Equitable interest in trust and fraud cases: how is it assessed?

Watson v Kea Investments Limited [2019] 

Date published




The Court of Appeal in this case provided guidance on what to consider when deciding on the rate of interest constructive trustees should pay in an equitable compensation claim, which arose out of a breach of fiduciary duty.

Background and facts

The appeal was made by the defendant, Eric Watson.

The other co-defendants to the action were Novatrust Limited (“Novatrust”) and Spartan Capital Limited (Spartan). The claimants were Kea Investments Limited (Kea) and Sir Owen Glenn (Sir Owen).

In 2012 Kea and Eric Watson agreed to participate in an investment joint venture, through Eric Watson’s company, Spartan (the joint venture vehicle). Kea invested £129m in the Spartan joint venture.

When the relationship deteriorated in 2015, Kea presented a petition for the winding up of Spartan on the ‘just and equitable’ ground. Kea issued a claim alleging deceit and a breach of fiduciary duty on the part of the defendants and sought to set aside the various joint venture agreements. Kea claimed restitution of the invested funds plus interest pursuant to the equitable jurisdiction of the court in compensation.

The trial judge held that Eric Watson was personally liable to pay equitable compensation to Kea. This represented the shortfall between a settlement which had been reached between Spartan and Kea. The judge upheld Kea’s claim on the basis that Kea was entitled to treat Spartan as a constructive trustee of the money it had received.

The key question was then establishing the amount of interest properly recoverable by Kea from Spartan up until the monies were paid.

The judge decided that interest should continue to accrue at 6.5% per annum. This figure represented the investment return the claimant could have expected to receive if trustees had invested the misapplied funds in proper trustee investments. 

The appeal

Eric Watson appealed, contending that the judge was wrong to adopt an investment rate of interest as if the interest was to be calculated against that of a defaulting trustee and that, in any event, the interest rate was an inappropriate high proxy.

Accordingly, the issue on appeal was whether the interest payable should properly have been fixed at a rate of 6.5% to reflect what the money to be recovered would have produced if invested in ‘proper trustee investments’.

Eric Watson argued that interest should instead be fixed by reference to borrowing or deposit rates, at a level no higher than 3% above base rate.


The appeal was dismissed. The Court of Appeal confirmed that, although a constructive trustee was not formally appointed as a trustee, it would still be liable to account for wrongful receipt of funds as if it were a formal trustee. It was held that the liability of Spartan to account to Kea for interest was no different from that of a trustee being sued by a beneficiary for misappropriating trust money. As a vehicle for trust investment, Kea had been entitled to protection for its investment monies, just as every beneficiary of a trust or of another fiduciary duty.


The decision in this case will be of considerable importance on the basis of which equitable interest is awarded in trust and fraud cases. The leading judgement of McCombe LJ provided relevant authorities to assist in this.

It serves as a useful reminder of how the court had applied the same principles it would have applied to a formally appointed trustee and outlines how judges are able to use their discretion in awarding interest by reference to the amount which would have been obtained had the money been invested in “proper trustee investments”.

As such, parties will want to ensure that they have obtained and compiled clear and convincing evidence of the rate of interest which could have been achieved if the money had been invested in proper trustee investments as this will be used to assist the court in determining an appropriate rate.