FHR European Ventures LLP and others v Mankarious and others

Fiduciary duty – Breach – Remedy – Appellant acting as agent of respondents to negotiate acquisition price for hotel – Appellant also entering into agreement with vendors of hotel under which fee earned on achieving sale – Appellant held to be liable to respondents for secret commission earned in breach of fiduciary duties owed to them – Nature of remedy – Whether respondents entitled to proprietary remedy or only personal remedy of account in equity – Appeal dismissed The appellant, a company that provided consultancy services to the hotel industry, acted as the respondents’ agent in negotiating the purchase price for a hotel in Monte Carlo and owed fiduciary duties to the respondents in that connection. The respondents ultimately acquired the hotel in December 2004 for €211.5m. In September 2004, the appellant had also entered into an “exclusive brokerage agreement” with the vendors of the hotel, under which it received a commission of €10m on achieving a sale.The respondents brought proceedings to recover the appellant’s €10m fee as being a secret commission that the appellant had earned in breach of its fiduciary duty. The appellant was found liable on the ground that it had not made sufficient disclosure of its relationship with the vendors to have acted with the informed consent of the respondents. However, the respondents were held to be entitled only to the personal remedy of an account in equity, rather than a proprietary remedy: see [2011] EWHC 2308 (Ch) and [2011] EWHC 2999 (Ch). That decision was reversed by the Court of Appeal, which held that the respondents were entitled to a proprietary remedy by which the appellant held the secret commission on a constructive trust for the respondents: see [2013] EWCA Civ 17; [2013] 02 EGLR 169. The appellant appealed to the Supreme Court. It contended that the respondents were not entitled to a proprietary remedy since a secret commission paid to an agent was not a benefit that could properly be said to be the property of the principal. The respondent argued that a proprietary remedy arose since an agent that received any benefit amounting to or resulting from a breach of its fiduciary duty owed to a principal held that benefit on trust for the principal. Held: The appeal was dismissed. (1) Whether a bribe or secret commission received by an agent was held on trust for his principal, or merely gave rise to a claim for equitable compensation in a sum equal to the bribe or secret commission, could be important for two practical reasons. First, if the agent became insolvent, a proprietary remedy would give to the principal priority over the agent’s unsecured creditors. Second, if the principal had a proprietary claim to the bribe or secret commission, it would be entitled to trace or follow it in equity. (2) In determining whether a proprietary remedy arose, it was relevant to consider three established principles: (i) an agent owed a fiduciary duty to its principal because it had undertaken to act for and on behalf of the principal in circumstances that gave rise to a relationship of trust and confidence; (ii) consequently, an agent should not make a profit out if its trust or place itself in a position where its duty and its interest might conflict; and (iii) a fiduciary that acted for two principals with potentially conflicting interests without the informed consent of both was in breach of the obligation of undivided loyalty and put itself in a position where its duty to one principal might conflict with its duty to the other: Bristol & West Building Society v Mothew [1998] Ch 1; [1996] EGCS 136 and Boardman v Phipps [1967] 2 AC 46 applied. (3) It was well established that an agent that received a benefit in breach of its fiduciary duty was obliged to account to the principal for that benefit and pay, in effect, a sum equal to its profit by way of equitable compensation. In addition to that personal remedy, there was an equitable rule that where an agent acquired a benefit which came to its notice as a result of its fiduciary position, it would, in some cases, be treated as having acquired the benefit on behalf of the principal, so that it was beneficially owned by the principal. Where the rule applied, the principal was entitled not merely to an equitable account but to the beneficial ownership of the benefit. (4) It was not possible to identify from the authorities any plainly right or wrong answer as to the extent of the rule. The case law was divided as to whether it applied where the benefit was a bribe or secret commission obtained by an agent in breach of its fiduciary duty to the principal. Many cases supported the notion that the rule should apply to bribes or secret commissions, so that the agent held them on trust for the principal, rather than simply having an equitable duty to account: Carter v Palmer (1842) 8 Cl & Fin 657, Bowes v City of Toronto (1858) 11 Moo PCC 463, Fawcett v Whitehouse (1829) 1 Russ & M 132, Barker v Harrison (1846) 2 Coll 546, Sugden v Crossland (1856) 2 Sm & G 192, Whaley Bridge Calico Printing Co v Green (1879) 5 QBD 109 and  Re Morvah Consols Tin Mining Co, McKay’s Case (1875) 2 Ch D 1 considered. Other cases were to the contrary effect: Tyrrell v Bank of London (1862) 10 HL Cas 26, Metropolitan Bank v Heiron (1880) 5 Ex D 319, Lister & Co v Stubbs (1890) 45 Ch D 1 and Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347; [2012] Ch 453 considered. (5) The matter therefore fell to be resolved by reference to principle and practicality, which supported the conclusion that all unauthorised benefits received by an agent in breach of its fiduciary duty to its principal should be treated as the property of the principal. That approach was consistent with the principles of the law of agency. The agent owed a duty of undivided loyalty to the principal unless the latter had given its informed consent to some less demanding standard of duty. The principal was therefore entitled to the entire benefit of the agent’s acts in the course of its agency, even where the agent had exceeded its authority. The principal was entitled to the benefit of the agent’s unauthorised acts in the course of its agency and the agent’s duty was to deliver up to its principal the benefit that it had obtained, not simply to pay compensation for having obtained it in excess of its authority. The argument that a bribe or secret commission paid to an agent was different in quality from other types of secret profit, not being a benefit that the agent should have obtained for the principal, was unattractive. Applying that approach would lead to uncertainty. Clarity and simplicity were desirable qualities in the law and, while subtle distinctions were sometimes inevitable, there was no reason to draw them in this instance. The whole reason why the agent should not have accepted the bribe or commission was that it put the agent in conflict with its duty to the principal; moreover, there had to be a strong possibility, as a matter of elementary economics, that the bribe or secret commission had disadvantaged the principal. As a matter of policy, bribes and secret commissioner were objectionable since they inevitably tended to undermine trust in the commercial world. (6) The simple answer, and the one capable of achieving certainty, was therefore that any benefit acquired by an agent as a result of its agency and in breach of its fiduciary duty was held on trust for the principal. That conclusion also had the advantage of aligning the circumstances in which an agent was obliged to account for a benefit received in breach of fiduciary duty and those in which the principal could claim the beneficial ownership of the benefit. Any argument that such a result would prejudice the agent’s unsecured creditors was balanced by the justice of enabling a principal whose agent had obtained a bribe or secret commission to trace the proceeds of the bribe or commission. The practical and policy considerations that favoured the wider application of the rules justified the court disapproving Tyrrell, which was inconsistent with a wealth of cases decided before and after it. The law had taken a wrong turn in Heiron and Lister, in which relevant authority had not been cited; those two cases should be treated as overruled, as should subsequent cases (including Sinclair Investments) so far as they relied on or followed Heiron  or Lister. Matthew Collings QC and Duncan McCombe (instructed by Farrer & Co LLP) appeared for the appellant; Christopher Pymont QC (instructed by Hogan Lovells International LLP) appeared for the respondents. Sally Dobson, barrister