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Stuart Ritchie QC & Lydia Banerjee on Supreme Court Decision on Fiduciary Duties

The Supreme Court holds that Proprietary Relief extends to all Benefits Received by an Agent Acting in Breach of his Fiduciary Duty to his Principal

SUMMARY

The Supreme Court holds that proprietary relief extends to all benefits received by an agent acting in breach of his fiduciary duty to his principal

The Supreme Court has handed down judgment in the case of FHR European Ventures v Cedar Partners LLC [2014] UKSC 45. The case concerned the extent to which proprietary relief is available in respect of benefits received in breach of fiduciary duty. This issue has attracted substantial interest from academics and other commentators as well as practitioners following the controversial decision of the Court of Appeal in Sinclair v Versailles [2012] Ch 453 in which it was held that proprietary relief for breach of fiduciary duty did not extend to bribes. This decision brings much-needed clarity and finality (at least for now) to the debate.

THE FACTS

FHR purchased the issued share capital of M SAM which owned a long leasehold in the Monte Carlo Grand hotel. The purchase was a joint venture between the claimants. FHR was the corporate vehicle. Cedar acted as the claimants’ agent in negotiating the purchase. Cedar had also entered into an agreement with the Vendor which provided for a $10m fee following successful sale and purchase of share capital of M SAM. That sum was duly paid by the vendor to Cedar.

THE ISSUE

The central issue in the case was the application and reach of the equitable rule (referred to in the judgment and below as “the Rule”) that an agent who 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 is to be treated as having acquired the benefit on behalf of his principal, so that it is beneficially owned by his principal, thus entitling the principal to a proprietary remedy in addition to his personal remedy.

THE DECISION

The Supreme Court decided that bribes and secret commissions fell within the ambit of the Rule, thus, in effect, determining that where a breach of the fiduciary “no conflict” or “no profit” duties is established, a proprietary remedy will lie. In practice, this is significant. In cases of the insolvency of a defaulting fiduciary, a principal will now have priority over unsecured creditors, and will also be entitled to follow and trace the unauthorised benefits.

The decision is to be welcomed – not least in being clear, unequivocal and contained in a single judgment of the Court. It removes the uncertainties which previously existed as a result of irreconcilable tension between Attorney General for Hong Kong v Reid [1994] 1 AC 324 and the Court of Appeal decisions in the instant case (reported at [2014] Ch 1) and Sinclair v Versailles; as a result, the existence or otherwise of a proprietary remedy was uncertain, and there lacked, in particular, a coherent or predictable regime for dealing with the remedial consequences of unlawful exploitation of business opportunities.

In a nutshell:

1. The Supreme Court has held that the Rule extends to bribes and secret commissions;
2. Thus, any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty is held on trust for his principal;
3. The House of Lords decision in Tyrrell v Bank of London (1862) 10 HL Cas 26 was disapproved and the Court of Appeal decisions in Lister v Stubbs (1890) 45 Ch D 1 and Metropolitan Bank v Heiron (1880) 5 Ex D 319 and subsequent decisions following or relying on them (including Sinclair v Versailles) are to be treated as overruled.

The Supreme Court analysed the issue under three heads:

(a) Existing case law;

(b) Legal principle and academic commentary;

(c) Practicality and principle.

Lord Neuberger (who had given the lead decision in Sinclair v Versailles) gave the judgment of the Court. In summary the reasoning in relation to the above heads was as follows:

(a) Although the case law did not speak with one voice, the weight of case law favoured the conclusion that proprietary relief extended to bribes and secret commissions. The law had taken a wrong turn in Lister v Stubbs and Metropolitan Bank v Heiron and the House of Lords decision in Tyrrell v Bank of London did not require the Supreme Court to adhere to such a view (paras 13-28 and 47-50).

(b) Academic opinion was split. There was no clearly right answer to the issue as a matter of law. In those circumstances, it was appropriate to turn to principle and practicality.(paras. 29-32)

(c) Principle and practicality favoured the approach adopted for a number of reasons:

• It was consistent with fundamental principles of agency law, in particular that a principal is entitled to the entire benefit of the agent’s acts in the course of his agency, even if an agent exceeds his authority (para. 33). This is key to the decision.
• In the absence of a plainly right legal answer, clarity and simplicity favoured the result (para. 35).
• The circumstances in which a fiduciary is obliged to account for benefits received in breach of fiduciary duty is now aligned with those in which the principal can claim the beneficial ownership of the benefit (para. 36).
• Such an approach would avoid artificiality, arguable inconsistency with fundamental case law (e.g. Keech v Sandford (1726) Sel Cas Ch 61) and the unsatisfactory conclusion that a fiduciary who had honestly made a profit in breach of fiduciary duty (which would be subject to a constructive trust) would potentially be worse off than a fiduciary who had received a bribe (which would not be subject to a constructive trust) (paras. 37-41).
• Wider policy considerations favoured such a remedy in cases of bribery (para. 42).
• The fact that unsecured creditors of an insolvent agent’s estate may be disadvantaged did not detract from this view (paras. 43-44).
• Such a decision would bring the law into line with the position in other common law jurisdictions which was desirable (para. 45)

NOTE

The Supreme Court’s decision, and its reasoning, follows the approach of two of the most influential voices in modern fiduciary law in Lord Millett and Finn J in Australia (author of the seminal text on fiduciary duties), writing both judicially and extra-judicially. The latter’s judgment in Grimaldi v Chameleon Mining (2012) 287 ALR 22 was cited in the Supreme Court’s decision and contains a detailed and valuable review of fiduciary principle as to liability and remedy more generally.