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.


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 closely analogous to such a claim, such that it was appropriate to award interest on the same equitable principles. The judge noted that in such cases, the appropriate interest rate is not the borrowing rate of interest but a rate to reflect the return on proper trustee investments over the relevant period. The judge held that this should apply to Kea, which although not itself a trustee was a vehicle for trustee investment.

Kea further argued for an interest rate of 8% based on what Kea would itself have done had it not invested in Spartan. The judge rejected this in accordance with authorities which indicated that the court should not have regard to what the individual fund could have been expected to make but adopt a broad brush approach based on the general attributes of the fund in question.

To determine an interest rate which could act as a proxy for the investment return that a fund vehicle with the general characteristics of Kea could expect to make, the judge relied on objective material put forward by Kea. Kea submitted performance indices of investment managers in different risk categories which had been analysed by two independent organisations, Asset Risk Consultants (ARC) and the Society of Trust and Estate Practitioners (STEP). The judge adopted a medium-risk rate by reference to those indices, to arrive at a rate of 6.5%.

Mr 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 inappropriately high proxy. He generally objected that an award of interest at this rate was made without precedent.

The Court of Appeal Decision

The Court of Appeal dismissed the appeal on the basis that the High Court judgment had been made in accordance with equitable principles, even if economic conditions had led to different final rates of interest in historic judgments.

The judge had been correct to apply an investment rate of interest to a payment of equitable compensation in circumstances analogous to that of a defaulting trustee scenario. The liability of Spartan (and in Spartan’s insolvency, the liability of Mr Watson) to account to Kea for interest was no different from that of a trustee being sued by a beneficiary for misappropriating trust money or otherwise causing it to be lost to the fund. As a vehicle for trust investment bound to invest in proper trustee investments, Kea had been entitled to protection for its investment monies, just as every beneficiary of a trust, or of another fiduciary duty.

In respect of the second issue, that is whether the interest rate was set at an inappropriately high proxy, the court reviewed previous authorities and observed that interest rates in cases of this type were bound to fluctuate as judges tried to make awards that were suited to the investment of trust funds and reflected the economic realities of the time. The court held that the judge had appropriately relied on the ARC/STEP material to determine a realistic proxy for profit for a fund of that type in the existing economic climate.

The Court of Appeal further endorsed the approach of looking to the investment return that vehicles with the general characteristics of the deprived fund could be expected to make as opposed to focusing on the deprived fund more specifically, as the latter method would consume disproportionate time and expense.


Whilst this decision was not a decision regarding a defaulting trustee, the court applied the same principles as would apply in a breach of trust case so as to put the claimant into the position it would have been in had its money been invested in proper trustee investments. This decision is therefore a useful reminder of those principles and a good illustration of how they can work in practice. The decision also demonstrates the breadth of the judge’s discretion to fix rates of interest payable pursuant to the court’s equitable jurisdiction.

In assessing the appropriate rate of interest to be applied to an equitable compensation payment, the court will apply an investment rate of interest where the aim of interest is to act as a realistic proxy for profit. To determine an appropriate rate of interest, the judge will look to the general attributes of the deprived fund in question. In such circumstances, parties should be prepared to adduce objective material to assist the court in arriving at a commensurate rate and such rate can be significantly higher than the type of interest applied in damages cases.