The House of Lords has unanimously allowed an appeal by the firm of solicitors, Redferns, against the decision of the Court of Appeal awarding a lender, Target, £1 million in respect of a breach of trust by Redferns in releasing mortgage money without Target's authority.

On appeal in Target's summary judgment application, the Court of Appeal had held that where a breach of trust involved payment of trust money to a 'stranger' there was an immediate loss to the trust fund and, in this case, Redferns was under an immediate duty to restore to the trust fund the whole of the money paid away.

It did not matter that Target would have lost the money in any event.Restoring the first instance decision, the House of Lords held that, assuming the facts in Redfern's favour (as they had to, as this was a summary judgment application and the actual facts could only be decided at the full trial of the action), ie that the underlying conveyancing transaction would have gone ahead even if there had been no breach of trust, Target had obtained exactly what it would have obtained had no breach of trust occurred, ie valid security for the sum advanced.

On the assumption made, therefore, Target had suffered no compensatable loss.

Redferns was entitled to leave to defend the breach of trust claim.

In a transaction which Lord Browne-Wilkinson in the House of Lords described as 'redolent of fraud and negligence', Redferns acted as solicitors for both Crowngate Developments Ltd and Target in respect of a loan of approximately £1,525,000 by Target to Crowngate to purchase two properties.

The loan was to be secured by mortgages over the properties which had been valued, it was alleged negligently, at £2 million.

Crowngate arranged to buy the properties through two intermediate companies (under the same ownership as Crowngate) for £775,000.

Redferns was aware that the properties were being purchased for £775,000 and that they were to be bought through the two intermediate companies.

These facts were not communicated to Target by Redferns or Crowngate.Prior to completion, Target paid the £1,525,000 to Redferns which, before completion, paid the money to the two intermediate companies.

Approximately £775,000 was then paid to the vendor of the prop erties and Redferns notified Target that the purchase and Target charge had been completed although these transactions had not yet taken place.

Several days later the various transfers and the Target charges were completed.

The balance of the loan was retained or paid away by the intermediate companies.

Three years later, having repossessed the properties, Target contracted to sell them for £500,000.

Target then brought proceedings against Redferns for negligence and breach of trust.

In proceedings for summary judgment, Redferns accepted that it had received the money from Target as its agent and until authorised by Target to release the money it held it on trust.

Redferns further accepted that it had committed a breach of trust when it transferred the money to the intermediate companies before the contract for the purchase of the properties by Crowngate and the charges had been received.

However, it was claimed that the breach of trust was only technical as Target had suffered no resultant loss because it had obtained the charges to which it was entitled.

Warner J considered that Target's claim for breach of trust was very nearly strong enough to justify summary judgment.

However, he gave Redferns leave to defend conditional upon an interim payment of £1 million to Target.

Unconditional leave to defend was given in respect of the claim in negligence.Redferns appealed, contending that as Target had suffered no loss resulting from the breach of trust it should have been entitled to unconditional leave to defend the breach of trust claim.

Target cross-appealed on the basis that it should have been given final judgment on the breach of trust claim.The Court of Appeal by a majority of two to one dismissed Redferns' appeal and allowed Target's cross-appeal giving judgment on the breach of trust claim.

Redferns was ordered to make restitution of the loan to Target giving credit only for the money recovered from sale of the properties.Ralph Gibson LJ in his dissenting speech accepted that where there had been a breach of trust the liability of the trustee to restore the trust fund could not be limited by the principles applied in tort and contract relating to causation of damage.

However, there had to be a causal connection between the breach of trust and the loss claimed.

Whether there was such a causal connection depended upon whether the loss would have happened if there had been no breach of trust.

In his view, Redferns had raised an arguable defence, namely that Target would have suffered the loss whether or not there had been a breach of trust.Peter Gibson LJ, with whom Hirst LJ agreed, confirmed that liability for breach of trust was not restricted by principles of causation, foreseeability and remoteness but that there was a requirement for a causal connection.

However, where the breach of trust consisted of the wrongful paying away of trust money he held that it was not necessary to consider whether the loss would have happened if there had been no breach.

In this situation there was an immediate loss and the causal connection was obvious.

The cause of action had been 'constituted simply by the payment away of Target's moneys in breach of trust and the loss is quantified in the amount of those moneys, subject to Target giving credit for the realisation of the security it received'.

Peter Gibson LJ commented that: 'If this appears harsh treatment of a defaulting trustee, it has to be acknowledged that equity has always treated a defaulting trustee severely.'Lord Browne-Wilkinson gave the only speech in the House o f Lords.

Lords Keith, Ackner, Jauncey and Lloyd agreed with the reasons given by Lord Browne-Wilkinson and allowed Redferns' appeal.Lord Browne-Wilkinson noted that Redferns' breach of trust could only be said to have caused the actual loss ultimately suffered by Target (ie the shortfall between the money advanced and the amount recovered on realisation of the security) if it could be shown that, but for the breach of trust, the transaction would not have gone ahead.

Until this issue was decided at the full trial of the action, it was appropriate to assume the transaction would have gone ahead.This had been an assumption necessarily adopted by the Court of Appeal.

Nevertheless, the Court of Appeal appeared to have decided that even if there was no causal link between the breach of trust by Redferns and the loss eventually suffered by Target, Redferns was liable for that loss.Lord Browne-Wilkinson could not agree with the Court of Appeal's view which, if correct, would apply to breaches of trust involving no suspicion of fraud or negligence.

He stated: 'For example, say an advance was made by a lender to an honest borrower in reliance on an entirely honest and accurate valuation.

The sum to be advanced is paid into the client account of the lender's solicitors.

Due to an honest and non-negligent error (eg an unforeseeable failure in the solicitors' computer) the monies in client account are transferred by the solicitors to the borrower one day before the mortgage is executed.

That is a breach of trust.

Then the property market collapses and when the lender realises the security by sale he recovers only half the sum advanced.

As I understand the Court of Appeal decision, the solicitors would bear the loss flowing from the collapse in the market value...''To my mind in the case of an unimpeachable transaction, this would be an unjust and surprising conclusion.'Although Lord Browne-Wilkinson agreed that the detailed rules of equity as to causation and the quantification of loss differed from those applicable at common law, the principles underlying both systems were the same.

The defendant's wrongful act must cause the damage complained of and the plaintiff is to be put in the same position as he would have been in if he had not sustained the wrong.

With a breach of trust, the first question to ask was what were the rights of the beneficiary.

His basic equitable right was to have the trust duly administered in accordance with the provisions of the relevant trust instrument, if any, and the general law.

In the case of a 'traditional trust', ie, where a trust fund is held for several beneficiaries who had differing equitable interests, the beneficiaries were entitled to reconstitution of the trust fund following a breach of trust by the trustee.

This was the only way in which all the beneficiaries' rights could be protected.

However, once the property under a traditional trust had vested absolutely in a beneficiary the trust became a 'bare trust'.

In the case of a bare trust the beneficiary's right was only to be compensated for the loss he had suffered by reason of a breach.

The present situation where money had been paid to a solicitor by a client was akin to a bare trust.

Although Lord Browne-Wilkinson had no doubt that a solicitor would be liable to restore to his or her client account any money wrongly paid out before the underlying conveyancing transaction had been completed, the situation was different once the transaction had been completed.

Once this had happened the client was only entitled to recover from the solici tor the loss suffered 'which, using hindsight and common sense, can be seen to have been caused by the breach'.The Court of Appeal had relied, in particular, on the unreported decision in Alliance & Leicester Building Society v Edgestop Ltd, 18 January 1991.

In that case, solicitors had also wrongly paid the building society's money away in breach of its instructions.

The building society was awarded an interim payment against the solicitors on the ground that the solicitors were liable for breach of trust.

The case was, however, distinguishable as it had been held by the judge that if the building society had known the true facts it would not have made the loan -- a fact that had to be assumed to the contrary in the present case.In this case, at the summary judgment stage it could not be said that Target had suffered any loss from Redferns' breach of trust.

The facts would have to be investigated at trial to ascertain whether the transaction would have gone ahead but for Redferns' breach of trust.

Lord Browne-Wilkinson made clear that the date at which compensation should be assessed was the date judgment was given, when the court could use the full benefit of hindsight, not the date the cause of action accrued (when the money was wrongfully paid away) or any other date.

That said, Lord Browne-Wilkinson thought it highly likely that the money made available by Redferns' breach of trust had been essential to enable the transaction to go through and that, in the circumstances, but for Redferns' breach of trust, Target would not have advanced any money.

If at trial this were found to be the case, the loss suffered by Target by reason of the breach of trust would be the total sum advanced less the proceeds recovered by Target from sale of the security.

The House of Lords' judgment is to be welcomed.

There had been considerable concern following the Court of Appeal decision that solicitors, in particular, and possibly others in a fiduciary relationship, eg company directors, brokers or other agents who hold principals' or clients' money on trust could, because of innocent and technical breaches, be held liable to restore money to a trust fund.

Provided the beneficiary could show that money had been paid away in breach of trust, it appeared that he or she could claim any loss suffered regardless of the cause of that loss.

The law has now been clarified and one of the many difficulties facing solicitors acting for both lender and borrower has been removed.