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Equitable Compensation

Cameron Stewart
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’.
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.
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.
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
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
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 pecunarily as that in which he was before the
injury.
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].
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
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
Accounts of profits or equitable
compensation
• Result

• Warman was 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
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.
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
(novus actus interveniens).
• Equity is not readily susceptible to such
speculation about other possible causes for loss
when there is a clearly identifiable breach
present
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
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.
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
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
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.
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.
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.
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
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
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].
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.
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.
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
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
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.
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.
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.
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
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.
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.
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
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.
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.
• Heydon JA, 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
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
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.
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.
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.
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.
Equitable damages in addition to
specific relief
• The provisions of Lord Cairns’ Act clearly
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.
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.