Target Holdings Ltd v Redferns [1995] UKHL 10

Facts

• Target Holdings, a mortgage lender, engaged solicitors Redferns to handle a property loan transaction for a client, Crowngate.
• Redferns was to hold funds on trust, releasing them only upon completion of the property transfer and creation of a securing mortgage.
• Redferns released the loan funds before completion and before the mortgage was established, breaching their authority.
• The property was later revealed to be fraudulently overvalued by Crowngate and the seller.
• Crowngate entered liquidation, resulting in Target recovering less than it had advanced.
• The breach of trust was acknowledged, but the central issue became the extent of compensation due to Target Holdings.
• Target sought compensation for the total trust amount advanced, while Redferns argued liability should only be for loss directly caused by their breach.

Issues

1. Whether compensation for a breach of trust in a commercial context should require reconstitution of the entire trust fund, or be limited to loss directly caused by the breach.
2. Whether a causal link between the breach and actual financial loss suffered by the beneficiary is necessary for equitable compensation.
3. How equitable principles apply differently in traditional trusts versus commercial trusts.

Decision

• The House of Lords held that compensation for breach of trust is limited to making good the actual loss directly caused by the breach, not full reconstitution of the trust fund.
• Lord Browne-Wilkinson stated that in commercial transactions, trustees are liable only for direct financial loss suffered by the beneficiary due to the breach.
• Since Target Holdings would have suffered the same loss even if Redferns had complied fully with the trust, no compensation was awarded.
• The judgment departed from earlier rigid doctrines that required reconstitution of the trust fund regardless of a causal link to loss.
• The approach was later affirmed in AIB Group (UK) Plc v Mark Redler [2014] UKSC 58, confirming the principle of compensation for actual loss only.

Legal Principles

• Equitable compensation aims to restore the beneficiary to the financial position they would have occupied but for the breach.
• A causal connection between breach of trust and actual loss is required for compensation.
• In commercial trusts, the obligation to reconstitute the fund applies only where the loss is directly attributable to the breach, differing from traditional trusts with multiple beneficiaries.
• The measure of loss is assessed at the time of judgment, not at the time of the breach.
• Trustees in commercial transactions are not liable to restore the full trust funds unless actual loss can be demonstrated as resulting from their breach.

Conclusion

Target Holdings Ltd v Redferns [1995] UKHL 10 established that equitable compensation for breach of trust, particularly in commercial contexts, is restricted to the actual loss directly caused by the trustee’s breach, requiring a demonstrated causal link and rejecting the automatic reconstitution of the trust fund approach.