Northampton Regional Livestock Centre Co Ltd v Cowling and another

Fiduciary duty – Breach – Sale of land – Second defendant acting for vendor on marketing of site for sale in return for commission – Second defendant also taking instructions from purchaser with remuneration in form of share of profit on onward sale of site – Whether second defendant acting in breach of fiduciary duty owed to vendor – Claim for breach of fiduciary duty allowed – Claims in negligence dismissed The defendants were the two partners in a firm that acted for the vendor company on a sale of a former cattle auction and market site in Northampton. The vendor instructed the firm in 2004 to market the site in return for a commission of 1.25% of the sale price. Early in 2005, the second defendant had indicated his desire to leave the partnership and work for himself but, pending a sale of the partnership as a going concern, he continued to act for the vendor in relation to the sale of the site; it was contemplated that the defendants would share equally in the commission on that sale. In July 2005, the second defendant also accepted instructions to act for a potential purchaser of the site, a company that was interested in buying the land for onward disposal. That purchaser agreed to pay the second defendant, by way of remuneration, one-third of any uplift in value between the price that it paid for the site and the value that it later realised on a subsequent sale or disposal. The second defendant did not inform the first defendant or the vendor of that agreement, although those parties knew generally that he was acting for the purchaser. Shortly thereafter, contracts were exchanged on a sale of the site to the purchaser for £2.25m. The purchaser then negotiated a deal to sell the site on for £5m and the two transactions were completed on the same day in April 2006, producing an immediate profit of £2.75m for the purchaser and a fee of £744,035.02 for the second defendant.Thereafter, the vendor went into liquidation and assigned any causes of action that it might have to the claimant. The claimant advanced claims for negligence, alleging that the defendants had sold the property at an undervalue, and for breach of fiduciary duty with regard to the second defendant’s conduct. As to the latter, it submitted that the first defendant was vicariously liable for the second defendant’s breach by virtue of section 10 of the Partnership Act 1890. Held: The claim was allowed in part.(1) An agent who acted for two sides of a transaction that his initial client had retained him to procure would be in breach of the fiduciary duty that he owed to that client as his principal: Wilson v Hurstanger Ltd [2007] EWCA Civ 299; [2007] 1 WLR 2351 applied. In such cases, a conflict of interest arose out of the incentives that operated on an agent who stood to be remunerated by both vendor and purchaser. Where a conflict arose, there followed an obligation not to profit. The actuality or the potential for a conflict of interest therefore triggered a duty to account to the principal for any profits. That reasoning underlay the rule against the making of secret profits out of a breach of fiduciary duty and the principle that a fiduciary should not exploit a commercial opportunity for his own benefit: Bhullar v Bhullar [2003] EWCA Civ 424 considered. However, as an exception to the duty to account, an agent could act for two principals with ostensibly conflicting interests without being in breach of his fiduciary duty, if the consent of both principals had been given on a fully informed basis; in that regard, the burden of proof of establishing such consent lay on the agent. Where there had been no disclosure at all, the agent would be deemed to have received a “secret commission”, which was a blatant breach of fiduciary duty, treated in law as a form of bribe for which the principal had extensive remedies against both the agent and the party who had paid the secret commission. In other case, where there had been partial or inadequate disclosure, sufficient to negate secrecy but none the less inadequate to enable the principal to give informed consent, the agent could be required to account to the principal for the commission that he had received. There was a further principle that a fiduciary could not use information that belonged to his principal for his own personal gain. An agent acting for a vendor might acquire inside track knowledge and market intelligence, which the vendor might wish to keep from possible purchasers. The vendor was entitled to assume that a loyal agent acting on its behalf would not disclose that information to a possible purchaser. Such information was commercially confidential to the principal and was provided to the agent in circumstances where the provider or owner of the information assumed or believed that the agent was acting loyally for the principal, was receiving that information in his capacity as agent and would use it solely for the benefit of the principal. Accordingly, an agent who owed a duty to his principal could not use confidential information that he received by virtue of his agency to the detriment of his principal. (2) Applying the foregoing principles to the instant case, the second defendant was in breach of the fiduciary duty that he owed to the vendor company. Although the second defendant’s relationship with his own agency had changed as from July 2005, he had continued to owe a fiduciary duty to the vendor at the time when he accepted instructions from the purchaser. He had placed himself in a position of acute conflict of interest by acting for both the vendor and the purchaser on the sale of the site without the vendor, his first client, knowing the terms of his agreement with the purchaser. Although he was due to be paid a commission by the vendor, representing a percentage of the sale price, he also had the prospect of a large pay-off from the purchaser if a significant uplift was achieved on a resale and therefore had an incentive to persuade the purchaser to pay as low a price as it could get away with. His disclosure obligation to the vendor required him to lay bare those terms.Moreover, he had imparted to the purchaser information that was confidential to and/or belonged to the vendor, in the sense that it was commercially valuable to the vendor, had come into the second defendant’s possession solely on the basis of his instructions from the vendor and was of a kind that the vendor would or might not wish to see divulged to a prospective purchaser. In that regard, the second defendant held a considerable amount of “inside track” information about the vendor, its negotiating strategy, and the complications of the planning process. He had imparted that information to the purchaser, and had advised it on how to get the best price from the vendor, because he wanted to make money out of the purchaser for an activity for which he was also due to be paid by the vendor. His personal interest was therefore in conflict with that of the vendor and he had no right to divulge that information without first disclosing his intention to the vendor. In the circumstances of the case, the vendor had not given consent to the second defendant’s conduct amounting to a conflict of interest. The second defendant was therefore in breach of his fiduciary duty to the vendor. He should be required to account to the vendor for: (i) for the sum of £744,035.02 earned from the purchaser through his breach; (ii) his fee earned from the vendor in respect of the sale, that being a fee connected to the conflict of interest; and (iii) interest thereon from the date of receipt of those sums. (3) The instant case demonstrated that, while it was commonplace to find arrangements where the same agent acted for both vendor and purchaser, such arrangements gave rise to problems since an agent who had an interest in the transaction from both sides of the negotiating table would have a clear conflict of interest. The solution was full disclosure by the agent so that all parties became fully aware of the position that he was in. Because of the advantages that could accrue from an agent who used his skill and contacts to bring sellers and buyers together, the respective principals might well be content to approve the agent’s dual role, possibly subject to conditions. If the principals accepted the position then the agent was secure from an allegation of breach of fiduciary duty. (4) On the facts of the case, the second defendant’s breach of fiduciary duty did not give rise to any vicarious liability on the part of the first defendant under section 10 Partnership Act 1890. The unauthorised conduct of the second defendant in relation to the purchaser was sufficiently divorced from the ordinary business of the agency that it had not occurred in the ordinary course of business. Furthermore, neither defendant had been negligent in relation to the sale. Those claims were dismissed accordingly. Matthew Reeve and Emily McCrea-Theaker (instructed by Geoffrey Leaver Solicitors, of Milton Keynes) appeared for the claimant; Timothy Walker (instructed by DFA Law LLP, of Northampton) appeared for the first defendant; David Lewis (instructed by Watson Burton LLP, of Newcastle upon Tyne) appeared for the second defendant. Sally Dobson, barrister