THOUGH trusts and fiduciary relations are in adulthood, the principles on compensation for breach of trust and fiduciary duty are at an earlier developmental stage. There are several reasons. First, the remedy of equitable compensation for breach of fiduciary duty is generally considered a recent development. Secondly, as yet there has been no final answer to the question: how far ought the principles for recovering compensation from defaulting trustees to apply to defaulting fiduciaries? Thirdly, compensation from a trustee may be delivered by a “common accounting”, namely of all the sums received by the trustee, or by a “wilful default” accounting, which is of all sums received by the trustee plus sums the trustee did not receive but ought to have received. These trust accounting principles suffered some obscurity, and they remain less than generally familiar. Fourthly, those accounting principles lack notoriety because their intricacy, slowness and costliness mean they are rarely applied. Claimants generally prefer to avoid the time and expense of a full accounting by suing for compensation in respect of a particular breach. Such claimants should recover no less or more than from a full accounting. But how courts should quantify loss when this simpler procedure is used has, like the accounting rules themselves, been an obscure process.

The Hong Kong Court of Final Appeal's decision in Libertarian Investments Ltd. v Hall [2013] HKCFA 93 clarifies the relevant principles significantly, and will merit consideration by courts in England and other jurisdictions.

The defendant, Mr. Hall, committed breaches of trust and, as agent, of fiduciary duty. He became a trustee when the plaintiff, Libertarian Investments Ltd., entrusted him with £35,790,980.67 to be deposited on sub-trust with solicitors pending the purchase of shares in The Sporting Exchange Ltd. (“TSE”). Hall's deposit of the moneys with the solicitors left him with exclusive control, and he made unauthorised disbursements. The Court straightforwardly applied ordinary accounting principles to require Hall to pay £37,054.69 to the plaintiff for the fund's shortfall.

More significant is the Court's assessment of the breaches of fiduciary duty. Relevantly, in breach of “some or all of” the fiduciary prohibitions on his acting in bad faith, placing his interest in conflict with his duty, and making an unauthorised profit, Hall deliberately did not perform his obligation as agent to acquire a tranche of shares in TSE. He withdrew £5,463,508.46 of the deposited money purportedly to acquire 1,777,700 of those shares and falsely told the plaintiff he acquired them. When the plaintiff later instructed Hall to sell those shares to Softbank Corp., who was offering to buy TSE shares at a high price, Hall falsely told the plaintiff he sold 414,700 of the shares to Softbank. Presumably in order to recover loss on more generous causation rules than apply to the assessment of contractual damages, the plaintiff successfully sought equitable compensation for breach of fiduciary duty. The Court found that had the defendant acquired the TSE shares for the plaintiff, the plaintiff would later have sold 42% of them to Softbank. For his fiduciary breaches, the defendant was found liable for equitable compensation comprising (before adjustments) (a) £9,855,942.10 representing the proceeds of sale of 746,634 TSE shares (42% of the hypothetical tranche) to Softbank; and (b) £9,114,623.44 representing the value of the remaining 1,031,066 TSE shares of the tranche the plaintiff would have owned had Hall acquired them, as his duties demanded, valued as at the date of judgment in the trial.

To identify the relevant quantification principles, Ribeiro P.J. (Chan P.J. and Bokhary N.P.J. agreeing) said one must first categorise the breach of trust. He adopted Tipping J.'s view (BNZ v NZ Guardian Trust Co. Ltd. [1999] 1 N.Z.L.R. 664, 678 (CA)) that:

In fact, this schema is not decisive: while Ribeiro P.J. said Hall's breaches of fiduciary duty were “wilful defaults” within category 2, he thought the principles for quantifying loss in a category 2 case were the same as for quantifying a loss suffered from a category 1 breach. Nevertheless, Ribeiro P.J. was, with respect, correct to say that for such claims: (a) loss is “established on a ‘but for’ basis without the constraints of the common law causation rules on remoteness and foreseeability”; (b) “[w]here the plaintiff provides evidence of loss flowing from the relevant breach of duty, the onus lies on a defaulting [trustee or other] fiduciary to disprove the apparent causal connection between the breach of duty and the loss (or particular aspects of the loss) apparently flowing therefrom”. While the former principle is well known in England, the principle as to onus is not.

This principle as to onus is important. First, it expresses what Lord Browne-Wilkinson surely meant in the well-known category 1 case, Target Holdings Ltd v Redferns [1996] 1 A.C. 421 (HL). The solicitor-trustees in that case breached the trust by advancing loan moneys before mortgage documents were received, but they were not ordered to compensate the lender since the lender's losses resulted from a fall in land values rather than from the trustees’ breach. On one reading, Lord Browne-Wilkinson said that there was a single principle for quantifying loss in a category 1 breach of trust case. But he seemed to contradict himself by also saying the principle was that all loss suffered by reason of the breach was recoverable without limitation, and saying elsewhere the principle was that a claimant might only recover that loss which would not have been suffered but for the trustee's breach. Ribeiro P.J.'s principle as to onus dispels the apparent contradiction.

Secondly, that same principle answers a lingering criticism of Target: that the solicitor-trustees ought to have restored the entirety of the disbursed sum, since their breach was to make the unauthorised disbursement: e.g., Mitchell [2013] C.L.P. 307, 322–324. The criticism is misplaced. Once a claimant shows a prima facie loss to the trust fund, the trustees may discharge their evidentiary onus by showing they restored a wrongly disbursed asset or its equivalent in money, thus satisfying their liability pro tanto (Re Massingberd's Settlement (1890) 63 L.T. 296, 299 (CA)). (It is artificial to suppose this principle did not apply in Target, since the very purpose of the trust was to exchange the money for the mortgage documents, which were obtained after the breach: Millett (1998) 114 L.Q.R. 214, 227.) If that exercise does not eliminate the trustees’ liability, they may show that any loss still asserted by the claimant is irrecoverable because it would have been suffered even had the trustees committed no breach: Youyang Pty. Ltd. v Minter Ellison (2003) 212 C.L.R. 484, at [45]–[50], [60]–[63]. Ribeiro P.J.'s onus principle accommodates these propositions.

Better than any other case, Libertarian Investments makes clear the disciplined role of conscience in assessing equitable compensation. “But-for” analysis involves contrasting things as they are and things as they would have been had some event not occurred. However, a defendant trustee or fiduciary may not assert that his default did not cause the relevant loss by saying that if he had not defaulted some third party's dishonesty or fraud would have caused the same loss; hypotheses about others’ wrongdoing do not relieve him of his obligations of conscience: Youyang at [63]. Nevertheless, Ribeiro P.J. opined that equitable compensation for a category 3 breach of an equitable duty of care is assessed subject to “the common law rules as to causation, foreseeability and remoteness”. This, with respect, is unconvincing and is not the law of England: Re Brogden (1889) 38 Ch.D. 546, 567–568, 572–573 (CA); Salway v Salway (1831) 2 Russ. & M. 215, 220, aff'd sub. nom. White v Baugh (1835) 3 Cl. & Fin. 44 (HL); cf. Bristol & West B.S. v Mothew [1998] Ch. 1, 17 (CA). Indeed, while Ribeiro P.J. said Hall committed “wilful defaults” within category 2 above, the commonest sort of wilful default in the law reports is a category 3 breach, which is then assessed on the same conscience-based principles as for categories 1 and 2. As a tool for identifying the principles for measuring loss for breach of trust or fiduciary duty, Tipping J.'s schema of such breaches is inaccurate outside New Zealand.

In sum, ignoring cases where a claimant waives or otherwise forgoes his or her claim to relief for loss, equitable compensation for loss suffered through a trustee's or a fiduciary's breach is generally assessed as follows, no matter the type of breach:

1. (a) Prima facie, the defendant is liable to pay equitable compensation for all loss to the trust fund or the principal suffered by reason of the breach.

2. (b) The defendant may show that the true loss is smaller than the amount in (a) by showing that the trust fund or the principal would have suffered that loss (or part thereof) had the defendant committed no breach.

3. (c) Equitable compensation payable under (a) or (b) will be reduced by the defendant's showing he:

   1. (i) has already satisfied that loss in whole or in part, or

   2. (ii) is entitled to offset some amount (e.g., for his expenses).