Equitable Remedies - Breach of fiduciary duty in Scot's Law

Paul Mcintosh, Partner in our commercial litigation and debt recovery teams explains breach of fiduciary duty.

Prescription

In part due to the recent decisions on the law of prescription and in particular the interpretation of section 11(3) in Gordon Trustees v Campbell Riddell Breeze Paterson LLP [2017] UKSC 75, there is an increased interest in alternative grounds of claim in matters which could fall into the category of “hard cases”.

Arguments for the earlier commencement of the short negative prescription are presently multifarious and varied. At the extremes, the five year period potentially commences and expires without anyone (in particular the unfortunate claimant) having any notion of the existence of a claim.

In these troubled times where strict literal interpretation has triumphed over likely intent, whilst claimants await the passing of the Prescription Scotland Bill, alternative claims which are not subject to the short negative periods are under consideration.

Breach of Fiduciary Duty

The subject of potential equitable remedies in solicitor claims in Scotland was considered in detail in the judgement of Lord Docherty in Heather Capital Ltd (in liquidation) v. Levy & McCrae [2016] CSOH 107.

The factual circumstances of these related actions are complex, well published and for the purposes of this article unnecessary to rehearse.

It was noted in the course of these actions that the Court of Session has a full equitable jurisdiction and as such equitable remedies are available in Scotland.

It was held by Lord Docherty that the law in respect of accounting for trust funds was clear and that short negative prescription did not apply to obligations of accounting for trust funds.

Claims for breach of fiduciary duty apply in circumstances where funds are held on trust to be disposed of in accordance with the trust instructions. The liability is enforceable by means of an action of count, reckoning and payment. The liability to make payment in respect of sums due in such an action would be governed by the long negative prescriptive period of 20 years.

As an alternative to an accounting for trust funds, a pursuer may seek restoration of the value of trust property paid away in breach of trust. Lord Docherty was equally clear that a trustee’s obligation to restore the value of trust property to the trust is not an obligation to which the short negative prescription applies.

Equitable Compensation

As an alternative to restoration of the trust where the trust is concluded, the court may find that equitable compensation for loss may be appropriate. The remedy of equitable compensation was held to be distinct from damages for the issue for prescription.

Equitable compensation was further considered in by Lord Tyre in Kidd v. Paull & Williamsons LLP [2017] CSOH 16:

“[46] Applying these observations in a Scots law context, I accept the proposition advanced on behalf of the pursuer that where a court in Scotland finds that equitable compensation (as opposed to, for example, restitution of funds or property) is the appropriate remedy for a breach of fiduciary duty, the measure of such compensation is what is required to put the pursuer in the position he would have been in but for the breach. The assessment is to be made with the benefit of hindsight and not as at the date of the breach. Foreseeability is not therefore a relevant consideration. But the loss compensated must flow directly from the breach, and the actings of the pursuer, as well as the actings of third parties after the date of the breach, will be material to the determination of whether the link between breach and loss is sufficiently direct to entitle the pursuer to the compensation sought. In some cases this may result in a quantification which differs little, if at all, from damages for negligence or breach of contract; in others it may produce a recovery which more closely resembles that appropriate for fraudulent misrepresentation.”

Alternative Approach

In circumstances where it can be established that funds were held by a solicitor in trust and that those funds have not been disposed of in accordance with the trust instructions leading to loss, there may be a claim against the solicitor for breach of fiduciary duty.

One of the clear advantages of such claim is that it would be subject to a twenty year prescriptive period on the basis of current judicial guidance. Accordingly, opportunities to raise claims for breach of contract or breach of duty of care which may have been lost following the decision in Gordon may be revitalised by a claim for breach of fiduciary duty. Claimants should certainly consider this potential head of claim carefully as an option.