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Equitable compensation and damages

1. Nature of equitable compensation
1.1 Historically, equity is not a punitive jurisdiction: Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298. Even when a fiduciary commits a flagrant breach of duty, the
relief awarded to the plaintiff, whether it be compensation and/or some other remedy, is not designed to punish the defendant. The objective is to place the plaintiff in the
position he/she would have been in prior to the actions of the defendant. Restitution is made to the plaintiff in the sense of restitutio in integrum, rather than an award of
damages, as at common law. The issue of equity and punitive awards is discussed in more detail below.
1.2 Although sometimes referred to as ‘damages’, the award of money by a court of equity is distinct from damages at common law. In the exclusive jurisdiction, equity
focuses on restoration of the actual money or thing lost. In the auxiliary jurisdiction, equity will award Lord Cairns Act damages (see below) in two very specific situations on a similar basis to common law. However, because it is an exercise of an equitable jurisdiction, unlike a common law, the award is discretionary.
2. The exclusive jurisdiction – equitable compensation
Note: It is preferable to refer to the amount awarded in the exclusive jurisdiction of equity as equitable compensation to distinguish it from equitable damages, which derive from statute.
2.1 An action for damages was unknown in equity’s exclusive jurisdiction. If a trustee was in breach of duty, thereby occasioning loss to the trust, the defaulting trustee
was required to restore the lost assets to the trust or provide compensation to the value of the asset: Target Holdings v Redferns [1996] AC 421, 434. Thus, equity
could impose a personal obligation on the defaulting trustee to make restitution to the estate. Such restitution was not fettered by the restrictions on common law
damages, such as concepts of remoteness or causation: Re Dawson (1966) 2 NSWR 211.
2.2 To recover equitable compensation the plaintiff must prove a breach of an equitable primary right or the breach of any equitable obligation. For example, a breach of fiduciary duty which causes loss to the object of the duty. However, if necessary, a court of equity has sufficient flexibility through its wide powers of
discretion to assess equitable compensation on the same basis as common law damages in circumstances where this would give effect to the purpose of restitution: Commonwealth Bank v Smith.

However, in Youyang Pty Ltd v Minter Ellison (2003) 196 ALR 482, the High Court expressed the view that equitable compensation is fundamentally different from
damages for tort or breach of contract and that, because the fiduciary duty has obligations of trust as its basis, it is not appropriate to rely upon common law
concepts of causation and remoteness. In other words, the strict liability imposed upon fiduciaries for breaches of duty do not allow for the consideration of any possible exculpatory factors.
2.3 Equity therefore asks the question not whether the loss was caused by the breach, but whether the loss would have happened had there been no breach: Re
Dawson. From the point of view of the defendant, this is a far more stringent test than asking whether, as a matter of common sense, the breach caused the loss. Thus, in equity, there can be no issue of novus actus interveniens.
2.4 In O’Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262, O’H, the managing director of the respondent company, committed a series of breaches of
fiduciary duty, including the wrongful sale of a parcel of shares. His breaches resulted in a loss to the respondent. The NSWSCCA noted that when a trustee has caused a loss to the trust estate through a breach of duty, the trustee is liable to pay the trust sufficient compensation to achieve restitutio in integrum. This does not allow for the common law doctrine of novus actus interveniens. The court went on to conclude that this strict standard also applied to non-trustee fiduciaries in cases of
misappropriation or misapplication of funds. Therefore, the emphasis in equity is upon replacing that which has been wrongfully taken and the defaulting trustee must replace the assets, notwithstanding the fact that increases in market values between the date of the breach and the date of recoupment would give a windfall to the trust and place a greater burden on the trustee than would be the position with respect to common law damages: Re Dawson.
2.5 The assets must be replaced at their value at the time of restoration not deprivation: Southern Real Estate Pty Ltd v Dellow (2003) 87 SASR 1. In Nocton v
Lord Ashburton [1914] AC 932 the House of Lords applied the above principles to the assessment arising from a breach of fiduciary relationship. Where there is a breach of fiduciary duty, the defaulting party will be required to make good the loss that flows from the breach, notwithstanding that there has been no reliance on the breach by the injured party: Brickenden v London Loan & Savings Co [1934] 3 DLR 465.
2.6 The relevant principles were summarised by Hanley JA in Youyang [2001] NSWCA 198, [16] and the High Court, on appeal, did not appear to dissent from this
aspect of His Honour’s reasoning:

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  •  The objective of equitable compensation is to restore persons to the position in which they would have been had there been no breach of the equitable obligation: O’Halloran, 272C.
  •  The court must decide, using hindsight and common sense, what loss was in fact caused by the breach of equitable duty: O’Halloran, 273The question is whether the loss would have occurred if there had been no breach: O’Halloran, 275.
  • If these issues are determined favourably to the beneficiaries of the trust, it does not matter that the immediate cause of the loss was the dishonesty or breach of duty of a third party, since there is no scope in equity for the common law rules of remoteness and the effect of new, intervening acts:
  • There is sufficient connection between the loss and the breach where the loss would not have occurred if there had been no breach of duty: O’Halloran, 277.
  •  Equitable compensation may be awarded against a third party pursuant to the rule in Barnes v Addy (1874).
  • Whilst equitable compensation is not punitive, this principle does not prevent the court from awarding interest on compensation. However, interest must be applied at a rate that is commensurate with the principles of restitution and must not be regarded as punitive: Bailey v Namol Pty Ltd (1994) 53 FCR 102.

Furthermore, aggravated damages may also be awarded in the exclusive jurisdiction because they are compensatory in nature: Giller v Procopets (2008) 24 VR 1, 34.
3. The auxiliary jurisdiction – damages in equity
3.1 Historically, when equity was dealing with a breach or potential breach of a legal right, it had no jurisdiction to award damages, either in addition to or in lieu of an injunction to protect a purely legal right, although there was a power to award damages in lieu of specific performance.
3.2 Therefore, the Chancery Amendment Act 1858, 21 & 22 Vict c 27 (the Lord Cairns’ Act) was enacted by the British Parliament to enable the Court of Chancery
to award damages in addition to or as a substitute for an injunction or specific performance, in an action based upon a common law right. This legislation was
enshrined in s 68 Supreme Court Act 1970 (NSW). Damages under the Lord Cairns’ Act are more appropriately called equitable damages, as they are akin to common law damages as opposed to equitable compensation, which is more in the nature of restitution.
3.2 Wrongful act: Although the Lord Cairns’ Act purports to give the court the power to award equitable damages in addition to or in lieu of an injunction or specific performance, the effect of the Act was not to empower the court to award damages

In cases where it did not have the power to award an injunction or specific performance prior to the passing of the Act. It was held in King v Poggioli (1923) 32
CLR 222 that if an action for specific performance failed because the plaintiff/purchaser had failed to tender the whole amount of the consideration payable, then damages under the Lord Cairns’ Act were not available. However, the contrary and preferable view was adopted by the High Court in Wentworth v Woollahara Municipal Council (1982) 149 CLR 672, in which damages under the LCA were held to be available notwithstanding the success of a discretionary defence which led the court to deny an order for specific performance. Thus, the LCA applies where the court would have been able to award an injunction or specific performance were it not for some discretionary defence: Wentworth, above.

Tutorial questions

1. What are the major differences between equitable compensation and damages at common law?
2. How is the amount of equitable compensation due to the plaintiff computed by the court?
3. Kermit is the trustee of the Sesame Street Trust. Part of the corpus of the trust is a parcel of shares valued in June 2018 at $250,000. On 30 June 2018, Kermit, in
breach of the terms of the trust, sells all of the shares to Big Bird for $250,000. Kermit uses the money to go to Monte Carlo for a holiday. In August 2018, Gonzo and Oscar, the beneficiaries of the trust, commence proceedings in equity claiming equitable compensation based upon Kermit’s breach. At the time of the hearing in
August 2019, the shares are worth $150,000.
What is the quantum of compensation? Would your answer have been different if, at the time of hearing, the shares were worth $350,000? Give reasons for your answer.
4. Is it appropriate that a defendant’s liability to provide equitable compensation is assessed upon the basis of the ‘but for’ rather than a ‘common sense’ approach?
5. Is it reasonable/equitable that a court of equity does not consider novus actus interveniens and places the whole of the liability for any loss by a plaintiff upon the
defendant fiduciary? What if a third party is involved in the breach and makes a profit from that involvement? (Hint – cast your mind back to Equity & Trusts).
6. Is the award of interest on equitable compensation or aggravated damages ‘punitive? Give reasons for your answer?
7. What are the differences between equitable compensation and equitable damages?
8. Section 68 of the Supreme Court Act refers to ‘any wrongful act’. This clearly includes torts, but what about breaches of statutory prohibitions and equitable wrongs? 
9. Are there any restrictions, statutory, equitable or legal, upon the court’s discretion in awarding Lord Cairns Act damages?
10. Can a plaintiff benefit from an order to specifically enforce a defendant’s obligations AND an award of LCA damages?

1. At 7.45 am on 23 March 2019, Toby Tyler, a self-employed accountant, was on his way to work. As he waited at the bus stop on the corner of Cambridge Street, he
looked to his left and noticed that a flat-top truck carrying a load of cardboard boxes and travelling at speed, had just run a red light at a nearby intersection. The truck turned into Cambridge Street at high speed and as it turned, a large cardboard box, weighing approx. 7 kgs, flew off the back and struck Toby on the side of the head.
Toby did not have time to take evasive action and was knocked unconscious. The police and an ambulance were called. Toby was taken to RPAH and a quick
thinking by-stander had taken the truck’s rego number. Other witnesses estimated that truck was travelling at about 60 kph, which was 10 kph over the speed limit for the area. This information was given to the police, who traced both the truck and its owner, Roy Rogers. Roy was charged with negligent driving, failing to properly
secure the load and a number of other traffic offences. Toby was diagnosed with concussion, discharged from hospital on 25 March and sent home with a few paracetamol tablets. Over the next couple of weeks, however, Toby became increasingly depressed and began to suffer from the following
symptoms:
Severe headaches

  • nausea
  • sleeplessness
  • nightmares
  • feelings of disorientation
  • panic attacks
  • reluctance to leave the house
  •  lethargy.

On 20 May 2019, Toby went to see his GP, who referred him to a neurologist. After a series of tests and scans the neurologist could find no physical cause for his symptoms and referred him to a psychologist. The psychologist diagnosed post- traumatic stress disorder caused by the accident and told Toby that he would be unable to work for a few months. Does Toby have any common law cause of action against Roy? If so, what damages can he claim? Does Roy have any defence?

2. In April 2019 Paris MacDonald decides to launch herself into a career as a fashion designer under the name ‘Paris Fashions’. She incorporates a company and calls it Paris Style Pty Ltd. Paris designs both the clothes and the materials from which they are made in order to produce a ‘distinctive style’ which will distinguish her designs
from those of her competitors.
Paris imports Thai silk, which is printed with her designs in colours of orange, purple, red, blue, green and yellow. The materials are printed by Gutenberg Pty Ltd. Her
clothes are then sewn together at a small manufacturer in Sydney, with emphasis being upon quality of manufacture and cut. Her first fashion show, which takes place
in June 2019, is a great success and she is swamped by orders from excusive retail stores. A few weeks after the show as she is walking down King Street, Newtown, she notices a dress in a shop window that appears to have been made from her fabric. She enters the shop and examines the garment. It is not one of her designs; the material, although the same colour and pattern as hers, is cheap nylon and the dress is shoddily made. Paris is extremely upset and is worried that the reputation of her designs will be adversely affected by the appearance of the inferior product. Is there any way at common law that she can protect her reputation? Can she claim damages and if so, against whom?

 

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