Equitable compensation

The idea

Equitable compensation asks what a defaulting trustee or fiduciary must pay, and the answer depends on classification before calculation. The category of the breach determines the applicable rules. An unauthorised application of trust money attracts restoration with hindsight and without the common law limits. A breach of the conflict rule attracts evidentiary presumptions that favour the beneficiary. A careless breach of the equitable duty of care is assessed in the manner of common law negligence. Most of the marks sit in placing the breach in the right category and holding the defendant to that category's rules. This is because the defences available in one category are denied in another. Examiners plant a defendant who pleads foreseeability or contributory fault against a misapplied fund. The strong answer names the category first and lets the rules follow.

Some rules carry a small icon marking the structure the rule takes. The icon is a reading aid and nothing more. The facts of the cases and the words of the rules do the work.

Attack plan

Name the category of breach first. The rules follow the category. Ask whether the dealing was an unauthorised application of trust property, a breach of the conflict rule, or a breach of the equitable duty of care. The trust instrument usually answers the question, since a dealing the instrument forbids sits in the first category.
For an unauthorised application, require restoration. The beneficiary strikes the outflow from the account as though it had never been made. The trustee must then restore the fund to the position it would occupy but for the breach, assessed at judgment with the full benefit of hindsight. Common law notions of causation, foreseeability and contributory fault do not reduce the award.
For a conflicted fiduciary, refuse the speculation. The fiduciary cannot reduce compensation by arguing the client would have proceeded anyway after proper disclosure. Losses are cut off only by acts truly independent of the breach, and the evidentiary presumptions favour the beneficiary.
For the equitable duty of care, assess in the manner of negligence. This duty is not distinctively fiduciary. Compensation therefore runs in the manner of common law negligence, with its scope limits available to the defendant.
Compute any account of profits. Identify the gross benefit obtained as a result of the breach and deduct the expenses properly attributable to earning it. Any allowance for the wrongdoer's skill and labour must be justified by the wrongdoer. The allowance is stinted or refused where the participation was dishonest.
Fit multiple recoveries together. Election between inconsistent remedies operates breach by breach, so restoration for one breach can stand beside an account for a separate breach. Where a trustee and a participant are liable for the same money, recovery against one abates the claim against the other. The object is restoration of the fund rather than double satisfaction.
Conclude with a dollar figure. State the award, the fact that drove it, the minimum the plaintiff recovers even on the losing view, and why the alternative award was rejected.

Cases at a glance

Case	In a line
Re Dawson	A defaulting trustee faced adverse currency movements between breach and judgment. He bore them, since restoration rather than foreseeability governs the remedy
Youyang	Trust money was released without the required bearer certificate. Full restoration followed even though the investment might have failed anyway
AIB	The English court confined recovery to the difference the breach made. That retreat is not Australian law and serves the defendant as a counterargument only
Brickenden	A fiduciary in breach of the conflict rule pointed to what proper disclosure might have changed. Equity refuses to hear the fiduciary speculate about what would have followed disclosure
Canson	Later engineers' negligence followed a fiduciary's breach. The truly independent act broke the chain and cut off the later losses
Hodgkinson	An adviser held undisclosed ties to the developers he recommended. The client recovered the full market collapse loss
PBS	The claim rested on a careless breach of the equitable duty of care. Compensation is assessed in the manner of common law negligence, since the duty is not distinctively fiduciary
AGLM	Edelman J set out the framework for money remedies in equity. The category of the breach determines the applicable rules
Warman	A business was built from a breach of fiduciary duty. Allowances were made for skill and labour, yet the account still captured the business the breach produced
Lifeplan	The question was how far the account of profits reaches. Any benefit causally connected to the breach is captured, including capital value
Daly	The plaintiff pressed remedies responding to the same wrong. Daly states the limit, since inconsistency is judged against each wrong separately
Pilmer	The defendant sought a reduction for the plaintiff's own carelessness. Contributory negligence does not reduce equitable compensation for fiduciary breach

The rules

R38 · How is a breach of trust or fiduciary duty categorised before selecting the remedial rules? The category of breach determines the applicable rules, so the first question is whether the dealing was an unauthorised application of trust property, a breach of the conflict rule, or a breach of the equitable duty of care. AGLM (Edelman J). Trap. Applying the rules of one category to another. Running negligence limits in a case of misapplied trust funds gives the defendant a defence equity denies. Strong answers run restoration and then frame the AIB counter, noting it only reaches the authorised part of the fund.

R39 · What must a trustee who applied trust funds without authority pay? A trustee who applies trust funds without authority must restore the fund to the position it would occupy but for the breach assessed at judgment with the full benefit of hindsight. Re Dawson. Trap. Restoration before judgment. Funds later restored to the trust, or ultimately applied as the trust directed, reduce the substitutive claim. Always identify what the fund actually lacked when proceedings began.

R40 · Do common law limits on damages apply to restoration of misapplied trust funds? Compensation for unauthorised application of trust money is not reduced by common law notions of causation foreseeability or contributory fault. The competing English version confines liability to loss that would not have occurred but for the breach, but that retreat is not Australian law. Youyang; AIB (contra).

R41 · How is compensation for breach of the fiduciary conflict rule assessed? A fiduciary in breach of the conflict rule cannot reduce compensation by speculating about what might have followed proper disclosure and losses are cut off only by acts truly independent of the breach with evidentiary presumptions favouring the beneficiary. Brickenden (SUPP); Canson; Hodgkinson.

R42 · How is breach of the equitable duty of care compensated? Breach of the equitable duty of care sounds in compensation assessed in the manner of common law negligence because the duty is not distinctively fiduciary. PBS. Trap. The analogy questions are the essay. Re Dawson is substitutive performance in the manner of a debt, which explains the absence of remoteness. PBS runs in the manner of negligence, which explains importing scope limits. Two sentences placing each claim in its category are worth many marks.

R43 · How is an account of profits computed? An account of profits is computed by identifying the gross benefit obtained as a result of the breach and deducting the expenses properly attributable to earning it with any allowance for skill and labour justified by the wrongdoer and stinted or refused where participation was dishonest. Warman; Lifeplan. Trap. Profit and loss on the same facts. Quantify equitable compensation and the account of profits, then elect (Warman).

R44 · Can equity award interest, and when compound rather than simple? Equity may award interest on monetary relief and may award compound rather than simple interest according to discretionary factors including the culpability of the defendant. Set texts (no prescribed case).

R45 · How does election between remedies operate across multiple breaches? Election between inconsistent remedies operates breach by breach so a plaintiff may take restoration for an unauthorised application and an account for a separate profit from position because inconsistency is judged against each wrong separately. Daly.

R46 · How are recoveries coordinated where trustee and participant are both liable for the same money? Where a trustee and a participant are both liable in respect of the same money recovery against one abates the corresponding claim against the other because the object is restoration of the fund and not double satisfaction. General principle (no case cited in schematic).

R47 · Does contributory negligence or mitigation reduce equitable compensation for fiduciary breach? Contributory negligence does not reduce equitable compensation for fiduciary breach and the textbook treats equity's wider position as unsettled so state the refusal as the course position. Mitigation has at most a limited role in conflict cases. Pilmer (SUPP). Trap. The statutory excuse for honest and reasonable trustees. A trustee who acted honestly and reasonably and ought fairly to be excused may be relieved under the trustee legislation. Close it off expressly where the trustee acted against written advice, since such a trustee is not acting reasonably.

The flowchart

The equitable compensation flowchart runs the attack plan as a single page of decisions, from the category question through the three streams to the coordination of recoveries. It ships with the Remedies flowcharts page at /remedies/flowcharts. Until that page is live the chart sits in Remedies Flowcharts (the companion document to the schematic).

A worked example, dissected

Corben is trustee of a testamentary trust for his late sister's two children, and clause 4 of the will confines investment to bank deposits and government bonds. Corben withdrew the trust's entire $300,000 term deposit and placed it in a golfing friend's private credit fund. The fund later froze redemptions and its administrators now project returns of $180,000 over two years. Undisputed actuarial evidence puts the fund at $327,000 had clause 4 been obeyed, and Corben refuses to pay because the freeze was an unforeseeable thunderbolt.

The move	What the strong answer does
Open on the category	Names the category question before any figure, since the rules follow the category. Clause 4 places the breach in the unauthorised application stream
Prove the application was unauthorised	Reads the deed against the investment. The deed names two classes and the private credit fund belongs to neither, so the trustee's own view of safety is beside the point
Fix the restoration figure	Measures the fund at judgment with hindsight. The undisputed bond figure of $327,000 is the authorised position rather than the original $300,000
Meet the thunderbolt argument	Refuses the foreseeability defence because it belongs to the negligence category. Re Dawson decides the exact contest, since the currency movements there were no more foreseeable
Conclude with the figure	$327,000 less the $180,000 the administrators project, leaving $147,000 at judgment, and the minimum recovery stated even on the losing view

The full problem, with its Pass answer, H1 answer and examiner's comments, is Problem 1 of the equitable compensation drill bank on the practice page.

Practise this module

Ten drills in the equitable compensation bank cover every rule above, and the exam tier runs the module inside integrated scenarios. Start with the quick drills on naming the category of breach, then attempt the bank blind. ��

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