FHR bought a long lease for €211.5 million. Cedar Capital conducted the negotiations on FHR's behalf, but also received a €10 million commission from the vendor. On becoming aware of this commission, FHR sought to recover it from Cedar Capital. As its negotiating agent, Cedar Capital owed fiduciary duties to FHR, and had not obtained FHR's fully informed consent to the commission. Cedar Capital therefore had to account to FHR for the commission. However, applying the Court of Appeal's decision in Sinclair Investments (UK) Ltd. v Versailles Trade Finance Ltd. [2011] EWCA Civ 347, [2012] Ch. 453, Simon J. held that the remedy was purely personal; FHR could not assert a proprietary constructive trust over the €10 million: FHR European Ventures LLP v Mankarious [2011] EWHC 2999 (Ch). The Court of Appeal allowed an appeal as to remedy, distinguishing the facts from those in Sinclair v Versailles, but also casting some doubt on the correctness of that decision: [2013] EWCA Civ 17, [2014] Ch. 1. The Supreme Court was thus required to pass judgment on the voluminous debate as to whether English law should follow Lister & Co. v Stubbs (1890) 45 Ch.D. 1, or Attorney-General for Hong Kong v Reid [1994] 1 A.C. 324.
Delivering judgment less than a month after argument, the Supreme Court has now held that Lister v Stubbs was mistakenly decided and overruled Sinclair v Versailles, holding that “where an agent 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, the equitable rule (‘the rule’) is that he is to be treated as having acquired the benefit on behalf of his principal, so that it is beneficially owned by the principal”: FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2014] 3 W.L.R. 535 at [7]. The Court of Appeal had, therefore, correctly found that FHR was entitled to a proprietary constructive trust over the €10 million.
The authorities on this issue had been, to say the least, confused: “it is not possible to identify any plainly right or plainly wrong answer … as a matter of pure legal authority”: FHR, at para. [32]. Some judgments, of which Lister v Stubbs is perhaps the most celebrated, had clearly limited the fiduciary's principal to a personal remedy in respect of a secret commission received in money form, denying the possibility of proprietary relief. Lindley L.J. famously suggested that to hold otherwise would entail “confounding ownership with obligation”: Lister, at p. 15. However, less than one year earlier, the same judge had held that where a secret commission comprised shares, “it would be contrary to all principles of law and equity to allow the [fiduciary] to retain the gift … and the [principal] has the option of claiming what is given, or its value”: Eden v Ridsdales Railway Lamp & Lighting Co. Ltd. (1889) 23 Q.B.D. 368, 372 (CA). Indeed, the Supreme Court noted in FHR that all of the judges in Lister “had given earlier judgments which were inconsistent”: FHR, at para. [47]. In Tyrrell v Bank of London (1862) 10 H.L.C. 26, 11 E.R. 934, the House of Lords had rejected proprietary relief in respect of some benefits received by a solicitor while acting for company promoters, although they would have allowed such relief in respect of profits made by the solicitor in connection with the property he had sold to the promoters. But the cryptic speeches in that case can also be read as rejecting even personal relief against the solicitor in respect of the other benefits he received, although they are not at all clear in this regard. In these circumstances, the Supreme Court turned to principle and policy.
FHR was not a case where the fiduciary was insolvent (see [2013] EWCA Civ 17, at para. [14]), but the consequences for third party creditors of recognising a proprietary constructive trust were addressed, if somewhat briefly. The Supreme Court seemed influenced by what Lord Collins (who sat in FHR) had said in Daraydan Holdings Ltd. v Solland International Ltd. [2004] EWHC 622 (Ch), [2005] Ch. 119 at [86]:
There are powerful policy reasons for ensuring that a fiduciary does not retain gains acquired in violation of fiduciary duty, and I do not consider that it should make any difference whether the fiduciary is insolvent. There is no injustice to the creditors in their not sharing in an asset for which the fiduciary has not given value, and which the fiduciary should not have had.
This prophylactic approach to the remedies for breach of fiduciary duty resonates with other facets of fiduciary doctrine.
Ultimately, “there is no ineluctable right answer” (Watts, (2013) 129 L.Q.R. 527, p. 531) to the questions addressed in FHR. The decision is dramatic for being a unanimous decision of a seven-member bench, and for being delivered by Lord Neuberger P.S.C., who (as Lord Neuberger M.R.) had delivered the Court of Appeal's (also unanimous) decision in Sinclair v Versailles. The Supreme Court has now set down a clear marker, and it is “useful to have a judgment in English law which is right because it is final”; as the debate prior to FHR shows, there is, and no doubt remains, “precious little prospect of agreement on a judgment that is final because it is right”: Nolan, (2011) 127 L.Q.R. 19, p. 23.
That said, questions remain following FHR. Once the point of legal principle was decided in FHR, its application to the facts in the case itself was straightforward. But that is not always going to be the case: for example, will benefits obtained indirectly from a breach of fiduciary duty, as in Sinclair v Versailles, be caught by the principle in FHR? In Sinclair, the fiduciary profited by selling shares which he did not hold, or deal with, in a fiduciary capacity, but where the fiduciary's misapplication of other funds (in a Ponzi scheme) allowed him to inflate the value of his shareholding. If the fiduciary must account for such profit, as the Court of Appeal indicated in Sinclair, FHR suggests that the principal will have a proprietary right to that profit (assuming it, or its traceable product, can be located).
Relatedly, if the fiduciary takes a loan from his principal in a way that involves a breach of fiduciary duty, will the principal have a proprietary claim in respect of any profits which the fiduciary generates from employment of the loan monies? Traditionally, a breach of fiduciary duty renders a transaction voidable, rather than void, which means that the principal can rescind the loan transaction, but has no proprietary interest (beyond the mere equity to rescind) in the loan monies (even assuming they can be identified or traced) until the transaction is rescinded: e.g. Daly v Sydney Stock Exchange Ltd. (1986) 160 C.L.R. 371, 387–88. It is unclear to what degree the decision in FHR might alter this position. Presumably, the results will be similar if the right to rescind is recognised as binding on unsecured creditors in the event of the fiduciary's insolvency (although that issue is itself difficult: Watts, (2009) 3 Jo. of Eq. 250).
Where a proprietary constructive trust is available in respect of a secret commission, the Supreme Court indicated that the principal can elect between that and a personal account of profits: FHR, at para. [7]. It is unclear to what degree this observation was intended to contradict the Privy Council's observation in Reid, at p. 336, that “[a] fiduciary remains liable for the amount of the bribe if, in the event, the value of the property then recovered by the injured person proved to be less than that amount”. Reid effectively permits the principal to elect for a lien over the commission, rather than a constructive trust, where that is beneficial to the principal, similarly to Foskett v McKeown [2001] 1 A.C. 102, 131. Hopefully, the election referred to in FHR, between proprietary and personal remedies, does not exclude a right to elect between different possible proprietary remedies (although this issue is also ameliorated, in part, if a Re Lake [1903] 1 K.B. 439 compromise can be employed).
Allied to the previous observation is the question whether the court can refuse to recognise the proprietary remedy in a particular case. While FHR brings English law into line with other Commonwealth jurisdictions as to the availability of a constructive trust (FHR, at para. [45]), the Supreme Court mentioned that the proprietary remedy which it recognises is not a remedial constructive trust (FHR, at para. [47]). Similarly, Reid suggested that the constructive trust arises automatically on receipt of the secret commission: Reid, at p. 331. In contrast, in Australia, the court can, in its discretion, refuse to recognise a constructive trust in such circumstances: see Grimaldi v Chameleon Mining NL (No. 2) [2012] FCAFC 6, (2012) 200 F.C.R. 296 at [582]. It remains to be seen to what degree England finds itself able to hold to its approach in future, and whether its lack of flexibility in this regard might generate injustice, although that question in turn re-opens to a significant degree the very debate the Supreme Court has sought to quiet (see e.g. Grimaldi, at para. [583]).
