FHR European Ventures LLP v Mankarious

JurisdictionEngland & Wales
JudgeLord Neuberger
Judgment Date16 July 2014
Neutral Citation[2014] UKSC 45
Date16 July 2014
CourtSupreme Court
FHR European Ventures Llp and others
(Respondents)
and
Cedar Capital Partners Llc
(Appellant)

[2014] UKSC 45

before

Lord Neuberger, President

Lord Mance

Lord Sumption

Lord Carnwath

Lord Toulson

Lord Hodge

Lord Collins

THE SUPREME COURT

Trinity Term

On appeal from: [2013] EWCA Civ 17

Appellant

Matthew Collings QC Duncan McCombe (Instructed by Farrer and Co LLP)

Respondent

Christopher Pymont QC (Instructed by Hogan Lovells International LLP)

Heard on 17–19 June 2014

Lord Neuberger, DELIVERING THE JUDGMENT OF THE COURT

1

This is the judgment of the Court on the issue of whether a bribe or secret commission received by an agent is held by the agent on trust for his principal, or whether the principal merely has a claim for equitable compensation in a sum equal to the value of the bribe or commission. The answer to this rather technical sounding question, which has produced inconsistent judicial decisions over the past 200 years, as well as a great deal of more recent academic controversy, is important in practical terms. If the bribe or commission is held on trust, the principal has a proprietary claim to it, whereas if the principal merely has a claim for equitable compensation, the claim is not proprietary. The distinction is significant for two main reasons. First, if the agent becomes insolvent, a proprietary claim would effectively give the principal priority over the agent's unsecured creditors, whereas the principal would rank pari passu, ie equally, with other unsecured creditors if he only has a claim for compensation. Secondly, if the principal has a proprietary claim to the bribe or commission, he can trace and follow it in equity, whereas (unless we develop the law of equitable tracing beyond its current boundaries) a principal with a right only to equitable compensation would have no such equitable right to trace or follow.

The facts
2

On 22 December 2004, FHR European Ventures LLP purchased the issued share capital of Monte Carlo Grand Hotel SAM (which owned a long leasehold interest in the Monte Carlo Grand Hotel) from Monte Carlo Grand Hotel Ltd ("the Vendor") for €211.5m. The purchase was a joint venture between the claimants in these proceedings, for whom FHR was the vehicle. Cedar Capital Partners LLC provided consultancy services to the hotel industry, and it had acted as the claimants' agent in negotiating the purchase. It is common ground that Cedar accordingly owed fiduciary duties to the claimants in that connection. Cedar had also entered into an agreement with the Vendor ("the Exclusive Brokerage Agreement") dated 24 September 2004, which provided for the payment to Cedar of a €10m fee following a successful conclusion of the sale and purchase of the issued share capital of Monte Carlo Grand Hotel SAM. The Vendor paid Cedar €10m on or about 7 January 2005.

3

On 23 November 2009 the claimants began these proceedings for recovery of the sum of €10m from Cedar (and others). The trial took place before Simon J, and the main issue was whether, as it contended, Cedar had made proper disclosure to the claimants of the Exclusive Brokerage Agreement. Simon J gave a judgment in which he found against Cedar on that issue – [2012] 2 BCLC 39. There was then a further hearing to determine what order should be made in the light of that judgment, following which Simon J gave a further judgment – [2013] 2 BCLC 1. In that judgment he concluded that he should (i) make a declaration of liability for breach of fiduciary duty on the part of Cedar for having failed to obtain the claimants' fully informed consent in respect of the €10m, and (ii) order Cedar to pay such sum to the claimants, but (iii) refuse to grant the claimants a proprietary remedy in respect of the monies.

4

The claimants appealed to the Court of Appeal against conclusion (iii), and it allowed the appeal for reasons given in a judgment given by Lewison LJ, with supporting judgments from Pill LJ and Sir Terence Etherton C — [2014] Ch 1. Accordingly, the Court of Appeal made an order which included a declaration that Cedar received the €10m fee on constructive trust for the claimants absolutely. Cedar now appeals to the Supreme Court on that issue. There is and was no challenge by Cedar to the Judge's conclusions (i) and (ii), so the only point on this appeal is whether, as the Court of Appeal held, the claimants are entitled to the proprietary remedy in respect of the €10m received by Cedar from the Vendor.

Prefatory comments
5

The following three principles are not in doubt, and they are taken from the classic summary of the law in the judgment of Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1, 18. First, an agent owes a fiduciary duty to his principal because he is "someone who has undertaken to act for or on behalf of [his principal] in a particular matter in circumstances which give rise to a relationship of trust and confidence". Secondly, as a result, an agent "must not make a profit out of his trust" and "must not place himself in a position in which his duty and his interest may conflict" — and, as Lord Upjohn pointed out in Boardman v Phipps [1967] 2 AC 46, 123, the former proposition is "part of the [latter] wider rule". Thirdly, "[a] fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where his duty to one principal may conflict with his duty to the other". Because of the importance which equity attaches to fiduciary duties, such "informed consent" is only effective if it is given after "full disclosure", to quote Sir George Jessel MR in Dunne v English (1874) LR 18 Eq 524, 533.

6

Another well established principle, which applies where an agent receives a benefit in breach of his fiduciary duty, is that the agent is obliged to account to the principal for such a benefit, and to pay, in effect, a sum equal to the profit by way of equitable compensation. The law on this topic was clearly stated in Regal (Hastings) Ltd v Gulliver (Note) (1942) [1967] 2 AC 134, 144–145, by Lord Russell, where he said this:

"The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made."

7

The principal's right to seek an account undoubtedly gives him a right to equitable compensation in respect of the bribe or secret commission, which is the quantum of that bribe or commission (subject to any permissible deduction in favour of the agent – eg for expenses incurred). That is because where an agent acquires a benefit in breach of his fiduciary duty, the relief accorded by equity is, again to quote Millett LJ in Mothew at p 18, "primarily restitutionary or restorative rather than compensatory". The agent's duty to account for the bribe or secret commission represents a personal remedy for the principal against the agent. However, the centrally relevant point for present purposes is that, at least in some cases where an agent acquires a benefit which came to his notice as a result of his fiduciary position, or pursuant to an opportunity which results from his fiduciary position, the equitable rule ("the Rule") is that he is to be treated as having acquired the benefit on behalf of his principal, so that it is beneficially owned by the principal. In such cases, the principal has a proprietary remedy in addition to his personal remedy against the agent, and the principal can elect between the two remedies.

8

Where the facts of a particular case are within the ambit of the Rule, it is strictly applied. The strict application of the Rule can be traced back to the well-known decision in Keech v Sandford (1726) Sel Cas Ch 61, where a trustee held a lease of a market on trust for an infant, and, having failed to negotiate a new lease on behalf of the infant because the landlord was dissatisfied with the proposed security for the rent, the trustee negotiated a new lease for himself. Lord King LC concluded at p 62 that, "though I do not say there is a fraud in this case" and though it "may seem hard", the infant was entitled to an assignment of the new lease and an account of the profits made in the meantime – a conclusion which could only be justified on the basis that the new lease had been beneficially acquired for the infant beneficiary.

9

Since then, the Rule has been applied in a great many cases. The question on this appeal is not so much concerned with the application of the Rule, as with its limits or boundaries. Specifically, what is in dispute is the extent to which the Rule applies where the benefit is a bribe or secret commission obtained by an agent in breach of his fiduciary duty to his principal.

10

On the one hand, Mr Collings QC contends for the appellant, Cedar, that the Rule should not apply to a bribe or secret commission paid to an agent, because it is not a benefit which can properly be said to be the property of the principal. This has the support of Professor Sir Roy Goode, who has suggested that no proprietary interest arises where an agent obtains a benefit in breach of his duty unless the benefit either (i) flows from an asset which was (a) beneficially owned by the principal, or (b) intended for the principal, or (ii) was derived from an activity of the agent which, if he...

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