Equitable compensation in respect of breach of trust takes two forms, firstly compensation for negligent investment and secondly, compensation for misapplication of property.
In the case of loss caused by negligence, the claim is essentially identical with a claim for money damages at common law for the tort of negligence. The claimant is under an equitable obligation to put the trust account in the postion that it would be in but for his negligence.
Target Holdings v. Redferns (Target Holdings v. Redferns, (1996) AC 514) illustrates the approach of the House of Lords in first sort of case. Crowngate was a prospective purchaser of land who employed a solicitor for the firm Redferns. The same firm acted for Target; a mortgage lender.
Unbeknownst to target, Crowngate was the final purchaser in a land transfer scheme, designed to make the land appear more valuable than it actually was. The solicitor at Redferns was fully aware of the scheme.
Target transferred the loan money to Redferns on instruction to pay money to Crowngate in exchange for an execution of the charge over the land. In breach of instruction, the solicitor transferred the money to the two intermediaries in the scheme. Crowngate became insolvent and Target was only able to realise a fraction of the loan money up for sale.
Target sued Redferns, claiming the entire loan minus the money realised on the sale.
The Court of Appeal awarded the entire loan to Target, holding that having paid away the entire loan in breach of trust, there was an immediate loss to the trust.
The House of Lords, however, reversed the decision. A claimant may recover for a loss caused by a defendant’s wrongful act. The compensation is calculated to put the plaintiff in the postion he would be in had not sustained the wrongfully caused loss.
The rules of remoteness and causation apply. Lord Browne Held,
There does have to be some causal connection between the breach of trust and loss to the trust estate for which compensation is recoverable. (As cited in The Law of Trusts, JE Penner, Butterworths Core Text Series, Third Edition.) It was not, therefore, the breach that caused the loss in the above case. The common law rules of causation apply.
In the second type of equitable compensation, property has been misapplied. The primary remedy is specific restoration. In many circumstances, however, such a remedy cannot be carried out. Causation, here, is not relevant. The aim of the court is to bring about restorative compensation not compensation for consequential loss. Compensation, therefore, takes the form of the money value of the loss to the trust account incurred as a result of the misapplication of property.
Millet LJ, speaking extra-judicially (As cited in The Law of Trusts, JE Penner, Butterworths Core Text Series, Third Edition.), expressed the view that Target Holdings should, in fact, have been decided in a similar manner. The breach lay in an unauthorised application of trust money. As such, the trust was fully restored according to its terms upon the acquisition of the mortgage.
There are, therefore, two forms of equitable compensation. When the trust account has suffered loss as a result of negligence, or due diligence, the trust is compensated according to the common law rules of causation. Where the breach is as a result of the misapplication of property, the loss is directly compensated and the rules of causation do not apply.
Berg, Modern Law Review, Accessory Liability for Breach of Trust Vol. 59, No. 3), pp. 443-453, 1996
Penner, The Law of Trusts, Butterworths Core Text Series, Third Edition, 2002
Rickett, Sydney Law Review, Equitable Compensation: Towards a Blueprint, 2003
Target Holdings v. Redferns, (1996) AC 514