Making a ‘split election’ between remedies: equitable compensation, an account of profits, or (sometimes) both?
Typically, a plaintiff suing for breach of trust or breach of fiduciary duty must elect between different and inconsistent equitable remedies: either equitable compensation or an account of profits. The New South Wales Court of Appeal has considered the question of whether a plaintiff can overcome this need for choice when suing multiple defendants, and the Court’s decision in Xiao v BCEG International (Australia) Pty Ltd[1] sets out the guiding principles for when a plaintiff may make a ‘split election’.
The facts
BCEG International (Australia) Pty Ltd (BCEG) was involved in two property developments: the ‘Wagga’ project and the ‘Varsity Lakes’ project. Mr Xiao and Ms Chen were Australian-based directors of the company; others were based in Beijing. Xiao and Chen were also engaged in another property development project, known as the ‘West Wyalong’ project, through one of their own companies, West Wyalong Marketplace Pty Ltd (WWM).
When BCEG received US$35m in finance from the Varsity Lakes development, Xiao and Chen diverted $3.4m of this to WWM under the guise of what were later found to have been fake invoices and sham subcontracts. The diverted money was used to fund the West Wyalong project.
BCEG, unaware of this transaction, proceeded to incur costs in relation to the Wagga project. The Wagga project was being carried out on land owned by a company which Xiao and Chen controlled, Interlink Wagga Central Pty Ltd (IWC). When the diversion of money was discovered, BCEG sued Xiao and Chen for breach of their fiduciary duties and also sued WWM and IWC for their accessorial involvement.
At trial
At trial, the primary judge ruled that:
Xiao and Chen had breached their fiduciary duties, owed respectively as director and de facto director of BCEG, when they diverted the money from BCEG to WWM, and were liable to make equitable compensation to BCEG for the amount;
WWM was knowing recipient of the money which had been diverted to it and was liable to account for its profits relating to the West Wyalong project;
Xiao and Chen were also liable to make equitable compensation to BCEG for BCEG’s losses on the Wagga project; and
IWC was knowingly involved in Xiao and Chen’s breach and was liable to account for the profits it had made in respect of the Wagga project.
Xiao and Chen and their companies sought to appeal the primary judge’s decision. BCEG was the sole respondent on appeal.
On appeal
The appeal was heard by Gleeson JA, Mitchelmore JA and Griffiths AJA.
Of the issues raised on appeal, perhaps the most significant was the question of whether BCEG was entitled to the various remedies it had received, namely:
equitable compensation from Xiao and Chen and an account of profits from WWM in relation to the West Wyalong project; and
equitable compensation from Xiao and Chen and an account of profits from IWC in relation to the Wagga project.
To place the issue in its legal context, at equity a plaintiff seeking relief in relation to a breach of fiduciary duty may seek either equitable compensation or an account of profits and must, at any time prior to judgment, elect between those remedies. As Gleeson JA, delivering the Court’s judgment on appeal, articulated:
The primary question raised by this appeal is whether a plaintiff is entitled to make a ‘split election’ seeking different remedies against different defendants being defaulting fiduciaries or knowing recipients of property the subject of the breach of fiduciary duty.[2]
The appellants argued that it was wrong in principle for the trial judge to have allowed BCEG to make such an election the result of which was that BCEG had obtained different remedies against different defendants. The appellants argued, essentially, that BCEG was required to make the same election as to a remedy against the knowing recipient of money flowing from a breach of fiduciary duty as it would against the defaulting fiduciary. This restriction applied, the appellants argued, to the relief sought for both the Wagga and West Wyalong projects.
BCEG, for its part, argued that it was entitled to obtain cumulative remedies.
The Court of Appeal dismissed the appeal so far as it related to this question. In doing so, the Court set out a number of key principles governing the particular equitable remedies before clarifying the law regarding split elections.
Some key principles
Before addressing the question of whether BCEG as plaintiff was entitled to make a split election, Gleeson JA noted at [39]–[46] the following (arguably uncontroversial) matters relating to the particular equitable remedies:
Equitable compensation and an account of profits are both ‘personal remedies’.
Whether or not either remedy is granted is at a court’s discretion and an equitable remedy may be refused if, among other reasons, it is disproportionate to the wrongdoing or if the plaintiff has not come to the court with ‘clean hands’.
An account of profits is concerned with the gain made by the party in breach or by the knowing assistant or recipient, and seeks to strip from the offending party the gains it has made by reason of the breach.
Equitable compensation is concerned with the loss suffered by the plaintiff, and seeks to restore the plaintiff to a position as if the wrong had not occurred.
The two types of remedy are inconsistent; as the House of Lords held in Neilson v Betts, ‘[t]he two things are hardly reconcilable, for if you take an account of profits, you condone the infringement’.[3]
Because the remedies are inconsistent, equity requires that a plaintiff choose between them.
The principle of choice or election between one remedy or the other applies both in cases of breach of fiduciary duty and in cases of breach of trust.
The plaintiff’s election is irrevocable upon one remedy being fully satisfied by the entry of judgment.
The liability of a knowing recipient or assistant is several with the fiduciary in breach, with two exceptions
Before answering the particular question raised on appeal, Gleeson JA also noted that the liability of knowing recipients — and, for that matter, knowing assistants — for loss suffered by a plaintiff is several. His Honour identified, as were detailed in the case of Grimaldi v Chameleon Mining NL (No 2),[4] two exceptions to this principle of several liability: the ‘alter ego’ exception and the ‘acting in concert’ exception.
The ‘alter ego’ situation arises where the knowing assistant or recipient is the alter ego or nominee of the fiduciary. In that case, the knowing assistant or recipient will have joint and several liability with the fiduciary.
The ‘acting in concert’ exception — which had been identified in Grimaldi but, unlike the ‘alter ego’ exception, had not been ruled upon in that case — arises where the fiduciary and the knowing assistant or recipient have acted in concert to secure a mutual benefit, for example, to misappropriate trust property for a particular mutually beneficial purpose. As the Full Court of the Federal Court noted in Grimaldi, ‘[o]ne can readily understand why, when wrongdoers so entangle their affairs, that the law … might wish to make it their responsibility — and not a claimant’s — to untangle them for accountability purposes’.[5]
Although no case was pleaded or run at trial to the effect that either of these exceptions should or should not apply, Gleeson JA noted that there was a clear position that ‘the liability of the fiduciary and the corporate accessory controlled by the fiduciary are distinct, and different remedies can be obtained against each of them’.[6]
Can a plaintiff make a ‘split election’?
Getting to the (equitable) heart of the matter, Gleeson JA held that the reasoning in Neilson v Betts — ‘if you take an account of profits, you condone the infringement’ — does not apply to a split election against multiple wrongdoers; ‘[a]s against the fiduciary, a plaintiff does not condone the fiduciary’s breach of duty by seeking a gain-based remedy of an account of profits from the knowing recipient’ and ‘[a] gain-based remedy against the knowing recipient is not inconsistent with a compensation remedy against the defaulting fiduciary’.[7]
Gleeson JA also noted that the ability to make a split election was consistent with the views expressed in a number of English authorities, and also appeared to have been settled by the High Court in Michael Wilson & Partners Ltd v Nicholls where the Court said that ‘the relief that is awarded against a defaulting fiduciary and a knowing assistant will not necessarily coincide in either nature or quantum’.[8] If there was any doubt about what the High Court meant, there is now clarification at an intermediate appellate level: having remedies which ‘[do] not necessarily coincide in nature or quantum’ means that a plaintiff can make a split election as to remedies.
What about the risk of double-recovery?
The appellants argued on appeal that BCEG, in obtaining an account of profits and equitable compensation resulting from Xiao and Chen’s diversion of money from the Varsity Lakes development, had double-recovered. Gleeson JA noted the practical difficulty in sustaining this submission given the failure of any of the appellants to apply for an injunction to prevent enforcement of the judgment against them in a way which might lead to double recovery.
His Honour also held that the cumulative remedies awarded to BCEG did not result in overcompensation because there were ‘two distinct wrongs’:[9] the liability of the fiduciary for its breach and the liability of the knowing assistant or recipient for its own wrong. This was so despite the reality that, as Gleeson JA observed, ‘the liability of the knowing recipient is dependent upon there being a breach of fiduciary duty, and to that extent the two wrongs are linked’.[10] Gleeson JA drew contrast with the case in United Australia Ltd v Barclays Bank Ltd.[11] There, cumulative remedies had been sought for the same loss; the plaintiff had sought damages for conversion, alternatively damages for negligence, alternatively for money had and received, all of which flowed from the wrongful drawing of a cheque.[12] BCEG, on the other hand, had sued for relief flowing from separate and distinct wrongs: the loss it suffered due to breach of fiduciary duties and the profits derived by the knowing recipients.
Given this distinction, the key question in determining whether there would be double-recovery, the Court’s decision suggests, is whether or not ‘satisfaction of judgment against one defendant constitute[s] satisfaction pro tanto of the claim for damages in the cause of action against another [wrongdoer] for the same loss’.[13]
Conclusion
Earlier in his Honour’s judgment, Gleeson JA stated that to deny a plaintiff seeking equitable compensation and an account of profits the ability to make a split election ‘would [be to] place a significant limitation on the available equitable remedies against different defendants who are defaulting fiduciaries or knowing recipients or assistants of the unauthorised dissipation of company assets’.[14] The Court’s decision in Xiao v BCEG International (Australia) Pty Ltd arguably upholds the breadth of discretion attending the formulation of equitable relief. The outcome also reflects what the High Court has described as the ‘cardinal principle of equity’ in ensuring that ‘the remedy … be fashioned to fit the nature of the case and the particular facts’.[15]
[1]: [2023] NSWCA 48.
[2]: Ibid [1].
[3]: Neilson v Betts [1871] UKLawRpHL 1; (1871) LR 5 HL 1, 22.
[4]: [2012] FCAFC 6.
[5]: Ibid [558] (Finn, Stone and Perram JJ).
[6]: Xiao v BCEG International (Australia) Pty Ltd [2023] NSWCA 48, [67].
[7]: Ibid [69].
[8]: (2011) 244 CLR 427, [106].
[9]: Xiao v BCEG International (Australia) Pty Ltd [2023] NSWCA 48, [74].
[10]: Ibid.
[11]: [1941] AC 1.
[12]: Ibid 7–8 (Viscount Simon LC).
[13]: Xiao v BCEG International (Australia) Pty Ltd [2023] NSWCA 48, [78] (emphasis added).
[14]: Ibid [37].
[15]: Warman International Ltd v Dwyer (1995) 182 CLR 544, 559.