Rescission and Awards of Interest

By Stephen Lee

In an earlier article, I dealt with interest in equity, with specific reference to the administration of trusts, and claims against trustees and other fiduciaries. This article deals with interest in the context of decrees of rescission.

It was seen in the previous article that interest in equity, including compound interest, can serve two goals, namely restitution for profit derived from the use of money and compensation for being held out of money. Those twin goals can be seen at work when rescission is sought as a remedy.

Take the case of a contract rescinded for misrepresentation. Where say the defendant is a vendor who exaggerated the worth of a business. On rescission the defendant will have to restore the purchase price at interest. The buyer may also have suffered trading losses, for which he is entitled to be indemnified, also at interest.

But in cases of rescission, it is not only the defendant who may have to pay interest. Sometimes the plaintiff has received money under or by reason of the contract and if so will have to restore that money with interest.

For example, when a constituent enters into a contract to sell property to or borrow money from a fiduciary, the constituent will commonly, as a condition of rescission, be required to restore that which was obtained pursuant to the contract at interest.^[1]

Historically, either 4% or 5% was regarded as the appropriate rate, depending on whether the trustee rate or a mercantile rate was justified, and commonly simple interest was awarded.^[2]  However, as in other contexts considered in the earlier article, more recent decisions moved away from the old 4%/5% rates, whilst still mindful of the need to distinguish between cases where a mercantile rate is appropriate and those where a lower rate should be applied. Modern courts may also be more willing to award compound interest when appropriate.

It is not useful to stay to analyse all of the old cases here. It would be surprising if the selection of the appropriate rate and the basis of the calculation simply turned on a distinction between who was the “innocent” party and who was the “wrongdoer”. That would be tantamount to admitting that an award of interest serves a punitive purpose.

On the contrary, the cases show that the ultimate enquiry is to seek what is just in the circumstances of the case which, in the rescission context, translates into doing what is “practically just” in order to achieve substantial restitutio in integrum. In approaching that ultimate question, once again particular regard should be had to one or both of the goals of (1) preventing a party from profiting from the use of the money (but not punishing a party for breach of fiduciary duty or unconscionable conduct) and (2) compensating (but not over-compensating) a party for being deprived of the use of the money. Equitable presumptions may assist in approaching these various tasks. But once again these presumptions do not replace the underlying enquiry.

It is no hard thing to conclude that a party who has deprived the other of money earned at least simple interest at least at the applicable trustee rate on the money, or that the party deprived would have earned at least that much on the money. The selection of the rate and basis of interest can be the result of inference based on slight evidence aided where applicable by presumptions. That should include a presumption that the plaintiff, had s/he not been deprived of the money would have made the most beneficial use of the money open to him/her.^[3]  It should also include a presumption that the most beneficial use was made of money where it was obtained by fraud. But doing what is practically just does not always mean that interest will be ordered for the full amount or for the entire period between payment and repayment.

Three well known House of Lords decisions are examples of interest awards at the trustee rate. The first is Erlanger v New Sombrero Phosphate Company. ^[4]  The second is Adam v Newbigging.^[5] The third is Spence v Crawford.^[6] It is helpful to stay to consider these.

Erlanger v New Sombrero Phosphate Company

In Erlanger, the promoters of a company purchased a Crown lease of an income-producing island in the West Indies in 1871 (Sombrero Island), and sold it to the company some days later at double the price.^[7] The syndicate had paid £55,000 for the island, and sold it to the company for £80,000 in cash plus £30,000 in shares. The purchase was approved by the board of directors, the membership of which had been arranged in such a way that proper scrutiny of the purchase transaction was unlikely to occur. It was subsequently ratified by a general meeting, attended by many of the investors who had subscribed for shares in the company following the issue of a prospectus. But they were not aware of the price that the vendors had themselves paid for the island, nor who the true vendors were. When the investors subsequently discovered the true facts, they caused new directors to be appointed, and the company sought to rescind the purchase.

At first instance, the Vice Chancellor dismissed the company’s bill without costs, but the House of Lords (delivering its judgment in 1878) upheld the decision of the Court of Appeal to set aside the purchase. As part of the decree, the syndicate was ordered to repay £80,000 with simple interest at 4% from the time of receipt of the money, and to give up the £30,000 worth of shares.^[8] In return, the company had to reconvey the lease of the island and account for any profit derived from the island in the meantime. No reasons were given for the award of interest. It may not have been in dispute. But it is plain that an award of that much was justified, as it could be inferred or presumed that interest at 4% was or would have been earned. But it is interesting to ponder the question why the interest award was so limited.

The chief protagonist, Baron Erlanger, was a banker. He was the prime mover behind the syndicate and held the greatest individual stake in the venture. The other members of the syndicate were friends and acquaintances whom Baron Erlanger persuaded to put up money to buy the island with a view to on-selling it at a profit; and he managed the enterprise on behalf of the syndicate.^[9] Whilst Baron Erlanger was privy to all decisions relating to the scheme or its execution, the rest of the syndicate was not.^[10] Also, it is necessary to consider what cash profit was left in the hands of the syndicate members. Of the total sale price of £110,000, £55,000 repaid the syndicate for their outlay to buy the island. Of the £55,000 gross profit, £30,000 was received by share issues to the syndicate members. It is unlikely the company would have paid dividends, although some of those shares may have been on-sold and the sale proceeds could have been used to make further profits.^[11] There were also costs involved in executing the scheme, including payments to solicitors and other agents. Therefore, only a small proportion of the £110,000 purchase price represented cash which the syndicate members could have used to earn further profits.^[12] An award of mercantile interest against the syndicate on the £80,000 ordered to be repaid may well have made the syndicate pay more than the profit they derived, and punished them for their breach of fiduciary duty. Moreover, given that little was known about the most of the syndicate members, and they were not privy to the fraud, there was not enough to presume that they earned mercantile interest on even the cash profits they derived from the scheme. Even though such a presumption could be made against Baron Erlanger, who was a financier and masterminded the scheme, it is not clear how much cash profit he had received from the venture, as opposed to shares. He had also offered, at an early stage of the dispute, to give up to the company the profit he had made in cash and shares from the transaction; but the other members of the syndicate did not make a similar offer.^[13] That, together with the delay until the House of Lords delivered judgment in 1878, after two hearings, may have contributed to the view that it would not have been just to award mercantile interest against Baron Erlanger let alone the whole syndicate.

Alternatively, compensatory reasoning did not justify an award of interest at greater than the trustee rate. It could readily be inferred or presumed that, if the true facts had been known and the company had not ratified the purchase, the company would have earned simple interest at the trustee rate on the money. But there was insufficient evidence to support anything more. The company, having been incorporated for the specific purpose of exploiting the phosphate on Sombrero Island, would either have been wound up or the objects of the company amended to allow for the company to carry on other activities. In the meantime, it was possible to infer or presume that truly independent directors would have invested the funds in authorised trustee investments at 4%.^[14] It would have over-compensated the company to award 5% on £80,000.

Adam v Newbigging

In Adam v Newbigging, Mr Newbigging was induced in 1882 to become a member of a partnership by innocent misrepresentations as to the financial condition of the business^.[15] The business subsequently failed. By a decision in 1888, the House of Lords held that Mr Newbigging was entitled to rescind the contract. It was further held that Mr Newbigging should have his capital repaid with interest at 4% from the times when the capital was brought in up to judgment, after deducting the sums drawn out by Mr Newbigging with interest up to the same time, and the Adams were to pay the balance to Mr Newbigging with interest at the same rate until payment.^[16] Mr Newbigging had sought 5% interest. But this could not be justified on a profit-stripping approach. The business operated at a loss, and there was no other reason to believe that the Adams had made a profit from the use of Mr Newbigging’s money. There was no fraud from which one could presume that a profit had been made by the Adams.^[17]

It was less obvious why the mercantile rate was not considered appropriate by taking a compensatory route. Mr Newbigging was in trade. The fact that this was his first business venture should not have altered that fact. Why was it not then presumed that he would (but for the misrepresentation) have made the best use of the money available to him, by entering into some other business of a similar kind? The answer could be that Mr Newbigging was still in the army, in India, when the misrepresentations were made and on the basis of which he was induced to give up his commission.^[18] The Court may have considered that it could not infer or presume that he would have gone into business if the misrepresentations had not been made. He may still have stayed in the army. Mr Newbigging was unlikely to have testified that he would have given up his commission anyway. In those circumstances, it was correct to conclude that he would have earned interest at the trustee rate, not mercantile interest, if he had not purchased the business.

Spence v Crawford

Spence v Crawford, a Scottish appeal decided in 1939, involved rescission by a vendor.^[19] Mr Spence, a holder of one half of the issued shares in a proprietary company, sold his shares to Mr Crawford, the other shareholder for £2,250. The purchaser induced the sale by fraudulently falsifying the accounts of the company. Of the purchase price, £900 was to be made up by Mr Crawford paying out a loan which the vendor had granted to the company, and £1,350 was to be paid in cash on deferred terms. The House of Lords held that Mr Spence was entitled to rescind. As part of the decree, Mr Spence was required (inter alia) to refund the £1,350 plus interest at 4% from the time of receipt, and pay a further amount to compensate Mr Crawford for a loss occasioned by reason of the transaction (arising in a respect that is not presently material to discuss), subject to Mr Crawford on the other side transferring back the shares and accounting for dividends received on the shares. The £900 did not come into play as it was actually repaid by the company, not by Mr Crawford.

Interest at 4% on the sale price of the shares (£1,350) was something which Mr Spence had offered to pay from the time of payment of the sale price, and the rate was agreed to by Counsel for Mr Crawford if Mr Spence were otherwise successful.^[20] It is not clear if the compensation payable by Mr Spence, or the sums due by Mr Crawford on account of dividends, carried interest. These sums were also the subject of agreement, with the House of Lords leaving it to the parties to agree on the amounts due “including interest where properly payable”.^[21] Whilst it is not clear, it seems that the parties may not have charged interest on the compensation and the dividends.^[22]

Even though it was the subject of agreement, an award of interest on the £1,350 sale price was plainly justifiable lest Mr Spence be left unjustly enriched, if not also to compensate Mr Crawford for loss of use of the £1,350. It could certainly be inferred or presumed that 4% was earned by Mr Spence. But given the agreement of Counsel there was no need for the Court to consider whether a mercantile rate was justified. Most likely 4% was appropriate. The report discloses no evidence that Mr Spence was in trade. He did have his stake in the company that he had sold to Mr Crawford, but there was presumably no evidence that Mr Spence was otherwise in trade or that he had used the £1,350 to earn further profits. Given that Mr Spence was not a fraudster, but the innocent victim, it could not be presumed that he earned a mercantile rate.

Looking at matters from a compensatory angle, the report does not refer to any evidence that Mr Crawford (the purchaser) had borrowed to pay the £1,350. He may have funded at least the £1,350 out of the £4,067 in dividends he received on the shares the subject of the action for which he had to account and/or out of a similar amount he would have received on his own (previously held) shares. Mr Crawford was in trade, given his own previously held shares in the company. But it was not necessary to explore whether he would otherwise (but for the fraud) have invested the money in the company to earn further profits, and even if he would have done so he only would have earned one-half of the profits. Or perhaps it was not appropriate to award higher than 4% given the extremely low interest rate environment at the time. ^[23]

Mercantile Interest

It is now convenient to turn to some cases where mercantile interest was awarded. In two older cases where the vendor claimed rescission on the ground of fraudulent misrepresentation, the vendor was required to repay the purchase price received at 5%.^[24] Whilst the reports of these cases are unclear, both seemed to involve income producing real properties. In those circumstances, it may have been inferred or presumed that the purchasers would have used the money in business if they had not made the particular purchases that were set aside; perhaps by buying an alternative business. It was not clear whether the purchaser had borrowed to fund the purchase price. So the decisions are justifiable by adopting a compensatory path to interest. There was nothing in the reports that would have justified a conclusion that the vendors (the innocent parties) made 5% on the purchase money.

There are also a number of cases involving claims to set aside usurious bonds^[25] or “catching bargains” with expectant heirs and reversioners,^[26] where the plaintiff’s relief was conditioned on restoring monies obtained by way of loan together with interest at the then mercantile rate of 5%. In an 1898 Victorian catching bargain case, 6% was allowed having regard to the higher rates then prevailing in that Colony.^[27] In cases where the borrower seeks rescission, a condition of relief is typically restoration of the money borrowed and interest. In this respect, it would not usually be reasonable to apply the trustee rate because the lender is in the business of lending money at commercial rates, and the borrower has had the benefit of the use of the money, a benefit which otherwise they would have had to pay for. In these circumstances, fair value for the use of the money (restitution measure) or fair compensation for the loss of the benefit of it (compensation measure) requires a commercial rate, in the older cases typically 5%.

In one case, the lender was not in the business of lending, but a mercantile rate was still appropriate because the borrower would have had to pay commercial rates to get the money on the market. ^[28] That was a case where a solicitor was a chargee of the client, and had acquired the property of his clients at a court-ordered sale in breach of the purchasing rule, and by using fraud and pretence.

The tenor of these loan cases was endorsed by the High Court in 1997, as shall be seen below.^[29]

The next example of an award of mercantile interest is a 1917 English case.^[30] There, a stockbroker, pretending to execute a mandate to buy shares in a specific company for a client, sold his own shares in that company to his client. The broker had acquired those shares in virtue of him having been a promoter in that company. The broker did not obtain the client’s fully informed consent. The client elected to rescind upon discovering the fraud, the shares having since fallen in value. The broker was ordered to refund the purchase price, together with interest at 5%, less a credit for dividends which the plaintiff had received in the meantime. In return, the plaintiff had to re-transfer the shares to the broker. Reasons were not given for applying the mercantile rate, but it was clearly correct. The stockbroker was in the business of stock speculation and he had also acted fraudulently. In the absence of countervailing evidence, it was therefore appropriate to presume that the broker used the purchase price in his trade and earned mercantile interest on it. It is not clear why compound interest was not ordered.

Alati v Kruger

Another example of mercantile interest is the well-known High Court decision in Alati v Kruger, a 1955 appeal from Queensland.^[31] This was a case of rescission by the purchaser. Mr Kruger was induced to buy Ms Alati’s fruit business at a cost of £700 in reliance on fraudulent misrepresentations including one that the average takings were £100 per week. The takings immediately proved to be much less than that, but proceeded to get even worse in part because a supermarket opened across the road (a fact of which Ms Alati had been aware). In many weeks Mr Kruger made losses, even without allowing wages for himself. Upholding Mr Kruger’s prompt rescission of the purchase, the High Court ordered (inter alia) that Ms Alati (the vendor) restore the purchase price of £700, and Mr Kruger was to restore chattels and an inquiry was ordered into what sum if any Mr Kruger should pay to Ms Alati by way of allowance for stock-in-trade and other benefits received by Mr Kruger under the contract which could not be restored. The High Court ordered Ms Alati to pay interest at 5% on £700 from the date of payment until repayment (as had the trial judge).^[32]

No reasons were given by either the High Court or the trial judge as to why 5% was selected as the rate of interest. Ms Alati had never actually received the £700, as Mr Kruger had paid the purchase money to the real estate agent, who paid £657 into Court after deducting agent’s commission.^[33] It is hard to imagine that 5% would have been earned on those moneys in the court’s trust account. That payment into court was about one month after settlement of the purchase contract.^[34] Therefore, Ms Alati did not profit from the use of the purchase money, and the award of mercantile or any interest could not be justified on the basis that she did. It could only be justified on the ground that Mr Kruger needed to be compensated for having been held out of the £700. The various reports do not say whether Mr Kruger had borrowed to fund the purchase. Nor do they refer to any evidence as to whether he was otherwise in trade. He had not run fruit businesses before. But Mr Kruger was in trade because of the purchase that he had been deceived into making. The case should probably be seen as one where it was inferred or presumed that Mr Kruger would have bought another (profitable) business if he had not made this purchase. In that way, he would have earned mercantile interest on his money but for this purchase, assisted by a presumption that he would have made the best use of the money available to him.

An interesting question is why compound interest was not ordered. The matter may not have been argued. The contract was made on 15 June 1954 and presumably settled about a month after that. The moneys were paid directly into Court by the agent around the time proceedings were commenced in July 1954. Judging by the High Court’s order, that is where the moneys remained until the High Court’s judgment on 29 November 1956. As Ms Alati never had the use of the moneys, it could not be presumed that she earned compound interest. As for Mr Kruger, there was presumably no evidence that he incurred borrowing costs at compound rates. Perhaps it was thought that there was insufficient evidence of the activity he would have carried on to support a presumption that he would have earned compound interest. It was probably also relevant that it was only a little over two years since Mr Kruger paid the purchase price.

Munchies Management Pty Ltd v Belperio

A somewhat unusual set of facts arose in a 1988 Full Federal Court case, Munchies Management Pty Ltd v Belperio.^[35] This matter, which originated in the South Australian District Registry, concerned s 87 of the then Trade Practices Act 1974. It was a case, like Alati v Kruger, where the plaintiffs had purchased a business, in this case a restaurant, bar and cafeteria business, in reliance on misrepresentations from the vendor which were fraudulent in the Derry v Peek sense (although fraud was not necessary to be shown to make out a case for contravention of s 52). In setting aside the contract under s 87, the Full Federal Court required the refund of the purchase price, together with interest at 10% from the date of payment to the date of court orders. It did so because such orders “may properly be considered as reducing the loss or damage suffered within the sense of s 87 of the Act”.^[36] But that does not mean that the case is unhelpful in regard to interest awards in equity; on the contrary, the Court seemed to regard it useful to derive assistance from rescission in equity in its approach to s 87.^[37]

The Court did not describe the rate in terms of the language of mercantile versus trustee rate. The Court noted that this was the rate adopted by the trial judge.^[38] Forster J (the trial judge) did not explain why he selected 10% either.^[39] Yet the fact that interest was limited to 10% was squarely in issue in the appeal. At that time, interest rates were very high. In the writer’s view, this rate was the result of a choice that had to do with the somewhat unusual facts of the case and the legislative confines within which s 87 of the Trade Practices Act operated.

If the claim had been brought in equity, it could have been presumed that the vendor earned a commercial rate of interest on the money, as he had been fraudulent. However, a profit-stripping approach may not be appropriate for s 87. In like manner, it may not have been appropriate to presume in a s 87 case that the vendor earned compound interest. But even in equity, compound interest may not have been awarded anyway, for two reasons. First, the purchasers acted quickly in rescinding. The contract was dated 14 November 1986. Settlement occurred in January 1987. The purchasers rescinded on 24 April 1987. Proceedings were commenced on 12 August 1987. It appears that the purchase price was repaid with interest on about or shortly after 9 June 1988, the date of the judgment of Forster J. The vendors had therefore only been kept out of their money for 1.5 years. Second, about one-half of the purchase price represented the discharge of a chattel lease. This constituted a saving to the vendor, not ready cash. It was not explored whether the vendor saved itself compound interest.

On the other hand, one would have thought that a mercantile rate of interest was justified based on compensatory reasoning. The Belperio’s were in trade in the sense that they purchased the business the subject of the proceedings. They already had other business interests, namely residential property investments and a market garden^.[40] They had borrowed virtually the entirety of the purchase price for the business, at rates of up to 17.5% and no doubt paid compound interest. It was found that the Belperio’s, to their knowledge, could not have serviced the borrowings out of the revenue from the restaurant business even if the representations had been correct. Those facts were enough to warrant an inference that the Belperio’s would have purchased some other business and would have earned profits for which a mercantile rate of interest was proper compensation.

The Belperio’s had sought the full amount of interest they had paid on the borrowings. This was sought either as damages under s 82 (by analogy to deceit) or by way of an indemnity for trading losses under s 87 (by analogy to indemnity in equity). That claim was rejected as lacking the appropriate causal connection or too remote:^[41]

The indemnity thus was limited to detriments suffered as “a direct consequence of the fraud”; accordingly, supervening causes such as an error of business judgment by the plaintiff in the arrangement of his affairs by, for example, borrowing from a third party greater sums than he could repay or service, may take a loss beyond the scope of an indemnity: cf Gould v Vaggelas (1985) 157 CLR 215 at 221—2 ; 56 ALR 31; Yorke v Ross Lucas Pty Ltd 69 FLR at 136; Milner v Delita Pty Ltd (1985) 61 ALR 557 at 581…. [I]t is apparent that the purchasers made a decision to borrow a very high proportion of the purchase price in the knowledge that even if the representations as to the turnover of the business, upon which they relied, had been made good, the prospective profits of the business would have been insufficient to service the purchasers’ borrowings. The interest charges were a cost that the purchasers were prepared to bear and were not (in the sense we have earlier explained) an item of loss suffered by reason of or as a result of the falsity of the representations. The purchasers must have carried the hope that they had the capacity to meet these costs from their other resources or by improving the performance of the business.

The Belperio’s loss was ameliorated but only in part by the Court’s decision to award interest on the unrefunded purchase price, which was allowed at 10% simple interest. As noted above, neither the trial judge nor the Full Court explained the choice of 10% simple interest.^[42] If it was appropriate to compensate the Belperio’s for losing the opportunity to make commercial profits from another viable business, or even to allow compensation for the borrowings, 10% seems below commercial rates at that time. The practice of the Federal Court at that time, when awarding interest under s 51A of the Federal Court of Australia Act 1976, was generally to apply the rates adopted by the courts of the State in which the Court sat.^[43] There was no reason why a similar practice could not apply in cases under s 87 of the Trade Practices Act. But, at that time, the Supreme Court of South Australia adopted 18-19% as the rate for statutory pre-judgment interest.^[44] The Supreme Court adopted 10% as the rate for overdue legacies, more akin to a trustee rate.^[45]

In the writer’s view, the rate of 10% simple interest was adopted as a kind of “rough and ready” rule to mould the remedy to fit the facts. The Belperio’s were partly to blame because they borrowed too much. It was clear they could not get mercantile interest on the whole sum borrowed. The calculation of interest would be different if they had paid a lower price for another suitable business, and all the more so if they had borrowed a lesser proportion of the overall purchase price of that notional business. If they had to pay interest to a commercial lender on those borrowings in a lesser principal amount, the interest paid by them would be less than the interest they in fact paid. On the other side, there would presumably be a question of interest foregone on the increased cash they would have had to put in to lower the gearing of the investment. It could also be looked at in terms of the profits the Belperio’s could be expected to earn if they had bought another viable business. It would be very difficult to quantify all these imponderables as an exact science. In the writer’s view, what the Court did was take a lower rate, 10% simple interest, and apply it to the whole of the purchase price in fact paid instead of working out a discounted purchase price and applying a mercantile rate to that discounted amount. As part of that exercise, simple interest was probably sufficient to compensate the Belperio’s, especially given the brevity of the period between the settlement of the contract and repayment.

An alternative explanation is that it was inferred that the Belperio’s lost simple interest at the trustee rate, and 10% was regarded at that time as an appropriate trustee rate.

The case re-affirms that the purpose of an award of interest is not to punish a wrongdoer, and that interest can be limited by reference to considerations of causation and remoteness. It also an example of interest being awarded to compensate a party for the cost of borrowing.^[46]

Compound Interest

Some rescission cases will now be mentioned where compound interest was awarded. In a 1994 decision of the Full Federal Court, it was recognised that a purchaser of a truck induced by innocent misrepresentation could, on setting aside the sale, have repayment of the purchase moneys together with interest at 12.25% (a rate agreed at trial), calculated at compound rates, because the purchaser incurred compound interest on borrowings used to purchase that truck^.[47] However, interest was not allowed for the whole period from the time of purchase in 1989, but only from the time of the election to rescind one year later. That is because the purchaser had the opportunity to use the truck in its business for one year, which offset any right to interest during that period.

A leading case where a fiduciary was required to pay compound interest as a condition of rescission was Maguire v Makaronis, a 1997 appeal from Victoria^.[48] There, the High Court held that borrowers could rescind a mortgage for breach of fiduciary duty, but only on terms that they repay the loan amount together with reasonable interest. The loan was an interest-only loan by way of bridging finance to enable Mr and Mrs Makaronis to purchase a poultry farm. The mortgagee was Messrs Maguire and Tansey, the solicitors in the purchase transaction for Mr and Mrs Makaronis. The solicitors did not disclose to their clients that they were the mortgagees. Mr and Mrs Makaronis had believed that the mortgage had been given to the Commonwealth Bank. The bank was the ultimate source of the bridging finance, but the solicitors had interposed themselves in the transaction and gave guarantees to the bank. The Mortgage, which was dated in 1990, provided for interest at 24% reducible to 22% if paid on time. This was not out of line with prevailing interest rates at the time.

The High Court held that, as a condition of relief, the purchasers should pay the sum outstanding under the Mortgage together with interest at commercial rates as allowed from time to time by the Supreme Court of Victoria, calculated at half yearly rests. The matter was remitted to the Victorian Court of Appeal to work that out.

The solicitors had argued that the Mortgage rate of 22% should be applied. The Court rejected this argument. Even assuming that 22% was evidence of commercial rates in June 1990, “it is a matter of common knowledge that interest rates have fallen since”. If 22% were applied, there was a risk that the solicitors would profit. Brooking J, the dissenting judge in the Victorian Court of Appeal with whose reasons the High Court substantially agreed, adopted 9% calculated with half yearly rests based on the analogy of the trustee rate and what was obtainable from authorised trustee investments. As to that, Brooking J had directed an inquiry before the Senior Master. The High Court however thought that analogy was inappropriate and that such a rate could disadvantage the solicitors, and preferred commercial rates as allowed from time to time by the Supreme Court of Victoria calculated at half yearly rests.

In requiring Mr and Mrs Makaronis to submit to terms, the primary consideration for the High Court was the ascertainment of what was fair value for, or compensation for, the use of the money by Mr and Mrs Makaronis over a period of (by that time) seven years from June 1990, having due regard to the nature of the mortgage transaction of which they had received the benefit.^[49] In working that out, the Court looked for what was “practically just”: that which would not allow the solicitors to profit from their breach of fiduciary duty, but also would not punish them for it or give the borrowers a windfall. The Court considered that a mercantile rate of interest was required, applying the analogy of the loan cases discussed above. Here, however, practical justice also required compound interest, presumably because the solicitors themselves would have had to pay compound interest to the Commonwealth Bank.

Discretion

Finally, doing what is just or “practically just” also means that interest is discretionary in the sense that the Court will do nothing that is unreasonable in the particular circumstances.^[50] Examples where interest was declined or limited to achieve justice between the parties have already been given.^[51] Delay could be relevant, but would not usually justify a refusal to award any interest unless it was so excessive as to be inequitable to allow interest.^[52] In that respect, interest will probably stand or fall with the decision on whether delay requires a refusal of rescission.

It militates against interest and especially compound interest if the party claiming interest benefitted from the use of the money. This is hardly surprising given that one of the purposes of an award of interest is to compensate a party for having been kept out of money. Fuller v Meehan is an example of this, discussed in the earlier article in the context of constructive trusts as a proprietary remedy. ^[53] A rescission example is a 1985 English decision, O’Sullivan v Management Agency Ltd.^[54]

Mr O’Sullivan was a musician. From about 1970, when he was 23, he entered into management, publishing and recording agreements with Gordon Mills and companies associated with him. Pursuant to those agreements, Mr O’Sullivan was to use exclusively the services of the defendants and assigned copyright in compositions and recordings for 50 years. The royalty payable to Mr O’Sullivan was less than would have been secured had he obtained independent advice (which he had not obtained). As a result of the relationship, he gained worldwide fame and enjoyed significant financial success, due in significant part to the endeavours of the defendants. Some ten years on, he claimed rescission of the agreements, and delivery up of the compositions and recordings. He succeeded, and the defendants were required to account for the profits made under the agreements, subject to an allowance for skill and labour including a profit element though less than the profit they would have derived if Mr O’Sullivan had received independent advice. The Court of Appeal allowed interest on the profits, but not compound interest (subject to an exception which was conceded).^[55] Although the defendants had used the profits in trade, the profits were used to promote Mr O’Sulliivan and he enjoyed the fruits of that.

Conclusion

The cases discussed in this and the earlier article show that interest, like other equitable relief, is ultimately informed by the nature of the particular equity and what is “practically just”. These things will, of course, depend on the evidence. However, the power to award interest must be exercised for proper purposes. Those purposes are to prevent an unjust enrichment or to compensate for loss.

Stephen Lee, Barrister

Footnotes

1. It is beyond the scope of this article to consider allowances for occupation rent or improvements. But in principle, interest could apply to such allowances as well.
2. Kerr on Fraud and Mistake 6^th ed 1929 (SE Williams ed) pp473-4, 476, 477, 481, 494; Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,320-2 .
3. In the writer’s view, this presumption ought not to be limited in its application to beneficiaries. In any event, parties against whom rescission is sought are constructive trustees.
4. (1878) 3 App Cas 1218.
5. (1888) 13 App Cas 308.
6. [1939] 3 All ER 271.
7. (1878) 3 App Cas 1218. For the decree see (1877) 5 Ch D 73,125.
8. Some of the shares seem to have been sold since, and the defendants had to account for the proceeds of the sales with interest at 4% from the time of receipt.
9. 1977) 5 Ch D 73, 75-6, 104-5.
10. (1877) 5 Ch D 73, 105.
11. But that was dealt with by the order referred to in footnote 7.
12. The syndicate members also lost the use of their cash (assuming they had not borrowed), but the correlative account of profits against the company would remedy that.
13. (1878) 3 App Cas 1218, 1222, 1253. It is also not clear from the judgment what Baron Erlanger had done with the profits after making the offer. He might have set it aside in an account bearing interest at 4%.
14. If it were resolved to wind up the company, it would not lie in the mouth of fiduciaries to contend that interest should only run until the time when the available surplus would have been ascertained and ready for distribution to shareholders.
15. (1888) 13 App Cas 308.
16. The orders are summarised at Newbigging v Adam (1886) 34 Ch D 582, 585.
17. Another innocent misrepresentation case where there was not enough to presume mercantile interest was earned by the defendant or was lost by the plaintiff is Root v Bradley [1960] NZLR 756, 763 which allowed 4% simple.
18. (1886) 34 Ch D 582, 589.
19. [1939] 3 All ER 271.
20. The purchaser could not have complained about loss of the £ 900, or the loss of its use. That was presumably a loan to the company on interest free terms intended to provide working capital for the company. The purchaser was perfectly free to call in that loan from the company at any time. Also, the purchaser no doubt received a benefit from that loan as he would have received dividends on his own (previously held) shares. He had held 2295 shares of his own prior to the transaction.
21. At p284.
22. See the table at p284.
23. Forrest Capie & Alan Webber, A Monetary History of the United Kingdom, 1870-1982 (George Allen & Unwin 1985), vol 1, Table III (10), pp494-5.
24. Donovan v Fricker (1821) Cas in Chan 165; Turner v Harvey (1821) Cas in Chan 169, both referred to in Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,321-2.
25. Referred to in Maguire v Makaronis (1997) 188 CLR 476-7, and Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,322.
26. Referred to in Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,320-2.
27.  Moloney v The Trustees Executors and Agency Co Ltd (1898) 24 VLR 297, 303.
28.  Popham v Exham (1860) Ir Chancery Rep 440, referred to in Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,321-2.
29. Cf also the observations of Lord Goff in Westdeutsche Landesbank Girozentral v Islington LBC [1996] AC 669, 691C-F.
30.  Armstrong v Jackson [1917] 2 KB 822.
31.  Alati v Kruger (1955) 94 CLR 216.
32. (1955) 94 CLR 216, 239; [1956] St R Qd 306, 311.
33. [1954] QWN 40.
34. [1954] QWN 40; (1955) 94 CLR 216, 221.
35.  Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274.
36. (1988) 58 FCR 274, 288B.
37. (1988) 58 FCR 274, 288C.
38. (1988) 58 FCR 274, 291B.
39. [1988] FCA 189 [49].
40. (1988) 58 FCR 274, 277C.
41. (1988) 58 FCR 274, 285B-C, 290C-D. For a similar case, see Yorke v Lucas [1982] FCA 180 (decided under the law prior to s 51A of the Federal Court of Australia Act 1976).
42. (1988) 58 FCR 274, 291B.
43. See eg Elsinora Global Ltd v DCT [2006] FCAFC 156 [66]. But see now Practice Note CM 16. Section 51A of the Federal Court of Australia Act 1976 had been inserted by Act No. 165 of 1984, Schedule 1.
44. Supreme Court Rules (SA) 1987 rule 84.19 and Third Schedule. The Rules were dated 12th August, 1986, and came into operation on 1st January, 1987. Even if those Rules did not apply because of “accrued rights” reasoning, which is not certain as pre-judgment interest may be characterized as procedural, it is still unlikely that the practice of the Supreme Court under the prior 1947-1986 Rules would have been to award only 10% for statutory pre-judgment interest, if the case law in other states is any guide.
45. Supreme Court Rules (SA) 1987 rule 85.23.
46. In Haydon v Jackson [1987] FCA 491, the Full Federal Court cited Fitzgerald J’s observations concerning s 87 in Sanrod Pty Ltd v Dainford Ltd [1984] FCA 154, (1984) 54 ALR 179, 191: “… when money is paid in consequence of misleading conduct, the loss suffered by that conduct includes not only the money paid but also the cost of borrowing that money or the loss from its investment, as the case may be…”.
47.  JAD International Pty Ltd v International Trucks Australia Ltd (1994) 50 FCR 378.
48. (1997) 188 CLR 449.
49. For use of the concept of compensation, see also Re Dawson [1966] 2 NSWR 211, 218; Automobile and General Finance Co Ltd v Hoskins Investments Ltd (1934) 34 SR (NSW) 375, 391 per Long Innes J. See also Spence v Crawford [1939] 3 All ER 271, 279-80.
50. O’Sullivan, Elliott & Zakrzewski, The Law of Rescission OUP p402. See also Kerr, supra, p479, which suggests that that interest will not be allowed if there was negligence on the part of the claimant. That suggestion might be overbroad.
51. See eg JAD International Pty Ltd v International Trucks Australia Ltd (1994) 50 FCR 378.
52. Erlanger v New Sombrero Phosphate Company (1878) 3 App Cas 1218, 1282.
53. [1999] QCA 37.
54. [1985] 1 QB 428.
55. At 473-4.