Citation(2016) 28 SAcLJ 825
Date01 December 2016
Published date01 December 2016

The Requirement of Certainty of Loss

Equity necessarily requires that the plaintiff's losses be made certain when awarding equitable compensation for losses flowing from breach of equity's proscriptive duties against unauthorised conflict and unauthorised profit. This article suggests that the method of making certain these losses must be consistent with equity's normative commitments in relation to the fiduciary's obligation of undivided loyalty. Two approaches are discussed: the first according to a method of probabilistic reasoning; and the second explicitly by reference to equitable discretion and according to equity's presumed standards of conduct expected of the fiduciary.

1 “Certainty of loss” refers to the requirement that the plaintiff satisfy the court as to the fact of damage and its amount.1 At law, whether, for example, in an action for breach of contract or pursuant to the tort of negligence, the plaintiff bears the legal burden of proving her claim for damages on the balance of probabilities. As Tilbury explains, this may be taken to imply an obligation on the plaintiff to establish the nature and extent of her losses.2 In many cases, this requirement will pose no factual difficulty since precise evidence will be capable of being adduced by the plaintiff to establish these matters. However, other losses are inherently uncertain: for example, the plaintiff's future pecuniary losses and non-pecuniary losses. A particular subset of uncertain losses includes the plaintiff's future lost opportunities or past hypothetical lost chances. In compensating for these losses, courts must grapple with the comparison of the plaintiff's position at trial and the position the

plaintiff would have been in without the defendant's breach. This latter situation necessarily involves some judgment about uncertain facts, which may or may not be able presently to be established at trial according to the civil standard of proof.

2 The limited purpose of this article is to suggest that distinct from any requirement of causation of loss arising from breach of fiduciary duty, equity necessarily requires that the plaintiff's losses be made certain when awarding reparative equitable compensation.3 An equity for relief exists for breach of the proscriptive fiduciary duties against unauthorised profit and conflict without proof of the plaintiff's loss. In contradistinction, for example, to the tort of negligence where the plaintiff must prove loss according to the civil standard, the equitable liability exists merely on breach of fiduciary duty.4 The

existence of loss is not a prerequisite to establishing fiduciary liability. However, notwithstanding that the plaintiff need not establish loss in order to claim equitable relief, where the remedy of reparative equitable compensation is in view, the discussion below will show that any loss must be made certain. Further, it will be argued that the method of making certain the principal's loss must be consistent with equity's normative commitments in relation to the fiduciary's obligations of undivided loyalty.
I. Remedies for breach of fiduciary duty: Equitable compensation

3 Various remedial consequences may flow from a finding of breach of fiduciary duty, many of which do not depend on the existence of the plaintiff's loss. For example, the plaintiff may seek rescission5 or, more controversially, exemplary damages.6

4 The parties may also fall into an accounting relationship such as trustee and beneficiary or custodial fiduciary and principal.7 The heart of an accounting relationship is that a person (eg, the trustee or custodial fiduciary) “controls property that she must hold and apply for another person's (eg the beneficiary or principal's) benefit”.8 Assuming

that the parties are accounting parties, the victim of the breach of fiduciary duty may call for an account. As discussed below,9 it is this ability to call for an account which is said to be the conceptual foundation of any subsequent obligation to pay equitable compensation.10

5 The taking of an account may disclose a deficit or a surplus in the position of the fiduciary vis-à-vis the principal. As explained by Austin J in Glazier Holdings v Australian Men's Health11 (“Glazier”):12

… [i]t is important to distinguish between two kinds of orders. One kind (… an order for account of administration) is made where the overall administration of a business enterprise or fund or other property is to be established or accounted for. Another kind (… an order for an account of profits) is made to provide a remedy for specific equitable wrongdoing.

This latter order relates to specified gains made by the defendant rather than any deficit to the plaintiff's ledger. However, the gain-based remedies of account of profits13 and any proprietary analogue via a constructive trust14 lie beyond the discussion in this article. An order for account (of administration) will allow the plaintiff victim to “identify and quantify any deficit in the … fund and seek the appropriate means

by which it may be made good”.15 It is through this process that a loss or deficit to the plaintiff may be revealed, thus grounding any subsequent obligation of the defendant to make a money payment to the plaintiff to make good the shortfall.

6 Accounts of administration are divided into an order in common form or for common account and an account taken on the basis of wilful default.16 In common account, the court looks to what has actually been received and dissipated by the accounting party. The principal may challenge the fiduciary's record of these transactions on either the outgoing side, for example by asking for a disbursement to be disallowed or by alleging that less was paid out of the fund (falsification), or the incoming side, by arguing that more was received by the fiduciary (surcharge). Where the principal or beneficiary establishes that the fiduciary's record is defective, the accounts are amended to reflect the true position in conformity with the fiduciary's obligation to maintain the fund. The fiduciary may be ordered to make a monetary payment to restore any deficit in the factual holding of the fund so that real world balances align with the now corrected records. Crucially, when ordering an account in common form, the court is limited in its inquiry to amounts actually received by the accounting party. Even when considering a potential surcharge to the account, this is in respect of amounts actually received by the accounting party, albeit not (initially at least) recorded as being held in a fiduciary capacity. Since it concerns amounts actually received or paid away by the fiduciary, the risk of uncertainty of loss is therefore minimal when an account is taken in common form.17 This discussion will not further consider accounts in common form.

7 An account taken on the basis of wilful default directs the court to examine not only amounts actually received and paid away by the accounting party but also what should have been received by that party had their duties been met. As such, an account on the basis of wilful default is a more searching inquiry, colourfully described by

Brightman LJ as a “roving commission”.18 As stated by Austin J in Glazier:19

… [t]he order is ‘entirely grounded on misconduct’, the defendant being required to account not only for what he or she has received, but also for what he or she might have received had it not been for the default.

The test asks “[whether] the past conduct of the trustees [is] such as to give rise to a reasonable prima facie inference that other breaches of trust not yet known to the plaintiff or the court have occurred?”20 An order for account on the basis of wilful default may result in an order for what has been described as reparative equitable compensation by which the breaching fiduciary compensates losses suffered by the principal.21

8 Beyond this traditional approach which proceeds via an intermediate accounting process, modern equity has in some instances dispensed with the taking of formal accounts; instead, cases such as Target Holdings Ltd v Redferns22 are argued and decided on “the liability of a trustee who commits a breach of trust to compensate beneficiaries for such a breach”.23AIB Group (UK) plc Ltd v Mark Redler & Co Solicitors24 adopts a similar method and the remedial orders of the court in these cases are thus not directed to any accounting procedure. When we speak about equitable compensation, therefore, the term is compendious and potentially includes the orders following a common account, account on the basis of wilful default and the “direct” claim for equitable compensation. It is a matter of debate the extent to which the existence of the direct claim for equitable compensation carries with it any differences in substantive principles applied by the court when assessing the money remedy.25 However, for the analysis in this article,

the point is to realise that however it is labelled, the remedy which in substance addresses a reparative measure raises the conceptual difficulty of uncertain loss.

9 That there is a causation inquiry for awards of reparative equitable compensation is relatively uncontroversial. A “but for” test is applied such that “the beneficiary is entitled to be compensated for any loss he would not have suffered but for the breach”.26 The “but for” test is said to perform an exclusionary rule against a common sense view of causation,27 so that the defendant is not made to pay for losses which would have been suffered even if the breach of duty had not occurred,28 and logically “it is difficult to see how ‘common sense’ could be different in common law and equity”.29 As has been said, the object of an award taken on the basis of wilful default will be to take the account:30

… as if the defendant had performed his duty and obtained [the property or investment] for the benefit of [the fund or trust]. Since ex hypothesi the...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT