Trusts, Fiduciaries and Awards of Interest in Equity
Interest is a vitally important topic in commercial litigation. Without it, claimants may be undercompensated and wrongdoers may profit from the use of money or property. The interest component of a judgment may represent a substantial proportion of an overall money award. In Duke Group v Pilmer, for example, interest accounted for $41m out of an overall award of $117m against the accountants; the interest awarded against the directors was even higher. The possibility of high interest awards may be heightened by compound interest, a jurisdiction which has long been recognised in equity.
Despite its importance, little attention tends to be devoted to the principles upon which interest is awarded and the basis on which it is calculated. Reasons given for judicial decisions on interest, insofar as reasons are given at all, tend to be brief. Sometimes (in academic writings as well as decisions) emphasis is placed on criteria which do not direct attention to the underlying question which the court is required to ask. The risk is that practitioners are left without adequate guidance when advising clients. Nowhere is there more need for elucidation of the principles upon which interest is awarded than the jurisdiction to award interest in equity. In recent times, some attention has been devoted to interest under statute (where compound interest is not available), and as well interest at common law following Hungerfords v Walker (1989). But the same trend has not been evident in relation to the topic of interest in equity.
Part of the difficulty is that the jurisdiction to award interest in equity is capable of arising in a wide variety of contexts. This includes fraud, rescission, specific performance, equitable tracing claims, contribution and recoupment, relief against forfeiture, the taking of accounts as between co-tenants or on the winding up of a partnership or in the administration of trusts and deceased estates, interest on legacies, account of profits, equitable compensation, when the Court imposes terms, and in many other areas. The jurisdiction of courts of equity to award interest in some areas has been confirmed by statute. Also, statutory remedies sometimes carry interest by analogy with their equitable counterparts, such as in the case of an account of profits for intellectual property rights.
Against this background, it is hardly surprising that Lord Goff should remark that the “law of interest has developed in a fragmentary and unsatisfactory manner, and in consequence insufficient attention has been given to the jurisdiction to award compound interest”.
Indeed, the diversity of the contexts in which interest can arise in equity makes it hard to identify common themes running through the cases across these different remedial contexts. But common themes there are. The particular remedial context in which the question arises is not irrelevant. Without understanding the remedial context it is difficult to understand the decision made with regard to interest. But, as always in equity, it is necessary to look through the form to discover the substance that lies underneath.
The ultimate question in awarding interest is: what does the justice of the case demand? This means that equity will not award interest, just as it will not grant other relief, if it would be inequitable to do so. However, that does not mean that there is an “at large” discretion. As in other areas of equity, the jurisdiction is to be exercised for proper purposes and within settled principles. 
There are two purposes of interest awards in equity. The first is to prevent a party from gaining an unjust benefit or enrichment. The epitome of this is the principle that a main purpose of the award of interest is “to prevent the trustee from making a profit out of his breach of trust”. The second purpose of interest is to ensure that adequate compensation is given to a party for being kept out of his or her money and for having lost the opportunity of earning profits or interest on it. Lord Denning MR expressed this view when he said, “mere replacement of the money – years later – is by no means adequate compensation, especially in days of inflation”.
Those goals are not opened ended. They have limits. Preventing unjust enrichment does not mean punishing a party, even though they acted wrongly. Lord Wright put it: “Though the defendant has been fraudulent, he must not be robbed, nor must the plaintiff be unjustly enriched”.
But the nature of these twin goals means that, where a person recovers money in equity, an award of interest will very nearly always follow. This is an empirical observation. Except in unusual circumstances, presumptions are available (when needed) which prove either the making of a profit from the use of the money or a loss from being deprived of it. And there will rarely be equitable defences that operate to defeat interest without defeating the principal claim entirely. It is true that there can be and often are countervailing circumstances, for example where the interest claimed would overcompensate a claimant or allow a defendant to benefit from wrongdoing; lack of causal connection or remoteness; but not delay per se. But these usually go to the quantum of interest, not to whether there should be interest at all.
Sometimes, equitable presumptions are seemingly elevated into rules. Often, a reference to a presumption is intended as no more than shorthand for the conclusion that a party is entitled to interest on the instant facts, because the presumption was not rebutted. But it should not ever be forgotten that presumptions do not replace the ultimate question. Assuming the principal claim succeeds and there are no circumstances making an award of interest inequitable, the question(s) to be asked are simply whether a party made a profit from the use of the money (and if so what profit) or whether a party suffered a loss by being held out of the money (and if so what loss). There are presumptions about the making of a profit or loss, about interest rates and about the basis of interest. For example, the presence of fraud gives rise to various presumptions considered below. But presumptions are all they are. Evidence can be led to rebut or to confirm them. The availability of such presumptions may mean that, empirically speaking, mercantile interest and/or compound interest, is more likely to be awarded when fraud is present. But that does not mean that the ultimate enquiry is whether or not the defendant was fraudulent.
This is subject to a qualification. There are some cases where a presumption does properly rise to the level of a rule. For example, there may be policy reasons why a fiduciary should not be permitted to raise a certain contention of fact at all. But, such cases aside, the presumptions referred to earlier are rebuttable by evidence.
It is the writer’s intention in this article to elucidate the above principles by showing them at work in the cases, in the context of trusts and fiduciaries. This is where the case law is particularly rich on the topic of interest, and also where there has been a spate of recent activity by the courts, especially in the last few decades. It is territory which is likely to be of particular practical relevance to litigators.
The present article will address equitable interest in turn in each of the main remedial contexts in which interest arises within the scope just mentioned. They are: account for the administration of a trust, account of profits, equitable compensation and proprietary remedies. Rescission is outside the scope of this article, but it is also fertile ground for interest in equity. It deserves separate treatment. It is not dealt with here to avoid making this article any longer than it already is.
Liability to account for the administration of a trust
In claims against trustees and other fiduciaries, interest is available in equity as an incident of the personal remedy of account. This includes an account of the administration of a trust.
A leading example is Attorney General v Alford. There, an executor and trustee, who had a duty by the will to apply the residuary estate to certain charitable purposes, retained the residuary estate in his hands for over ten years without informing anyone of the existence of the charitable trust. The defendant, a solicitor, made investments of some of the funds in 3 per cent consols, claiming to have done so to better secure the capital of the trust. The Lord Chancellor concluded that the defendant had not intended to appropriate the money to his own use, but had misconceived and neglected his duties nonetheless. His Lordship held that the defendant should pay simple interest at 4 per cent, but no more, on the whole of the net residuary estate and on the income that was received on such investments that he did make. In so holding, Lord Cranworth LC stated:
What the Court ought to do … is to charge [the trustee] only with the interest he has received … or which it is justly entitled to say he ought to have received, or which it is so fairly to be presumed that he did receive that he is estopped from saying that he did not receive it.
The defendant was chargeable with interest at 4 per cent, because “it is presumed that he must have made interest, and four per cent is that rate of interest which this Court has usually treated it right to charge”. His Lordship likened it to a case of “executors and trustees having money in their hands which they ought to invest and do not invest”. In other words, the defendant had a duty to invest the funds in a manner that would have achieved returns not less than, but also not greater than, those applicable to ordinary prudent trustee investments. The Court dismissed an argument that the defendant should pay 5% calculated with annual rests, because the evidence showed that the defendant had not earned 5 per cent and had not acted fraudulently to benefit himself such as would support a presumption that he earned 5 per cent.
Three typical situations
It is convenient to distinguish between three main situations in which interest is typically awarded, although the categories can and do overlap in practice.
The situation is where a trustee (including a constructive trustee ) has wrongly withheld trust funds or converted them to his/her own use. On taking an ordinary (or “common”) account for the administration of a trust, the availability of interest does not depend on whether the trustee has acted fraudulently or innocently. As Long Innes J observed in Nixon v Furphy:
This practice of the Equity Court as regards purely equitable demands is not confined to cases where the accounting party has been guilty of any wrongdoing, but extends practically to all cases in which he, in the contemplation of a Court of Equity, must be regarded as a trustee or quasi-trustee who has retained moneys to which he is not entitled and has thereby been the cause of the true owner losing the opportunity of earning interest on the money to which he was entitled.
The common account calls on the trustee to account for what s/he received and of what has become of it. In such a case, proof of fault or loss is not required (although it is often present). If trust property has been wrongly withheld, “wrongly” in the sense of contrary to the terms of the trust, there is power to order the trustee to pay the amount found to be due to the person entitled, together with interest. Whether and when an account serves compensatory or restitutionary goals, or both, is much debated, and this topic will be returned to below. Street J remarked in Re Dawson, “The Court’s jurisdiction in selecting the appropriate rate of interest is exercisable solely for compensatory purposes.” By the use of “solely”, His Honour was distinguishing and eschewing punitive goals.
A variation on the above theme is where the trustee has converted trust funds to his or her own use and earned interest on those funds, where presumptions may be brought into play. Wallersteiner v Moir [No 2], discussed further below, could be viewed as an example of this.
The situation is where a trustee has misapplied trust property. An example is paying trust money to someone not entitled to it. This could be done fraudulently, as occurred on one possible analysis of the facts in Wallersteiner v Moir [No 2]. Or a misapplication could be the result of negligence, as occurred in Alemite v Lubrequip Pty Ltd, discussed below. A trustee may make an improvident or speculative investment causing loss to trust corpus. That trustee can be required to restore the lost capital in an action for a common account, together with interest which the trustee ought to have received. Or trust funds might be placed in an investment with an inadequate return, as happened in Attorney General v Alford (which case might also be analysed as one of a trustee withholding trust funds). Street J said in the oft-cited case of Re Dawson: “The general principle is that where a trustee has, through his breach of trust, occasioned loss to the trust estate then he is liable to make good that loss, together with interest”.
In Re Dawson itself, the deceased left assets in New Zealand and Australia. He appointed his son, Percy Dawson, as an executor. Percy wanted to transfer Â£4700 in funds realised from the sale of the New Zealand assets to New South Wales and to loan those funds to two companies in which he was interested. But it was illegal to transfer that amount of money across the Tasman. Percy therefore made a surreptitious deal with one Raymond Nelson to bring the funds into New South Wales by subterfuge. Mr Nelson absconded with the money and was never seen again. The New South Wales Supreme Court held that Percy’s estate was liable to account for the moneys lost to the estate at the exchange rate applicable at the date of the order together with interest at the mercantile rate of 5%. More will be said about this case below.
A situation is where, although the trustee never received trust property, he ought to have received it and will be obliged to account as if he did. This is referred to as an account on the footing of wilful default. In this sense, “wilful” is not limited to conscious wrongdoing, but can include negligence. If the trustee has failed to get in property, either because of fraud or because of negligence, the trustee can be required to account for the value of that property lost to the trust together with interest. For the purposes of taking the account, the trustee is treated as if s/he had, and is presumed to have, received the property and interest.
 Duke Group Ltd (in liq) v Pilmer (1999) 31 ACSR 213 (not challenged in HC: (2001) 207 CLR 165).
 Hungerfords v Walker (1989) 171 CLR 125 (where, incidentally, compound interest was recovered).
 Cf Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285 .
 See Alati v Kruger (1955) 94 CLR 216, 230; Maguire v Makaronis (1997) 188 CLR 449, 475-7; Kerr on Fraud and Mistake 6th ed 1929 ed SE Williams, p467 et seq; JLR Davis, “Interest as Compensation“, p137 in PD Finn (ed), “Essays on Damages”, LBC 1992; O’Sullivan, Elliott & Zakrzewski, The Law of Rescission OUP p401-3.
 Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285 ; Davies v Littlejohn (1923) 34 CLR 174, 185-6; International Railway Co v Niagara Parks Commission  AC 328; Davis, “Interest as Compensation“, supra, pp138-9; Cassidy (1997) 71 ALJ 514, 525.
 Westdeutsche Landesbank Girozentral v Islington LBC  AC 669, 727-9.
 Morgan Equipment Co v Rodgers [No2] (1993) 32 NSWLR 467, 486-7; AE Goodwin Ltd v AG Healing Ltd (1979) 7 ACLR 481; Halsbury’s Laws of Australia [370-1130].
 Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285 .
 President of India v La Pintada Compania  AC 104, 116; In re Tennant (1942) 65 CLR 473. But compare Re Diplock  Ch 465, where an award interest against the charities was not justified on the particular facts.
 Maguire v Makaronis  V Conv R Â¶54-533 per Brooking J at p66,320-1.
 Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285 .
 See eg Harrison v Schipp  NSWCA 13.
 See eg Nelson v Nelson (1995) 184 CLR 538; Maguire v Makaronis (1997) 188 CLR 449.
 See eg Halsbury’s Laws of England 4th ed volume 32 “Money”, paragraphs 109, & 112 nn 4 &5.
 See eg ss 27(1)(c) & 45(1) Partnership Act 1891 (Qld); s 52(1)(e) Succession Act (Qld) 1981.
 LED Builders Pty Ltd v Eagle Homes Pty Ltd  FCA 584 -.
 Westdeutsche Landesbank Girozentral v Islington LBC  AC 669, 682.
 Hungerfords v Walker (1989) 171 CLR 125, 148.
 Maguire v Makaronis (1997) 188 CLR 449; Warman International Pty Ltd v Dwyer (1995) 182 CLR 544, 559.
 Fuller v Meehan, unreported QCA 26/2/99 (de Jersey CJ, Pincus & Thomas JJA), BC9900463, at . See to like effect Wallersteiner v Moir (No2)  QB 373, 388; and Scott v Scott (1963) 109 CLR 649, 660.
 Wallersteiner v Moir (No2)  QB 373, 388 (per Lord Denning MR), also at 397 (per Buckley LJ) and 406 (Scarman LJ); Burdick v Garrick (1870) 5 LR Ch App 233, 241-2, 243-4; Re Dawson  2 NSWR 211, 218; Cureton v Blackshaw Services Pty Ltd  NSWCA 187 -. Wallersteiner v Moir is cited with approval in Hungerfords v Walker (1989) 171 CLR 125, 148.
 Spence v Crawford  3 All ER 271, 288-9. See also Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41,109 per Mason J citing Vyse v Foster (1872) LR 8 Ch App 309 at 333; Wallersteiner v Moir (No2)  QB 373, 388.
 AG (UK) v Alford (1855) 4 DeGM&G 843, 851; Burdick v Garrick (1870) LR 5 Ch App 233, 243; Wallersteiner v Moir (No2)  QB 373, 388; Re Dawson  2 NSWR 211, 218-9; Campbell v Turner  QCA 126 .
 See eg Fuller v Meehan  QCA 37 ; O’Sullivan v Management Agency Ltd  1 QB 428; Ninety-Five Pty Ltd (in liq) v Banque National de Paris  WAR 132; JAD International Pty Ltd v International Trucks Australia Ltd (1994) 50 FCR 378 ; Aequitas v AEFC  NSWSC 14.
 Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274, 285, 290.
 Aequitas v AEFC  NSWSC 14; Ninety-Five Pty Ltd (in liq) v Banque Nationale de Paris  WAR 132, 181.
 (1855) 4 De G M & G 846.
 AG (UK) v Alford (1855) 4 De GM&G 843, 851. See to like effect: Vyse v Foster (1872) LR 8 Ch App 309, 333; In re Barclay  1 Ch 674, 683; Wallersteiner v Moir (No2)  QB 373, 397; Re Dawson  2 NSWR 211, 218.
 At 851.
 At 850.
 At 852.
 See eg Nixon v Furphy (1926) 26 SR (NSW) 409, aff’d (1925) 37 CLR 161; Southern Cross Commodities Pty Ltd (In Liquidation) v Ewing (1988) 14 ACLR 39 (SAFC); and Nattrass v Nattrass  WASC 77 - .
 (1926) 26 SR (NSW) 409, 413.
 AG (UK) v Alford (1855) 4 De GM&G 843; Herrod v Johnston  2 Qd R 102.
 Cf Re Dawson  2 NSWR 211; Maguire v Makaronis (1996) 188 CLR 449, 469; Youyang Pty Ltd v Minter Ellison (2003) 212 CLR 484 . See also Rickett, “Equitable Compensation: Towards a Blueprint?” (2003) 25 Syd L Rev 31.
  2 NSWR 211, 218.
 Re Dawson  2 NSWR 211, 218; Alemite Lubrequip Pty Ltd v Adams (1997) 41 NSWLR 45, 46; Cureton v Blackshaw Services Pty Ltd  NSWCA 187 ; Herrod v Johnston  2 Qd R 102; Ford & Lee [17.2250]; Jacobs’ Law of Trusts in Australia 7th ed ; Halsbury’s Laws of Australia [370-6595].
 Wallersteiner v Moir (No 2)  QB 373 (and see also  3 All ER 217).
 See eg Mulleneux v Brennan  WASC 43. In cases of fraud, interest is available in equity (and at law) even in the absence of an express trust or fiduciary relationship: Johnson v R  AC 817, 822.
 Wallersteiner v Moir (No 2)  QB 373 (and see also  3 All ER 217).
 (1997) 41 NSWLR 45.
 Re Dawson  2 NSWR 211 at 218 per Street J.
  2 NSWR 211.
 Glazier Holdings Pty Ltd v Australian Men’s Health Pty Ltd  NSWSC 6 -; Bartlett v Barclays Bank Trust Co Ltd [No2]  2 All ER 92, 97.
 Williams on Executors, 18th ed 2000 [55-12].