Northampton Regional Livestock Centre Co Ltd v Cowling and another

Fiduciary duty – Breach – Sale of land – Respondents’ partnership marketing site for sale on behalf of vendor in return for commission – Second respondent also taking instructions from purchaser with remuneration in form of share of profit on onward sale of site – Whether respondents negligently selling at undervalue – Whether second respondent acting in breach of fiduciary duty owed to vendor – Whether first respondent vicariously liable for any such breach under section 10 of Partnership Act 1890 – Appeal allowed in part In 2004, the vendor of a site in Northampton, on which a cattle auction and market had formerly been held, instructed the respondents’ partnership to market the site for sale in return for a commission of 1.25% of the sale price. The first respondent was also the chairman and largest single shareholder of the vendor company. Early in 2005, the second respondent 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 cattle market site; it was contemplated that the defendants would share equally in the commission on that sale. In July 2005, the second respondent also accepted instructions to act for a potential purchaser of the site, which agreed to pay him 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 respondent did not inform the first respondent or the vendor of that agreement, although those parties knew generally that he was acting for the purchaser. Contracts were exchanged on a sale of the site for £2.25m to the purchaser, which then negotiated a deal to sell it on for £5m. 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 respondent. Thereafter, the vendor went into liquidation. The appellant, as its assignee, brought claims against the respondents for: (i) negligently selling the property at an undervalue, by marketing it on the basis of its existing use as an auction site instead of its development potential; and (ii) breach of fiduciary duty by the second respondent, for which the first respondent was alleged to be vicariously liable under section 10 of the Partnership Act 1890. The claim in negligence was dismissed in the court below. The claim for breach of fiduciary duty was allowed against the second respondent but the judge held that the breach gave rise to no vicarious liability under the 1980 Act on the part of the first respondent: see [2014] EWHC 30 (QB); [2014] PLSCS 30. The appellant appealed against the dismissal of its negligence claim and against the finding that the respondents were not jointly and severally liable. Held: The appeal was allowed in part. (1) The appellant’s claim against the first respondent in negligence was defeated by the judge’s finding, which the appellant did not challenge, that the first respondent had properly and carefully discharged his duties as a director of the vendor company. The first respondent was highly experienced in the acquisition and disposal of commercial property and the vendor had placed great reliance on his advice as to the correct approach to marketing the site. Previous efforts to market the site on the broadest possible basis, exploring all development opportunities, had come to nothing for various reasons including effective lobbying of the local planning authority by farmers and farming minority shareholders of the vendor against any grant of planning permission for the site as anything other than a cattle market. As a consequence, the first respondent and the company board of the vendor had decided to limit the sale, with a preference for unconditional offers on the basis of existing use. The respondents’ partnership had in fact marketed the site on the basis that there was a preference for unconditional offers but that conditional offers, dependent on a grant of planning permission, were not excluded. The appellant did not contend that, in instructing the partnership in that manner, the first respondent had acted in breach of his duties owed to the vendor. That being so, it was absurd to suggest that the partnership should have advised the vendor to rethink a strategy which had been carefully and properly devised by the first respondent, with input and assistance from the second respondent, and acknowledged as reached in the best interests of the vendor. In any event, the loss to the vendor from any finding of breach would have been highly speculative in light of the judge’s finding that, even if the site had been more broadly marketed, it was unlikely to have generated either more offers or better offers, whether of a conditional or unconditional nature. Against the factual background, it was not negligent of the respondents’ partnership to allowing the vendor to sell the site for £2.25m. If the first respondent was not negligent or in breach of duty as director of the vendor company in advising it to sell at that price, the partnership could not be criticised for failing to advise that it would be a sale at an undervalue. On the contrary, the sale evidently represented a sale at the best price reasonably obtainable by the vendor in the circumstances in which it found itself. (2) However, the judge had correctly found that the second respondent was liable to the appellant for breach of fiduciary duty. There could be no challenge to the judge’s finding that the second respondent remained a fiduciary after he left the partnership in July 2005. In continuing to assist in the marketing of the site on behalf of the vendor, the second respondent was seeing out the obligation to the vendor which he and the first respondent had jointly undertaken, and in relation to which he expected to receive 50% of the fee due to the partnership in the event that its endeavours were successful in bringing about a sale of the site for the vendor. In those circumstances, the judge was doing no more than spelling out the term which had necessarily to be implied into the parties’ agreement in order to give business efficacy to it. The second respondent remained bound so to conduct himself as to ensure that his duty and his personal interest did not conflict. The vendor’s knowledge that the second respondent was also acting for the purchaser was not sufficient to give rise to an estoppel preventing the vendor from denying that the second respondent was entitled to take an undisclosed commission from the purchaser. The second respondent was entitled to act in a manner which put his duty and his interest in conflict. His acceptance of an unusual commission from a second principal without the knowledge of his first principal put his duties to his two principals, or his duty to the vendor and his own interests, starkly at odds. In those circumstances, it was not unconscionable for the vendor to seek to recover from the second respondent the benefit which he had secured to himself: Rossetti Marketing Ltd v Diamond Sofa Co Ltd [2012] EWCA Civ 1021; [2013] 1 All ER (Comm) 308 distinguished. It followed that the commission of £744,035.02 paid to the second respondent by the purchaser was held on trust for the vendor, which was entitled to a proprietary remedy if it wished so to elect: FHR European Ventures LLP v Mankarious [2014] UKSC 45; [2014] 3 WLR 535; [2014] EGILR 71; [2014] 3 EGLR 119 applied. (3) The judge had erred in finding that the first respondent was not vicariously liable under section 10 of the 1980 Act for the second respondent’s breach of fiduciary duty. The second respondent’s wrongful act had been committed “in the ordinary course of the business of the firm, or with the authority of his co-partner” within the meaning of section 10. Although the first respondent had not authorised the second respondent’s wrongful act, the connection between the wrongful conduct and the acts that the second respondent was authorised to do was such that the wrongful conduct could fairly and properly be regarded as done by the second respondent while acting in the ordinary course of the business of the partnership. The legal policy underlying vicarious liability was based on the recognition that carrying on a business enterprise necessarily involved the risk that others would be harmed by wrongful acts committed by the agents through whom the business was carried on. When those risks ripened into loss, it was just that the business should be responsible for compensating the person who had been wronged. The respondents’ partnership had agreed a retainer with the vendor for the purpose of selling the site and it was to be rewarded for so doing. It had authorised the second respondent to perform the task of selling the site as agent for the partnership. In introducing a purchaser, the second respondent was performing the very task which the partnership had undertaken to the vendor to perform. He was not acting on a frolic of his own but, on the contrary, was carrying out the partnership’s business, albeit in a misguided fashion. Accordingly, the first respondent was jointly and severally liable with the second respondent to account both for the commission earned from the purchaser through the second respondent’s breach of fiduciary duty and for the second respondent’s share of the fee paid by the vendor to the partnership in respect of the sale of the site, although no proprietary remedy was available against the first respondent in respect of those sums: Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48; [2003] 2 AC 366 applied. Mattnew Reeve and Emily McCrea-Theaker (instructed by Geoffrey Leaver Solicitors, of Milton Keynes) appeared for the appellant; Timothy Walker (instructed by DFA Law LLP, of Northampton) appeared for the first respondent; David Lewis (instructed by direct access) appeared for the second respondent. Sally Dobson, barrister Click here to download the transcript of Northampton Regional Livestock Centre Co Ltd v Cowling and another