Watson v Kea Investments Ltd [2019] – Rate of interest awarded against trustees

In Watson v. Kea [2019] the Court of Appeal ‘considered the basis on which interest is awarded against trustees. It surveyed the history of awards of interest on equitable compensation and trust claims, and found that the courts have consistently tried to make awards that were suited to investment of trust funds and the economic realities of the times. It is no longer realistic to assume that a missing trust fund would have been invested with no regard for capital accretion. It was therefore appropriate in determining a rate of interest to have regard to evidence of how a trustee might have invested the funds in the period for which interest is awarded, and to determine the rate accordingly even though it will include nominal capital return as well as missed income. This new [counterfactual] approach can be justified on the footing that, where a higher rate has historically been charged where a trustee has made a profit using trust money, the interest has been awarded in lieu of profit.’ [Lewin on Trusts 20th edition (2020), Vol 2, 41-060].

This new ‘counterfactual’ approach impacts:

(i) quantification of loss, i.e. the value of the claim;

(ii) pleading; and

(ii) proof – i.e. the need for expert evidence of the counterfactual, and related to that about norms and standards of behaviour expected of trustees.

Later in the year, together with a leading trust law academic at Cambridge University, I will be co-writing an in depth article ‘Trustees and Executors Duties and Powers in relation to Property and Investments’.

Watson v Kea Investments Ltd [2019] EWCA Civ 1759 (23 October 2019)

Extracts from the leading judgment by Lord Justice McCombe (with whom Lord Justice Hamblin and Sir Bernard Rix agreed):


‘3. The issue on this appeal raises the question whether the interest, payable by Spartan, and continuing to accrue, should properly have been fixed by the judge at 6.5% to reflect what the money to be recovered would have produced if invested in “proper trustee investments” – this would include an element of total return (including capital return) to the victim (Kea) – or should be fixed at some other (and if so, what) rate. The judge set the rate as a proxy for the rate of return that trustee investments would achieve. He did so based on performance indices of investment managers in different risk categories, as analysed by two (as was and is accepted) independent and reputable organisations, Asset Risk Consultants (“ARC”) and the Society of Trust and Estate Practitioners (“STEP”). The judge adopted a medium-risk rate identified by reference to those two indices.


47. As one reads through the cases, one notes that the courts’ awards of interest in equity, while proceeding from certain basics, have been astute to adapt to developments in contemporary economic conditions, in giving weight to the arguments presented to them by the parties. This feature of adaptability recalls the comment made by Lord Scarman, in an entirely different context, in Gillick v West Norfolk AHA [1986] AC 112 at 183 B-D. about changing social conditions. His Lordship said:

“The law ignores these developments at its peril. The House’s task, therefore, as the supreme court in a legal system largely based on rules of law evolved over the years by the judicial process, is to search the overfull and cluttered shelves of the law reports for a principle, or set of principles recognised by the judges over the years but stripped of the detail which, however appropriate in their day, would, if applied today, lay the judges open to a justified criticism for failing to keep the law abreast of the society in which they live and work.”

I see much the same exercise being conducted by the equity courts in adapting awards of interest to changing economic conditions. In exercising that wide discretionary jurisdiction, the courts have been clearly as free as a supreme court in Lord Scarman’s example.

48.The next case to which we were taken, A-G v Alford (1855) 4 De GM & G 843, illustrates the principle that the defaulting trustee must account for profit actually received, or for the money that he must be presumed to have earned (and which has been lost to the trust) or pay interest instead. In that case the trustee had for several years retained trust funds uninvested which he ought to have invested. He was found liable to account and chargeable with simple interest at 4% because there was nothing to show that he had profited by misconduct. He was only liable for what would have been earned on proper trust investment, i.e. at the usual rate of 4% simple. Lord Cranworth LC said (at p.851):

“What the Court ought to do, I think, is to charge him only with the interest which he has received, or which it is justly entitled to say he ought to have received, or which it is so fairly to be presumed that he did receive that he estopped from saying that he did not receive it. I do not think there is any other intelligible ground for charging an executor with more interest than he has made, than one of those I have mentioned. Misconduct does not seem to me to warrant the conclusion, that the executor did in point of fact receive, or is estopped from saying that he did not receive, the interest, or that he is to be charged with anything he did not receive, if it is not misconduct contributing to that particular result.”

As Nugee J observed this was a case where the trustee was made liable for interest on the basis of what he ought to have received on the uninvested funds: see paragraph 22 of the Interest Judgment.

49.In Re Emmet’s Estate (1881) 17 Ch. D. 142 a trustee was ordered to pay interest at 4% compound in respect of a portion of a fund invested in unauthorised investments (and in respect of some funds not invested at all). The original trust had also required the trustee during the beneficiary’s minority to accumulate surplus income. The award seems to have been made on the basis of the failure to invest in the way that he should have done and to compensate for the absence of accumulation after the fund should have been handed over on the beneficiary’s attaining majority, i.e. to compensate for loss of return that the trust fund would otherwise have achieved. In the course of his judgment, Hall V-C said (at p. 149-150):

“There being, then, no trust for accumulation directed beyond the time of minority, we must now consider what is the obligation so created. There is, I consider, a liability and obligation to accumulate the income subject only to such application as might be made of any part of it, less or more, for the specified purposes of maintenance, education, or advancement. The trust comes to an end when a child attains twenty-one. So far I hold the trustee liable to account at compound interest for non-accumulation. Does his liability go beyond the date when a child attains twenty-one? After a child attains twenty-one there is no duty undischarged, except to hand over to the child the fund with the accumulations. The trustee did not so hand it over, nor did he explain to the child that he was entitled to call for and have transferred to him the fund, with the accumulations upon it, in his hands, but he left things in exactly the same position as they were in when the child attained twenty-one. Can I then allow a trustee, under such circumstances, to say, “I am, now that the child has attained twenty-one, holding the fund on a different trust, which does not require any accumulation at all, but merely makes me liable for simple interest; and I can keep it in my hands and use it, and only charge myself with simple interest”? That would be inconsistent with the duties the trustee had undertaken. The accumulations should have gone on until the trustee transferred the fund. In my opinion, if he does not hand it over when he ought to do, he must be taken to be holding it still on the same trust and subject to the same obligations as before.”

50.It is instructive to note that from the end of the 19th century it was clear that the set rate of 4% was (a) based upon the rate expected that trustees might be expected to achieve, and (b) liable to change with changing economic conditions. Re Lambert [1897] 2 Ch. 169, which was not a breach of trust case, illustrates the principle. Commenting on the earlier case of Re Rees (1881) 17 Ch. D. 701, Stirling J said (at [1897] 2 Ch. At 180):

In re Rees (1) that rate of interest had been adopted by the Court of Chancery as representing the average rate of interest payable in respect of investments such as trustees were authorized by the Court to invest in; it is also a rate of interest which is charged according to the rules on debts which are provable in administrations, and as to which there is no special provision as to their bearing interest. The rule as to the interest payable on debts has not yet been altered, and that remains the rate at which interest is charged on debts; but as regards other applications of the rule charging 4 per cent., it has in recent times been thought that it is excessive, inasmuch as in these days trust investments do not yield anything like 4 per cent., and several judges, I think North J. and Kekewich J. particularly in the number, have under circumstances such as these said that only 3 per cent. ought to be charged.”

51.In Re Beech [1920] 1 Ch 40, Eve J said (at p. 44) this:

“In In re Woods Kekewich J. allowed only 3 per cent. interest, and in so doing he expressly took into consideration two factors, the one that the securities were of a wasting nature, and the other that the value of money had then materially altered since the date when 4 per cent. had been fixed as the correct rate. In 1905, in In re Chaytor, Warrington J. not only followed what had been done in In re Woods as to unauthorized securities of a wasting nature, but fixed 3 per cent. as the interest to be paid on the value of all unauthorized securities, whether wasting or not. There can be no doubt that in 1904 and 1905 the income derivable from trust securities was very much less than it had been in the days when Meyer v. Simonsen was decided, but subsequent experience perhaps provokes the observation that a departure from a salutary rule in matters of this kind – introducing as it does an element of uncertainty in practice and administration – can only be justified if the changed conditions on which it is founded continue at least as constant as those upon which the rule was itself framed. Had the value of money remained till to-day the same as it was in 1904 and 1905 I might have felt myself constrained to follow these last two cases, and to hold that as between tenant for life and remainderman 3 per cent., and not 4 per cent., was now the proper rate of interest. But the conditions have materially changed since 1904 and 1905, and at the present date, when first-class investments can be obtained for trust moneys yielding interest at 5 per cent., matters approach much more near to the condition of things subsisting when Meyer v. Simonsen was decided than to those obtaining when In re Woods and In re Chaytor introduced exceptions to the rule laid down in the earlier case, and on these grounds I think much of the reasoning on which these later decisions were based has no application to-day.”

The judge reverted to 4%. Again, it seems to me the Chancery court was astute to fix interest rates in varying types of trustee cases in accordance with the economic realities of the day. The idea that the court should be hidebound to any rigid rate, irrespective of the loss caused to a trust by a trustee’s default, seems to be contrary to the principle emerging from such cases.

52.In Wallersteiner v Moir (No.2) [1975] QB 373 the court was faced with an argument that it had no jurisdiction to award interest under the statutory jurisdiction conferred by the Law Reform (Miscellaneous Provisions) Act 1934 on a default judgment and, therefore, that it had no jurisdiction to award interest at all. The court held that, whatever the true range of the statutory power, it would award interest under the equitable jurisdiction of the court. The judgments do not discuss the rate, however it can be seen from the report that the judgment was to bear compound interest at one per cent over bank rate or minimum lending rate with yearly rests from time to time from the date of original indebtedness and at 7 ½ % from judgment.

53.The judgments in that case discuss the principles upon which the courts of equity award interest. At p. 388B-H, Lord Denning MR said:

“The principles on which the courts of equity acted are expounded in a series of cases of which I would take the judgment of Sir John Romilly M.R. in Jones v. Foxall (1852) 15 Beav. 388, 391: of Lord Cranworth L.C. in Attorney-General v. Alford (1855) 4 De G.M. & G. 843, 851: of Lord Hatherley L.C. in Burdick v. Garrick (1870) 5 Ch.App. 233, 241-242 and of Sir W. M. James L.J. in Vyse v. Foster (1872) 8 Ch.App. 309, 333; (1874) L.R. 7 H.L. 318. Those judgments show that, in equity, interest is never awarded by way of punishment. Equity awards it whenever money is misused by an executor or a trustee or anyone else in a fiduciary position – who has misapplied the money and made use of it himself for his own benefit. The court:

“presumes that the party against whom relief is sought has made that amount of profit which persons ordinarily do make in trade, and in these cases the court directs rests to be made,” i.e., compound interest: see Burdick v. Garrick, 5 Ch.App. 233, 242, per Lord Hatherley L.C.

The reason is because a person in a fiduciary position is not allowed to make a profit out of his trust: and, if he does, he is liable to account for that profit or interest in lieu thereof.

In addition, in equity interest is awarded whenever a wrongdoer deprives a company of money which it needs for use in its business. It is plain that the company should be compensated for the loss thereby occasioned to it. Mere replacement of the money – years later – is by no means adequate compensation, especially in days of inflation. The company should be compensated by the award of interest. That was done by Sir William Page Wood V.-C. (afterwards Lord Hatherley) in one of the leading cases on the subject, Atwool v. Merryweather (1867) L.R. 5 Eq. 464n., 468-469. But the question arises: should it be simple interest or compound interest? On general principles I think it should be presumed that the company (had it not been deprived of the money) would have made the most beneficial use open to it: cf. Armory v. Delamirie (1723) 1 Stra. 505. It may be that the company would have used it in its own trading operations; or that it would have used it to help its subsidiaries. Alternatively, it should be presumed that the wrongdoer made the most beneficial use of it. But, whichever it is, in order to give adequate compensation, the money should be replaced at interest with yearly rests, i.e., compound interest.

Buckley LJ (at p. 397B-F) said:

It is well established in equity that a trustee who in breach of trust misapplies trust funds will be liable not only to replace the misapplied principal fund but to do so with interest from the date of the misapplication. This is on the notional ground that the money so applied was in fact the trustee’s own money and that he has retained the misapplied trust money in his own hands and used it for his own purposes. Where a trustee has retained trust money in his own hands, he will be accountable for the profit which he has made or which he is assumed to have made from the use of the money. In Attorney-General v. Alford, 4 De G.M. & G. 843, 851, Lord Cranworth L.C. said:

“What the court ought to do, I think, is to charge him only with the interest which he has received, or which it is justly entitled to say he ought to have received, or which it is so fairly to be presumed that he did receive that he is estopped from saying that he did not receive it.”

This is an application of the doctrine that the court will not allow a trustee to make any profit from his trust. The defaulting trustee is normally charged with simple interest only, but if it is established that he has used the money in trade he may be charged compound interest: see Burdick v. Garrick. 5 Ch.App. 233, per Lord Hatherley L.C., at p. 241, and Lewin, Trusts, 16th ed. (1964), p. 226, and the cases there noted. The justification for charging compound interest normally lies in the fact that profits earned in trade would be likely to be used as working capital for earning further profits. Precisely similar equitable principles apply to an agent who has retained moneys of his principal in his hands and used them for his own purposes: Burdick v. Garrick.”

Buckley LJ said that the court in that case should not work on the basis that the moneys were working capital of the victim companies as interest was not normally to be paid to compensate for loss but to ensure that the defendant does not retain a profit. In any event, it had not been shown that the moneys were working capital. (p.398F-399A).

54.At p. 406 of the report there is the judgment of Scarman LJ (as he then was) to similar effect as to the equitable principles set out by Lord Denning and Buckley LJ, which I do not think it is necessary to quote here.

55.The next case to which I should refer is Bartlett v Barclays Bank Trust Co. Ltd. [1980] Ch 515. This was a case where a professional trustee had permitted a company in which it was a majority shareholder to invest in property development of a speculative character which it could have stopped and which Brightman LJ (as he had become between trial and judgment) held it should have stopped. The trustee was held liable to compensate the trust fund for its loss until such time as restitution of the fund had been achieved. As for interest on the sum to be recovered, the plaintiffs sought interest at a borrowing rate currently obtainable by reference to Wallersteiner: see per the late Mr Nugee QC (senior; our judge’s father) and Mr Sher for the plaintiffs at p.540C. For the defendant, Mr Sebestyen referred to the old standard rate of 4% and said that to fix a rate pre-empted the enquiry as to damages. Interestingly, Brightman LJ referred to the help he had gained from the tables of borrowing and deposit rates provided to him by one of the parties. Compare here the use of the ARC and STEP materials upon which Nugee J (junior) relied.

56.Brightman LJ awarded interest at the rate available on the courts’ short-term investment account. At pp.546G-547D, he said this:

“I turn now to the question of interest. It is common ground that interest can be claimed on the compensation which is found due. Dispute only arises on the rate of interest to be charged. In former days a trustee was as a rule charged only with interest of 4 per cent. unless there were special circumstances. That rate seems to have prevailed as the general rule until recent years. The defendant has helpfully supplied the court with a table of bank and minimum lending rates, and bank deposit rates. Between 1963, the year in which the Old Bailey scheme began, and the present day there have been nearly 80 changes of bank rate of minimum lending rate and nearly 70 changes in Barclays Bank deposit rate. The bank or minimum lending rate during this period has varied between 4 per cent. and 17 per cent. and deposit rate has varied between two per cent. and 15 per cent. In these days of huge and constantly changing interest rates (the movement being usually upwards so far) I think it would be unrealistic for a court of equity to abide by the modest rate of interest which was current in the stable times of our forefathers.

In my judgment, a proper rate of interest to be awarded, in the absence of special circumstances, to compensate beneficiaries and trust funds for non-receipt from a trustee of money that ought to have been received is that allowed from time to time on the courts’ short-term investment account, established under section 6 (1) of the Administration of Justice Act 1965. To some extent the high interest rates payable on money lent reflect and compensate for the continual erosion in the value of money by reason of galloping inflation. It seems to me arguable, therefore, that if a high rate of interest is payable in such circumstances, a proportion of that interest should be added to capital in order to help maintain the value of the corpus of the trust estate. It may be, therefore, that there will have to be some adjustment as between life tenant and remaindermen. I do not decide this point and I express no view upon it. I merely mention it as something which may have to be considered by the trustees and their legal advisers.”

57.The principle for Brightman LJ was to “… compensate beneficiaries and trust funds for non-receipt from a trustee of money that ought to have been received…”. The rate was not that which had been awarded in any previous case. It was not the old 4%, nor was it the proxy for a borrowing rate that had been awarded in Wallersteiner. It was a rate to provide for both capital and income loss which would need to be apportioned between life tenant and remaindermen accordingly.

58.I should mention briefly Re Duckwari PLC [1999] Ch 268, in which a company sought successfully to recover from a director a loss incurred in respect of a transaction entered into by the company in contravention of section 320 of the Companies Act 1985. That section prohibited transactions with persons connected with the company unless approved by the company in general meeting. A question arose as to the proper rate of interest to be awarded on the compensation. The defendants’ counsel, somewhat hesitantly it seems, advanced the old 4% rate as being appropriate, but he accepted that in recent years that rate had been departed from; he suggested base rate less 0.5% would be correct on that basis. The claimant’s counsel argued for a rate reflecting the amount that the company would have had to pay to borrow the money, i.e. base rate + 3%. The court awarded base rate, plus 1%.

59.Nourse LJ (with whom Pill and Thorpe LJJ agreed) said (at p. 273C-H):

“There remains the question of interest. Mr. Hoser’s formal position is that we should follow the established practice, dating from before the time of Knott v. Cottee, 16 Beav. 77, which was to charge the trustee with simple interest at 4 per cent. unless there was misconduct. More realistically, he accepts that in recent years the court has regularly departed from that rate. His alternative submission is that Duckwari should be held to the notional interest rate (base rate less 0.5 per cent., simple not compound) which it has claimed in respect of the £155,923 applied in part payment of the purchase price. I will say at once that no case has been made out for compound interest.

On the other side, Mr. Richards has relied on the judgment of Forbes J. in Tate & Lyle Food and Distribution Ltd. v. Greater London Council [1982] 1 W.L.R. 149, 154 for the proposition that interest should be payable at a commercial rate, i.e. at the rate Duckwari would have had to pay in order to borrow the money, and that in the case of a small concern such as Duckwari the rate should be taken to be as high as base rate plus 3 per cent. My impression is that Forbes J.’s suggestion that the rate should vary according to the size and prestige of the concern which is taken to have borrowed the money has not won general acceptance. The practice of the Commercial Court is to award interest at base rate plus 1 per cent.

In Bartlett v. Barclays Bank Trust Co. Ltd. (No. 2) [1980] Ch. 515, 547 Brightman J. was of the opinion that a proper rate of interest to be awarded, in the absence of special circumstances, to compensate beneficiaries and trust funds for non-receipt from a trustee of money that ought to have been received was that allowed from time to time on the short term investment account, a rate which may be taken to be not more favourable than base rate less 0.5 per cent. However, such a rate is not appropriate where the entity which is out of pocket is not a private trust but a commercial concern. In such a case interest ought to be awarded at a commercial rate. A precedent is at hand in the shape of Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. (No. 2) [1980] 1 All E.R. 393, 419, to which reference was made in my earlier judgment [1998] 3 W.L.R. 913, 920G. There simple interest was awarded on the sum recoverable by the company in constructive trust at base rate plus 1 per cent. I propose that we should award it at the same rate here.”

60.That was a case in which each side was contending for a borrowing rate in respect of a company which would not have been investing the money but would have been using it for its own business purposes. Thus, the rate awarded was a percentage over base borrowing rates. Again, this was a case where the court resolved the dispute by reference to the nature of the claimant with which it was concerned and the respective arguments presented. There was no argument that anything other than a borrowing rate should be adopted.

61.The next case is another in which each of the parties was contending for different borrowing rates to be awarded. This is Fiona Trust v Privalov [2011] EWHC 664 (Comm) (Andrew Smith J). There was no argument that the rate should be fixed by what return the claimants might have made from investing the funds to which they were entitled: see paragraph 14 of the judgment. In such circumstances, it is not surprising that the judge should have said that the court usually decides at what rate of interest the recipient could have borrowed the funds in question or that he should have referred to cases where that was the issue: see paragraph 14 of the judgment. Further, as Nugee J pointed out in the Interest Judgment (paragraph 32) the Fiona Trust case did not involve a claim against a defaulting trustee and it involved losses to a trading company. That case and the ones referred to by Andrew Smith J involved claims by trading companies for losses incurred in their businesses.

62.I turn to Challinor, to which I have referred in another context above. This was a case where solicitors were held to have paid away clients’ money without authority and in breach of trust. They were liable to restore the lost fund by way of equitable compensation. Argument arose as to the proper rate of interest. The rival contentions were for a borrowing rate of 5% over base by the claimants and a deposit rate, i.e. not more that 1% over base, by the defendant.

63.Hildyard J compared cases where there had been loss in relation to the conduct of a business, where it was assumed that money would be borrowed to replace it, with cases where the award amounted to an increase in the claimant’s funds rather than a replacement of what he had previously had (e.g. personal injury cases) where minimum return on deposit would be the norm. At paragraphs 33 and 34 of his judgment, Hildyard J said:

“33. This case does not really fit easily into either category. It seems to me an example of a third type of case, which is where the claimant is not running a business that depends upon credit, and where the loss of the money is likely to deprive the claimant of other opportunities, but where any ordinary presumption of the need for credit is weak or non-existent.

34. In cases of this third type, in my view, neither a minimum investment basis nor a proxy borrowing cost basis, is really a logical proxy. Thus, it is unlikely that any of the Claimants in this case, being sophisticated investors, would have left money on bank deposit at such low rates of return; but it is also unlikely that any of them would have borrowed at (say) 5% over base rate to make further investments: even someone with an unusual appetite for geared investment would be likely to be put off. Further, neither reflects the larger reality that in this case the Claimants’ real loss is the opportunity denied for further investment: and that is not measurable.”

He continued (at paragraphs 36 to 38) as follows:

“36. However, I have concluded that in this case, neither the investment rate nor the unsecured borrowing rate really provides a fair answer; and that the appropriate rate is such rate as is reasonable to assume that persons in the position of the Claimants would have had to pay for monies for geared investment. I have no direct evidence of applicable rates in such a context: and I suspect there are fairly broad variations according to personal circumstances.

37.That brings me to issue (2) in paragraph 30 above: what rate would be fair across the board. Again, a broad brush is required: in assessing any special rate the Court disclaims the task of determining what each claimant’s financial position is and at what rate that claimant could have borrowed money. It seeks to assess a reasonably representative or proxy rate which can without apparent injustice be applied across the class of claimants.

38.The fashioning and calculation of a representative or proxy rate is more art than science; and it is more in the nature of “one size fits all” than “made to measure”. It is an exercise of discretion rather than of settled rules. The Court must do its best to fashion a proxy which suits the nature of the case and the claimants as a whole, though it does not and cannot reflect the individual financial position of each claimant.”

64.As can be seen, Hildyard J had no evidence as to the applicable rates for the type of investment that he considered to be the most appropriate proxy. The judge reviewed such evidence as he had about the claimants as a whole and then reverted to what borrowing rates might be available. In the end his award was 3% above base. At paragraph 46, he set out his underlying thinking in setting this rate:

“46. …It is intended to reflect my assessment of (a) the general characteristics of the Claimants as appears likely from the nature of the activity in which they were all engaged, (b) the likelihood that they were as a class in a marginally better position than most to obtain credit in light of their likely standing and financial sophistication, and (c) an element of blending between rates available to borrowers and savers. It is, in a sense, intended to represent a pragmatically enhanced version of the old Commercial Court rate, taking into account the present unusual financial and economic circumstances.”

65.This seems to me to be a case where a judge had to award interest on what he saw to be inadequate evidential materials for his purposes. He did his best to assess the circumstances of a number of different types of claimant, but he recognised that none of the available proxies entirely filled the bill. That is not our case, however. Here the judge had very precise and reputable information from two sources by which to assess what would be returned on proper trust investments.

66.Finally, I would refer to Carrasco v Johnson [2018] EWCA Civ 87, in which the leading judgment was given by my Lord, Hamblen LJ, with whom Kitchin LJ (as he then was) agreed. The claim was to recover a balance of two unsecured loans. The claimant abandoned her original claim to contractual interest and claimed interest pursuant to statute. The District Judge awarded interest at the rate of 3% per annum. This represented between 2.5% and 2.75% over base rate in the relevant period. On the claimant’s appeal it was argued that the rate did not reflect the evidence as to the actual cost to her of being kept out of her money; no proper account had been taken of the expert evidence as to borrowing rates; and while the judge accepted that the parties were private individuals and not commercial concerns she had awarded interest at a commercial rate. Two other grounds arose which do not need separate mention.

67.This was, of course, a statutory interest case and did not involve equitable compensation and interest thereon at all. The defendant was not a defaulting trustee. The claimant was not a beneficiary of a trust fund. The cases referred to by my Lord in his judgment in that case (at paragraph 16) reflect those facts. Apart from Challinor, none of the cited authorities involved the equitable jurisdiction to award interest. At paragraphs 17 and 18, Hamblen LJ set out the guidance to be derived from the cases cited as follows:

“17. The guidance to be derived from these cases includes the following:

(1) Interest is awarded to compensate claimants for being kept out of money which ought to have been paid to them rather than as compensation for damage done or to deprive defendants of profit they may have made from the use of the money.

(2) This is a question to be approached broadly. The court will consider the position of persons with the claimants’ general attributes, but will not have regard to claimants’ particular attributes or any special position in which they may have been.

(3) In relation to commercial claimants the general presumption will be that they would have borrowed less and so the court will have regard to the rate at which persons with the general attributes of the claimant could have borrowed. This is likely to be a percentage over base rate and may be higher for small businesses than for first class borrowers.

(4) In relation to personal injury claimants the general presumption will be that the appropriate rate of interest is the investment rate.

(5) Many claimants will not fall clearly into a category of those who would have borrowed or those who would have put money on deposit and a fair rate for them may often fall somewhere between those two rates.

18. Challinor and Reinhard are examples of cases which were held to fall within that mid-category, justifying a blending between rates, and in both cases interest was awarded at 3% over base rate.

Applying those principles, the court dismissed the appeal.

68.In my judgment, while Carrasco provides an extremely useful and succinct statement of the principles governing the award of interest in the type of case there considered, it does not concern interest upon equitable compensation in general or the liabilities of constructive trustees in particular.

69.The cases in equity, some of which I have sought to summarise, do not concern cases of that type in issue in Carrasco. The courts of equity and later the Chancery Division have applied the principles developed in the trust cases over the years to fix interest rates appropriate to such cases.

70.A trustee’s position affords the ability to act in ways distinctly inimical to the interests of his beneficiaries and without necessarily the signs of default being readily discernible by the beneficiaries (a fortiori, if the beneficiaries are minors). The investing parties in this present case were sophisticated businesspeople but were entitled to similar protections for their trust funds as every beneficiary of a trust or of another fiduciary duty, once the funds came into the hands of a person (natural or legal) who owed trustee duties, including actual or notional investment duties. The principles governing recovery of equitable compensation are not, and need not be, the same as those governing damages or restitutionary claims arising between commercial parties or parties in “arms length” relationships (as in Carrasco).

71.In my judgment, in dealing with questions of interest on equitable compensation in trust cases, the courts have consistently tried to make awards that were suited to investment of trust funds and the economic realities of the times. In the 19th century the task was relatively simple; trust investments could be expected to yield 4%; trustees who mixed trust assets with their own for the purposes of commerce could safely be presumed to have earned at least 5% which they should restore to the trust. If they are thought to have offered 5% as a cheap price of their true profit, an account of that profit would be ordered, as in Docker v Somes (supra).

72.Reality required interest rates to change with the times: see the early 20th century cases cited above. Then in a very different economic climate in 1974, at the time of Wallersteiner v Moir, the traditional rates were simply not high enough. The court sought to deprive Dr Wallersteiner of his profit. It did so by reference to a convenient borrowing rate. The victims of his wrongdoing were commercial concerns. I do not read that case as laying down for all time a rule that borrowing rates were the appropriate ones in all cases. Indeed, later cases (even at common law – see the Carrasco principles) debate the relative merit of borrowing rates and deposit rates in various types of case. There can be no doubt, however, that the courts have sought to find, in each individual case, a suitable proxy rate for the general characteristics of the claimant entitled to the equitable remedy. As Nugee J pointed out, in paragraph 50 of the Interest Judgment, quoted above, this is entirely in accord with the approach to the interest award, in different circumstances, in Carrasco: see paragraph 27 of Hamblen LJ’s judgment.

73.A borrowing rate is simply not the realistic proxy in a case of this sort. It is unrealistic to assume that the deprived fund would have borrowed to invest; it would not have done so. It is unrealistic to assume that the trust fund, duly replaced, would have been placed (in breach of trust, one might add) on deposit with no regard to capital accretion; it would not have been so placed. That is simply not the real world of trustee investment and it is also unlike the world in the 19th century when trustees’ investment powers were substantially more restricted.

74.The material before the judge (ARC/STEP) illustrated precisely what a deprived fund of this type would have done with the misappropriated money. (Brightman LJ had such materials to assist with different rival arguments in Bartlett.) There was no need to work in a way contrary to reality or to embark on an element of speculation, as Hildyard J was constrained to do in Challinor. Why ignore reality? In my judgment, there was no need do so in this case and Nugee J did not do so.


75.As I said at the outset, in my judgment, Nugee J (long experienced and highly respected trust and equity practitioner and judge that he is) reached an answer in this case that was well within his wide discretion and in accord with the principles to be derived from, the relevant cases. I regret having had to expand on his reasoning which I would have liked to adopt without more ado. In this judgment, I have intended to say nothing inconsistent or in conflict with Nugee J’s judgment.