Target Holdings v Redfern

Factual and Procedural Background

Company A (the lender) agreed to lend approximately £1.7 million to Company D (the borrower) to finance the purchase of commercial property in The City. Company B, a firm of solicitors, acted both for Company A and for Company D. Company C, a firm of valuers, supplied a valuation placing the property’s worth at £2 million.

Unknown to Company A, a complex series of intermediate sales had been arranged whereby the property would change hands through offshore and domestic companies, inflating the price from £775,000 to £2 million. Acting on instructions from two individuals (“Individual 1” and “Individual 2”), Company B paid £1.25 million of the loan monies to an offshore company before the borrower had obtained title or executed a legal charge in favour of Company A. A further £240,000 was later paid out, leaving only administrative sums in the client account. These payments were accepted by all parties to be breaches of trust.

Although Company A ultimately received a registered first legal charge, the borrower later went into insolvency. Company A realised the security for £500,000 and sued Company B (for negligence and breach of trust) and Company C (for negligent valuation). Default judgment was obtained against Company C, which was insolvent.

On an application for summary judgment, Judge Warner ordered Company B to pay £1 million into court as a condition of defending the breach-of-trust claim. The Court of Appeal (by majority) set aside that condition, entered final judgment against Company B for £1.49 million (less the £500,000 sale proceeds) and dismissed Company B’s appeal. Company B appealed to the House of Lords, which heard argument in February 1995 and delivered judgment on 20 July 1995.

Legal Issues Presented

1. Whether, upon a breach of trust consisting of an unauthorised payment of trust monies, a trustee must restore the entire sum immediately, irrespective of whether the breach caused the beneficiary’s ultimate loss.
2. Whether, in assessing equitable compensation for breach of trust, the court “stops the clock” at the date of breach or assesses loss with the benefit of hindsight at the date of judgment.
3. Whether a beneficiary who has become solely entitled to the trust property is entitled to insist on formal reconstitution of the trust fund, or merely to compensation for proven loss.

Arguments of the Parties

Company A’s Arguments

• The unauthorised payments created an immediate shortfall in the trust fund; therefore Company B was obliged to restore the full £1.49 million forthwith, subject only to credit for the £500,000 realised on sale.
• Common-law rules of causation are irrelevant; a trustee is strictly liable to make the trust fund whole.
• Even on ordinary causation, the transaction would have collapsed without the wrongful payment, so the entire advance was lost because of the breach.

Company B’s Arguments

• The loss suffered by Company A was caused by third-party fraud and a fall in the property market, not by the breach of trust.
• Equitable compensation, like common-law damages, requires proof that the breach caused the loss; therefore only loss actually flowing from the breach is recoverable.
• Company A received exactly the security it bargained for; absent proof that the transaction would have failed, no compensable loss exists.

Table of Precedents Cited

Court's Reasoning and Analysis

The House of Lords, in a leading opinion by Lord Browne-Wilkinson, re-examined equitable principles governing breach of trust in a commercial context.

1. Primary right of the beneficiary. The beneficiary’s core right is to have the trust administered properly. Where a beneficiary is now solely entitled, that right translates into a claim for compensation, not automatic reconstitution of a trust fund that no longer serves any purpose.
2. Appropriateness of restitution. Reconstitution of the fund is essential in traditional successive-interest trusts, but artificial where monies were only ever held as an incident of a conveyancing transaction which has since completed.
3. Causation. Equity, like common law, requires a causal connection: the beneficiary must prove a loss which would not have been suffered but for the breach. The fact that money left the client account does not, by itself, fix the loss at that moment.
4. Timing of assessment. Consistent with In re Dawson, loss is measured at the date of judgment using hindsight. Therefore subsequent events (e.g., realisation of security) must be considered.
5. Application to facts assumed. On the assumption (accepted for summary-judgment purposes) that the transaction would have proceeded even without the unauthorised payment, Company A ended up in the very position it intended: a loan secured by a first charge. The breach therefore caused no proven loss.
6. Conditional leave to defend. Judge Warner’s requirement that Company B pay £1 million into court was appropriate because there remains a triable issue whether the transaction would have collapsed absent the breach (in which case Company A’s loss could equal the full advance).

Holding and Implications

HELD: The appeal was allowed; the Court of Appeal’s order was set aside and the conditional order of Judge Warner was restored.

Company B therefore has leave to defend the breach-of-trust claim, conditional on the £1 million payment into court. The matter is remitted to the Chancery Division for trial.

Implications: The judgment clarifies that in commercial “bare trust” situations, equitable compensation is confined to actual loss causally linked to the breach, assessed at the date of judgment. Trustees are not automatically liable for market-driven or third-party losses unrelated to their wrongdoing, thereby preventing strict liability from expanding beyond its principled bounds.