Law Report: Solicitors have duty to replace money: Target Holdings Ltd v Redferns and another - Court of Appeal (Lord Justice Ralph Gibson, Lord Justice Hirst and Lord Justice Peter Gibson), 8 November 1993.

A trustee, who in breach of trust disposes of trust money causing immediate loss, is under an immediate duty to make restitution and replace the money even though the loss would have happened if there had been no breach.

The Court of Appeal (Lord Justice Ralph Gibson dissenting) dismissed an appeal by Redferns, a firm of solicitors, from Mr Justice Warner's order that it have conditional leave to defend, allowed a cross-appeal by Target Holdings, and made an order for final judgment in Order 14 proceedings.

Target, as mortgagee, proposed to lend pounds 1.5m to Crowngate Developments Ltd to purchase property which had been valued at pounds 2m. Redferns acted as solicitors for both Target and Crowngate. Redferns did not tell Target that Crowngate was purchasing the property for pounds 775,000. In June 1989 Redferns received the pounds 1.5m from Target and in breach of trust released that sum before the transfers of property and charges were executed in July.

Target brought proceedings for summary judgment against Redferns. Redferns contended that the breach of trust was technical only because the charges were executed, although only after the money was released. Target claimed it was entitled to summary judgment for restitution of the full sum, pounds 1.5m, less any credit for the proceeds of about pounds 500,000 from sale of the property. Mr Justice Warner gave Redferns leave to defend Target's claim on condition that Redferns bring into court pounds 1m.

Anthony Mann QC and Grant Crawford (Wansbroughs Willey Hargrave) for Redferns; Nicholas Patten QC and Thomas Leech (Rosling King) for Target.

LORD JUSTICE PETER GIBSON said that the obligation of a trustee who committed a breach of trust was to account for and restore to the trust fund that which had thereby been lost to it. The remedy afforded to the beneficiary in equity was compensation in the form of restitution of that which had been lost to the trust estate, not damages. As the trustee was liable to place the trust estate in the same position as it would have been in if no breach had been committed, 'considerations of causation, forseeability and remoteness do not readily enter into the matter': Re Dawson (1966) 2 NSWR 211.

In cases where the breach of trust was not one of wrongful disposal of trust property causing immediate loss, one waited to see whether and, if so, what loss would thereby be eventually sustained. Where the breach consisted in the wrongful paying away of trust monies so that there was an immediate loss, no inquiry was necessary: the causal connection was obvious.

There was no answer to Target's claim that Redferns was liable to replace all the monies paid away in breach of trust, subject only to Target giving credit for any monies recovered on the realisation by it of its security.

A trustee or other fiduciary who in breach of trust disposed of trust property to a stranger came under an immediate duty to make restitution.

The cause of action was constituted simply by the payment away of Target's monies in breach of trust and the loss was quantified in the amount of those monies, subject to Target giving credit to the realisation of the security it received. Equity had always treated a defaulting trustee severely.

LORD JUSTICE HIRST agreed.

LORD JUSTICE RALPH GIBSON, dissenting, said that in considering whether it was open to a defendant, who had committed a breach of trust by paying away without authority money held on trust, to contend that the loss caused would have happened if there had been no breach of trust, it was necessary for the court to examine the nature of the relationship between the plaintiff and defendant out of which the fiduciary duty arose. If it appeared just to the court to regard the breach as having caused no loss to the plaintiff, because the loss would have happened if there had been no breach, then the court could and must so hold. Redferns had made out an arguable defence which entitled it conditional leave to defend.

Ying Hui Tan, Barrister.