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    12:02 AM Tan Ruo Yu (Associate, Rajah & Tann Singapore LLP)

    Equitable Compensation at a Tipping Point

        

    Introduction

    Unlike in other Commonwealth jurisdictions, the difficult issues concerning the conceptual understanding and principles governing the measure of equitable compensation for breach of trust or fiduciary duty have yet to be fully addressed by the apex court in Singapore. In Maryani Sadeli v Arjun Permanand Samtani [2014] SGCA 55 (“Then Khek Koon (CA)”), however, the Singapore Court of Appeal confirmed that the time is ripe for the court to review this area of the law when the next case comes before it. This is opportune because while the High Court in that case had occasion to address these issues (see Then Khek Koon v Arjun Permanand Samtani [2014] 1 SLR 245 (“Then Khek Koon (HC)”)), the High Court did not have the benefit of hearing the arguments on all the relevant jurisprudence and academic literature which the Court of Appeal signaled that it will consider in a future case (see Then Khek Koon (CA) at [10]). Then Khek Koon (HC) was decided before the significant decisions of the Hong Kong Court of Final Appeal in Libertarian Investments Ltd v Thomas Hall [2013] HKCFA 93 (“Libertarian Investments”) and the UK Supreme Court in AIB v Mark Redler [2014] UKSC 58 (“AIB”).

    This blog entry discusses the implications of Then Khek Koon (HC), Libertarian Investments and AIB, as it is anticipated that the issues arising in these three cases will significantly influence the future development of the law on equitable compensation in Singapore. 

    Then Khek Koon (HC)

    In Then Khek Koon (HC), the plaintiff subsidiary proprietors had, in previous proceedings, successfully set aside a collective sale of a condominium by establishing, inter alia, the defendant sale committee members’ breach of fiduciary duty in the sale process (see Ng Eng Ghee v Mamata Kapildev Dave [2009] 3 SLR(R) 109). However, the plaintiffs failed to recover the full legal costs that they thereby incurred. They thus sued the defendants for equitable compensation via new proceedings in Then Khek Koon (HC), claiming that the latter’s breach of fiduciary duty caused their losses in the form of unrecovered legal costs. Vinodh Coomarasamy J delivered a lengthy judgment against the plaintiffs. For present purposes, however, it suffices to note the learned judge’s holding that claims for equitable compensation fall into three separate categories, each being governed by a different causation test (Then Khek Koon (HC) at [108]):

    (a)    Any fiduciary’s liability for breaches of his duties of skill and care and of prudence and diligence are subject to the doctrines of foreseeability, causation and remoteness: Bristol and West Building Society v Mothew [1998] Ch 1.

    (b)    A fiduciary who is in one of the well-established categories of fiduciaries and who commits a culpable breach of his core duties of honesty and fidelity is liable to pay equitable compensation even if the object of those duties is unable to prove but-for causation: Brickenden v London Loan & Savings Company of Canada [1934] 3 DLR 465 (“Brickenden”).

    (c)    A fiduciary who is in one of the well-established categories of fiduciaries and who causes loss to the trust property as a result of an innocent breach of his fiduciary duties is not liable to reconstitute the trust property unless the object of those duties is able to prove at least a but-for causal connection between the breach of fiduciary duty and the loss to the trust fund: Target Holdings Ltd v Redferns [1996] 1 AC 421 (“Target Holdings”).

    It will be interesting to see how the Singapore Court of Appeal will approach the three distinct tests for equitable compensation laid down in Then Khek Koon (HC) when the issue comes squarely before it. In so far as category (b) is concerned, the Privy Council held in Brickenden that an errant fiduciary who withheld material facts from his principal in a loss-making transaction cannot escape liability by arguing that his non-disclosure was irrelevant. However, the soundness of Brickenden has been seriously questioned, and courts in other jurisdictions have refrained from interpreting the case strictly. Moreover, it is conceptually and practically difficult to distinguish between “well-established” categories of fiduciary relationships and those that are presumably not, and between “innocent” and “culpable” breaches of the fiduciary duties of honesty and fidelity. Notably, if the Brickenden rule as formulated in Then Khek Koon (HC) is accepted, then Singapore will have ascribed the strictest effect to Brickenden amongst the common law jurisdictions by removing even the need for but-for causation. (See further Tan Ruo Yu, “Causation in Equitable Compensation – The Brickenden Rule in Singapore” (2014) 26 SAcLJ 724.)

    In relation to category (c), it is now necessary to read Target Holdings in light of Libertarian Investments and AIB. Before proceeding further, however, it is apposite to first clarify the conceptual and practical distinctions between substitutive performance claims and reparative claims against errant trustees, as this lies at the heart of the debate surrounding Target Holdings. Traditionally, when a beneficiary required a trustee to reconstitute misapplied trust property, he could do so without having to prove causation of loss by seeking substitutive performance of the trustee’s primary obligation to account for that property. On the other hand, if the beneficiary were seeking reparative compensation for harm or injury that he suffered by reason of the trustee’s breach, proof of causation would be required. 

    Target Holdings was a case that involved solicitors’ misapplication of trust monies in a mortgage transaction. Nonetheless, the House of Lords held that the beneficiary was only entitled to equitable compensation for loss he would not have suffered but for the defendant solicitors’ breach. This is why a number of commentators, the most prominent being Lord Millett (see PJ Millett, ‘Equity’s Place in the Law of Commerce’ (1998) 114 LQR 214 at 225–227), have said that Target Holdings erroneously introduced a but-for causation requirement for misapplication of trust property claims. That said, as will be seen in the discussion below, the courts in different jurisdictions have differed in their treatment of Target Holdings

    Libertarian Investments

    In Libertarian Investments, the plaintiff entrusted the defendant with trust monies for the purpose of acquiring certain shares. The defendant failed to purchase these shares, but lied to the plaintiff that he had done so. As a result, the plaintiff was later unable to profit from the increased value of the shares. The plaintiff sued the defendant for breach of trust and sought equitable compensation on a “wilful default” basis. 

    Two leading judgments were delivered in the Hong Kong Court of Final Appeal, both allowing the same measure of recovery but on different reasoning. According to Ribeiro PJ, the starting point is that rules on causation in equitable compensation are conditioned by the type of duty and breach in question, and the present case was one where it was unnecessary to satisfy the common law rules requiring the loss to be foreseeable and not too remote (Libertarian Investments at [76], [78], [82]). On this reparative approach, Ribeiro PJ ordered an immediate award of equitable compensation, to obviate the evidential difficulties in carrying out the accounting process given the defendant’s uncooperative attitude. In doing so, Ribeiro PJ presumed the facts against the errant trustee, thereby shifting the burden of proof to him to prove otherwise (Libertarian Investments at [138]).

    In contrast, Lord Millett NPJ proceeded on the conventional approach that is reminiscent of his extra-judicial criticism of Target Holdings. Lord Millett started by stating that “[t]rustees and most fiduciaries are accounting parties, and their beneficiaries or principals do not have to prove that there has been a breach of trust or fiduciary duty in order to obtain an order for account”. Such an order for account is not itself a remedy, but only a procedural step allowing the beneficiary to scrutinise the trust fund (Libertarian Investments at [167], [168]). The learned judge then laid down an authoritative restatement of the accounting procedure and the closely-related substitutive performance claim (Libertarian Investments at [168], [170]):

    “Once the plaintiff has been provided with an account he can falsify and surcharge it. If the account discloses an unauthorised disbursement the plaintiff may falsify it, that is to say ask for the disbursement to be disallowed. This will produce a deficit which the defendant must make good, either in specie or in money … If on the other hand the account is shown to be defective because it does not include property which the defendant in breach of his duty failed to obtain for the benefit of the trust, the plaintiff can surcharge the account by asking for it to be taken on the basis of ‘wilful default’, that is to say on the basis that the property should be treated as if the defendant had performed his duty and obtained it for the benefit of the trust. Since ex hypothesi the property has not been acquired, the defendant will be ordered to make good the deficiency by the payment of money, and in this case the payment of ‘equitable compensation’ is akin to the payment of damages as compensation for loss.” 

    It is noteworthy that the conventional accounting analysis was also accepted and applied, albeit less explicitly, by the High Court of Australia in Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15, which was also a case of solicitors’ misapplication of trust monies with analogous facts to Target Holdings. There, the plaintiff beneficiary was allowed to recover certain trust monies which were misapplied even though there was no causal link between the plaintiff’s loss of these sums and the trustee’s breach. This is to be contrasted with the UK Supreme Court’s avowedly loss-based approach in AIB, to which the discussion now turns.

    AIB

    AIB, similarly to Target Holdings, was a case involving solicitors’ misapplication of trust monies in a remortgage transaction. The plaintiff bank (AIB) agreed to lend £3.3 million to the Sondhis, secured on the latter’s property valued at £4.2 million. In order for AIB to register a first charge over the property, £1.5 million out of the £3.3 million was to be spent redeeming an existing charge in favour of Barclays Bank. However, the defendant solicitors (Redler) failed to correctly ascertain the redemption figure, and instead transferred £1.2 million to Barclays and £2.1 million to the Sondhis. As a result, monies remained owing to Barclays and its security was not released, preventing AIB’s charge from being registered. Following negotiations between the two banks, AIB was allowed to register a second charge ranked after Barclays’ first charge for the sum of £273,777.42. The Sondhis later defaulted and the property was sold for £1.2 million, of which AIB received only £867,697.78 after Barclays’ charge was satisfied. AIB commenced action against Redler, claiming equitable compensation on a substitutive measure for £3.3 million that AIB claimed Redler disbursed in breach of trust (less the sale proceeds of the property).

    The UK Supreme Court upheld the English Court of Appeal’s decision that AIB was only entitled to equitable compensation of £273,777.42, being the loss that they suffered from Redler’s breach (i.e. a reparative award). Both Lord Toulson and Lord Reed, who delivered the two leading judgments, placed weight on the commercial context of the case and affirmed the but-for causation test that was laid down in Target Holdings. The reasoning and outcome in AIB leave no doubt that in the UK Supreme Court’s view, equitable compensation for breach of trust, at least in commercial transactions, must be limited by a causal link between the trustee’s breach and the beneficiary’s loss (see AIB at [63], [73], [140]). As such, in England, at least, AIB may have sounded the death knell for substitutive performance claims. (See further Tan Ruo Yu, “Substitutive Performance Claims for Breach of Trust: Final Nail in the Coffin?” (2015) Trust & Trustees (forthcoming)). 

    Conclusion

    The law on equitable compensation in Singapore, while relatively undeveloped compared to other Commonwealth jurisdictions, has now certainly reached a tipping point. As the Singapore Court of Appeal held, “[a] definitive ruling on this difficult area of the law can be made when it next comes for decision before this court” (Then Khek Koon (CA) at [11]). As outlined above, a number of inter-related issues await the court’s guidance. What are the applicable tests for causation governing the measure of equitable compensation for breach of trust and/or fiduciary duty? In particular, what is the import of Brickenden in Singapore, and as against errant trustees, will Singapore recognise the distinction between substitutive performance claims and reparative claims? It will be interesting to see how the Singapore Court of Appeal will approach these issues and develop the local jurisprudence on this area of the law. 

    * This blog entry may be cited as Tan Ruo Yu, "Equitable Compensation at a Tipping Point", Singapore Law Blog (3 February 2015) (http://www.singaporelawblog.sg/blog/article/82)

    ** A PDF version of this entry may be downloaded here

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