English Court Of Appeal Endorses High Court Approach To Determining Interest Rate Applicable To Equitable Compensation Payment Arising Out Of Breach Of Fiduciary Duty

In the recent decision of Watson v Kea Investments Ltd [2019] EWCA Civ 1759 the English Court of Appeal endorsed the approach taken by the High Court in determining the interest rate to be applied to an equitable compensation payment which arose out of a breach of fiduciary duty. The High Court judge had been correct to award interest on the same equitable principles as a defaulting trustee claim in such analogous circumstances. The High Court judge was also right to rely on performance indices of investment managers in different risk categories to arrive at an appropriate rate of interest.

Background

In 2012, Mr Watson and Kea Investments Ltd (“Kea“) agreed to participate in an investment joint venture through Mr Watson's company, Spartan Capital Limited (“Spartan“). Kea invested £129 million in the Spartan joint venture.

Relations between the parties deteriorated and in 2015, Kea issued proceedings against Spartan and Mr Watson for deceit and breach of fiduciary duty. Kea claimed restitution of the invested funds, together with interest pursuant to the equitable jurisdiction of the court, in compensation for being kept out of its money.

The judge upheld the claims on the basis that Kea was entitled to treat Spartan as a constructive trustee of the money it had received. Spartan accordingly paid back what it could. In the circumstances of Spartan's insolvency and Mr Watson's own breach of fiduciary duty, the judge ordered Mr Watson to pay equitable compensation to Kea for the balance of the money which was due from Spartan to Kea which Spartan had proved unable to pay. The balance was an amount of £43.5 million.

Mr Watson's total liability depended upon the rate of equitable interest to be applied to the equitable compensation payment of £43.5 million. The judge fixed the interest on the equitable compensation payment at a rate of 6.5% (compounded annually) and set out the basis for determining the interest rate in a separate judgment.

The High Court Interest Judgment

It was common ground between the parties that the interest should compound annually. The issue in dispute was the appropriate rate of interest in such a claim.

Mr Watson's counsel contended that a rate should be fixed by reference to borrowing or deposit rates and that there was no reason to adopt a rate higher than 3% above the base rate.

Kea argued, and the judge accepted, that whilst Kea's claim was not the claim of a beneficiary against a defaulting trustee, it was...