Equitable Compensation

1. Equitable Compensation Cameron Stewart

2. Equitable compensation and damages • There are two possible bases for an order for the payment of money to an aggrieved party at equity. • The first arises from the inherent jurisdiction of equity to make orders for monetary compensation as an appropriate means to remedy a purely equitable wrong such as breach of fiduciary duty. This is known as ‘equitable compensation’. • The second is the ability conferred by statute for an order of damages to be substituted for, or added to, specific performance or injunction where those remedies have been sought in respect of contracts, torts or any wrongful act. Thus, in certain situations, equity has the power to provide for a remedy of damages in respect of a common law wrong. This is referred to as ‘equitable damages’.

3. Equitable compensation • Although equity courts never ordered damages as a remedy for the infringement of equitable obligations, they did provide for monetary forms of relief. • In Ex parte Adamson (1878) 8 Ch D 807, at 819, James and Baggallay LJJ noted that relief in such cases was by way of ‘a suit … for equitable debt or liability in the nature of a debt. It was a suit for the restitution of the actual money or thing, or value of the thing, of which the cheated party had been cheated’. • Equitable compensation orders were originally restricted to cases involving breaches of fiduciary obligations.

4. Re Dawson (dec’d) [1966] 2 NSWR 211 • A trustee who had improperly dealt with trust funds was ordered to pay equitable compensation to the trust to restore the trust to the position it would have been in had there been no default on his part.

5. Nocton v Lord Ashburton • Nocton was a solicitor • Lord Asburton was his client • Nocton and Baring (Ashburton’s brother) entered into a land development • They later agreed to sell the land to Douglas and Holloway but Douglas and Holloway needed a mortgage • Nocton convinced Ashburton to lend them the money, after a valuation (even after being warned by • Later, as the properties were developed, it became clear that there was insufficient security in the land • At trial the judge treated the case as one of fraud and found not evidence of intention • The Court of Appeal, found that there was actual fraud which would enable an action in deceit

6. Nocton v Lord Ashburton • Viscount Haldane was very critical of the proceedings but said that there was a third way – breach of fiduciary duty • That breach did not require that actual fraud be proved in the common law sense of intention • Lord Dunedin and Lord Shaw agreed

7. Equitable compensation • The House of Lords was prepared to award monetary compensation on the basis of Nocton’s breach of fiduciary obligations. Viscount Haldane LC, at 952, affirmed the longstanding ability of the equity courts to order monetary compensation, and said: Operating in personam as a Court of conscience it could order the defendant, not, indeed, in those days, to pay damages as such, but to make restitution, or to compensate the plaintiff by putting him in as good a position pecunarilyas that in which he was before the injury.

8. The nature of equitable compensation • In achieving its goal of restoring the position of the plaintiff to the position that he or she was in before the breach of equitable obligation occurred, equity’s approach to compensation, like all other equitable remedies, is conditioned by its ‘flexible character’: Cole v Manning [2002] NSWCA 150, at [63]. The appropriate date for the assessment of equitable compensation is the date on which the court makes the order for compensation and the quantum of compensation should reflect the amount that is necessary to put the plaintiff back into the position in which he or she would have been had there been no breach of equitable obligation: McNally v Harris (No 3) [2008] NSWSC 861, at [12]-[17].

9. Accounts of profits or equitable compensation • You can have one or the other • Warman International v Dwyer (1995) 182 CLR 544 – Bonfiglioli made gear boxes in Italy and used Warman as its agent to sell them in Australia • Warman was aked to enter into a joint venture to make the gearboxes I Australia but declined • Dwyer was a manager at Warman which ran the agancy side of the business. He was thinking of leaving and Warman offered to sell him the agency. He declined • Before leaving he undermined Warman’s relationship with Bonfiglioli , set up a new business, and took up the joint venture with Bonfiglioli, which then took over the agency business • Trial judge – breach of fiduciary duty – account of profits with allowaNCES • Court of Appeal – should be equitable compensation

10. Accounts of profits or equitable compensation • Remedy? Account - MASON CJ, BRENNAN, DEANE, DAWSON AND GAUDRON JJ • In the case of a business it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal's goodwill over an indefinite period of time. In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances. That may well be the case when it appears that a significant proportion of an increase in profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which he has introduced and the risks he has taken, so long as they are not risks to which the principal's property has been exposed. Then it may be said that the relevant proportion of the increased profits is not the product or consequence of the plaintiff's property but the product of the fiduciary's skill, efforts, property and resources. This is not to say that the liability of a fiduciary to account should be governed by the doctrine of unjust enrichment, though that doctrine may well have a useful part to play; it is simply to say that the stringent rule requiring a fiduciary to account for profits can be carried to extremes and that in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff

11. Accounts of profits or equitable compensation • Result • Warmanwas entitled to an account of profits made by the new company in its first two years of operation on the basis of the net profits of the business before tax less an appropriate allowance for the expenses, skill, expertise, effort and resources contributed by the defendants

12. The relationship to the common law conception of damages • An important question in relation to equitable compensation is the extent to which equity’s purpose of restoring a plaintiff to his or her original position differs from that of common law damages. Common law damages are also focused upon returning the plaintiff to the position he or she would have been in had the wrong not occurred: Wenham v Ella (1972) 127 CLR 454. Although both common law and equity share the aim of providing monetary compensation to a plaintiff, there are significant differences between them in relation to the principles to be applied in assessing the quantum of monetary relief. The most important of these differences is that the liability under equity for breach of trust or fiduciary duty is more absolute than liability that arises under the common law of contract or tort.

13. Causation • A consequence of this approach is that a defendant in equity cannot resist a finding of adequate causation by arguing that there was a break in the causal connection between breach of loss suffered by reason of some intervening act (novusactusinterveniens). • Equity is not readily susceptible to such speculation about other possible causes for loss when there is a clearly identifiable breach present

14. Brickenden v London Loan & Savings Co [1934] 3 DLR 465 • Brickenden was a solicitor for the LLS finance coy • Brickenden made a secret profit from deposits made by Biggs • Once a breach was found the question of whether Brickenden would have been allowed to keep the money wasn’t relevant

15. Brickenden v London Loan & Savings Co [1934] 3 DLR 465 • At 469, the Privy Council observed: • When a party holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent’s action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure, would have taken is not relevant.

16. Target Holdings Ltd v Redferns [1996] 1 AC 421 • Target deposited £1.5m with Redferns to provide by way of mortgage to Crowngate Developments • The money was no to be released until the land sale was complete and a mortgage had been executed • In breach the solicitors release £1.4m to another company before the sale was complete. • The development was a dud – Crowngate folded and Target was left with a £500K loss

17. Target Holdings Ltd v Redferns [1996] 1 AC 421 • Was the loss caused by the breach? • House of Lords – no – there was no connection between the loss and the breach • Some causal connection was needed

18. Target Holdings Ltd v Redferns [1996] 1 AC 421 • Lord Browne-Wilkinson said: • At common law there are two principles fundamental to the award of damages. First, that the defendant’s wrongful act must cause the damage complained of. Second, that the plaintiff is to be put ‘in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation’. Although, as will appear, in many ways equity approaches liability for making good a breach of trust from a different starting point, in my judgment those two principles are applicable as much in equity as at common law. Under both systems liability is fault-based: the defendant is only liable for the consequences of the legal wrong he has done to the plaintiff and to make good the damage caused by such wrong. He is not responsible for damage not caused by his wrong or to pay by way of compensation more than the loss suffered from such wrong. The detailed rules of equity as to causation and the quantification of loss differ, at least ostensibly, from those applicable at common law. But the principles underlying both systems are the same.

19. Target Holdings Ltd v Redferns [1996] 1 AC 421 • Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate: see Nocton v Lord Ashburton [1914] AC 932, 952, 958, per Viscount Haldane LC If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed: Caffrey v Darby (1801) 6 Ves. 488; Clough v Bond (1838) 3 My. and Cr. 490. Even if the immediate cause of the loss is the dishonesty or failure of a third party, the trustee is liable to make good that loss to the trust estate if, but for the breach, such loss would not have occurred: see Underhill and Hayton, Law of Trusts and Trustees 14th ed. (1987) pp. 734-736; In re Dawson decd.; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211; Bartlett v Barclays Bank Trust Co Ltd (Nos. 1 and 2) [1980] Ch. 515. Thus the common law rules of remoteness of damage and causation do not apply. However there does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable viz. the fact that the loss would not have occurred but for the breach: see also In re Miller's Deed Trusts (1978) 75 L.S.G. 454; Nestle v National Westminster Bank Plc [1993] 1 WLR 1260.

20. Maguire v Makaronis(1997) 188 CLR 449 • A husband and wife executed a mortgage in favour of their solicitors to secure bridging finance for the purchase of a poultry farm. • The trial judge found that the solicitors did not draw the clients' attention to the fact that the solicitors were to be the mortgagees or tell them that they should obtain independent legal advice. • The clients defaulted on the loan secured by the mortgage and the solicitors claimed possession of the mortgaged property. The clients sought by counter-claim a declaration that the mortgage was void. • Breach of fiduciary duty – however The mortgage could not be set aside without conditioning relief upon repayment by the mortgagor’s of principal and interest. Otherwise the mortgagors would be left with the fruits of the transaction of which they complained.

21. Maguire v Makaronis (1997) 188 CLR 449 • Brennan CJ, Gaudron, McHugh and Gummow JJ observed that, in equitable compensation cases, a common sense view of causation required that there be ‘an adequate or sufficient connection between the equitable compensation claimed and the breach of [equitable obligation]’. • Facts will not be ‘material’ if the relevant loss would have happened if there had been no breach: Maguire v Makaronis at CLR 493

22. Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 56 NSWLR 298 • Y was discretionary trust • Money was deposited in Minters’ trust account as part of a subscription agreement for shares – later the investment went bad • It was argued that the breach of trust did not cause any damage • HC: Monies were paid in breach of trust when the solicitors did not obtain a deposit certificate on the purchase of the shares • Other events which contributed to the loss were not relevant if there was a sufficient connection between the breach and the damages

23. Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 56 NSWLR 298 • Whilst the rights of Youyang against Minters crystallised on 24 September 1993, decisions such as that by Street J in Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd[8] indicate that the appropriate remedy, and, in particular, the quantum of pecuniary remedy, falls for determination at a later stage. In Target Holdings Ltd v Redferns[9], Lord Browne-Wilkinson, with reference to Re Dawson and the judgment of McLachlin J in Canson Enterprises Ltd v Boughton & Co[10], said: • "A trustee who wrongly pays away trust money, like a trustee who makes an unauthorised investment, commits a breach of trust and comes under an immediate duty to remedy such breach. If immediate proceedings are brought, the court will make an immediate order requiring restoration to the trust fund of the assets wrongly distributed or, in the case of an unauthorised investment, will order the sale of the unauthorised investment and the payment of compensation for any loss suffered. But the fact that there is an accrued cause of action as soon as the breach is committed does not in my judgment mean that the quantum of the compensation payable is ultimately fixed as at the date when the breach occurred." In Canson, McLachlin J, after putting to one side considerations that arise in tort and contract law, said that in equity "the losses are to be assessed as at the time of trial, using the full benefit of hindsight"[11].

24. Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 56 NSWLR 298 • Given the nature of the present case, those questions do not arise on this appeal. However, there must be a real question whether the unique foundation and goals of equity, which has the institution of the trust at its heart, warrant any assimilation even in this limited way with the measure of compensatory damages in tort and contract. It may be thought strange to decide that the precept that trustees are to be kept by courts of equity up to their duty has an application limited to the observance by trustees of some only of their duties to beneficiaries in dealing with trust funds.

25. Plaintiff’s contribution to loss • In New Zealand and Canada courts have held that a plaintiff’s claim for equitable compensation may be successfully defended on the basis that his or her contribution to the loss may be a complete or partial defence to liability on the part of the defendant: Day v Mead [1987] 2 NZLR 443, at 451; Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534, at 585; (1991) DLR (4th) 129, at 151.

26. Day v Mead [1987] 2 NZLR 443 • Mead was Day’s solicitor and bought shares in Pacific Mills on Mead’s advice • Day took an active interest in the company • Day ought more shares after being advised to do so • Company went broke • Trial judge gave full compensation for the first investment but only half of the second given Day’s contribution to the loss

27. Day v Mead [1987] 2 NZLR 443 • Cooke P: • Whether or not there are reported cases in which compensation for breach of a fiduciary obligation has been assessed on the footing that the plaintiff should accept some share of the responsibility, there appears to be no solid reason for denying jurisdiction to follow that obviously just course, especially now that law and equity have mingled or are interacting. It is an opportunity for equity to show that it has not petrified and to live up to the spirit of its maxims

28. Duke Group Limited (in liq) v Pilmer (1999) 73 SASR 64 • The Full Court of the Supreme Court of South Australia found the accountants to be in breach of the contractual, tortious, and fiduciary duties which they owed to the company. Ultimately, the court measured the damages payable by the defendants using the principles relevant to breach of contractual duty, since these resulted in the higher figure.

29. Plaintiff’s contribution to loss • However, although thus not strictly necessary to decide, the Full Court considered the effect which a plaintiff’s contribution to loss would have upon an assessment of equitable compensation for breach of fiduciary duty. In this respect, the Full Court, at 250, said that it would be: • … inherently unjust, and we would say, inequitable, to require a defendant, whose fiduciary breach unlocked the door to the plaintiff acting in obvious disregard of its own interests, to bear sole responsibility for the total loss thereby suffered by the plaintiff where the plaintiff’s own conduct has made a material contribution to that loss.

30. Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165 • The appeal to the High Court by the former partners of the accounting firm succeeded on the basis that the calculation of damages to compensate for Kia Ora’s loss had been incorrect and also that no fiduciary obligation had been breached. Although Kirby J disagreed on the latter score, the court was of one mind in rejecting any place for reduction on the basis of the plaintiff’s conduct in the determination of equitable compensation. The reasons included an appreciation of the essence of the fiduciary relationship in which the beneficiary has no obligation to protect himself or herself against the fiduciary and the nature of contributory negligence in tort law. McHugh, Gummow, Hayne and Callinan JJ, at CLR 201–2; ALR 274, said: • Contributory negligence focuses on the conduct of the plaintiff, fiduciary law upon the obligation by the defendant to act in the interests of the plaintiff. Moreover, any question of apportionment with respect to contributory negligence arises from legislation, not the common law. Astley indicates that the particular apportionment legislation of South Australia which was there in question did not touch contractual liability. The reasoning in Astley would suggest, a fortiori, that such legislation did not touch the fiduciary relationship.

31. Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 • Solicitors acted in a dodgy land devlopment where secret profits were made but others • Later the land development went sour due to negligence in the pile driving during construction • A negligence action was successful but the judgment was partly unsatisfied • Could you sue the defaulting solicitor for the shortfall? • Trial judge found liability and assessed damages by the same causation rules as a deceit • La Forest, Sopinka, Gonthier and Cory JJ - yes

32. Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 • La Forrest J: • There might be room for concern if one were indiscriminately attempting to meld the whole of the two systems. Equitable concepts like trusts, equitable estates and consequent equitable remedies must continue to exist apart, if not in isolation, from common law rules. But when one moves to fiduciary relationships and the law regarding misstatements, we have a situation where now the courts of common law, now the courts of equity moved forward to provide remedies where a person failed to meet the trust or confidence reposed in that person. There was throughout considerable overlap. In time the common law outstripped equity and the remedy of compensation became somewhat atrophied. Under these circumstances, why should it not borrow from the experience of the common law? Whether the courts refine the equitable tools such as the remedy of compensation, or follow the common law on its own terms, seems not particularly important where the same policy objective is sought.

33. Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 • McLachlin J (in dissent on this point but not on dismissal of appeal) said: • In negligence and contract the law limits the actions of the parties who are expected to pursue their own best interest. Each is expected to continue to look after their own interests after a breach or tort, and so a duty of mitigation is imposed. In contrast, the hallmark of fiduciary relationship is that the fiduciary, at least within a certain scope, is expected to pursue the best interest of the client. It may not be fair to allow the fiduciary to complain when the client fails forthwith to shoulder the fiduciary’s burden. This approach to mitigation accords with the basic rule of equitable compensation that the injured party will be reimbursed for all losses flowing directly from the breach. When the plaintiff, after due notice and opportunity, fails to take the most obvious steps to alleviate his or her losses, then we may rightly say that the plaintiff has been ‘the author of his own misfortune’. At this point the plaintiff’s failure to mitigate may become so egregious that it is no longer sensible to say that the losses which followed were caused by the fiduciary’s breach. But until that point, mitigation will not be required.

34. Exemplary damages? • Aquaculture Corporation v NZ Mussel Co Ltd [1990] 3 NZLR 299 and the Supreme Court of Canada in Norberg v Wynrib (1992) 92 DLR (4th) 440

35. Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 • This case concerned an action by Digital Pulse against two former employees who had diverted work to their own company. • This was in clear breach of the clause in their contracts of employment not to compete with Digital Pulse for business. • At first instance, Palmer J also found that the defendants had been in breach of the fiduciary duty which they owed their employer. • So flagrant was the defendants’ behaviour that, in addition to other forms of relief, his Honour awarded $10,000 exemplary damages against each.

36. Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 • The majority of the Court of Appeal upheld the appeal and found that Palmer J had erred in awarding exemplary damages on these facts. • HeydonJA, at 360–91, who authored the leading judgment, expressed a fundamental objection to the concept of damages as punishment at equity after a thorough canvassing of authorities. He rejected the persuasiveness of New Zealand and Canadian authorities. Indeed, his Honour’s ultimate dismissal of exemplary damages in equity laid the blame for the suggestion at the door, not so much of Palmer J, but the New Zealand Court of Appeal. His Honour, at 416, said: • What [that court] contemplated in the Aquaculture Corporation case was a form — perhaps a mild form, but a form nonetheless — of fusion. It was fusion in the sense of selecting a remedy from the common law range of remedies which a court of equity administering the law relating to equitable wrongs before the introduction of a judicature system would not have administered. What is contemplated is that the unified court administering the two systems may select a remedy historically granted by the courts of common law in relation to a wrong recognised only in the courts of equity. But whatever one calls the process, it must be recognised as a process involving a deliberate judicially-engineered change in the law

37. Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 • Mason P dissented. His Honour, at 326, said: • Both ‘Equity’ and ‘Common Law’ had adequate powers to adopt and adapt concepts from each other’s system well before the passing of the Judicature Act, and nothing in that legislation limits such powers. They are of the very essence of judicial method which was and is part of the armoury of every judge in every ‘common law’ jurisdiction

38. Giller v Procopets (2008) 24 VR 1 • Neave JA held that, ‘[s]uch damages are compensatory, not punitive’. Her Honour, at 105, went on to rule that, in the appropriate case, it was proper for a court to include a component for aggravation in an award of equitable compensation. In determining whether or not an order for compensation for aggravation should be made, a court will assess the defendant’s conduct on criteria that are very similar to the assessment of whether an award of exemplary damages would be made against the defendant.

39. Equitable Damages Chancery Amendment Act 1858 (UK), more popularly known as Lord Cairns’ Act s 68 of the Supreme Court Act 1970 (NSW) which states: Where the Court has power: (a) to grant an injunction against the breach of any covenant, contract or agreement, or against the commission or continuance of any wrongful act, or (b) to order the specific performance of any covenant, contract or agreement, the Court may award damages to the party injured either in addition to or in substitution for the injunction or specific performance.

40. Lord Cairns Act damages • In Wentworth v Woollahra Municipal Council (1982) 149 CLR 672, at 676; 42 ALR 69, at 72, Gibbs CJ, Mason, Murphy and Brennan JJ referred to the purpose of Lord Cairns’ Act in the following terms: • The main object of the Act was to enable the Court of Chancery to do ‘complete justice’ between the parties by awarding damages in those cases in which it formerly refused equitable relief in respect of a legal right and left the plaintiff to sue for damages at common law.

41. Jurisdiction to award equitable damages • Before equitable damages can be awarded, the court must have the jurisdiction to order a decree of specific performance or an injunction. Thus, if such equitable relief is refused on the basis that damages at common law are adequate, the court has no jurisdiction to award equitable damages.

42. Equitable damages in addition to specific relief • The provisions of Lord Cairns’ Actclearly envisage the making of an order for damages in addition to specific performance or injunctive relief. This is especially useful in enabling the court to address the issue of any losses caused to the plaintiff by the defendant’s breach that are not properly addressed by an order for equitable relief.

43. Equitable damages in lieu of specific relief • the fact that specific relief is denied on discretionary grounds does not preclude the court from ordering equitable damages. • where specific relief once ordered becomes impossible to carry out due to intervening circumstances, a court will readily make an order for equitable damages in lieu of specific relief.