Analysis
In 2012, the claimant trustee (K) invested £129m into a joint venture (Spartan), which was alleged have been procured by the deceit of Mr Watson. The action between K and Spartan was settled, with certain agreements between Spartan and K set aside. As a result, K was entitled to treat Spartan as constructive trustee of £129m, which also gave rise to a right to interest under the equitable jurisdiction of the Court, or s35A Senior Courts Act 1981. K continued its claim against Mr Watson, who was found liable to pay equitable compensation to K of all sums which were due from Spartan, but which Spartan proved unable to pay.
Giving judgment on the question of interest as between Spartan and K ([2018] EWHC 2483 (Ch), Nugee J applied by analogy the principles applicable to claims against defaulting trustees, on the basis that monies had been paid over as a result of deceit. He rejected Mr Watson’s submission that the rate should be based upon the cost of borrowing; K was known by all involved to be a vehicle for the investment of trust monies, and it was illogical to assume it would have borrowed, rather than invested. The judge held that the rate should compensate the claimant for the income lost, and the rate should be a proxy for the investment return that trust funds with the general characteristics of the fund in question could expect to make. He therefore ordered a rate of 6.5% per annum compounded annually, based upon performance indices of investment managers and striking a balance between caution and risk.
The defendant appealed, arguing that the rate ought not to have been calculated by reference to claims against defaulting trustees, and that in any event an appropriate rate of interest should represent income yield only.
The issue on appeal was what principles should be applied by judges in awarding interest under the equitable jurisdiction of the court?
Held:
- 1) The judge exercised his discretion entirely in accord with the principles to be found in the decided cases. The judge was best placed to assess the nature of K’s activities as a vehicle for trust investment, and was entitled to conclude that that should be the basis for assessing a rate of interest; that was a finding of primary fact which could not be said to be ‘plainly wrong’ – Henderson v Foxworth [2014] 1 WLR 2600 applied.
- 2) The judge had also been entitled to conclude that, in light of a finding that Spartan had received money procured by deceit, it should account as a constructive trustee – El-Ajou v Dollar Land Holdings PLC [1995] 2 All ER 213 applied. The courts’ awards of interest in equity have been astute to adapt to developments in contemporary economic conditions; the task of the court is to make an award which reflects the investment of trust funds and the economic realities of the time – Docker v Somes (1834) 2 My & K 656 applied. Either a borrowing or an investment rate may be suitable for the particular facts of the case; there is no strict rule – Wallersteiner v Moir (No.2) [1975] QB 373 explained. The principles governing equitable compensation are distinct from those governing damages or restitutionary claims between commercial parties – Carrasco v Johnson [2018] EWCA Civ 87 distinguished.
- 3) For cases in which constructive trusteeship is imposed in favour of a trust investment vehicle, neither a borrowing rate nor a deposit rate offered a realistic proxy. The material before the judge illustrated what the deprived fund would have achieved by investment of the sums lost. His decision was in accordance with the correct principles and was well within the wide discretion accorded to him.
Appeal dismissed.
JUDGMENT McCOMBE LJ: Introduction [1] This is the appeal of Mr Eric Watson (Mr Watson) from part of the order of 13 September 2018 of Nugee J made after the trial of an action between the respondent, Kea Investments Limited (Kea) and Sir Owen Glenn (Sir Owen), as claimants, against several defendants including Mr Watson …Continue reading "Watson v Kea Investments Ltd [2020] WTLR 351"