FHR European Ventures LLP and Others v Mankarious and Others

Hearing dates : 21/22 November 2012

What is the appropriate remedy against an agent who has received a secret commission from the seller of property which his principal bought at a price negotiated on his behalf by the agent? That is the question raised by this appeal. The full facts may be found in the judgment of the trial judge, Simon J, whose judgment is at [2011] EWHC 2308 (Ch) [2012] 2 BCLC 39. Only a short summary is necessary for the purposes of this appeal.

In September 2004 the Monte Carlo Grand Hotel in Monaco was owned by Monte Carlo Grand Hotel SAM, a Monegasque company. Its share capital was owned by Monte Carlo Grand Hotel Ltd, a BVI company. The latter was interested in a discreet sale either of the hotel itself or of the company that owned it. Cedar Capital Partners LLC ("Cedar") was a new business venture established a couple of months earlier by Mr Mankarious with the intention of providing consultancy services to the hotel industry. A number of the claimants were among his clients and contacts. Even before he established Cedar Mr Mankarious had learned of the wish of the ultimate owners of the hotel to sell it; and that they were looking for a price in excess of € 200 million. In August Mr Mankarious encouraged the relevant claimants ("the Investor Group") to investigate the possibility of buying the hotel; and in the following month he prepared a memorandum for them that told them that the owners were offering the hotel for sale through Cedar on an off market basis.

On 24 September Monte Carlo Grand Hotel Ltd and Cedar entered into an agreement called an "Exclusive Brokerage Agreement". The relevant terms of that agreement were as follows:

"1.Term

This Agreement shall be in place as an exclusive right to sell the Property for a period which commences as of the date hereof and terminates on 31/12/05 PROVIDED THAT it is understood and agreed that if the Owner sells the property to the Investor Group (as defined below) or any member thereof on or before 31/12/05 the fee referred to in article 3 below shall remain payable to Cedar.

2. Responsibilities

Cedar's sole responsibility during the term of the Agreement is to identify and introduce prospective purchasers. Cedar shall not participate in any negotiations with the Purchaser on behalf of the Owner …

3. Fee

In consideration of the services of Cedar hereunder in securing the Purchaser, and provided that the Purchaser and Owner close on the sale of the Property, Owner agrees to pay Cedar a fee … equal to …€10 million. The fee shall be paid within 5 working days of receipt of funds from buyer.

4. Investor Group

Cedar intends to introduce Owner to a purchaser which is a group consisting of a number of investors, which shall include, but not be limited to the following companies/individuals: [various of the claimants] (or any one or more entities related or affiliated with such parties ('Investor Group').

…

6. Terms of Agreement of Sale and Purchase

Owner acknowledges that Cedar shall have no involvement in the negotiation on behalf of the Owner of any terms relating to the sale of the Property. Owner acknowledges that Cedar intends to advise and be a member of the Investment Group purchasing the Property and pursuant to Paragraph 7 of this Agreement, Owner waives any conflict that may arise due to Cedar acting as a facilitator under this Agreement and as participating as part of the Investor Group …

7. Conflict of Interest

The parties all understand that Cedar is only acting as a facilitator to introduce the Owner to the Purchaser. It is contemplated that Cedar will advise and be part of the Investor Group purchasing the Property. As part of the Investor Group, Cedar will be participating in the negotiations as a Purchaser. The parties all understand and waive any conflict of interest that may arise due to Cedar acting pursuant to this Agreement and Cedar's participation as an advisor and member of the Investor Group. Cedar shall disclose its appointment hereunder to the investor group."

Both Mr Pymont QC, appearing for the Investor Group, and Mr Collings QC, appearing for Cedar, emphasised that the agreement was not intended to be a corrupt payment or bribe. On the contrary, so far as Monte Carlo Grand Hotel Ltd was concerned it was entitled to expect Cedar to comply with its contractual obligation to disclose its appointment to the Investor Group. Mr Collings laid particular stress on the fact that the judge consistently described the fee as a commission.

Following the making of that agreement Cedar continued to advise the Investor Group, including negotiating the price. Ultimately a sale of the hotel to the Investor Group took place in December 2004 for which the Investor Group paid € 211.5 million. The sale took the form of a share purchase of the issued share capital of Monte Carlo Grand Hotel SAM. Cedar, through Mr Mankarious, had made limited disclosure of Cedar's retainer by the sellers; but not enough to deprive the fee of €10 million payable under the Exclusive Brokerage Agreement of its character as a secret profit.

The Particulars of Claim alleged that following completion of the sale Monte Carlo Grand Hotel Ltd (the BVI company) paid Cedar €10 million "pursuant to" the Exclusive Brokerage Agreement. The Defence admitted that Monte Carlo Grand Hotel Ltd had paid Cedar €10 million. However, the judge made no finding about precisely when the payment had been made; nor did he find that the payment had been made out of the proceeds of sale themselves.

The main issue at trial was whether Cedar had made sufficient disclosure of its relationship with Monte Carlo Grand Hotel Ltd, so that it could be said that it had acted with the informed consent of the Investor Group. Simon J ruled (§ 103):

"It follows that unless Cedar obtained the fully informed consent of [the Investor Group], it could not receive and retain the €10 million commission from the Vendors; and that if it did, it would hold the sum subject to a Constructive Trust…"

On the facts he held that there had been insufficient disclosure. He accepted the evidence of Mr Johnston (a representative of one of the participants in the Investor Group) that if he had been told of the size of Cedar's fee he would not have agreed the fee structure that he did. He also made two further relevant findings. First (§ 102):

"…in circumstances where Cedar were engaged to negotiate the best price, at the very least it was material that the vendor was in fact prepared to receive a net sum of €201.5 million from the sale. That was material to be known by Cedar's principal and was not made known to them."

Second (§ 106):

"The fact that the commission was a flat fee is irrelevant. It meant little more than that the amount in respect of which the price paid by the Joint Venturers could be said to be too high was fixed at €10 million. It is unnecessary and unfruitful to speculate about what might have happened if the Joint Venture participants had been told about the payment of €10 million. At the very least it is likely that they could have used the information to their financial advantage in the course of negotiations."

At the conclusion of his judgment he invited submissions on what form of order he should make.

It was on the subsequent hearing to decide the form of order that the current battle lines were drawn. On that occasion ( [2011] EWHC 2999 (Ch)) the judge acknowledged that his use of the phrase "Constructive Trust" was unfortunate. Having heard submissions based principally on the decision of this court in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347 [2012] Ch 453 he decided that the Investor Group were not entitled to a proprietary remedy against Cedar; but were only entitled to the personal remedy of an account in equity. What Sinclair v Versailles decided can be summarised for the time being as follows:

"… a beneficiary of a fiduciary's duties cannot claim a proprietary interest, but is entitled to an equitable account, in respect of any money or asset acquired by a fiduciary in breach of his duties to the beneficiary, unless the asset or money is or has been beneficially the property of the beneficiary or the trustee acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary."

The judge considered whether the secret commission fell within either of these two exceptions. He said:

"As to (a), the question whether the sum of €10 million was or had been the property of the Claimants has not yet been decided. At present it appears that the sum was a secret and unauthorised commission which bypassed the Claimants. I do not accept that secret commissions are for present purposes to be characterised as assets of the beneficiary, cf the Sinclair case at...