Summary: Faults or process failures may drastically change system behaviour leading to performance degradation and instability. The reliability and fault-tolerance of a control system can be achieved through the design of either an active or passive fault tolerant control (FTC) scheme. This paper proposes a new approach to fault compensation for FTC using fault estimation by which the faults acting in a dynamical system are estimated and compensated within an adaptive control scheme with required stability and performance robustness. The FTC scheme has an augmented state observer (ASO) in the control system, which has an intrinsic robustness in terms of the stability and performance of the estimation error. The design concepts are illustrated using the notion that the friction forces in a mechanical system can be estimated and compensated to give good control performance and stability. The example given is that of a non-linear inverted pendulum with Stribeck friction.