The Supreme Court held unanimously that if trust property is misapplied, the trustee should restore the trust fund to the position it would have been in but for the breach. If no longer there, it must pay money compensation on the same basis. Compensation was to be measured at the date of trial, on a common sense view of causation of losses flowing from the breach. Foreseeability of loss, however, was irrelevant. Principles of equity do not differ with the trust's nature. But principles of traditional trusts did not necessarily apply to bare trusts in a commercial contract. This defined the trust's parameters. It was part of the machinery for its performance. Contract terms were relevant for the but for test.
25. Lord Browne-Wilkinson began his speech [in Target Holdings Ltd v Redferns ] 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 [1996] AC 421, 428:
“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 sustained 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.
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47. The debate which has followed Target Holdings [1996] AC 421 is part of a wider debate, or series of debates, about equitable doctrines and remedies and their inter-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.
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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.
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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”.
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58. ... 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 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.
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62. [...] 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. [...] a monetary award which reflected neither loss caused nor profit gained by the wrongdoer would be penal.
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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 paperwork. There is something wrong with a state of the law which makes it necessary to create fairy tales.
70. [...] 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.
71. [...] 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 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.
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73. 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.
Lord Reed concurred and said the following.
93. 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.
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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....
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.
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140. 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.
