An English misturning with equitable compensation  

Paper delivered at the UNSW Australia colloquium on equitable compensation and disgorgement of profit, 7-8 August 2015.

James Edelman

This paper examines a new English approach to the question of monetary liability of a trustee in breach of trust. Historically, this question was answered through the account. The trustee in breach could be made to account on one of three different bases. That old language of account has now been replaced by the language of equitable compensation. Associated with this modern school there is a view that monetary liability involves only questions of loss and causation. In this paper I suggest that this view is misguided. I do so by reference to the manner in which counsel argued the case of AIB Group (UK) Plc Ltd v Mark Redler [2014] UKSC 58; [2014] 3 WLR 1367 from trial to the Supreme Court of the United Kingdom.
Introduction: debt and damages
A and B enter an agreement. For consideration, B promises to hold $1 million on trust for A. B promises to repay $1 million to A if the money is not used for a particular purpose. The money is not used for the particular purpose. Is B required to repay it to A as he had promised? 
For at least the last three centuries, the same answer to this question would be given at common law as in equity. At common law there is a contract. B promised to repay the money to A if it was not used for a purpose. It had not been used for that purpose. A debt arose. Loss need not be proved. A claim could be brought for the debt. Similarly, in equity, a bill could be brought against B as a trustee requiring him to account for the $1 million. Since B cannot prove an authorised disbursement, B would be liable to reconstitute the fund.
In equity, the language of ‘account’ was misleading in one significant respect. It concealed the different types of accounting process and the different types of liability that could arise. Those different types of account, and different types of liability, were based upon (i) an account of administration in common form, (ii) an account on the basis of wilful default, and (iii) an account of profits. The first was the claim for debt in equity that I have described, where a debt arose from an unauthorised disbursement. The second was a claim for loss caused by default, even where the conduct was authorised provided there was fault including carelessness. The third was a claim for profits made by the trustee. 
Whilst trials of liability were separate from the taking of an account in equity, the three forms of account, and the rules governing them, were unlikely to cause difficulty. When liability to account was found, the attention of all the parties was squarely focused upon the rules for accounting and the basis upon which the account was taken. These rules were well known. In the opening words of Lord Selborne’s speech in Speight v Gaunt, the Lord Chancellor said:
the principles of equity, with respect to the duties and responsibilities of trustees, and the distinction between those losses of trust funds for which they are, and those for which they are not, liable, are so well settled, and are of such great general importance, that the present case, in which two Courts have differed as to their application, has naturally been considered by your Lordships with some anxiety.
Two developments led to change. The first was the movement after the Judicature Acts from the expensive and time consuming process of splitting trials of liability and quantum. What began to vanish was a split which had occurred in Chancery particularly in cases of wilful default accounting of the questions of (i) whether a defendant was accountable from (ii) the taking of the account. Split trials still occur but they are no longer frequent for good reasons which the High Court of Australia has explained. Without a split trial, the attention of the parties is often heavily focused upon liability at the expense of the rules governing remedy. The three forms of account that would have been crystal clear to a 19th century chancery practitioner began to be neglected.  
The second development was that during the 20th century, the old language of account became modernised. Lawyers began to speak instead of claims for ‘equitable compensation’. In one sense this was more accurate since parties would often prove a loss in the same suit as the trial of liability. No account was needed. But the language of equitable compensation has also led to real difficulty. The difficulty arises because to almost any lawyer or layperson, the word “compensation” is associated with “loss”. Dictionary definitions also associate ‘compensation’ with ‘loss’. There is an immediate tendency to forget that there are two other remedial forms because the use of an undifferentiated label of ‘equitable compensation’ encourages attempts to shoehorn at least three different principles into the same analytical framework. As equity textbooks that had previously been very closely focused on historical remedies were ‘updated’ this attempt to modernise by a unitary label has had unfortunate consequences.
On occasion, even from the early 19th century, there were lawyers and judges who used “damages” in this same way as a unitary term to describe money awards in equity. As late as 1998, Sir Peter Millett said that:
	Woe betide a Chancery Junior who spoke of “damages for breach of trust” or “damages for breach of fiduciary duty”. The judges knew that misuse of language often conceals a confusion of thought. Nowadays these misleading expressions are in common use. It is time that the usage was stamped out.

Just as the attempt to unify money awards in equity by the single, undifferentiated label ‘damages’ was problematic, it was also inevitable that the attempts to shoehorn three different remedies into a single, undifferentiated notion of ‘compensation’ would cause problems. Three examples can be given of the dangers of the use of ‘equitable compensation’ as an undifferentiated label now common in equity texts and some judicial decisions. 
First, it is sometimes said that a plaintiff who has suffered no loss can sometimes obtain ‘equitable compensation’ for a breach of duty which has caused profit to a defendant. But as a matter of nomenclature, it is very awkward to speak of disgorgement of a defendant’s profits as ‘compensating’ a plaintiff who has suffered no loss. As Professors McFarlane and Mitchell rightly say, ‘[n]o good can come of describing a gain-based liability as though it were a liability to compensate for loss. We must hope that the courts do not use this language in future cases.’
Secondly, it has been said that ‘equitable compensation’ is subject to a ‘defence’ of ‘no causation’, which defence might not always apply. Taken literally, this would mean that, subject to defences, a plaintiff is entitled to recover any losses suffered from a defendant who did not cause them. On this approach, the defendant could sometimes, but perhaps not always, defend that claim by saying “I did not cause your loss”. No case has adopted this principle in such terms. This second point is closely related to the third point below which is to assume that all cases that are today described as ‘equitable compensation’ should be seen as claims for loss. This is both ahistorical and unprincipled. 
Thirdly, and most relevantly to this paper, the language of equitable compensation tends to lead to a denial of the existence of a claim for equitable debt, which would historically have been based on the common account. That was the conclusion reached in a powerful essay by Professor Chambers. The language of ‘equitable compensation’, undifferentiated, invites this conclusion. A debt is not compensation. 
Chambers’ argument, which is by far the most cogent exposition of this thesis, goes as follows. The ‘equitable debt’ claims all involve some form of ‘default’ by the trustee. Therefore these claims must all be based on trustee wrongdoing. Therefore these claims must all be concerned with loss. The false step in this argument is the assumption that because these claims involve a ‘default’ by a trustee they must therefore be claims for wrongdoing and not for debt. It is akin to an assertion that there can be no claim for a contractual debt because every failure to pay a debt is a breach of contract. 
The argument is ahistorical. The cases of accountability are not concerned with trustee default or breach. They contrast with the accountability on the basis of wilful default which was concerned with loss, and was based on a breach by the trustee. As Kindersley VC said in Partington v Reynolds:
The one [common account] is a decree compelling him to account only for what he has received ... the other is a decree compelling him to account, not only for what he has received, but also for what he might, without his wilful neglect or default, have received, although he has not received it ... They proceed upon totally distinct grounds. The one supposes no misconduct; the other is entirely grounded on misconduct.
Chambers accepts the historical characterisation of common accountability but he argues that the claim must be based on wrongdoing because the trustee is exempted from liability in cases where the trust property is stolen or where the bank where it is invested becomes insolvent. The case commonly cited for this proposition is a decision from 1894: Re Gasquoine. As Chambers recognises, however, the principle existed for centuries before 1894. None of those cases conceived of these circumstances as a ‘defence’. They were merely the boundaries of the trustee’s primary duty to account. The cases concerned the rules for calculating the debt owed, not the loss suffered. The principle was that the trustee must account, as a debt, for the value of the trust fund that he holds at the time of the account. The fund might have increased by payments of interest. Just as, today, a bank’s debt to its customer might be reduced by fees payable to the bank, so too the trustee’s debt could be reduced by matters which were legitimate debits. One legitimate debit was where the fund was stolen or subject to insolvency, entirely independently of any act by the trustee. The trustee will still have performed her obligation to maintain the trust fund. As Professor Hanbury explained, avoiding the use of the word ‘defence’, on the taking of a common account ‘  
In contrast, the trustee was accountable for the full debt, and reductions would be falsified, if the reduction arose as a result of an act or omission by the trustee, even if the trustee was entirely without fault. For instance, trustees were liable when they paid over the trust fund to the wrong persons because they relied upon a marriage certificate which turned out to be a forgery which the Master of the Rolls said would have deceived anyone not looking for fraud. The Master of the Rolls simply said that the trustee is ‘bound to pay the trust fund to the right person’. The cases involving theft were cited but disregarded. Again, the cases involving theft were disregarded when a trustee handed over trust property to a solicitor, chosen carefully, but who turned out to be fraudulent. The Master of the Rolls said that the ‘case is too clear for argument’. These were not novel decisions. A century earlier, the Lord Chancellor had said, in a case involving a forged transfer, that ‘if the transfer is made without the authority of the owner the act is a nullity, and in consideration of law and equity the rights remain as before. This is such plain, clear reasoning, that I need do no more in order to give the plaintiff complete relief…’ 
The simplest lesson from this paper is that the greatest danger of treating all equitable awards as ‘compensation’ or ‘damages’ is that it ignores a basic distinction between a claim for compensation/damages and a claim for debt. The former is a claim based on breach of a right. The latter is a claim for the enforcement of the right by an order that the defendant do something as close as possible to the promised performance.
The academic view that abandons claims for debt in an attempt to create a unified award of ‘compensation’ might have easily been rejected were it not supported by a recent decision of the United Kingdom Supreme Court in AIB Group (UK) Plc Ltd v Mark Redler. The remainder of this paper focuses heavily upon that decision. The difficulty with the decision is really the manner in which it was pleaded and argued. The focus of counsel, and therefore the court, was upon compensation following breach. This is a powerful illustration of the grave danger in using the language, undifferentiated, of ‘equitable compensation’.
The AIB case was not pleaded or argued at trial as one involving a debt. Had the case been pleaded or argued as one about debt then the result might have been different. For instance, in the simple example with which I commenced this paper, A could argue that B’s obligation to repay was a debt subject to a condition precedent. If the condition occurred then the debt arose. It matters not what A would otherwise do with the money or what events might otherwise have happened. This obvious truth was unfortunately obscured by the fact that the case was argued as one involving ‘equitable compensation’ for breach of trust. More broadly, it is a truth that is often misunderstood because of a focus on notions of ‘causation’ which have no place in this area of discourse. Once this truth is recognised it is possible to consider the same issues which arise where the obligation is not to repay money but to transfer other rights such as shares.
The decision in AIB Group (UK) Plc Ltd v Mark Redler
AIB agreed to lend £3.3 million to borrowers so that they could re-mortgage their home. AIB retained the solicitors, Mark Redler & Co, for the transaction. AIB required a first charge over the borrowers’ home, which had been valued at £4.25 million. As it turned out, this security sought by AIB was ‘hopelessly inadequate’.  
The contract between AIB and Mark Redler consisted of a letter of instruction which incorporated the Council of Mortgage Lenders’ Handbook. AIB would pay the loan monies to Mark Redler. Mark Redler would hold the money on trust for AIB until completion of the transaction. The contract (by the Handbook) included a term that upon completion the mortgage lender required a fully enforceable first charge over the property by way of legal mortgage. It also required all existing charges to be redeemed on or before completion. The contractual clause at the heart of AIB Group was as follows:
You must hold the loan on trust for us until completion. If completion is delayed, you must return it to us when and how we tell you.
Although the clause only referred to a delayed completion, it must also have included a complete failure to complete. A failure to complete would include a delay in the completion. In any event, by necessary implication, if the client had terminated the contract so that there would never be completion, the solicitors could not possibly claim to retain the money.
AIB paid £3.3 million to Mark Redler. Mark Redler should then have attended a settlement at which it paid £1.5 million to Barclays to refinance the borrowers’ existing loan with the remainder being paid to the borrowers. The payment of £1.5 million would have been in exchange for a simultaneous undertaking either by Barclays or its solicitors that the money would be applied to redeem its first charge. Unfortunately, Mark Redler made a mistake. It only paid £1.2 million to Barclays. So it did not receive a discharge of the first charge held by Barclays. The transaction never completed.
In the lower courts, there had been some dispute about whether the transaction had completed. Mark Redler argued that the transaction had completed when it released the loan money even though the money was released without a solicitors’ undertaking and without confirmation from Barclays that the money would be applied to redeem the first charge. The Court of Appeal accepted the argument by AIB that completion did not occur. In the leading judgment, Patten LJ said:
I accept Mr Cousins' submission that the completion of the remortgage transaction required [Mark Redler] to be in receipt of a solicitors' undertaking, or unconditional confirmation from Barclays that the advance monies would be applied by it in redemption of its charge, before releasing the advance. 
In the United Kingdom Supreme Court, it appears that Mark Redler did not challenge this finding. 
However, there were references in each of the judgments of Lord Toulson JSC and Lord Reed JSC to the transaction having been completed ‘commercially’, albeit without AIB ever obtaining what it regarded as essential to completion: a first charge.
Lord Toulson said:
The solicitors did not complete the transaction in compliance with the requirements of the CML Handbook. But as a commercial matter the transaction was executed or completed when the loan moneys were released to the borrowers. At that moment the relationship between the borrowers and the bank became one of contractual borrower and lender, and that was a fait accompli. The Court of Appeal was right in the present case to understand and apply the reasoning in Target Holdings as it did. 

Lord Reed said:
If Redler had performed their trust, they would on completion have held a registrable first charge which secured a debt of £3.3m. In the event, on completion they held a second charge in respect of that debt; but Barclays continued to hold a first charge.
 
This must simply have been a loose use of the term ‘completion’. To paraphrase the words of Lord Toulson, the transaction was completed ‘as a commercial matter’ but it was not completed as required by the contractual documents. The reason why there cannot have been completion in the sense in which the term was used in the parties’ contract is because if completion had occurred then the act of releasing the funds would have been authorised. It might have been careless but it would have been an authorised act. But, as I have said, the Court of Appeal rejected this argument and there was no dispute in the Supreme Court that the release of funds was unauthorised.
Therefore, under the key contractual clause, and in the absence of completion (within its contractual meaning), Mark Redler was under a continuing obligation in equity to hold the £3.3 million on trust for AIB as well as an obligation to pay £3.3 million to AIB “when and how” AIB told them. 
The Supreme Court held that Mark Redler was not required to pay the £3.3 million to AIB. Lord Toulson JSC said:
This involves effectively treating the unauthorised application of trust funds as creating an immediate debt between the trustee and the beneficiary, rather than conduct meriting equitable compensation for any loss thereby caused.
With respect, this is correct. But the Supreme Court apparently considered that no debt had been created. This may be because the most obvious debt claim would be at common law. But no claim for debt had been brought at common law. It is hard to understand why AIB did not do so. AIB brought four claims: breach of trust, breach of fiduciary duty, breach of contract and negligence. Breach of contract and negligence were admitted by the solicitors. But AIB never brought a claim which was of the form “repay the money which you promised to repay under the conditions which occurred”.
The existence of a trust would not have precluded AIB from bringing a common law claim for debt. The rights arising as a result of a trust do not exclude common law debt obligations. For instance, trustees often borrow money to invest to obtain returns for a trust. The trustee cannot say to a lender of funds “I am not required to repay the money to you because I hold the benefit of it on trust”.
The obvious advantage of a claim in AIB for debt (rather than ‘compensation’) is that matters concerning causation, loss, and remoteness would have been irrelevant. As Millett LJ (Otton LJ and Sir Stephen Brown P agreeing) said in Jervis v Harris, there is a clear distinction between a claim for payment of a debt and a claim for damages for breach of contract. A plaintiff ‘who claims payment of a debt need not prove anything beyond the occurrence of the event or condition on the occurrence of which the debt became due. He need prove no loss; the rules as to remoteness of damage and mitigation of loss are irrelevant’.
The decision in Target Holdings and the traditional approach in equity
Central to the Supreme Court’s decision in AIB v Redler was an earlier decision of the House of Lords in Target Holdings Ltd v Redferns. The cases were similar but there was one critical difference. In Target Holdings, a purchaser had been lent £1.5 million by Target Holdings. The money was paid by Target Holdings to the purchasers’ solicitors, Redferns. The terms on which the money was paid to Redferns was that the money was to be held on trust and not to be distributed until Redferns had obtained a mortgage over the property. Redferns distributed most of the money before the mortgage was executed. After the purchaser defaulted, Target sold the property for £450,000. Target claimed the difference from Redferns. Redferns defended the claim on the basis that they had not caused Target’s loss. The loss had been caused because the property (on the assumed facts) had been overvalued as a result of fraud. On the analysis above, and on these facts only, Target Holdings should have succeeded against Redferns in a claim for debt, either at common law or in equity.

In the House of Lords, the claim by Target Holdings was brought only in equity. In the leading speech, Lord Browne-Wilkinson acknowledged the traditional equitable approach required the trustee to account for the money that it held. Where a trustee undertook responsibility for trust assets, the trustee was accountable for those assets as an administrator. If the trustee paid them away without authority then the payment entry was falsified in the accounts and he remained liable to the beneficiary for the assets. This meant that he had to pay the cost to ensure that those assets were maintained as promised. The cost of performing the trust duty was usually calculated by the value of the notional trust assets at the date of trial because the trustee’s undertaking usually continued until trial. As Lord Millett explained in Libertarian Investments Ltd v Hall:

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. Where the defendant is ordered to make good the deficit by the payment of money, the award is sometimes described as the payment of equitable compensation; but it is not compensation for loss but restitutionary or restorative. The amount of the award is measured by the objective value of the property lost determined at the date when the account is taken and with the full benefit of hindsight.

In other words, this account of administration required the trustee to pay the cost of performing his duty to preserve the fund. This was a duty assumed by every express trustee. Even the trustee of a bare trust was required to perform his duty to preserve the trust property. As the High Court of Australia explained in CGU Insurance Limited v One.Tel Limited (In Liquidation):

One obligation of a trustee which exists by virtue of the very office is the obligation to get the trust property in, protect it, and vindicate the rights attaching to it. That obligation exists even if no provision of any statute or trust instrument creates it. It exists unless it is negated by a provision of any statute or trust instrument.

The obligation to maintain the property, and the liability to account for it, was described in some cases as ‘equitable debt’. Like claims for common law debt, in a claim for equitable debt questions of remoteness or mitigation of loss were irrelevant. Hence, it did not matter if that the ultimate cause of the loss was the dishonesty of a third party. As Lord Lyndhurst said in White v Baugh:

The Court says, “You cannot be relieved from your liability unless your conduct has been strictly regular, whether the loss has been occasioned by the irregularity of your conduct or not.”

On the facts of Target, involving a modern commercial trust, Lord Browne-Wilkinson rejected the traditional approach. The reason why he considered that the traditional approach should not apply was his concern that the traditional approach requiring performance by trustees would render modern commercial arrangements useless. Lord Browne-Wilkinson therefore insisted that, in this commercial context, the claimant could only recover for losses which had been caused by Redferns’ breach.

Earlier doubts concerning Target Holdings

In Bairstow v Queens Moat Houses plc, Robert Walker LJ had considered a case involving a director’s liability for a knowingly wrongful distribution of dividends. His Lordship considered that the same principles should apply to directors as those that apply to trustees, saying that custodial directors ‘were not strictly speaking trustees, as title to the assets was not vested in them; but they had trustee-like responsibilities, because they had the power and the duty to manage the company’s business in the interests of all its members’. His Lordship then raised doubts about the reasoning in Target Holdings. His Lordship said that:

It may be that a more satisfactory dividing line is not that between the traditional trust and the commercial trust, but between a breach of fiduciary duty in the wrongful disbursement of funds of which the fiduciary has this sort of trustee-like stewardship and a breach of fiduciary duty of a different character (for instance a solicitor’s failure to disclose a conflict of interest…

His Lordship distinguished Target Holdings, and applied the traditional accounting approach on the basis that the unlawful distribution in that case had been deliberate rather than negligent. This is a distinction of fact but not of relevant principle. His Lordship said:

It is sufficient, in my view, to observe that this is a wholly different case from Target Holdings, in which (so far as concerned the application for summary judgment) the solicitors were shown to have done no more than to have acted imprudently in disbursing their client’s funds before they obtained their client’s security. In this case the former directors are liable for deliberately and (at least in relation to the 1991 accounts) dishonestly paying unlawful dividends out of the company’s funds which were in their stewardship. Those unlawful payments have never been reimbursed. Queens Moat’s case does not depend on any artificial exercise in ‘stopping the clock’. The judge (at p.42 of the dividends judgment) rejected the submission that there was no loss because lawful dividends could and would have been paid, had the 1991 accounts reflected the true position. But even in the absence of such a finding, the submission was in my view bound to fail.

Subsequently, the decision of the House of Lords in Revenue and Customs Commissioners v Holland, In Re Paycheck Services 3 Ltd also appeared to revert to the traditional accounting approach. In that case, composite companies in a complicated network of companies had paid dividends on the basis that the company was not liable for higher rate corporation tax. The structure had been established to avoid the higher rate tax and the defendants knew that the composite companies had become liable for the higher rate. When the composite companies went into liquidation there was a substantial deficiency of assets. The Revenue argued that the defendants were de facto directors who were in breach of their directors’ duties, and that the distribution of dividends was unlawful. The trial judge held that one defendant (Mr Holland) was a de facto director. The Court of Appeal, and the Supreme Court (by majority) held that Mr Holland was not a de facto director.

Although Mr Holland was held not to be liable as a de facto director, in the course of the reasoning the Court of Appeal and Supreme Court made observations about the alternative arguments run by Mr Holland. One of those alternative arguments concerned the compensation for which Mr Holland was liable to pay. It was accepted that directors are under an unqualified duty not to cause an unlawful and ultra vires payment of a dividend. But, it was argued for Mr Holland, in reliance upon Target Holdings, that if Mr Holland was in breach of a duty as a director then the correct measure of recovery was damages for that breach which required an investigation into whether the net position of the companies was worse by continued trading and payment of dividends than if trading had stopped. In the Court of Appeal, Rimer LJ (with whom Elias and Ward LJJ agreed on this point) rejected this argument saying:

the basic remedy is one of restitution. That is because directors of a company, if not trustees in the strict sense (because its assets are not vested in them), owe a like duty as a trustee not to misapply the company’s assets and a like duty to make restitution to the company if they do.

In the Supreme Court, the approach of Rimer LJ was endorsed by Lord Clarke and Lord Walker. Lord Hope also said that:

The obligation is to restore the moneys wrongfully paid out. This, as the deputy judge accepted, is the established remedy. Where dividends have been paid unlawfully, the directors’ obligation is to account to the company for the full amount of those dividends.

The desire to distinguish the reasoning of the House of Lords in Target appears to have been motivated by doubts concerning whether there should be a distinction between commercial and non-commercial trusts. Lord Browne-Wilkinson’s assertion that the commercial trust would be rendered “commercially useless” was unsupported by any reference to any empirical study which suggested that the equitable approach to performance, tempered by the power to excuse trustees or directors who have acted honestly, reasonably and ought fairly be excused.

Lord Millett’s re-explanation of Target Holdings

Some commentators observed that the reasoning in Target Holdings was unorthodox. One attempt to justify the result in Target Holdings without departing from the traditional approach of equity was made by Sir Peter Millett. In an extrajudicial article in 1998, Lord Millett argued that even on the traditional approach the solicitors ought not to have been liable because they had performed their obligations: “the acquisition of the mortgage or the disbursement by which it was obtained... was an authorised application of what must be treated as trust money notionally restored to the trust estate”.

I have previously argued that there is a difficulty with this explanation of Target Holdings. The central difficulty is that it involves a fiction. It treats as retrospectively authorised a transaction which was unauthorised. There was no finding that the solicitors were authorised to receive the mortgage a month after the money had been dissipated. The moment Redferns paid out the money without having first obtained the mortgage they came under a duty to reimburse the trust fund. When they later obtained the mortgage, Target Holdings could have refused to accept the mortgage. Any explanation of the result in Target needs to acknowledge that the unauthorised transaction had not been immediately cured. A better explanation may be that Target Holdings waived its right to refuse the mortgage when it ultimately accepted the mortgage and relied upon it in the sale of the property. Hence, the disbursement of trust funds would not be treated as unauthorised on the ground that it had been paid out without having obtained the mortgage.
Irrespective of whether Target Holdings should be re-explained, or the manner in which it should be re-explained, the case was very different from AIB v Redler. The fundamental difference is that in Redler the obligation to obtain the first charge (and complete the transaction) was never fulfilled and was never waived. The effect of AIB v Redler must now be that in English law claims against a trustee can no longer be brought as an equitable debt claim. Claimants will need to be careful not to neglect a possible claim for common law debt. The position in other jurisdictions, notably Hong Kong and Australia, may still permit the claim for equitable debt.
Is the position different in cases where there is no money debt?
I began this paper with an example where A promises, for consideration, to pay $1 million to B on trust and B promises to use the money only for a particular purpose and otherwise to repay it to A. As I have explained, if the money is paid to B, but the condition is not satisfied, then a debt arises.
A difficult question arises where the subject matter is something other than money. Would it make a difference if the subject matter transferred to B is publicly traded shares? In other words, if B had promised to transfer publicly traded shares to A then can A demand that B pay to A the money value of the shares irrespective of any loss that A has suffered? The difficulty for A is that at common law a money debt has not arisen and the obligation to transfer the shares would not be the subject of an order for specific performance.
Common law
At common law, a claim in the circumstances above was never expressed as a claim for debt. Debt was an obligation to pay money. Historically, however, the claim at common law would have been brought as a claim for an account. Indeed, in Jones v Lewis, the Lord Chancellor explained that the principle exempting a trustee from accounting for goods that had been stolen was derived from the account at common law, requiring a bailee to account for goods that the bailee held. The liability of the bailee was to account as promised that care would be taken of the goods. This account required no proof of fault by the bailee. Nor did it require proof that the bailee caused any loss. So when goods are bailed to a bailee, the bailee was, and still is, liable to account for the careless loss of the goods even where she acts honestly and reasonably by entrusting the safekeeping to an apparently competent independent contractor. As Professor Stevens explains, the ‘duty assumed is that care will be taken of the claimant’s goods, not a duty that the bailee will personally take care’.

But, at common law, the claim for the money value of a promise to maintain an asset is no longer expressed in the language of account. The language used is ‘damages’ which carries with it the same connotations of loss. Hence, there are cases where the result appears inexplicable. Damages without loss. A case which illustrates this point, deriving from a line of older English authority, is the decision in Joyner v Weeks. A lessor sued a lessee for breach of a lease covenant to leave the demised premises in good repair. The lessor claimed as “damages” the full cost of repair. However, this was not a real loss because lessor had granted a lease to another person which required the demolition of part of the premises. The lessee was still required to pay damages for a failure to repair that part of the premises which was to be pulled down. The Court of Appeal gave different reasons why causation of loss was disregarded. Lord Esher MR was “strongly inclined” to think that an award of the cost of repair for breach of a covenant to repair was “an absolute rule applicable under all circumstances”. In contrast, Fry LJ relied on “a general rule ... that, where a cause of action exists, the damages must be estimated with regard to the time when the cause of action comes into existence”.

The decision in Joyner v Weeks was approved by the High Court of Australia in Graham v The Markets Hotel Pty Ltd. This decision involved a different situation in which the state of repair had rendered the premises unlettable at the end of the lease because they were disqualified from a liquor licence. But the High Court rejected the submission of Barwick KC that Joyner v Weeks should be confined to its ‘special facts’. Latham CJ described Joyner v Weeks as creating a ‘general rule’, and Starke J described it as the ‘true measure’. The effect of the decision in Joyner v Weeks was ameliorated in England and Wales by s 18 of the Law of Property Act 1925 (UK), and in New South Wales, by s 133A of the Conveyancing Act 1919 (NSW). But it remained a common law rule and remains an illustration of a case where the award of damages at common law is quantified by the money value of the obligation of a non-money performance.

The leading decision in Australia is now the decision of the High Court of Australia in Clark v Macourt. In that case, the purchaser of defective straws of sperm was held to be entitled to recover the value that the straws would have had if the contract had been performed, even though the purchaser had acquired new straws and defrayed much of that cost by sale to patients using the new straws. The judgments focused on the nature of the award as representing the money value of the obligation of performance. As Hayne J said the compensation “reflects a normative order in which contracts must be performed”. And, as Keane J said:

it is the general intention of the law that, in giving damages for breach of contract, the party complaining should, so far as it can be done by money, be placed in the same position as he would have been in if the contract had been performed.

The same concept of a money award to substitute for the value of the promised performance at common law was the issue that divided the House of Lords in Alfred McAlpine Construction Ltd v Panatown Ltd. McAlpine promised Panatown that it would build an office block and car park. For tax reasons, the owner of the land upon which McAlpine would build was not Panatown but was a company related to Panatown called UIPL. McAlpine undertook, by deed with UIPL, to take reasonable care in performing the work. McAlpine performed the work defectively and Panatown sought recovery of the cost of repair. A minority of the House of Lords would have dismissed the appeal because no financial loss had been suffered by Panatown. However, a majority considered, or assumed, that despite the absence of financial loss, a contracting party is generally entitled to recover the cost of performance. Lords Goff and Millett considered that such an award should have been available. Lord Browne-Wilkinson also assumed that the cost of performance award should be available but he dismissed the appeal because McAlpine had entered a duty of care deed to UIPL, which could recover the cost. For Lord Browne-Wilkinson, this meant that McAlpine had no interest in performance because the purpose of the whole contractual scheme was to ensure that it was UIPL which was the party which would enforce any right to performance. A majority of their Lordships, therefore, recognised or assumed that, absent a duty of care deed, Panatown had a right to recover the cost of repair to ensure that it obtained the performance it had been promised. All their Lordships assumed that this remedy was subject to ‘reasonableness’, a notion which Lord Millett assimilated with ‘legitimate interest’. The reasoning of Lords Goff and Millett in Panatown has been applied by lower courts. However, the principle remains controversial. In one case it was said that to the extent that such a principle exists it should be confined to services cases and that it does not apply to sales of goods.

Commentators such as Professor Coote have referred to this type of award as performance interest damages. The label is important. It reminds us that the award focuses on the value of performance rather than loss. As Dr Winterton has explained:

	the claimant has not suffered any loss in the sense in which this term is typically understood. Rather, to the extent that any ‘loss’ was suffered, it was a loss of the performance that the innocent party was entitled to under the contract … references to ‘loss’ should be confined to describing deteriorations in a party’s factual position.

Dr Winterton explains that the justification for an award of this nature is not a desire to compensate for loss but a desire to undo, as far as possible, a breach by requiring a payment of the cost of achieving performance of the duty. The award is designed to achieve ‘next best conformity’: it is the next best thing to being awarded the performance that was promised. As Lord Neuberger MR said of a doctor’s negligence in Wright (A Child) v Cambridge Medical Group (A Partnership), ‘it is the nearest the law can get to putting the patient into the position that she should have been if the doctor had not been negligent’. So understood, in contract the money award of the value of performance is little more than the money cost of specific performance. ‘Specific performance’ is really a misnomer. It is also an award that aims for next best conformity because specific performance almost never involves the precise performance of the promised duty. Almost inevitably, the claimant for specific performance of a contractual right will bring the claim because the defendant has failed to perform at the time required.

Equity
It might have been thought that equity would take the same approach as the common law, requiring a monetary payment, essentially as a debt, which represents the substitute for the cost of obtaining the promised performance by a trustee, or other custodial fiduciary. Indeed, equity was more generous than the common law in recognising claims for debt. the absence of a common law debt is not an obstacle to an order in equity. Even if the contract right had not accrued for a debt to arise at common law, equity would require that the money be paid. In M’Intosh v Great Western Railway Company, Mr M’Intosh agreed to do work for the Great Western Railway Company. Mr M’Intosh was only entitled to be paid upon the issue of a certificate of completion by the company’s engineer. The engineer refused to provide a certificate; this was not found to be fraudulent. The Lord Chancellor accepted that the certificate was a condition ‘without the performance of which it is provided that no right under the contract shall arise.’ But, affirming the decision of the Vice Chancellor, he held that the claim was not demurrable. He rejected the argument that Mr M’Intosh was confined to a claim for damages for breach of contract. Mr M’Intosh was held to be entitled to an account in equity of the value that was due to him even though no right to it had accrued.
Historically in equity it also did not matter if the obligation was non-monetary. In Dr Elliott’s doctoral research on this subject he used the label ‘substitutive compensation’ to differentiate these claims from those for loss (which he called ‘reparative compensation’) and which were based on a different type of account concerned with wilful default. That distinction reappears in the chapter on equitable compensation written by Dr Elliott in the leading English text on equity.
As I have explained above, that English approach had a long historical lineage up until the decision in Target Holdings. That approach cannot now have survived the decisions in Target Holdings and AIB. It would be incoherent for equity to refuse a claim that the trustee pay a money award based on performance of a duty to maintain money but to allow a claim that the trustee pay a money award as a substitute for the performance of a duty to maintain a non-money asset.
Conclusion
The focus of this paper has been on English rather than Australian law. The reason for this is that, unlike Australian law, English law has now twice confronted, and rejected, a long established orthodoxy in equity, including a very recent decision last year. The purpose of this paper has been to consider any reasons why this path might not be taken by Australian lawyers.
There are reasons to believe that Australian law might not follow the new English path. The leading Australian case on this subject is Youyang Pty Ltd v Minter Ellison Morris Fletcher. In Youyang the agreement was between an investment company and solicitors. The investment company paid money to the solicitors. The first half of the money was only to be released for investment by the solicitors when they had obtained a bearer deposit certificate. Once they obtained the certificate then the other half of the money was to be invested in speculative activities on the international money market. The solicitors released all the money to a prime bank without obtaining a certificate. The solicitors later reinvested the money on the instructions of the investment company but still no bearer deposit certificate was obtained. The money was all lost in bad investments. A majority of the New South Wales Court of Appeal held that Youyang’s claim should fail for reasons of causation. As Handley JA explained, if the director who acted on behalf of Youyang ‘had been told about the form of the certificate he would not have been concerned and would have proceeded with the investment’.
The appeal to the High Court of Australia was argued as a case of compensation for loss. Senior counsel for the solicitors in breach submitted that the ‘issue is whether the required causal connection between breach and loss was established’ The submission was that ‘a trustee in breach of trust is not obliged to restore to the trust fund, or pay by way of equitable compensation to the beneficiaries, moneys which would have been lost if the breach had not occurred’. The High Court applied this causal reasoning but reached the opposite conclusion, endorsing the comments of Hodgson JA who dissented in the New South Wales Court of Appeal saying:
[I]f a trustee wishes to assert that a breach of trust caused no damage for the reason that the beneficiary would, if asked, have authorised the very action which constituted the breach of trust, then there is at least an evidentiary onus on the trustee to make good that proposition.
The case was argued, and therefore decided, by the High Court on these causal principles. But, the High Court nevertheless made a number of remarks that can be read as endorsing, in some contexts, the accounting liability approach described extrajudicially by Lord Millett. For instance, the High Court referred to Lord Millett’s explanation of Target that:
The plaintiff could not object to the acquisition of the mortgage or the disbursement by which it was obtained; it was an authorised application of what must be treated as trust money notionally restored to the trust estate on the taking of the account.
The High Court also distinguished Target on two grounds, one of which was that ‘the proposed commercial transaction, involving the provision of security to Youyang, was not after delay, as in Target Holdings, completed; the security was never provided and Minters should not have disbursed Youyang's moneys’. Precisely the same point could have been made about AIB v Redler.