Fiduciary duty – Breach – Remedy – Respondents introducing appellant group of investors to purchase of hotel and agreeing to negotiate price for them – Respondents also entering into agreement with vendors of hotel under which commission earned on introducing purchaser – Respondents held liable to appellants for secret commission obtained in breach of fiduciary duties owed to them – Appellants granted personal remedy of account in equity – Whether entitled to proprietary remedy – Whether commission moneys belonging to appellants or acquired by exploiting an opportunity that was properly that of appellants – Appeal allowed
The first respondent provided consultancy services to the hotel industry through his company, the second respondent. In August 2004, he introduced the appellants, a group of investors, to a potential purchase of a hotel in Monte Carlo, which the owners were interested in selling by a discreet, “off-market” transaction. In September 2004, the hotel owners entered into an “exclusive brokerage agreement” with the second respondent, granting to it the exclusive right to sell the property for a defined period and the right to a fee of €10m on achieving such a sale. The second respondent’s sole responsibility under the agreement was to identify and introduce prospective purchasers; it was not to be involved in any negotiations with the purchaser on behalf of the owner but was instead to be a member of the investor group and participate in the negotiations as a purchaser.
The respondents negotiated a purchase price of €22.5m for the hotel; the sale to the appellants took place in December 2004 and the second respondent received the €10m commission from the vendors. Thereafter, the appellants claimed that they were entitled to the €10m as a secret commission received by the respondents in breach of fiduciary duty.
Allowing the claim, the judge found that the second respondent had not made sufficient disclosure of its relationship with the vendors to have acted with the informed consent of the appellants. On the issue of the appropriate relief, he held that the appellants were not entitled to a proprietary remedy but only to the personal remedy of an account in equity. In reaching that conclusion, he applied the principle in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347 that a beneficiary of a fiduciary duty could not claim a proprietary interest in any money or asserts acquired by the fiduciary in breach of duty unless either: (i) the asset or money had been beneficially the property of the beneficiary; or (ii) the fiduciary had acquired it by taking advantage of an opportunity or right that was properly that of the beneficiary. He found that the €10m commission fell into neither category.24
On appeal from that decision, the appellants contended that they had acquired a proprietary interest in the commission either because: (i) the commission was beneficially theirs, having been paid out of their money and; or (ii) in practical terms, the vendors had been willing to accept €10m less than the nominal purchase price for the hotel, such that the €10m was a benefit that the second respondents should have acquired on behalf of its principal but instead diverted to itself.
Held: The appeal was allowed.
(1) The beneficiary of a fiduciary duty was entitled to a proprietary remedy where he could show that the fiduciary had acquired the beneficiary’s own money or property; in such cases, the fiduciary would be a constructive trustee of that money or property. However, that principle applied only where, in equity, the money or asset had never ceased to be the property of the beneficiary; it was not enough that the alleged secret commission could be tracked back to money that had once belonged to the principal. The €10m received by the second respondent was not beneficially the property of the appellants, even if it had come out of the purchase moneys that the appellants had paid to the hotel vendors. When the appellants paid the vendors, it must have been the intention of both parties that, in return for the hotel, the vendors would acquire beneficial title to the sale price. No part of that sale price remained the property of the appellants and they were not entitled to a proprietary remedy on that ground: Sinclair Investments, Metropolitan Bank v Heiron (1880) 5 Ex D 319 and Lister & Co v Stubbs (1890) 45 Ch D 1 applied; Re Canadian Oil Works Corp (1875) 10 Ch App 593 and Re Morvah Consols Tin Mining Co (1875) 2 Ch D 1 distinguished.
(2) The appellants were none the less entitled to a proprietary remedy on the ground that the second respondent had diverted to itself an opportunity that it should have procured for its principal. Fawcett v Whitehouse (1829) 1 Russ & M 132, Tyrrell v Bank of London (1862) HL Cas 26 and Whaley Bridge Calico Printing Co v Green (1879) QBD 109. Although opportunities were not themselves a species of property that was capable of being held on trust, the contract that came into existence as a result of the exploitation of the opportunity would belong in equity to the beneficiary in cases where the opportunity was properly his. Accordingly, issues of tracing or following arose, not at the stage of the opportunity itself, but once the court declared that an asset was held on constructive trust for the principal. The mere fact that the fiduciary obtained the benefit from a third party, or that the benefit could never have been obtained by the principals, that the principals had obtained what they wanted or intended from the opportunity, was not necessarily a bar to a constructive trust of the benefit wrongly obtained by the fiduciary by taking advantage of the opportunity. The relevant question was whether the fiduciary’s exploitation of the opportunity was such as to attract the application of the rule: Bhullar v Bhullar [2003] EWCA Civ 424 applied. It was not necessary to isolate the opportunity to acquire the hotel at a lower price from the opportunity to acquire the asset at all. The exclusive brokerage agreement was part of the overall arrangement surrounding the purchase of the hotel. Had the appellants known of the agreement they might have deferred contracting to purchase the hotel until that agreement lapsed and then negotiated the purchase price on the basis that the vendor was by then free of an obligation to meet an expense of €210m. There was also evidence that, had the appellants known of the agreement, they would have changed their own fee arrangements with the second respondent.
Accordingly, had the appellants known of the agreement, they would have had the opportunity to reduce their fee to the second respondent, thereby reducing the cost to them of purchasing the hotel. The exploitation of the opportunity by the second respondent was such as to attract the operation of the rule; accordingly, it held the benefit of the exclusive brokerage agreement on a constructive trust for the appellants. That benefit could then be traced into the money paid under the agreement, which the second respondent likewise held on the same constructive trust.
Christopher Pymont QC (instructed by Hogan Lovells international LLP) appeared for the appellants; Matthew Collings QC (instructed by Farrer & Co LLP) appeared for the respondents.
Sally Dobson, barrister
