Equitable Compensation Claims

My article, ‘Equitable compensation arising out of sale of a property ordered under s.14 TLATA’ was published in ‘Trusts & Trustees’ by Oxford University Press, 28 November 2017, and will feature in the February issue of the journal, which is sold and distributed worldwide: https://academic.oup.com/tandt

‘Equitable compensation is not compensation for loss, it is restitution of the trust fund. If the defaulting trustee cannot restore the assets to the trust fund, then he must pay money into the trust instead. How much has to be paid into the trust fund is assessed by looking at the matter with hindsight to see what would be comprised in the trust fund but for the breach. Issues of remoteness, causation and mitigation have no place in the assessment of equitable compensation as they do with damages.’ Equitable Compensation: The Traditional View by Penelope Reed QC, presented to the Chancery Bar Association 5 May 2017: http://www.chba.org.uk/for-members/library/overseas-seminars/equitable-compensation

Whilst the remedy is not limited by foreseeability, remoteness, and other considerations which affect the recovery of common law damages, there must be a causal link between the breach and the loss to the trust fund.

It is important to work out the nature of the breach, as a  breach by a fiduciary which is not a breach of fiduciary duty but breach of his duty of care, will be treated like a claim for damages.

A trust takes effect over property creating equitable proprietary rights in favour of the beneficiaries, and Trustees owe fiduciary duties to beneficiaries not to:

(i)      make unauthorised profits;

(ii)     allow any conflict of interest; and

(iii)    self-deal with trust property.

‘Trustees are under a duty to act in “the best interests” of their beneficiaries. This is such a firmly established assumption that the duty has been incorporated explicitly in various statutes.’ The Law of Trusts by Geraint Thomas and Alastair Hudson.  It is also a fiduciary duty.

If the trustee makes an unauthorised disposal of the trust property, the obvious remedy is to require him to restore the assets or their monetary value. It is likely to be the only way to put the beneficiaries in the same position as if the breach had not occurred. It is a real loss which is being made good.

‘Trust duties are… fiduciary duties, trust relationships are necessarily fiduciary relationships, and trustees are… fiduciaries. On the other hand, fiduciary duties may not be trust duties.… [Fiduciaries] are obliged, within the fiduciary elements of their interactions to focus their energies on serving their beneficiaries’ best interests. The definition of “best interests” is not entirely straightforward, though. Does it entail that fiduciaries have positive duties to foster or further their beneficiaries’ interests, such as taking positive steps to obtain the best possible price for a property? Alternatively… must fiduciaries only refrain from acting in ways that are detrimental to their beneficiaries’ interests, thereby entailing that their duties are negatively fashioned – for example, a duty not to engage in conflicts, whether of interest and duty or of duty and duty?… Whether or not the rules and obligations imposed upon fiduciaries are positive (you must do this) or negative (you may not do that), the fact is that the fiduciary concept prescribes such rules and obligations: these are positive, purposive inclusions designed to achieve particular results. As with the situation involving express trustees, once persons or things are described as fiduciaries, Equity intervenes and prescribes a standard of conduct to which they must adhere.’ ‘Fiduciary Law’ by Leonard L. Rotman.

‘Although the normal remedy for equitable wrongdoing is restitutionary … the notion of equitable compensation is recognised by English law. Although this remedy has sometimes been called restitutionary, since the effect of it is to restore the claimant to the position which he or she occupied had the wrong not been committed, the remedy has nothing to do with the law of restitution as such simply because it is not assessed by reference to the gain made by the defendant but is instead assessed by reference to the loss suffered by the claimant… It is still unclear, however, to what extent the prevalence of restitutionary remedies for equitable wrongdoing will be affected by the growing recognition of equitable compensation.’ The Principles of the Law of Restitution by Graham Virgo.

It is submitted that when considering compensation for a breach of an obligation the focus is not on the classification of the relationship as a whole but on the nature of the obligation which has been breached.

In AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (a case argued and decided in the context of a claim for breach of trust), Lord Reed stated,

‘Notwithstanding some differences, there appears to be a broad measure of consensus across a number of common law jurisdictions that the correct general approach to the assessment of equitable compensation for breach of trust is that described by McLachlin J in Canson Enterprises and endorsed by Lord Browne-Wilkinson in Target Holdings.

In Canada itself, McLachin J’s approach appears to have gained greater acceptance in the more recent case law, and it is common ground that equitable compensation and damages for tort or breach of contract may differ where different policy objectives are applicable.

Following that approach, which I have discussed more fully at paras 90-94, the model of equitable compensation, where trust property has been misapplied, is to require the trustee to restore the trust fund to the position it would have been in if the trustee had performed his obligation. If the trust has come to an end, the trustee can be ordered to compensate the beneficiary directly. In that situation the compensation is assessed on the same basis, since it is equivalent in substance to a distribution of the trust fund. If the trust fund has been diminished as a result of some other breach of trust, the same approach ordinarily applies, mutatis mutandis.

The measure of compensation should therefore normally be assessed at the date of trial, with the benefit of hindsight. The foreseeability of loss is generally irrelevant, but the loss must be caused by the breach of trust, in the sense that it must flow directly from it. Losses resulting from unreasonable behaviour on the part of the claimant will be adjudged to flow from that behaviour, and not from the breach. The requirement that the loss should flow directly from the breach is also the key to determining whether causation has been interrupted by the acts of third parties. The point is illustrated by the contrast between Caffrey v Darby, where the trustee’s neglect enabled a third party to default on payments due to the trust, and Canson Enterprises, where the wrongful conduct by the third parties occurred after the plaintiff had taken Page 42 control of the property, and was unrelated to the defendants’ earlier breach of fiduciary duty.

It follows that the liability of a trustee for breach of trust, even where the trust arises in the context of a commercial transaction which is otherwise regulated by contract, is not generally the same as a liability in damages for tort or breach of contract. Of course, the aim of equitable compensation is to compensate: that is to say, to provide a monetary equivalent of what has been lost as a result of a breach of duty. At that level of generality, it has the same aim as most awards of damages for tort or breach of contract. Equally, since the concept of loss necessarily involves the concept of causation, and that concept in turn inevitably involves a consideration of the necessary connection between the breach of duty and a postulated consequence (and therefore of such questions as whether a consequence flows “directly” from the breach of duty, and whether loss should be attributed to the conduct of third parties, or to the conduct of the person to whom the duty was owed), there are some structural similarities between the assessment of equitable compensation and the assessment of common law damages.

Those structural similarities do not however entail that the relevant rules are identical: as in mathematics, isomorphism is not the same as equality. As courts around the world have accepted, a trust imposes different obligations from a contractual or tortious relationship, in the setting of a different kind of relationship. The law responds to those differences by allowing a measure of compensation for breach of trust causing loss to the trust fund which reflects the nature of the obligation breached and the relationship between the parties. In particular, as Lord Toulson explains at para 71, where a trust is part of the machinery for the performance of a contract, that fact will be relevant in considering what loss has been suffered by reason of a breach of the trust.

This does not mean that the law is clinging atavistically to differences which are explicable only in terms of the historical origin of the relevant rules. The classification of claims as arising in equity or at common law generally reflects the nature of the relationship between the parties and their respective rights and obligations, and is therefore of more than merely historical significance. As the case law on equitable compensation develops, however, the reasoning supporting the assessment of compensation can be seen more clearly to reflect an analysis of the characteristics of the particular obligation breached. This increase in transparency permits greater scope for developing rules which are coherent with those adopted in the common law. To the extent that the same underlying principles apply, the rules should be consistent. To the extent that the underlying principles are different, the rules should be understandably different.’