Equitable Compensation for Breach

breach of trust

When a trustee has failed to obey one of the terms of the trust

- sometimes it means that the trustees have not obeyed the limits of their powers

equitable power

the ability to change the beneficial interest

what was the old law?

taking an account against a trustee

an account

involved appointing a master of chancery to superintend the accounts

accounting process

1. Lord Chancellor gives you a reference to a master and a trustee would show an account book with receipts to prove all payments were authorised

2. if transactions were not authorised, they would be falsified

3. when more money should have been paid, you surcharge the account

4. at the end, you come up with a different figure of what the account should be and the trustee pays the difference

what does it mean to say a transaction would be falsified?

say the transaction never occurred and put the account in the state it ought to have been in

why was the old law problematice

- it all occurred in the master's office and nobody checks apart from the Lord Chancellor

- there is rarely any writing to explain why decisions were made

Dr Lushington in Doss v Doss

a decree for an account is not just the courts asking someone to check the numbers and report back, the courts have already decided that one party is entitled to money from the other

Re Collie, Ex parte Adamson

Equity focuses on restitution, not compensation. It aims to restore the claimant to what they originally had strip the defendant of wrongful gains

define restitution

putting people back into their "status quo", the state they were in before entering a contract

Justice Street in Re Dawson

- The obligation for restitution is personal not proprietary and is not limited by common law decisions of remoteness of damage

- You assess the value of property on the day of the judgment → if the value of the property goes up, then you will have to pay the increased value because trustees have a continuing obligation to ensure the trust is in a correct state at all times

Target Holdings Ltd v Redferns facts

when mortgagees disappeared, a bank went to sell the property but found it misvalued as £2mil when it was worth £700k. the bank had solicitors who acted as escrow agents with a trust which said they had the power to pay out the money after they received signed documents, since the solicitors paid the money out early, the bank argued it was ultra vires and tried to claim their money through the solicitors

Target decision trial judge

An equitable debt arises at the moment of the breach

Account would be falsified and the debt would be due without needing to prove fraud or negligence

Target decision HoL

although there was a technical breach of trust, the transaction did later complete as intended, the lender's loss arose because the property was inadequate not because of the premature payment

- the solicitors are only liable for losses caused by the breach, not all losses that happened afterwards

Lord Browne-Wilkinson's commercial reasoning in Target

1. trust law should not be applied mechanically in commercial transactions, he rejected the idea that any breach of trust creates a debt-like liability

2. focus on causation - liability should depend on whether the breach actually caused the loss

3. consider the purpose of the transaction and whether the breach undermined the overall commercial purpose

what are the 2 types of breaches Peter Birks identifies?

1. ultra vires transactions

2. failure of management

ultra vires transactions

- no fault or negligence required to be proved

- automatic proprietary affect

- account reflects the proprietary state of the beneficial interest

failure of management

- breaches of an equitable duty of care

- have to prove fault by wilful default

- has remedy of surcharging

- similar to common law compensation

why does Lord Justice Millet argue Lord Browne-Wilkinson's decision is misleading

- The trustee comes under a liability to restore the trust account to its authorised state

- They are allowed to do this in any form authorised by the terms of the trust

- A proper account should have been made

What does Charles Mitchell argue

argues that there is strict liability → if you want to relieve the trustees, you have to go by Section 61 of the trustee act

Section 61 of the trustee act

If there is a breach of trust, but the trustee has acted honestly and reasonably and ought fairly to be excused from the breach of trust [...] the court may relieve him either wholly or partly from the personal liability of the claim.

Steven Elliot

There are two types of equitable compensation:

1. Substitutive compensation → ultra vires

2. Reparative compensation → calculated to repair the loss, matches injury caused by the defendant's misconduct (breach of duty)

What are the 3 types of accounts

1. Account in common form

2. Account on the basis of wilful default

3. Account of profits

Account in common form

- available as a right, relates to ultra vires transactions

- remedy is falsifying (substitutive compensation)

- automatic/right → no fault or wrong needed

Concerned with duties

account on the basis of wilful default

- requires you to prove breach/fault

- just means fault, it does not have to be wilful

- remedy is surcharging (reparative compensation)

- concerned with powers

AIB v Redler facts

facts: AIB hired Redler as solicitors and requested them to take over Barclays's charge on a borrower's property to discharge it and pay the remainder of the 3.3 million to the borrower

- Redler mistakenly paid the borrower 300k more which was intended for Barclays

- the charge is not discharged and as a result AIB's charge is not registered

- the property is then sold for a small amount and does not cover the debts, 300k goes to Barclays and AIB gets the remainder

AIB decision

- 300k is the measure of compensation

- Target principle is used for commercial and traditional trusts

- Lord Reid: the remedy is dictated by the duty and we need to pay careful attention to the duty

Lord Tilson

disapproves of accounts "there is something wrong with the state of the law if we have to invent fairy tales for the Target to work."

Lord Millet

"equity is not a set of rules but a state of mind"

- equity lawyers look at relationships between parties

- equity enforces a duty through money enforcement of a trust

Justice Gummow

the solicitors were tasked with getting a charge but instead got a charge by subrogation and a second charge which is not the same (opposes Millett) the second charge was riskier and you should have to accept these charges if they were not what was intended

Sarah Worthington

Look at the counterfactual and construct the counterfactual through the duty, Lord Reid was right

what is the counterfactual

but for test: what would have happened but for the breach?

Ho and Nolan

Equitable compensation is subsidiary to other remedies in trust law

the remedy is the enforcement of the duty

Main v Giambrone & Law facts

- IRA and Mafia fraudulent real estate scheme

- Italian govt required anybody investing in construction had to receive grade one guarantees

- investor's solicitors obtained the wrong type of guarantee

- the solicitors argued applying AIB/Target, since the right guarantee would have still be worthless and the money still lost, they should not be liable

Main v Giambrone & Law decision:

- CoA held that they had to refund all the money they paid out

- Paying careful attention to the duty, the solicitors were meant to passive and hold onto the money until a specific guarantee appeared

- Since the guarantee never appeared the counterfactual would have been what would have happened if the trustees held onto the money

what is the law?

Account is an analytical tool to ensure we are reaching the correct result. We are supposed to be using the but-for test.

Hotel Portfolio

the law has moved on from account. Loss is assessed by comparing the but-for position

Exam technique

In a problem question, must use the but-for test

In an essay, you can criticise different positions, so long as there is good analysis