The central question answered in Target Holdings v Redferns [1]was whether, in the event of a breach, a trustee should only be personally liable for losses to the trust fund in fact caused by their breach. Lord Browne-Wilkinson championed the need for factual causation and established that, like contractual damages, equitable compensation should place the beneficiary in their expected position absent the breach. Although Target[2] seemingly blurred the distinction between the two remedies, its application in subsequent case law suggests that courts have merely modelled, rather than replicated, equitable compensation on contractual damages. Paradoxically, this has birthed a clearer framework of equitable compensation that accounts for the variety of commercial trustee duties. An exploration of Target[3]and AIB Group v Mark Redler [4]will display how Lord Browne-Wilkinson’s reasoning re-centred the doctrine of equitable compensation on upholding parties’ intentions instead of vindicating beneficiaries’ rights. Although this may undermine the substitutive nature of equitable compensation, Various Claimants v Giambrone[5]highlights how courts’ restrictive attitude towards the principle of remoteness has maintained a barrier between common law damages and equitable compensation. Ultimately, it will be shown that using a trustee’s exact ‘obligations’ to assess the extent of their personal liability safeguards the prophylactic nature of their fiduciary role.[6] This ensures that commercial trusts continue to oil the ‘machinery’ of contracts.[7]
Target Holdings: Lord Browne-Wilkinson’s Bullseye
Target Holdings Ltd (‘Target’) gave £1.5 million to Redferns Solicitors (‘Redferns’) as trustees to loan to Crowngate Development (‘Crowngate’) for their property purchase. To achieve Target’s intended first-charge mortgage, Redferns was instructed to only release the funds once the mortgage had been executed. Redferns breached the trust’s terms by releasing the funds early. The subsequent insolvency of Crowngate meant that Target’s realised charge was only worth £500,000. Although Redferns admitted a breach of trust, it argued that Target’s loss would have occurred irrespective of their breach. This was because Crowngate’s fraudulent overvaluation of the security charge was a more direct cause of the loss.[8]
In assessing the extent of equitable compensation at the time of the trial, the House of Lords gave specific weight to the fact that Redferns had still obtained a first-charge mortgage and thus carried out the full extent of their trustee duty. The House of Lords focused on whether the ‘underlying commercial transaction’ had been completed. This demonstrated that the extent of equitable compensation should be awarded based on the substance and not the form of a trustee’s duty, departing from the orthodox mandate of a trustee’s strict liability for breaches of trust.[9] The materialisation of a dichotomy between lay and commercial trustees necessarily reflects that a variety of factors can impact contractual performance. In the case of Target,[10]this was the involvement of intermediary purchasers and third-party fraud. As recognised by Lord Browne-Wilkinson, commercial trusts, therefore, only constitute a transactional ‘device’.[11] It follows that commercial trustees should not be subject to strict liability for breaches as their beneficiaries are not as reliant on the benefits derived from, or impacted by possible losses to, the trust fund.
The importance of this dichotomy can be further examined in the context of a beneficiary’s automatic right to reconstitution. Such a right safeguards the interests of other beneficiaries under the same trust. Accordingly, should a trustee’s breach cause any loss to any beneficiary, all beneficiaries can rest assured that a court will prioritise restoring the trust’s operation in their favour. Traditional beneficiaries therefore pursue a very general aim: to benefit from the trust. The rationale underlying a beneficiary’s automatic right to reconstitution, however, cannot be sensibly applied to sole commercial beneficiaries — where the trust is established exclusively for the benefit of a single person or entity. This is for two reasons. Firstly, a commercial beneficiary’s main aim via a commercial trust is to achieve a specific commercial objective. For example, Target Holdings’ and AIB Group’s pursuits of a first-charge mortgage. This is evidenced by the fact that commercial trustees’ duties will be ‘closely defined and of limited duration’[12] in the trust deed — signifying parties’ intentions to limit the circumstances in which a breach may occur. Secondly, the very position of a sole beneficiary entails the non-existence of other beneficiaries. This means that their automatic right to reconstitution does not perform a safeguarding function over the trust’s ability to benefit anyone else. It follows that granting sole commercial beneficiaries an indefinite and broad right to reconstitution would undermine the common law’s ability to uphold the intentions of commercial parties who have deliberately limited the scope of trustee duties. This would disincentivise commercial trustees’ entrance into such agreements, threatening the highly functional role of commercial trusts in the wider transactional environment.
Furthermore, finding a causative link between a trustee’s breach and a beneficiary’s loss in cases like Target[13]would prevent the substitutive nature of equitable compensation from incentivising risk-averse behaviour. In turn, this ensures that commercial beneficiaries cannot use trustees as a scapegoat for their bad bargains. As discussed below, for example, the highly volatile property market in AIB[14]contributed towards the claimant’s loss. Arguably, the limited scope of commercial trusteeship duties displays parties’ intention to proportionately allocate both common and unforeseeable risks between them. Allowing commercial beneficiaries to use the law as a safe haven against the burden of any risk would ‘fly in the face’ of equity’s core function: the avoidance of claims without substantive merit.[15] This inequitable and disproportionate allocation of risk would further disincentivise commercial trusteeship. Clearly, Target[16] revolutionised the rules governing equitable compensation insofar as suggesting that commercial beneficiaries should be relieved of their right to reconstitution once their commercial aim is fulfilled. Basing the extent of equitable compensation on a trust’s context and aim — that is, fulfilling a commercial beneficiary’s intention or vindicating a traditional beneficiary’s rights — fixes gaps in the law and places a commercial beneficiary back in their position absent breach. This allows them to reattempt their transaction, recognising that commercial trusts merely fuel parties’ long road to profit.
However, centring the law of equitable compensation on parties’ obligations seemingly equates the duty of a commercial trustee to a mere contracting party. Mitchell argues that this undermines a beneficiary’s core and inalienable right to due administration — the defining factor of a trustee-beneficiary relationship.[17] This is because equitable compensation is a substitutive remedy that rectifies a trustee’s failure to fulfil its primary obligation of administering the trust as per its terms. Therefore, causation within the law of equitable compensation is irrelevant as the breach, not the loss,is the wrongdoing. A trustee in breach should always be liable. Mitchell further contends that Section 61 of the Trustee Act 1925 adequately protects trustees from liability for insubstantial claims as courts can excuse trustees they believe acted honestly and reasonably in the event of a breach.[18]
Whilst Mitchell highlights how the absence of contractual consideration within trusteeship is intended, he fails to note how strict adherence to the substitutive nature of equitable compensation may impose a penal obligation on commercial trustees. In instances where neither the loss caused nor profit gained can be linked to their breach, requiring a trustee to compensate a beneficiary in full gives rise to concerns surrounding the beneficiary’s unjust enrichment. Furthermore, blurring the boundaries between trustees’ duty of due administration — achieving distributive justice — and the criminal law’s focus on retributive justice has wider implications for the common law’s iterative nature. This begs the question — how can trusts law continue to provide ‘appropriate relief,’ given the use of trusts across a ‘spectrum’[19] of financial transactions?
Fairy Tales and Fiduciaries
Lord Toulson’s application of Target[20]in AIB[21]highlights how courts have used Lord Browne-Wilkinson’s judgement to expand traditional trust law. The Supreme Court stressed the importance of identifying ‘the content of any relevant obligation’.[22] As the solicitor in AIB only obtained a second-charge mortgage for the claimant, contrary to the claimant’s desire for a first-charge mortgage,[23] the Court viewed the commercial transaction as incomplete. This justified the trustee’s liability for equitable compensation. Moreover, unlike contractual damages, intervening events like the volatile property market did not reduce the trustee’s liability. Such deductive reasoning, as opposed to strict liability, maintains a barrier between the award of contractual damages and equitable compensation.
Giambrone[24] further exemplifies that although courts have largely modelled the law of equitable compensation for commercial trusts on contractual damages, they still use a trustee’s fiduciary role to hold them to a higher standard than a mere contracting party. The trustee breached their duty to withhold funds. Unlike Target[25] and AIB,[26] the trustee’s simple custodialdutymeant that the beneficiary would have been in a substantially better position but for the breach. Thus, the clear causative link between the trustee’s breach and the beneficiary’s loss justified the Court of Appeal’s refusal to qualify liability. This was also despite the claimant’s own contribution to fault — ignoring the common law principles of remoteness and contributory fault that operate when rewarding contractual damages. This clear reinforcement of the barrier between equitable compensation and contractual damages clarifies that because commercial trustee duties oscillate between active (discharging funds) and custodial (safekeeping funds), the degree that contractual principles impact the reward of equitable compensation should be adapted accordingly. Foregrounding that equitable compensation has merely been inspired, not inundated, by the law of contractual damages ensures the continued utility of the commercial trust. As displayed by Target[27], AIB[28] and Giambrone[29], such utility primarily lies in outsourcing the management of money to a commercial party more qualified to do so — facilitating the broader transactional environment.
Hoyle rejects that commercial trustees’ duties operate on a spectrum, arguing that the consent of a trustee to their fiduciary role is also consent to their duty of ‘undivided loyalty’.[30] He uses Lord Browne-Wilkinson’s own focus on intention to challenge him: if parties intended to qualify liability via remoteness and contributory fault, they would have remained in a purely contractual relationship. Thus, the different legal obligations of a trustee and a contracting party leave no room for even a mere alignment of equitable compensation and contractual damages.
Despite Hoyle’s attempt to maintain a strict doctrinal difference between the two remedies, his argument does raise the possibility of creating a hierarchy of trustee duties. This makes it possible to maintain the sanctity of a trustee’s fiduciary duty whilst qualifying their liability. Within such a hierarchy, the apex of commercial and traditional trusteeship would be the duty to achieve a transactional aim and the duty of undivided loyalty respectively. Courts would then base their assessment of a breach on whether or not the requisite duty has been departed from, ascertaining liability for equitable compensation more certainly. This aligns with Lord Browne-Wilkinson’s suggestion that equitable compensation should seek to achieve different aims depending on a trust’s context — shifting Courts’ focus to clarifying the barrier between different trustee duties. Moreover, the range of equitable remedies available for a breach of trust emphasises that relaxing the doctrine of equitable compensation does not radically uproot the foundation of a trust relationship. Gain-based remedies, like an account of profits and remedial constructive trusts, ensure that beneficiaries still enjoy their trust. This, thereby, dispels the fear of undermining the prophylactic element of trusteeship, whilst preventing the need for the law’s creation of ‘fairy tales’ that help trustees escape unjust liability.[31]
In light of AIB’s[32]decade anniversary, it is imperative to highlight the continued relevance of Target’s[33] dicta to the law of equity and trusts. Crucially, novel forms of commercial financing — and their diverse commercial aims — have strengthened the need to introduce a hierarchy of trustee duties. For example, sustainability-linked loans are allocated to finance ESG-focused corporate activity. Any trustee appointed to manage these funds should have their fiduciary duty tied to the achievement of this initial aim. It follows that liability for breach should be limited to the release of funds for an alternate venture and any losses occurring as a result. Such losses would not have occurred but for the trustee’s default. Similarly, a trustee should not be required to compensate a beneficiary for losses they suffer due to the unprofitability of a sustainability-linked venture — the beneficiary is relieved of their right to reconstitution as soon as the funds are released for the correct purpose. Accordingly, such a contextual and adaptable approach to fiduciary liability ensures the continued use of trusts as an efficient value-adding mechanism to corporate finance.
To conclude, Target[34]necessarily redesigned the law of equitable compensation based on the award of contractual damages. Despite concerns that finding a factual link between breach and loss would undermine the stringent nature of a trustee’s fiduciary duty, courts’ application of dicta from Target[35]has adequately maintained the difference between a trustee and a mere contracting party. Target[36]further presented an impetus for varying the degree of similarity between equitable compensation and contractual damages depending on a trust’s context. This would allow equitable compensation, as a substitutive remedy, to fulfil commercial parties’ obligations and vindicate the rights of traditional beneficiaries. Ultimately, this upholds the commercial trust’s role as a single building block in the foundation of contracts.
[1] Target Holdings v Redferns [1995] UKHL 10, [1996] 1 AC 421.
[2] Target Holdings (n 1).
[3] Target Holdings (n 1).
[4] AIB Group (UK) Plc (Appellant) v Mark Redler & Co Solicitors [2014] UKSC 58.
[5] Various Claimants v Giambrone [2017] EWCA Civ 1193.
[6] AIB Group (UK) (n 4) [71] (Lord Toulson).
[7] ibid.
[8] Target Holdings (n 1).
[9] Target Holdings (n 1) [10] (Lord Browne-Wilkinson).
[10] Target Holdings (n 1).
[11] Target Holdings (n 1) [9] (Lord Browne-Wilkinson).
[12] AIB Group (UK) (n 4) [70] (Lord Toulson).
[13] Target Holdings (n 1).
[14] AIB Group (UK) (n 4).
[15] Target Holdings (n 1) [10] (Lord Browne-Wilkinson).
[16] Target Holdings (n 1).
[17] Charles Mitchell, ‘Stewardship of Property and Liability to Account’ (2014) 3 Conveyancer and Property Lawyer 215, 227.
[18] ibid.
[19] AIB Group (UK) (n 4) [70] (Lord Toulson).
[20] Target Holdings (n 1).
[21] AIB Group (UK) (n 4).
[22] AIB Group (UK) (n 4) [76] (Lord Toulson).
[23] ibid.
[24] Giambrone (n 5).
[25] Target Holdings (n 1).
[26] AIB Group (UK) (n 4).
[27] Target Holdings (n 1).
[28] AIB Group (UK) (n 4).
[29] Giambrone (n 5).
[30] Matthew Hoyle, ‘“Where there is discord, may we bring harmony”: AIB Group (UK) v Mark Redler and the Perils Facing Equity’ [2016] Oxford University Undergraduate Law Journal 22, 30.
[31] AIB Group (UK) (n 4) [69] (Lord Toulson).
[32] AIB Group (UK) (n 4).
[33] Target Holdings (n 1).
[34] Target Holdings (n 1).
[35] Target Holdings (n 1).
[36] Target Holdings (n 1).
Sabah Ahmed
LLB (UCL) ’24