
means as clear” (p 145). La Forest J went on to observe at p 148, in relation
to claims of the latter kind:
“The truth is that barring different policy considerations
underlying one action or the other, I see no reason why the
same basic claim, whether framed in terms of a common law
action or an equitable remedy, should give rise to different
levels of redress.”
On that footing (and subject to the proviso contained in the first part of that
sentence), principles developed in the common law, such as the mitigation of
damages and contributory negligence, could also be applied to analogous
claims brought in an equitable context. In the instant case, damages
equivalent to those for deceit were appropriate, and the appellants’ claim was
therefore rejected. La Forest J acknowledged that the same result could have
been produced using equitable principles alone.
82. McLachlin J agreed in the result, but based her analysis entirely on equitable
principles. Her judgment, with which Lamer CJC and L’Heureux-Dubé J
concurred, merits detailed consideration.
83. First, she rejected the argument that the starting point, when quantifying
compensation for breach of fiduciary duty, should be an analogy with tort or
contract. In her view, that approach overlooked the unique foundation and
goals of equity. In negligence and contract the parties were taken to be
independent and equal actors, concerned primarily with their own self-
Page 25
interest. Consequently, the law sought a balance between enforcing
obligations by awarding compensation, and preserving optimum freedom for
those involved in the relationship. The essence of a fiduciary relationship, by
contrast, was that one party pledged herself to act in the best interests of the
other. The freedom of the fiduciary was diminished by the nature of the
obligation she had undertaken. The fiduciary relationship had trust, not selfinterest, at its core.
84. It therefore could not be assumed that an analogy with tortious damages was
appropriate. Such an analogy would also have suggested that some wellestablished equitable principles should not operate, such as the presumption
that trust funds would be put to the most profitable use, and the requirement
to disgorge profits gained through a breach of duty, even though such profits
were not made at the expense of the person to whom the duty was owed. An
analogy with tort would not be of great assistance in any event, since tort
offered different measures of compensation, depending on the nature of the
wrong. Rather than attempt to decide which tort was the closest analogy, the
better approach was to look at the policy behind compensation for breach of
fiduciary duty and determine how best to further that policy. In so far as
shared concerns made it helpful, insights might be accepted from the law of
tort.
85. Furthermore, an analogy with tort would require an artificial distinction to be
drawn between a breach of trust involving the misapplication of property,
where the tort analogy was on any view inapplicable, and other breaches of
trust or of fiduciary obligations. In the former case, equity required property
wrongfully appropriated to be restored together with an account of profits.
Where there was no property which could be restored, the court could award
compensation in lieu, with the ideal of restoring that which was lost through
the breach of duty. That distinction should not obscure the fact that the
measure of compensation was restitutionary in both cases. Any further
distinction was difficult to support.
86. It followed that equitable compensation was assessed at a different time from
damages in tort or contract, and that the foreseeability of loss was not
relevant. In a passage cited with approval in Target Holdings, McLachlin J
said:
“In this area tort and contract law are of little help. There, the
general rule is that damages are assessed … as at the time of
the wrongful act, in view of what was then foreseeable, either
by a reasonable person, or in the particular expectation of the
parties. … The basis of compensation at equity, by contrast, is
Page 26
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.” (p 162)
That result reflected the nature of fiduciary obligations. In negligence, the
law protected reasonable freedom of action of the defendant, and the
reasonableness of his or her action could be judged by what consequences
could be foreseen. In the case of a breach of fiduciary duty, as in deceit, there
was no need to look to the consequences to judge the reasonableness of the
actions. A breach of fiduciary duty was a wrong in itself, regardless of
whether a loss could be foreseen.
87. Liability was however not unlimited. There was in the first place a
requirement of causation:
“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.” (p 160)
A further limitation arose from the plaintiff’s responsibility not to act
unreasonably. When the plaintiff, after due notice and opportunity, failed to
take the most obvious steps to alleviate his or her losses, then it could rightly
be said that the plaintiff had been the author of his own misfortune. I would
comment that, rather than being a distinct principle, this might be regarded
as following from the requirement of a direct causal connection.
88. A further potential limitation related to the interventions of third parties.
McLachlin J distinguished between cases such as Caffrey v Darby (1801) 6
Ves Jun 488, where the failure of the trustees to take reasonable steps to
recover payments owed to the trust had enabled a third party to default, and
cases such as the instant case, where the plaintiff suffered loss as a result of
the act of a third party after the fiduciary’s obligation had terminated and the
plaintiff had taken control of the property. These cases illustrate how the
intervention of a third party may, or may not, interrupt the causal connection
between a breach of trust and subsequent loss.
89. McLachlin J summarised her conclusions in another passage which was cited
with approval in Target Holdings:
Page 27
“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, ie the plaintiff’s lost opportunity. The plaintiff’s
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. The plaintiff will not be
required to mitigate, as the term is used in law, but losses
resulting from clearly unreasonable behaviour on the part of the
plaintiff will be adjudged to flow from that behaviour, and not
from the breach. Where the trustee’s breach permits the
wrongful or negligent acts of third parties, thus establishing a
direct link between the breach and the loss, the resulting loss
will be recoverable. Where there is no such link, the loss must
be recovered from the third parties.” (p 163)
Discussion
90. It may be helpful at this stage to discuss three important points which can be
derived from this illuminating judgment, and to which I shall return after
considering other relevant authorities. The first is the distinction between
liability and remedy. A breach of trust involving the misapplication of trust
property can be remedied by means of proceedings designed to secure the
performance of the trust. Such proceedings can include the drawing up of an
account as a preliminary to the distribution of the trust fund. If property has
been misapplied, the relevant entry in the account will be disallowed and the
property must be restored by the trustee. If the property cannot be restored in
specie, the trustee must restore the trust fund to the position it would have
been in but for the breach, by paying into the fund sufficient pecuniary
compensation to meet that objective. The compensation then forms part of
the trust fund and is held on the same terms as the remainder of the fund.
Alternatively, and more commonly in practice, proceedings may be brought
directly for such a monetary remedy.
91. As I shall explain, another remedy can be sought where the trust is no longer
subsisting, namely the payment of compensation directly to the beneficiary
absolutely entitled to the trust fund. The liability, in that situation, is to
compensate the beneficiary for the diminution in the value of the trust fund
which was caused by the breach of trust, to the extent of the beneficiary’s
interest. The measure of compensation is therefore the same as would be
payable on an accounting, although the procedure is different.
Page 28
92. The second point is that the loss resulting from a breach of duty has to be
measured according to legal rules, and that different rules apply to the breach
of different obligations. The rules applicable to the tort of negligence, for
example, have a rationale related to the nature of that tort. In general, and
subject to special rules applicable to particular situations, which have their
own rationale, the liability resulting from a failure to take reasonable care to
guard against a reasonably foreseeable risk is limited to such consequences
as are reasonably foreseeable at the time of the negligent act. The different
rule applicable to the tort of deceit has a different rationale, related to the
different nature of that tort: the liability of a person who intentionally
deceives another is to compensate for all the loss which that person suffers in
consequence, whether it is foreseeable or not. In that situation, foreseeability
does not enter into the wrongfulness of the defendant’s conduct, and there is
no reason why it should limit the extent of his responsibility. The tort of
conversion has a different rule again: the defendant is liable to pay the value
of the asset in question, measured as at the date when it was converted. And
so, mutatis mutandis, for other breaches of duty, whether in tort, contract or
equity.
93. The rules appropriate to a breach of duty by a trustee similarly have to be
determined in the light of the characteristics of the obligation in question.
This focus upon the trustee’s obligations is the third and most important
point. Putting the matter very broadly, compensation for the breach of an
obligation generally seeks to place the claimant in the position he would have
been in if the obligation had been performed. Equitable compensation for
breach of trust is no different in principle: again putting the matter broadly,
it aims to provide the pecuniary equivalent of performance of the trust.
94. Some of the typical obligations of the trustee of a fund are strict: for example,
the duty to distribute the fund in accordance with the purposes of the trust.
Others are obligations of reasonable care: for example, the duty to exercise
reasonable care and skill in the management of the fund. Since these equitable
obligations relate to a fund held for trust purposes, the trustee’s liability for a
breach of trust will, again putting the matter broadly, depend upon its effect
upon the fund: the measure of compensation will generally be based upon the
diminution in the value of the fund caused by the trustee’s default.
95. The only other observation I need make in relation to the judgment of
McLachlin J concerns the statement that causation should be assessed “on a
common sense view”. In its context, that statement served to emphasise that
principles of causation developed in other contexts cannot be applied
automatically in an equitable setting. Difficult questions of causation do not
however always have an intuitively obvious answer. Legal analysis is as
important in equity as in the common law.
Page 29
Target Holdings Ltd v Redferns
96. The facts of Target Holdings Ltd v Redferns are well known. The case
concerned a claim against a firm of solicitors, sued for its involvement in a
mortgage fraud. Fraud as well as negligence was pleaded. The solicitors had
parted with the mortgage advance to the wrong person, prior to the
completion of the transaction and without obtaining the security. The
transaction was however subsequently completed and the security was
obtained. It later proved hopelessly inadequate. The claimant sought
summary judgment on the basis of the unauthorised payment. They argued
that the solicitors came under an immediate duty to restore the money paid
away in breach of trust, and that it was irrelevant that the claimant had
subsequently received exactly the security that it was intending to obtain.
This was described by Lord Browne-Wilkinson as argument (B). Before the
House of Lords, it was also argued that the claimant remained entitled at the
date of judgment to have the solicitors reconstitute the trust fund (argument
(A)).
97. The Court of Appeal gave judgment in favour of the claimant. An appeal was
allowed by the House of Lords, for reasons given by Lord BrowneWilkinson. The reasoning has been much debated, and in view of the
invitation to review it in the present appeal it is necessary to consider it in
some detail.
98. His Lordship began by noting that the case was concerned with the rights of
a beneficiary, and summarised the nature of such rights:
“The basic right of a beneficiary is to have the trust duly
administered in accordance with the provisions of the trust
instrument … The equitable rules of compensation for breach
of trust have been largely developed in relation to … 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. … If 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 … 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
Page 30
occurred. … 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.” (p 434)
99. Where the trust was still subsisting, the only right of each beneficiary was to
have the trust fund reconstituted as it should be. Where however the trust had
come to an end, and the beneficiary had become absolutely entitled, it was
normally inappropriate to order the reconstitution of the trust fund and its
subsequent distribution: instead, the court ordered the payment of
compensation directly to the beneficiary:
“The measure of such compensation is the same, ie the
difference between what the beneficiary has in fact received
and the amount he would have received but for the breach of
trust.”
Accordingly, in traditional trusts for persons by way of succession, once
those trusts had been exhausted and the fund had become absolutely vested
in possession, the beneficiary was not normally entitled to have the exhausted
trust reconstituted: his right was to be compensated for the loss he had
suffered by reason of the breach.
100. What Lord Browne-Wilkinson was discussing at this point was a question of
remedy. The pecuniary remedy for a breach of trust affecting the trust fund
cannot involve a payment to a particular beneficiary, unless the beneficiary
is absolutely entitled to the fund. Absent such entitlement, the only way to
ensure that each beneficiary is appropriately compensated is for the payment
to be made into the trust fund, to be held in accordance with the terms of the
trust. This is accomplished by adding the appropriate amount to the fund, so
that the fund is restored or replenished. Where, on the other hand, the trust is
no longer subsisting, compensation for the breach of trust can be paid directly
to the beneficiary absolutely entitled. As Lord Browne-Wilkinson explained,
the measure of compensation is the same as if there had been an accounting
and execution of the trust: in other words, the difference between what the
beneficiary ought to have received and what he has in fact received as a result
of the diminution in the trust fund.
101. His Lordship then turned to argument (A). He began by stating that “even if
the equitable rules developed in relation to traditional trusts were directly
Page 31
applicable to such a case as this”, a beneficiary absolutely entitled to a trust
fund had no automatic right to have the trust fund reconstituted. He had
already explained why that was so, but had also explained the corollary,
namely that the beneficiary would in that event be entitled to compensation
in the same measure (unless the trustee was under no liability, for example
by reason of acquiescence by the beneficiary in the breach of trust). His
Lordship’s focus was again on the question of the appropriate remedy, rather
than the measure of liability. He continued:
“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.” (p 435)
102. This is one of a number of passages in the speech which have given rise to
debate. The point that there are different types of trust, and that it would be
mistaken to think that they must all be governed in every respect by identical
rules, had also been made by McLachlin J in Canson Enterprises at pp 156-
157. In particular, as Lord Browne-Wilkinson pointed out, commercial trusts,
usually arising out of contractual relationships rather than the transfer of
property by way of gift, differ in a number of respects from the more
traditional trust. That is not to say that there is a categorical distinction
between trusts in commercial and non-commercial relationships, or to assert
that there are trusts to which the fundamental principles of equity do not
apply. It is, on the other hand, to recognise that the duties and liabilities of
trustees may depend, in some respects, upon the terms of the trust in question
and the relationship between the relevant parties (cf Kelly v Cooper [1993]
AC 205, 214-215).
103. Lord Browne-Wilkinson then considered the particular type of trust with
which the appeal was concerned. He began by identifying the relevant
characteristics of the trust:
Page 32
“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:
eg 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.” (p 436)
104. Lord Browne-Wilkinson continued:
“I do not intend to cast any doubt on the fact that moneys 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 (ie 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.’” (p 436)
105. This passage contains a number of ideas. The first is that “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.”
That is a broad proposition, which leaves open what precisely is meant by
“loss”, and how it is assessed. As McLachlin J explained in Canson
Page 33
Enterprises, the basic obligation of a defaulting trustee is to restore the trust
fund to the position it would have been in but for the default. In relation to
the breach of a fiduciary duty, her Ladyship said (in the passage cited at para
89, also cited by Lord Browne-Wilkinson with approval at a later point in his
speech) that, by analogy, compensation for breach of such a duty attempts to
restore to the plaintiff what has been lost as a result of the breach. Lord
Browne-Wilkinson’s dictum should in my view be understood in that sense:
the “loss” is what the beneficiary has been deprived of as a result of the
breach.
106. The second idea is that, where a solicitor holds money on trust as an incident
of a commercial transaction, he can be required to restore moneys paid away
until the commercial transaction has been completed, but not after that point,
since it would be artificial to impose the same obligation once the transaction
has been completed. Lord Browne-Wilkinson is again focusing on procedure:
as he had previously explained, the appropriate remedy where the trust is no
longer in subsistence is the payment of compensation directly to the
beneficiary. Consistently with that general approach, it would be
inappropriate to require a trustee to reconstitute the trust fund (such as a
solicitor’s client account) in a case where a bare trust had come into being for
the purpose of a commercial transaction which had in practical terms been
completed, leaving no active obligations for the trustee to perform. As he had
previously explained, the measure of compensation would be the same as the
loss to the trust fund.
107. The third idea, expressed in the penultimate sentence of the passage I have
cited, is that to impose an obligation to reconstitute the trust fund, in order to
enable the client to recover more than he has in fact lost, “flies in the face and
is in direct conflict with the basic principles of equitable compensation”. That
is clearly correct. As Lord Browne-Wilkinson went on to explain, an
obligation to reconstitute the trust fund does not inexorably require a payment
into the fund of the value of misapplied property: for example, where the
consequences of the breach of trust have been mitigated by subsequent
events.
108. Lord Browne-Wilkinson might however be understood, from the
juxtaposition of the two final sentences (the last sentence stating a conclusion
which might be read as being based on his rejection of the idea postulated in
the preceding sentence), to be envisaging that the remedy of an accounting
might result in the trustee’s paying more into the trust fund than had actually
been lost by the beneficiary entitled to the fund. I doubt however whether that
was what Lord Browne-Wilkinson meant. The direct payment of equitable
compensation to the beneficiary is procedurally different from the
reconstitution and distribution of the trust fund, but the end result should not
Page 34
be different: otherwise, the beneficiary would receive something other than
his entitlement under the trust. Equally, the remedy of an accounting and
execution of the trust cannot require more to be paid into the trust fund than
is missing from it.
109. Argument (A) was thus dismissed on a procedural ground: the wrong remedy
had been sought. Lord Browne-Wilkinson then turned to argument (B). He
noted that the Court of Appeal had drawn 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 wrongfully paid away trust moneys.
There was, he said, no doubt that in the former case, the restitution or
compensation payable was assessed at the date of trial, not of breach. In the
latter case, however, the Court of Appeal considered that events between the
date of breach and the date of trial were irrelevant in assessing the loss
suffered by reason of the breach.
110. As Lord Browne-Wilkinson remarked, the fact that there was an accrued
cause of action as soon as the breach was committed did not mean that the
quantum of the compensation payable was fixed on that date. The quantum
was fixed at the date of judgment, as the figure then necessary to put the trust
fund or the beneficiary back into the position it would have been in had there
been no breach.
111. In that regard, Lord Browne-Wilkinson cited the judgment of McLachlin J in
Canson Enterprises, which he described as containing “an illuminating
exposition of the rules applicable to equitable compensation for breach of
trust”. In particular, he cited passages from the judgment which I also have
cited at paras 86, 87 and 89, in which her Ladyship discussed causation,
foreseeability and the time of assessment. He commented:
“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 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.” (p 439)
In the instant case, the claimant obtained exactly what it ought to have
obtained, namely a valid security for the sum advanced, and therefore
suffered no compensatable loss.
Page 35
112. Finally, there was accepted to be a triable issue as to whether the premature
payment of the mortgage advance to its recipients had been essential to
enable the entire transaction to proceed. Lord Browne-Wilkinson commented
that if that was established, the loss suffered by the claimant by reason of the
breach of trust would be the total sum advanced less the proceeds of the
security. That comment is consistent with the approach to foreseeability, and
to interventions by third parties, adopted by McLachlin J.
113. Although the passages which I have discussed in paras 102 and 105-108 may
be capable of a different interpretation, at least if read in isolation, it appears
therefore that Lord Browne-Wilkinson intended his approach to be consistent
with that of McLachlin J in Canson Enterprises.
114. The result of the appeal was undoubtedly correct. The mortgage advance had
been paid out prematurely and to the wrong person, with the consequence
that at that point the trustee did not have the charges which he ought to have
had. That deficiency was however remedied when the charges were obtained
some weeks later. The assets under the control of the trustee were then
exactly what they ought to have been. There was nothing missing from the
trust fund, and therefore no basis for a claim for restoration. For the same
reason, there was no basis for a claim to compensation by the mortgagee.
115. Lord Browne-Wilkinson’s judgment has been interpreted by some academic
lawyers as adopting a “reparative” measure of compensation, as distinct from
McLachlin J’s “substitutive” analysis. That interpretation is based primarily
on Lord Browne-Wilkinson’s statement that “the beneficiary is entitled to be
compensated for any loss he would not have suffered but for the breach.”
That dictum has been interpreted as meaning that equitable compensation is
to be assessed in the same way as common law damages, either generally or
at least in circumstances such as those with which the case was concerned.
116. I do not understand that to have been Lord Browne-Wilkinson’s meaning. As
I have explained at paras 99-100, 105-108 and 110-111, and particularly in
view of his endorsement of the passages cited from McLachlin J’s judgment,
which I discussed at paras 86 and 87-89, I am not persuaded that Lord
Browne-Wilkinson intended to depart from the orthodox view that the
equitable obligation arising from a breach of trust affecting the trust fund is
to restore the fund to the position it would have been in but for the breach,
and that the measure of compensation, whether it is payable into the trust
fund or directly to a beneficiary, should be assessed on that basis.
Furthermore, as I shall shortly explain, Target Holdings has not been
understood in other leading common law jurisdictions as having established
that the basis upon which equitable compensation is assessed is the same as
Page 36
the basis upon which common law damages are calculated. If that were its
effect, the development of equity in English law would be at odds with its
development in those jurisdictions.
The case law since Target Holdings
117. It remains to consider, prior to turning to the present case, some of the most
significant cases in this area since Target Holdings.
118. In Bristol and West Building Society v Mothew [1998] Ch 1, a case concerned
with a negligent misrepresentation made by a solicitor to his client, Millett
LJ drew a distinction at pp 16-17 between a duty which is special to
fiduciaries, such as the fiduciary duty of loyalty, and a duty which is
incumbent upon a fiduciary but is not peculiar to a person in that position,
such as the duty of care imposed on those who have assumed responsibility
for the property or affairs of others. Millett LJ commented:
“Although the remedy which equity makes available for breach
of the equitable duty of skill and care is equitable compensation
rather than damages, this is merely the product of history and
in this context is in my opinion a distinction without a
difference. Equitable compensation for breach of the duty of
skill and care resembles common law damages in that it is
awarded by way of compensation to the plaintiff for his loss.
There is no reason in principle why the common law rules of
causation, remoteness of damage and measure of damages
should not be applied by analogy in such a case.” (p 17)
119. As I shall explain, that dictum has been questioned, or given a restrictive
application, in a number of other jurisdictions. It is unnecessary to consider
it in detail in the present appeal. It may however be helpful to make two
observations. First, Millett LJ was not considering the liability of a trustee.
Secondly, as McLachlin J pointed out in Canson Enterprises, the application
by analogy of “the common law rules” is complicated by the fact that there
is no single set of common law rules. It is necessary to consider the specific
characteristics of the obligation in question (such as the duty to exercise care
in the management of a trust fund), and the respects in which it resembles or
differs from obligations arising in other areas of the law (such as duties of
care in contract or in tort), in order for the law governing liability for the
breach of these various obligations to be coherent.
Page 37
120. The only other decision in this jurisdiction which need be mentioned is FHR
European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45;
[2014] 3 WLR 535. The case concerned the question whether a principal had
a proprietary claim to a secret profit received by his agent in breach of his
fiduciary duty. I note in passing that the alternative remedy, a personal claim
to payment of the amount brought out by an account of profits, was described
by the court as “equitable compensation”. In order to avoid confusion, it is
necessary to note that the expression was being used in a different sense from
the one that it bears in the present context.
121. In reaching its conclusion in the FHR case, the court was influenced by the
case law of other common law jurisdictions, remarking at para 45 that it
seemed highly desirable for all those jurisdictions to learn from each other,
and at least to lean in favour of harmonising the development of the common
law round the world. With that observation in mind, I turn to the more recent
case law of Canada, Australia, New Zealand and Hong Kong.
122. In Canada, the argument in Canson Enterprises has been carried forward in
a number of cases. In M(K) v M(H) [1992] 3 SCR 6, 80-81, 86 it was agreed
that where “the same policy objectives underlie two different causes of action
similar measures of compensation may be appropriate”; and the same
approach can be seen in Cadbury Schweppes v FBI Foods [1999] 1 SCR 142.
In Hodgkinson v Simms [1994] 3 SCR 377 La Forest J, giving the judgment
of the majority, drew the same distinction as had been drawn by McLachlin
J in Canson Enterprises between fiduciary relationships and commercial
interactions governed by the common law, the former being characterised by
one party’s duty to act in the other’s best interests, and often by power on the
one hand and dependency on the other, whereas the common law generally
respected the pursuit of self-interest. The proper approach to damages for
breach of a fiduciary duty was said to be restitutionary. On that basis, the
majority of the court concluded that the claimant was entitled to be
compensated for the loss sustained on investments which he had made on the
advice of a fiduciary who had failed to disclose a conflict of interest,
notwithstanding that the loss had resulted from an unforeseen general
economic downturn. The decision of the majority in Canson Enterprises was
explained as holding that a court exercising equitable jurisdiction was not
precluded from considering the principles of remoteness, causation and
intervening act where necessary to reach a just result.
123. In Australia, McLachlin J’s analysis of the distinction between fiduciary
relationships and those regulated by tort and contract has been accepted by
the High Court: Pilmer v Duke Group Ltd [2001] HCA 31; (2001) 207 CLR
165, para 71. The court has consequently questioned the view, based on the
dictum of Millett LJ in Bristol and West Building Society v Mothew, that
Page 38
equitable compensation for breach of the duty of skill and care in the
administration of a trust should be governed by common law rules: Youyang
Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR
484, paras 39-40. The Australian cases proceed on the basis that liability in
respect of losses sustained by reason of a breach of duty by a trustee or other
fiduciary is determined by equitable principles, and that these may require
different rules from those which govern the assessment of damages in tort or
contract: see for example Maguire v Makaronis [1997] HCA 23; (1997) 188
CLR 449, which concerned causation, and Pilmer v Duke Group Ltd, which
concerned contributory negligence. In the latter case, McHugh, Gummow,
Hayne and Callinan JJ said at para 85:
“In Australia, the measure of compensation in respect of losses
sustained by reason of breach of duty by a trustee or other
fiduciary is determined by equitable principles and … these do
not necessarily reflect the rules for assessment of damages in
tort or contract.”
124. Target Holdings was considered by the High Court of Australia in Youyang
Pty Ltd v Minter Ellison Morris Fletcher, a case on broadly analogous facts,
with the important distinction that the security – which would have been good
– was never provided (in addition, the plaintiff investor was not the client of
the solicitor trustee). The court distinguished Target Holdings on the basis
that it was a case where, ultimately, the property was conveyed to the
mortgagor and the charges were executed. That element being absent in
Youyang, the defendant solicitors were ordered to repay the monies which
they had paid out in breach of trust. The court regarded it as beside the point
that, after the money had been disbursed in breach of trust, there was also
conduct by third parties which resulted in the loss of the unsecured funds. In
those respects the decision appears to me to be consistent with the approach
adopted in Target Holdings.
125. As in Target Holdings, the court observed that the nature of the remedy for
breach of trust could vary to reflect the terms of the trust and the breach of
which complaint was made. In particular, as in Target Holdings, the solicitors
did not hold the moneys for indeterminate or contingent beneficial interests,
and the case was not one where the appropriate remedy was to have duly
administered a restored trust fund.
126. McLachlin J’s approach in Canson Enterprises to the assessment of
compensation for the breach of a fiduciary duty, as set out in the passage
which I have cited at para 89, was also accepted by Elias CJ in the Supreme
Court of New Zealand: Premium Real Estate Ltd v Stevens [2009] NZSC 15;
Page 39
[2009] 2 NZLR 384, paras 34-36. In relation to remoteness of damage, it was
observed that the question of foreseeability in common law claims was
effectively overtaken by the relationships out of which fiduciary duties arose,
and that different policy considerations might affect remoteness of damage
in cases of breach of fiduciary duty than in common law claims. But the
necessity of demonstrating that a loss was caused by the claimed breach of
fiduciary duty followed from the compensatory justification for the remedy.
127. In the earlier case of Bank of New Zealand v New Zealand Guardian Trust
Co Ltd [1999] 1 NZLR 664, Millett LJ’s dictum in Bristol and West Building
Society v Mothew [1998] Ch 1, 17 was cited with approval by the Court of
Appeal. The case was not concerned with the duty of a trustee to exercise
reasonable care and skill in the management of a trust fund, but, like Mothew,
with a duty of care relating to the provision of information. The trustee was
required, under a debenture deed securing advances by banks to a property
investment company, to take care to detect breaches of the deed by the
company. The plaintiff bank claimed to have suffered loss as a consequence
of the trustee’s negligent failure to detect and report breaches by the
company, notwithstanding the absence of any diminution in the value of the
security. The case illustrates how the obligations of a trustee under a
commercial trust can differ from those typically imposed by more traditional
trusts: as Tipping J observed, the relationship of trustee and beneficiary was
“in a sense, incidental” (p 688).
128. This rapid, and inevitably somewhat superficial and selective, tour d’horizon
can be completed by considering two decisions of the Hong Kong Final Court
of Appeal. First, in Akai Holdings Ltd v Kasikornbank PCL [2011] 1 HKC
357, it was said, under reference to Target Holdings and the Australian case
of Maguire v Makaronis, that “the notion that equitable compensation is
assessed on a somewhat different basis from common law damages is clearly
right (albeit that the difference can be overstated)” (para 131). It was also
accepted, under reference to those cases and to the judgment of McLachlin J
in Canson Enterprises, that “the losses made good are only those which, on
a common sense view of causation, were caused by the breach” (para 152).
129. Secondly, in Libertarian Investments Ltd v Hall [2014] 1 HKC 368 Ribeiro
PJ carried out a valuable review of the authorities concerned with equitable
compensation in the context of a commercial relationship. He noted that
where a relationship was fiduciary, there might be obligations which were
not fiduciary in nature; and, equally, even in a commercial relationship, there
might be aspects which engaged fiduciary obligations. As Blanchard J had
stated in Amaltal Corpn Ltd v Maruha Corpn [2007] NZSC 40; [2007] 3
NZLR 192, para 21:
Page 40
“That is because in the nature of that particular aspect of the
relationship one party is entitled to rely upon the other, not just
for adherence to contractual arrangements between them, but
also for loyal performance of some function.”
Hence the important focus was on the nature of the obligation in question.
130. Ribeiro PJ accepted the suggestion made by Brennan CJ in Breen v Williams
(1996) 186 CLR 71 that fiduciary duties could arise either from agency or
from a relationship of ascendancy or influence by one party over another, or
dependence or trust on the part of that other. An obvious example of the
“agency” type of situation was the case where a person received money or
other property for and on behalf of or as trustee of another person.
Accordingly:
“It is plain that fiduciary duties may well arise as aspects of a
commercial relationship. Moreover, it is clear that legal and
equitable rights and remedies are capable of co-existence, even
in a single transaction.” (para 70)
131. Ribeiro PJ accepted McLachlin J’s explanation of the distinction between
fiduciary and common law relationships in a commercial context, and its
reflection in the differences between equitable compensation and common
law damages in relation to causation, foreseeability, mitigation of loss and
the time of assessment (at paras 72, 80-81, 90-92 and 96).
132. Ribeiro PJ also considered the distinction drawn by Millett LJ in Bristol and
West Building Society v Mothew [1998] Ch 1, 17, between the breach of a
duty of skill and care within a fiduciary relationship and the breach of a duty
which is fiduciary in nature. He accepted the view expressed by Tipping J in
Bank of New Zealand v New Zealand Guardian Trust Co Ltd that, where there
was a breach of a duty of care by a trustee which did not result in any loss to
the trust fund, any liability in damages which might arise would be assessed
by applying common law rules (para 77). On the other hand, where loss was
caused by the fiduciary to trust property, strict rules on causation applied.
Those were rules borrowed from those developed in relation to traditional
trusts, requiring the trustee to restore to the trust fund what he had caused it
to lose as a result of his breach of trust. In support of that restitutionary theory
of equitable compensation, Ribeiro PJ cited Lord Browne-Wilkinson’s
dictum in Target Holdings at p 434:
Page 41
“If 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.”
Causation was established on a “but for” basis, without the constraints of
common law rules on remoteness and foreseeability.
General conclusions
133. Notwithstanding some differences, there appears to be a broad measure of
consensus across a number of common law jurisdictions that the correct
general approach to the assessment of equitable compensation for breach of
trust is that described by McLachlin J in Canson Enterprises and endorsed
by Lord Browne-Wilkinson in Target Holdings. In Canada itself, McLachin
J’s approach appears to have gained greater acceptance in the more recent
case law, and it is common ground that equitable compensation and damages
for tort or breach of contract may differ where different policy objectives are
applicable.
134. Following that approach, which I have discussed more fully at paras 90-94,
the model of equitable compensation, where trust property has been
misapplied, is to require the trustee to restore the trust fund to the position it
would have been in if the trustee had performed his obligation. If the trust
has come to an end, the trustee can be ordered to compensate the beneficiary
directly. In that situation the compensation is assessed on the same basis,
since it is equivalent in substance to a distribution of the trust fund. If the
trust fund has been diminished as a result of some other breach of trust, the
same approach ordinarily applies, mutatis mutandis.
135. The measure of compensation should therefore normally be assessed at the
date of trial, with the benefit of hindsight. The foreseeability of loss is
generally irrelevant, but the loss must be caused by the breach of trust, in the
sense that it must flow directly from it. Losses resulting from unreasonable
behaviour on the part of the claimant will be adjudged to flow from that
behaviour, and not from the breach. The requirement that the loss should flow
directly from the breach is also the key to determining whether causation has
been interrupted by the acts of third parties. The point is illustrated by the
contrast between Caffrey v Darby, where the trustee’s neglect enabled a third
party to default on payments due to the trust, and Canson Enterprises, where
the wrongful conduct by the third parties occurred after the plaintiff had taken
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control of the property, and was unrelated to the defendants’ earlier breach
of fiduciary duty.
136. It follows that the liability of a trustee for breach of trust, even where the trust
arises in the context of a commercial transaction which is otherwise regulated
by contract, is not generally the same as a liability in damages for tort or
breach of contract. Of course, the aim of equitable compensation is to
compensate: that is to say, to provide a monetary equivalent of what has been
lost as a result of a breach of duty. At that level of generality, it has the same
aim as most awards of damages for tort or breach of contract. Equally, since
the concept of loss necessarily involves the concept of causation, and that
concept in turn inevitably involves a consideration of the necessary
connection between the breach of duty and a postulated consequence (and
therefore of such questions as whether a consequence flows “directly” from
the breach of duty, and whether loss should be attributed to the conduct of
third parties, or to the conduct of the person to whom the duty was owed),
there are some structural similarities between the assessment of equitable
compensation and the assessment of common law damages.
137. Those structural similarities do not however entail that the relevant rules are
identical: as in mathematics, isomorphism is not the same as equality. As
courts around the world have accepted, a trust imposes different obligations
from a contractual or tortious relationship, in the setting of a different kind of
relationship. The law responds to those differences by allowing a measure of
compensation for breach of trust causing loss to the trust fund which reflects
the nature of the obligation breached and the relationship between the parties.
In particular, as Lord Toulson explains at para 71, where a trust is part of the
machinery for the performance of a contract, that fact will be relevant in
considering what loss has been suffered by reason of a breach of the trust.
138. This does not mean that the law is clinging atavistically to differences which
are explicable only in terms of the historical origin of the relevant rules. The
classification of claims as arising in equity or at common law generally
reflects the nature of the relationship between the parties and their respective
rights and obligations, and is therefore of more than merely historical
significance. As the case law on equitable compensation develops, however,
the reasoning supporting the assessment of compensation can be seen more
clearly to reflect an analysis of the characteristics of the particular obligation
breached. This increase in transparency permits greater scope for developing
rules which are coherent with those adopted in the common law. To the extent
that the same underlying principles apply, the rules should be consistent. To
the extent that the underlying principles are different, the rules should be
understandably different.
Page 43
The present case
139. In the present case, AIB transmitted £3.3m to Redler for the purpose of
discharging the Sondhis’ debt to Barclays, discharging the related charge
which Barclays held over their property, paying the balance of the money to
the Sondhis and obtaining a first charge over the property. If Redler had
performed their trust, they would on completion have held a registrable first
charge which secured a debt of £3.3m. In the event, on completion they held
a second charge in respect of that debt; but Barclays continued to hold a first
charge in respect of an undischarged debt of £309,000, and AIB’s charge
could not be registered because Barclays’ charge included a covenant against
the registration of other charges. Following negotiations between AIB and
Barclays, it was agreed during 2008 that AIB’s charge could be registered
and that Barclays’ priority would be limited to £273,777.42, with the
consequence that AIB’s interest was worth £273,777.42 less than it should
have been. That proved to be the position in 2011, when the security was
enforced and these proceedings were begun: the proceeds of sale were
insufficient to meet the Sondhis’ liabilities to both Barclays and AIB, and in
consequence AIB received £273,777.42 less than they would have done if
Redler had fulfilled their instructions.
140. AIB argue that they are entitled to payment of the entire £3.3m, less the
£867,697.78 which they received on the sale of the property, on the basis that
Redler’s liability for their breach of trust is unlimited by causation or
remoteness. In my opinion that argument is based on three fallacies, each of
which is fatal to AIB’s claim. First, it assumes that Redler misapplied the
entire £3.3m, whereas in my opinion all that was misapplied was the
£309,000 which was paid to the Sondhis rather than Barclays. Since the Court
of Appeal’s decision to the contrary was not challenged, however, it is
necessary to consider the appeal on the basis on which it was argued by both
parties, namely that the breach of trust involved the misapplication of the
entire £3.3m. On that premise, the appeal fails because it rests on the
remaining fallacies. The second fallacy in AIB’s argument is that it assumes
that the measure of Redler’s liability was fixed as at the date of the breach of
trust: a proposition which was rejected in Target Holdings and in the
Commonwealth authorities which I have cited. The third fallacy is that the
argument assumes that liability does not depend on a causal link between the
breach of trust and the loss: Redler is sought to be made liable for the
consequences of the hopeless inadequacy of the security accepted by AIB
before Redler’s involvement, despite the fact that Redler’s breach of trust did
not affect that security except to the extent, initially, of £309,000, and finally
of £273,777.42. That proposition also was rejected in Target Holdings and in
the Commonwealth cases.
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141. In these circumstances, applying the approach to the assessment of equitable
compensation which I have explained, it appears to me that the loss to the
trust estate as a result of Redler’s breach of trust proved to be £273,777.42:
that amount proved to be the pecuniary value of the difference between a first
ranking security and one which was postponed to Barclays’. That was also
the loss to AIB, who were absolutely entitled to the trust estate. The trust no
longer being on foot, the appropriate order is for Redler to pay AIB
£273,777.42 plus interest from 2011.
142. Since AIB have already been awarded £273,777.42 plus interest against
Redler (and no issue being raised in relation to the interest), it follows that
they are not entitled to anything more. Their appeal should therefore be
dismissed.
LORD NEUBERGER, LADY HALE AND LORD WILSON
143. We agree that this appeal should be dismissed for the reasons given by Lord
Toulson and Lord Reed.
