FHR European Ventures LLP & Ors v Mankarious & Ors

In this action the Claimants claim €10 million as undisclosed commission received by the Defendants in breach of their duty as fiduciary agents not to profit from their position or to put themselves in a position where their interest and duty were in conflict. The Defendants contend that they are entitled to retain the commission the payment of which was known to the Claimants and counterclaim for sums due from the Claimants in respect of work done on their behalf.

At the centre of this dispute is the sale of a long leasehold interest in the Monte Carlo Grand Hotel (‘the Hotel’) in December 2004. The vendor of the Hotel was a company, owned or controlled by Mr Toufic Aboukhater, and the purchaser was the first Claimant (‘FHR’), a Limited Liability Partnership incorporated in England and Wales. The price paid for the Hotel was €211.5 million.

In July 2004 the first Defendant (‘Mr Mankarious’) established a new business venture, Cedar Capital Partners (‘Cedar’), with the intention of providing consultancy services to the hotel industry. Among Cedar’s clients were the 6th Claimant (‘BoS’) and the 4th Claimant (‘Fairmont’). BoS funded and invested in hotel businesses; and Fairmont owned and managed a number of hotels.

Acting on behalf of BoS and Fairmont Mr Mankarious negotiated a non-binding Memorandum of Understanding with the vendor on 5 October 2004. This recorded proposed indicative terms by which a joint venture company would acquire the exclusive right to purchase the vendor’s interests in the Hotel for €215 million. It was intended that there should be other investors in the Hotel; and subsequently the 2nd claimant (‘Kingdom’) became an investor. Kingdom, which represented the commercial interests of Prince Alwaleed bin Talal bin AbdulAziz al Saud (‘the Prince’), was a well-established investor in luxury hotels around the world. Kingdom and the Prince were advised by an independent advisory business, Hotel Capital Advisers (‘HCA’) whose President was Mr Chuck Henry.

The vendor regarded secrecy and confidentiality as important; and the Memorandum of Understanding contained terms covering confidentiality as well as exclusivity. At a late stage in the due diligence enquiries carried out on behalf of the purchasers, an unforeseen liability for costs was discovered; and Mr Mankarious negotiated a reduction in the purchase price from €215 million to €211.5 million. 75% of this sum was financed by debt and 25% by the equity participations of the Joint Venture participants (BoS 50%, Fairmont 25% and Kingdom 25%).

On 21 December 2004 BoS, Fairmont and Kingdom agreed terms by which their subsidiaries, the 7th, 5th and 3rd Claimants became shareholders in FHR. The joint venture had a potential investment capacity of £800 million with £600 million of financing provided by BoS, and equity funding of £200 million which would be provided in the proportions used in the funding of the purchase of the Hotel. Cedar was to be appointed as manager and investment advisor to FHR.

Following the successful acquisition of the Hotel, Cedar continued to work on other potential projects on behalf of FHR and its backers, and rendered invoices in respect of the work it had done. In April 2005 Kingdom discovered that Cedar had been paid a fee by the vendors in relation to the sale of the Hotel. After some equivocation Mr Mankarious revealed that the fee was €10 million. Kingdom and Fairmont took a strongly adverse view to this discovery and declined to pay Cedar’s invoices. The view of BoS seems to have been less an objection to the payment of a fee than to its amount. The reason for this was that it is common ground that Mr Middleton and Mr Shankland of BoS had been told by Mr Mankarious, in terms which are disputed, that he was to be paid a fee by the vendor if the Hotel were sold to the joint venture purchasers.

On 15 September 2005 Dundas & Wilson CS LLP wrote on behalf of FHR to Cedar complaining about the fee and bringing to an end the business dealings between FHR and Cedar, making clear Cedar’s invoices would not be paid and reserving the right to bring proceedings to recover the €10 million payment.

On 23 November 2009 the Claimants issued proceedings for the recovery of €10 million on the basis that it had been paid to the Defendants at a time when they were acting as the Claimants’ agents.

From 1995 until 30 June 2004 Mr Mankarious was employed by Kingdom to look into opportunities for acquisition and investment in hotels. In that capacity he had come into contact with Toufic Aboukhater in late 2002, and had looked into the possibility of Kingdom acquiring the Hotel. These negotiations, which also involved Fairmont as the potential operator, had reached the stage of a non-binding Letter of Intent dated 21 March 2003 for the acquisition of the Hotel by a Kingdom subsidiary for US$215 million. In the event the sale did not proceed due to Kingdom’s discovery of adverse trading results and the vendor increasing the price.

At a meeting with the owners of the Hotel on 19 May 2004, Mr Mankarious learned that they were again prepared to sell the Hotel, for a price in excess of €200 million.

After the establishment of Cedar on 1 July, Mr Mankarious was retained by Kingdom in connection with its proposed purchase of the Savoy Hotel in London. This involved work with BoS (as funders of the acquisition) and Fairmont (as operator). Among those who were involved in the purchase of the Savoy Hotel and in the later purchase of the Hotel in Monte Carlo were Mr Peter Cummings (the Managing Director of BoS’s Corporate Banking arm), Mr Douglas Middleton (the Director in the Joint Venture Division at BoS) and Mr Andrew Shankland (who was Mr Middleton’s subordinate in the Joint Venture Division), Mr Bill Fatt (the CEO of Fairmont) and Mr John Johnston (the Executive Vice President of Development at Fairmont).

At the same time as the Savoy Hotel deal transaction was going ahead, Mr Mankarious was continuing to make contact with the owner of the Hotel who seemed, at least at the early stages, equivocal about selling.

On 10 August Mr Mankarious had a meeting with Bassam Aboukhater, the son of Toufic Aboukhater, and noted his agreement (subject to confirmation from his father) that Cedar would represent the owners in selling the Hotel at a minimum price of €225 million, and his agreement that Cedar would also be permitted to represent the purchasers.

In the light of this understanding with the owners and in the course of finalising the Savoy Hotel transaction, Mr Mankarious wrote on 11 August to Mr Cummings of BoS about the possibility of a purchase of the Hotel and indicating Fairmont’s interest in operating and investing in the Hotel.

Mr Mankarious invited Mr Cummings to join him and Mr Fatt on a visit to Monte Carlo to view the Hotel. Mr Cummings was unable to join them on the visit, but expressed BoS’s interest and suggested that Mr Mankarious make contact with Mr Middleton.

Mr Mankarious’s notes show that a set-back to his plans occurred on 14 August when he was told by Bassam Aboukhater that his father was no longer interested in selling the Hotel. However, by 26 August he (Toufic) had changed his mind and indicated to Mr Mankarious that he wanted to sell for around €225 million, although this was subject to an interest from another prospective purchaser.

In the meantime Mr Mankarious continued to encourage BoS and Fairmont to buy the Hotel. Discussions took place about a Joint Venture funded by BoS with equity provided by participating joint venturers; and it is clear that Mr Mankarious was keen to promote both the concept of the joint venture and the acquisition of the Hotel once the Savoy Hotel transaction was concluded.

On 16 September Mr Mankarious wrote to Mr Fatt suggesting ways in which Cedar might be able to assist Fairmont, both in relation to the acquisition of the Hotel and the proposed joint venture which would acquire further hotels; and referred to his extensive discussions with BoS.

In early September Mr Mankarious and his assistant Mr Phil Golding, who had joined Cedar on 7 September, prepared the first of a number of drafts of a document headed, ‘Investment Memorandum’. The document, which was sent by Cedar to BoS and Fairmont in slightly different forms, described the Hotel and its prospects. Both versions had an initial note about confidentiality.

In the version which appears to have been sent to BoS sometime between 16 and 22 September there was a description of what was described as ‘The Opportunity’.

On 22 September there was a meeting between Mr Mankarious, Mr Middleton and Mr Shankland at the offices of HBOS in Bishopsgate. Although there are differences of recollection as to what was said at this meeting, it is common ground that BoS was told that Cedar would receive a fee from the vendors if it introduced a successful purchaser.

Five issues arise from this meeting: first, whether Mr Mankarious stated that Cedar would receive a ‘flat fee’; secondly, whether Mr Mankarious’s statement was a sufficient disclosure of Cedar’s remuneration from the vendors; thirdly, whether Mr Mankarious specifically requested BoS’s approval of the fee; fourthly, whether Messrs Middleton and Shankland said they would discuss the matter internally; and fifthly whether BoS was acting on behalf of any other party at the time. It is common ground that the size of Cedar’s fee from the Vendor was not mentioned.

The basis on which the vendors granted Cedar the right to act as sole selling agent of the Hotel on behalf of the vendors was contained in an ‘Exclusive Brokerage Agreement’ dated 24 September 2004. The terms included the following

It is apparent, and could hardly have been concealed, that Cedar and Mr Mankarious fully informed the vendors of the role they intended to play as part of the Investor Group. The main question that arises is whether Cedar and Mr Mankarious disclosed to the Purchaser on behalf of whom they also acted the nature and extent of the remuneration that was to be paid by the vendors if the sale of the Hotel went ahead.

On 28 September Cedar sent a version of the Investment Memorandum to Fairmont. As already noted, the contents were different from the version previously made available to BoS. Information which had been derived from Fairmont was not included in the version that was sent to Fairmont and the heading ‘The Opportunity’ contained nothing about the basis on which Cedar were involved on behalf of the vendors.

On the following day and at the request of BoS, Cedar sent a revised version of the Investment Memorandum to BoS. This omitted the words quoted above in §21 and replaced them with:

Mr Mankarious gave evidence that the change was made at the request of the vendors who were concerned to avoid giving the impression that they wished to sell the Hotel.

On 30 September Mr Mankarious sent the first of a number of draft proposals for the Joint Venture. At this stage the proposal was for a Joint Venture managed by Cedar which would acquire hotels across Europe, with a capital base of £200 million (funded as to 50% by BOS, 25% by Fairmont and 25% by another investor). Mr Mankarious also proposed a fee structure for Cedar based on an annual management fee, acquisition and disposition fees, and a share in the profits of the Joint Venture. By this stage Mr Mankarious had Kingdom in mind as the ‘other investor’.

A number of meetings were held by Mr Mankarious on 4 October. One of these took place at approximately 12.30-1.00 pm at Cedar’s rooms at Fairmont’s offices in Soho Square. Mr Middleton and Mr Shankland were present on behalf of BoS, and Mr Mankarious and Mr Golding were there on behalf of Cedar. Two factual issues arise in respect of this meeting. First, whether the BoS representatives said that they had discussed Cedar’s fee internally and had concluded that it did not give rise to a conflict of interest; and secondly, whether BoS were acting on behalf of anyone else at this stage. Again it is common ground that the size of Cedar’s fee from the vendors was not mentioned.

On the following day Mr Mankarious held a meeting with Mr Johnston of Faimont. Unlike Cedar’s meetings with BoS on 22 September and 4 October, there is a stark difference of recollection as to whether Mr Mankarious told Mr Johnston that BoS had approved Cedar’s fee arrangement with the vendors. Mr Mankarious gave evidence that he did. Mr Johnston’s evidence was that he did not.

On 5 October a Memorandum of Understanding was signed between the vendors on the one side and Mr Shankland and Mr Fatt, on behalf of the proposed joint venture purchasers, on the other. This provided for the sale of the Hotel at a price of €215 million during an ‘Exclusivity Period’ up to 31 December 2004.

In a letter dated 8 October, Mr Mankarious wrote to the Prince inviting Kingdom to participate in the Joint Venture. The proposal was that Kingdom should take a 25% (£50 million) equity interest. The Joint Venture was described as an equal partnership in which investment opportunities would have to be approved by all partners. The letter also referred to the recently signed Memorandum of Understanding for the sale of the Hotel, and proposed this as the first investment. On 26 October Mr Henry notified Mr Mankarious of the Prince’s decision fully to back the proposal, with the Hotel as the Joint Venture’s first investment.

Once Kingdom had agreed to participate, Cedar continued to act for the Joint Venture partners in negotiations with the vendors, including the €3.5 million reduction in the purchase price to take into account the cost of the necessary plumbing works. Cedar also carried out work for the Joint Venture in relation to the acquisition of three other hotel projects: the Hotel Danieli in Venice, the Hotel Intercontinental in Paris and the Hotel de l’Europe in Amsterdam.

The matter of Cedar’s remuneration was addressed in the early part of 2005. The partners in FHR had entered into an agreement on 21 December 2004 to record the terms of their joint venture and, by clause 3.2(i), agreed that FHR would enter into ‘the Investment Advisory Agreement’ with Cedar. Cedar’s intended role as ‘managers and investment advisors for the joint venture’ was also mentioned in a Press Announcement on 22 December.

No written agreement with Cedar was ever concluded, but it is Cedar’s case that all the terms were agreed prior to the termination of Cedar’s position as manager and investment advisor, by reference to Cedar’s ‘Role and Fee Term Sheet’. These terms were the subject of negotiation in the early months of 2005; and on 7 April Cedar sent invoices addressed to FHR representing (a) a success fee for the acquisition of the Hotel in the sum of £400,000 (+ VAT) and (b) 2 quarterly retainer fees of £81,250 (representing the period 5 October 2004 to 5 March 2000) in the overall sum of £162,500 (+ VAT). BoS and Fairmont were content with these figures. However, Kingdom (through Mr Henry of HCA) was not prepared to agree. Kingdom had earlier insisted that Kingdom’s share of Cedar’s fee be shared with HCA, and had more recently discovered that Cedar had been paid a fee by the vendor of the Hotel. As Mr Henry explained in an email on 11 April,

Mr Johnston of Fairmont immediately responded.

On 3 May 2005, BoS circulated a further draft of the proposed agreement with Cedar prepared by Dundas & Wilson. This was said to encompass the ‘commercial discussions’ of which Mr Johnston would not have been aware, as well as some further amendments which were proposed by the lawyers after discussions with Mr Middleton and Mr Mankarious. Mr Mankarious responded to this draft on 11 May 2005; and at BoS’s suggestion circulated his comments to Mr Henry (HCA) and Mr Johnston (Fairmont).

In the event, an agreement with Cedar became impossible after the discovery by Kingdom and Fairmont that Mr Mankarious had received a fee from the Hotel vendors. The Prince’s advisor, Michael Jensen of Citigroup, spoke to Mr Mankarious about the issue on 27 June 2005 and reported the terms of their conversation to the Prince. This included,

The Prince was annoyed by Mr Mankarious’s failure to tell Kingdom about the fee; and refused to have any further dealings with him.

According to Mr Mankarious’s personal note, he met Mr Middleton on 29 June to discuss the issue of the Vendor’s fee.

After some equivocation, which may have been due to the effect of disclosure on a separate claim for commission brought against the Vendors in relation to the sale of the Hotel (see Aboualsaud v. Aboukhater[2007] EWHC 2122 (QB)), Mr Mankarious disclosed the Exclusive Brokerage Agreement to BoS, Fairmont and Kingdom .

The disclosure of the Exclusive Brokerage Agreement, and in particular the size of the fee, ended the negotiations about Cedar’s services and remuneration. On 2 August 2005, Mr Mankarious sent to BOS four invoices addressed to FHR. These were the 2 unpaid previous invoices, a third invoice for the quarterly fee from 5 April to 4 July 2005 and a fourth invoice for 3 quarterly Asset Management Fees £37,000 (+VAT) at £12,500 per quarter.

On 15 September 2005 Dundas & Wilson wrote on behalf of FHR, terminating any further business connection of whatsoever nature between Cedar and FHR and giving notice that FHR would not pay any sums for services provided and would not enter into any agreement for the provision of services. This was said to be due to,

Following the issue of the Claim, the Defendants served a Defence and Counterclaim. In addition to resisting the claim and advancing a set off, the Defendants cross-claimed for what they claimed was their entitlement under the agreement on the final terms of the Role and Fee Term Sheet (‘Term Sheet’). The counterclaim was based on the Acquisition Phase Consultancy Fee (£400,000 as the success fee for the acquisition of the Hotel), the Pre-Acquisition Phase Consultancy fee (£325,000 per annum) and the Asset Management Consultancy Fee (£50,000 per annum). In addition a claim was made which was based on an Asset Disposal Phase Consultancy Fee based on the later sale of the Hotel by FHR allegedly for €310 million.

It is convenient at this stage to set out my view of the witnesses in so far as their evidence bore directly on the important issues in the case.

Mr Shankland was disadvantaged by an almost complete failure by BoS to make contemporaneous notes of meetings. This is particularly striking when one considers that BoS had involved itself in potential financial commitments of up to £700 million. Although it is common ground that Mr Middleton and Mr Shankland were told that Cedar was receiving a fee from the Vendor, there is no record of this anywhere in BoS’s records. This posed difficulties for Mr Shankland who had to recall two short conversations which occurred nearly 7 years before without the assistance of a contemporary record. Mr Middleton was not called to give evidence by either side.

Mr Johnston is an experienced businessman and was an impressive witness. He was clear and assured in his evidence, and emphatic and persuasive in his recollection of what occurred at the meeting with Mr Mankarious on 5 October 2005.

Mr Mankarious is an adroit businessman who had a bold vision for his newly-established company, Cedar. It was plain that he had thought very carefully about the case and was acutely aware of the implications of the evidence he gave. I accept much of his evidence; however, there were some parts which I was unable to accept. I did not get the impression that he was being deliberately untruthful: rather that over the years he has come to think that he had said more than he did.

Mr Golding struck me as an essentially truthful witness, although he made assumptions in the light of what he was told by Mr Mankarious.

There are two primary factual issues which arise for decision. The first concerns the extent of Cedar’s disclosure of the Exclusive Brokerage Agreement with the vendors. The second, which is a matter of mixed fact and law, is whether there was a concluded contract between Cedar and FHR.

As already noted, it is common ground that BOS were informed of the fee from the Vendors. As Mr Shankland put it in §§16 and 17 of his first witness statement,

Mr Mankarious’s recollection was set out in §57 of his first witness statement.

In his second witness statement at §§7 and 8 Mr Shankland took issue with Mr Mankarious’s description of what occurred.

I have concluded that Mr Shankland is correct in saying that Mr Mankarious was playing down the significance of the fee. Although Mr Mankarious recognised the importance of telling BOS that there was such a fee, he did not wish to tell them how much it was. As he said in evidence,

In my judgment Mr Mankarious knew very well that the Joint Venture partners would object to the size of the fee and this was why he did not tell them. This meant that what he told BoS about the fee had to be said in such a way that he would not be asked questions which might oblige him to reveal the amount. It seems to me that the strong likelihood is that Mr Mankarious wished to give the impression that the fee was an immaterial or ‘minor issue’ in the overall context of the transaction, and that he succeeded in conveying this impression.

I am also satisfied that Mr Mankarious did not say he was receiving ‘a flat fee’. At this stage he would not have thought it either necessary or desirable to elaborate on the nature of the fee. The importance of the fee being a flat fee emerged when the potential conflict of interest was brought into the open, and was raised by him in order to answer the argument that Cedar did not have an interest in negotiating a purchase price which was as low as possible.

Mr Mankarious may have received the impression that the issue of the fee was going to be discussed internally by BoS, but nothing said by Mr Middleton or Mr Shankland justified this impression. They were not being asked to give their consent. It is likely that BoS indicated that they would reflect on what they had been told rather than that there would be internal discussions within BoS; but this observation may have been said in the context of Cedar’s proposal for its fees from the Joint Venture.

The evidence about this meeting was contained in the statements of Mr Mankarious and Mr Golding. Mr Mankarious’s 1st witness statement described the meeting in §§63-64.

In §65 of his statement Mr Mankarious describes his reasons for not telling BOS about the amount of the fee adding,

Mr Golding gave evidence about this meeting in §§9-10 of his 1st witness statement.

Both witnesses gave oral evidence which accorded with their statements. Mr Shankland had no recollection of the meeting.

The meeting was primarily concerned with transactional matters and not with discussions about Cedar’s fee. I accept that Mr Mankarious may have been apprehensive at the beginning of this meeting about BoS’s reaction to what it had been told about the fee; but his apprehensions were more based on what he knew than on what he had told BoS. Although Mr Golding describes the BoS executives saying the issue had been discussed internally, it is clear from Mr Shankland’s evidence that any discussions would have been between Mr Middleton and him, in the light of what they had been told. Having considered the evidence I have concluded that Messrs Middleton and Shankland indicated that the fee was not a problem. Although this was probably said in the context of Cedar receiving a fee from the vendor, it is at least possible that it referred to Cedar’s proposed fees from the Joint Venture participants.

Mr Mankarious described the meeting in his 1st witness statement.

Surprisingly Mr Johnston did not deal with this meeting in his 1st witness statement. However he did so in §§8-10 of his 2nd witness statement,

Mr Johnston’s oral evidence was that there had been a discussion about Cedar’s fees but no discussion about its arrangement with the Vendors. He was challenged in cross-examination as to what he would have done if he had been told.

Having heard the witnesses give their evidence (including Mr Golding’s evidence as to what Mr Mankarious told him after the meeting), I have concluded that Mr Mankarious did not raise Cedar’s fees with Mr Johnston, or at least not in a way from which he could be expected to understand that Cedar was to be paid a fee by the Vendor if the sale went ahead, and that BoS had agreed to this. Mr Mankarious’s note referring to ‘Cedar fees’ is equivocal and is most likely to have been a reference to the fees that Cedar was expecting from Fairmont and the proposed Joint Venture. There are 3 further points which reinforce this conclusion. First, if Mr Mankarious thought that BoS was the lead partner and that disclosure to BoS was sufficient, it is unclear why he thought it necessary to disclose Cedar’s arrangement with the Vendors to Mr Johnston at all. Secondly, if Mr Mankarious had made disclosure that BoS had approved Cedar’s fee arrangement in anything other than clear terms, Mr Johnston might easily have misunderstood him to be referring to Cedar’s fees from the purchasers. Thirdly, there is the immediate reaction email response from Mr Johnston, when told on 11 April 2005 that Mr Mankarious was saying that BoS and Fairmont were aware of the fee arrangement and had agreed to it,

His evidence was that this was the first time that he was aware that Cedar was being paid a fee by the vendors. I am entirely satisfied that if Mr Mankarious had told Mr Johnston on 5 October 2004 that Cedar was receiving a fee from the Vendors, Mr Johnston would have immediately wanted to know how much it was. He struck me as likely to have been much more alert to the implications of such a fee than the BoS employees were.

It is clear that Mr Mankarious had been putting forward Term Sheets as a basis for Cedar’s remuneration from as early as 26 September 2004. In a version (described as ‘Agreed Term Sheet’) dated 28 January 2005 the fee structure was proposed on the basis of (1) an annual pre-acquisition and management fee of £375,000, (2) an acquisition or success fee of 0.5% of the purchase price of the Hotel with a minimum of £200,000 and a maximum of £400,000 per transaction, (3) an asset disposal success fee of 0.2% of the Joint Venture equity proceeds on re-sale, and (4) a profit share on a sliding scale based on the Investment Rate of Return. Among the terms was a provision for the ‘Termination of Contract’,

The commercial terms were agreed by each of BoS, Fairmont and Kingdom, and a draft Consultancy Services Deed was prepared by Dundas & Wilson, described as ‘Draft for Discussion’. The parties were Cedar, Mr Mankarious and FHR. This document was sent to BoS and HCA on 7 February on the factually correct assumption that the commercial terms in the draft were the outcome of discussions between BoS and HCA (acting on behalf of Kingdom).

On 1 April 2005 Cedar emailed invoices to BoS for £400,000 (+VAT) in respect of the acquisition fee and £162,500 (+VAT), representing half of the annual pre-acquisition and management fee of £375,000. On 6 April BoS and Fairmont agreed that the payments should be made. The invoices were then resubmitted to FHR. It was shortly after this that HCA discovered that Cedar had been paid a fee by the Vendor. On 3 and 10 May Dundas & Wilson produced further draft Consultancy Services Deeds, each again described as a ‘Draft for Discussion’. In the middle of May an issue arose as to what was to happen to Cedar’s entitlement if the Agreement were terminated before the fifth year. Mr Mankarious proposed a sliding scale of entitlement to the fee which would be earned; and Mr Middleton suggested a different sliding scale. The issue had arisen in the context of the possibility of Mr Mankarious simply deciding to stop work within the 5 year operative period of the Deed.

On 2 August a further invoice was rendered in respect of the outstanding fees and in respect of the third quarterly payment of the annual pre-acquisition and management fee.

Mr Mill submitted that this was an example of an agreement where the parties had shown an intention to be bound by clear commercial terms in advance of the conclusion of a signed written agreement dealing with other issues which might arise. Mr Pymont submitted that it was clear from the terms of the Term Sheet relied on by Cedar that no agreement had been reached on how the Agreement might be terminated ‘For Cause’; and what might happen if Mr Mankarious ceased working within the period of the Deed, but without giving rise to a termination for cause. He argued that this was a case where the parties intended that their contract should not become binding until all the terms of had been agreed, reduced into writing and signed.

The nature of an agent’s fiduciary duty is conveniently summarised in a passage from the judgment of Millet LJ in Bristol and West BS v. Mothew [1998] 1 Ch at 18.

It follows that an agent may not put himself in a position or enter into a transaction in which his personal interest, or his duty to another principal may conflict with his duty to his principal, unless his principal, with full knowledge of all the material circumstances and of the nature and extent of the agent’s interest, consents, see Bowstead on Agency (2006) 18th Ed. §6-055, approved by Atkinson J in Hindmarsh & anor v. Brigham & Cowan Ltd (1943) Ll L Rep 141 at 151.

The principle may be stated in the form of a general rule and an exception. So far as the general rule is concerned, it has been stated to be an ‘an inflexible rule of a Court of Equity’, see Bray v. Ford[1896] AC 44 at p.51 per Lord Herschell, a rule which applies not only to cases of actual conflict but also where the fiduciary’s interest may possibly conflict with his duty, see Aberdeen Railway Co v. Blaikie Bros (1854) 1 Macq. 461 at p.471 per Lord Cranworth LC, and a rule which applies even where the fiduciary’s conduct has benefited the principal, see Regal (Hastings) v. Gulliver[1967] 2 AC 134 at p.153 per Lord Macmillan.

The exception applies where the principal has given fully informed consent. There is ample authority for this proposition which was accepted as a matter of principle by the Privy Council in N Z Netherlands Society ‘Oranje’ Inc v. Kuys[1973] 1WLR 1126 p.1131h-1132a. The point was stated succinctly, and by reference to the statement of principle of Lord St Leonards LC in Murphy v Shea (1845) 8 J & Lat 422, by Sir George Jessel MR in Dunne v. English (1874) LR 18 Equity Cases 524 at 533,

The agent who relies on the exception of informed consent must prove it. The editors of Bowstead set out the principle at §6-057.

The materiality of what must be disclosed is to be assessed on the basis of whether it might have affected the principal’s decision and not whether it would have done so, see for example Andrews v. Ramsay & Co[1903] 2 KB 635 Lord Alverstone CJ at 637-8 and Johnson v EBS Pensioner Trustees Ltd[2002] EWCA Civ 164 Dyson LJ at [71].

In Hurstanger the Court of Appeal also considered whether the agent’s duty of disclosure requires disclosure of the amount of the commission. On this question the Tuckey LJ at [36] cited with approval a further passage from Bowstead at 6-084,

Since the sufficiency of disclosure is dependent on the facts of particular cases, previous decisions will be of limited assistance. However, it is convenient at this stage to refer to a line of cases relied on by the Defendant:

There may be circumstances in which the payment of commission is wholly immaterial since it does not give rise to any conflict of interest and duty and therefore the application of the ‘inflexible rule’, see for example Anangel Atlas Compania Naviera AS and ors v. Ishika Wajima-Harima Heavy Industries Co. Ltd [1990] 1 Ll. Rep 167.

Where the principal knows the agent will receive a commission and could have discovered what the commission was, but did not take the trouble to enquire, a misapprehension as to the amount of the commission will not mean that there has been no informed consent, see for example Great Western Insurance Co of New York v. Cunliffe(1874) LR 9 Ch App 525 at 539 and Baring v. Stanton(1876) 3 Ch D 502 at 505.

The Court will not regard there being a lack of consent where the principal knows that commission will be paid, but wrongly assumes that it is an annual retainer rather than the ‘standard and usual brokerage’, see Hindmarsh v. Brigham & Cowan Ltd [1943] 76 Ll.LR 141 at 152r.

The latter two categories illustrate a consistent approach: where the agent can show a customary usage or that the amount of the commission is standard and ascertainable on enquiry, the failure of the principal to make enquiries as to the amount of the commission is fatal to a contention that there has been insufficient disclosure. They do not assist where there is no customary usage of which the principal is deemed to have notice, or where the amount of the commission is not easily ascertainable from an available source which the principal has failed to take the trouble to discover.

Where the agent has more than one principal the disclosure must be made to each principal unless one principal is (expressly or implicitly) authorised by another principal to receive disclosure on behalf of that other principal. Mr Mill argued that BoS was ‘the lead partner’ and that it was sufficient to make disclosure to ‘someone who is the leader’. He relied on a short passage in the judgment of Briggs J in RossRiver Ltd and anor v, Cambridge City Football Club[2007] EWHC 2115 (Ch) at [215]. The passage illustrates that Briggs J was dealing with a different type of case.

In the present case, as in most such cases, the question of whether the disclosure to one principal is sufficient disclosure to all principals raises an issue of authority. Thus in the present case the issue is whether BoS was conferred with actual or implied authority to be the recipient of disclosure on behalf of the co-principals (it being conceded that issues of ostensible authority do not arise here).

If the agent is in breach of fiduciary duty in relation to the receipt of commission he will be bound to account for such sum to the principal, see Snell’s Equity 31stEd. §7-127 and Bowstead §6-082. In addition, the principal is entitled to refuse to pay contractual commission in respect of the transaction as to which the agent is in breach, and can bring to an end the contract of agency summarily, see Bowstead §7-047. The case of Andrews v Ramsey & Co (above) at p.636-8, approved and applied in a number of subsequent decisions of the Court of Appeal is clear authority for both of these consequences of an agent’s breach of fiduciary duty.

In Rhodes v. Macalister (1923) 29 Comm Cas 19 at 28 the Court of Appeal made clear that it makes no difference to the agent’s position that no damage was caused, or that the principal may be advantaged by the agent’s breach of duty in accepting secret commission. At p. 20 Bankes LJ said,

The reason that Equity has adopted a strict approach to the payment of secret commission to an agent was explained by Jacob LJ in Imageview Management Ltd v. Jack[2009] EWCA Civ 63 at [50],

Although the general rule as stated above is said to be an inflexible rule of Equity, there will be cases in which the Court may adopt a flexible course, where the consequence of the application of an inflexible rule would result in inequity.

First, there may be cases where an agent effects severable transactions, and in such cases the rule will only apply to those transactions in respect of which he is in breach of duty, see Bowstead p.296 and cases cited.

Secondly, there are cases where the Court may make an equitable allowance in favour of the agent for expenditure incurred, and for work and skill applied for the benefit of the principal.

Thirdly, where there has been sufficient disclosure to negate the secrecy of the commission, but nevertheless the principal’s informed consent was not obtained, see Hurstanger (above) at [39].

The basis on which an equitable allowance for skill and effort may be made is set out in Snell at §7-131, approved by the Court of Appeal in the Imageview case at [56]. Thus, omitting the authorities referred to in the footnotes,

The principle, which derives from the decision of Wilberforce J and the Court of Appeal in Phipps v Boardman[1964] 1 WLR 993 at 1018 and [1965] Ch 992, Lord Denning MR at 1020, was approved by the House of Lords in Boardman v. Phipps[1967] 2 AC 46.

In Guinness Plc v. Saunders [1990] 2 AC at 701E Lord Goff set out an important limit on an entitlement to an equitable allowance, confining it to,

Finally, on the subject of fiduciary duty, it is convenient to set out a passage from the judgment of Bankes LJ in Rhodes v. Macalister (above) at pp 23-24, cited in the Imageview case:

A further legal issue arises as to whether there was an enforceable contract between FHR, Mr Mankarious and Cedar in the spring of 2005. The issue of whether a contract is complete or incomplete is dealt with comprehensively in Chitty on Contracts 30th Ed. §2-112 and following. Although there are guiding principles which may be applied, whether an agreement is complete or incomplete can conveniently be tested by whether the parties intended to be contractually bound to ascertainable performance at a particular point, see also Pagnan SpA v. Feed Products Ltd [1987] 2 Lloyds Rep 601, Lloyd LJ at 619.

Each side called expert evidence: Mr Frank Croston (on behalf of the Claimants) and Mr Peter Tyrie MBE (on behalf of the Defendants). Each was highly experienced and well-qualified to give evidence about the level of fees which might be expected to be paid to agents who were engaged to sell hotels. Each was also asked to express a view about an agent’s disclosure obligations, while rightly accepting that this was a matter of law, rather than a matter of practice or custom.

In summary the experts agreed that a fee of 1.25% of the sale value represented a fair view of the average percentage fee for hotel transactions in 2004 (this would equate to €2,643,750 on a sale of €211,500,000). Mr Tyrie qualified this by saying that this would be the appropriate fee for a large broking firm acting on the open market. In Mr Tyrie’s view there was no norm for off-market transactions. However he accepted that a fee of €10 million was exceptional and outside what might be considered to represent a normal level of fee.

There is no doubt that Cedar owed an agent’s fiduciary duties to BoS and Fairmont in relation to the establishment of the Joint Venture and in negotiating the purchase and the price of the Hotel. These duties, which were owed from no later than 5 October (in the case of BoS and Fairmont) and preceded the duties owed to Kingdom from the time it agreed to join the Joint Venture on or around 26 October. These duties continued up until the time Cedar’s retainer was terminated.

These duties were owed severally to each of the participants in the Joint Venture and there is no proper basis for finding that BoS was the ‘leader’, with actual authority to act on behalf of Fairmont or Kingdom in relation to commercial dealings with Cedar, or that they were conferred with authority which is to be implied from the role BoS undertook. Each of the Joint Venture participants acted independently of the others in relation to the commercial decisions that were being taken. As Mr Mankarious was aware there were potential conflicts of interests between BoS (as lender as well as participant in the Joint Venture) and Fairmont (as intended operator of the Hotel as well as participant in the Joint Venture) and Kingdom (as participant).

It is clear both from the Exclusive Brokerage Agreement (dated 24 September 2004) and from the Memorandum of Understanding (dated 5 October 2004) that the acquisition would involve subsidiaries or affiliates of BoS, Fairmont and Kingdom (or, in the case of the Memorandum of Understanding, affiliates of other potential investors); and Cedar’s fiduciary duties to BoS, Fairmont and Kingdom extended to the subsidiaries or affiliates of those companies once the structure of the Joint Venture involved such subsidiaries or affiliates. Similarly it was well known by Cedar, not least from its own draft Term Sheets setting out the draft outline terms and conditions on which Cedar would provide services, that a Joint Venture would be established to which Cedar would owe fiduciary duties. I accept however, that Cedar’s obligation of disclosure to the 1st, 3rd, 5th and 7th Claimants would have been discharged by disclosure to each of BoS, Fairmont and Kingdom.

I reject Mr Mill’s submission that Cedar had no conflict of duty and interest. This was a case in which duty and interest were plainly in conflict in the course of Cedar’s negotiation about the price. As Mr Pymont submitted, in circumstances where Cedar were engaged to negotiate the best price, at the very least it was material that the vendor was in fact prepared to receive a net sum of €201.5 million from the sale. That was material to be known by Cedar’s principal and was not made known to them. In any event Mr Mill’s submission seems to be founded on the misconception which Bankes LJ referred to in Rhodes v. Macalister (above) at p.20.

It follows that unless Cedar obtained the fully informed consent of BoS and Fairmont and Kingdom, it could not receive and retain the €10 million commission from the Vendors; and that if it did, it would hold the sum subject to a Constructive Trust, and would not be entitled to claim contractual commission for services in relation to establishing the Joint Venture and the purchase of the Hotel.

So far as BoS was concerned, the sending of the Draft Investment Memorandum, with its references to a sale ‘through’ Cedar ‘on an ‘off-market’ basis’, was not sufficient disclosure that Cedar would receive a commission from the Vendors. Although something may have been said before the 22 September to Mr Middleton and Mr Shankland about Cedar being retained to sell the Hotel by the Vendor, the meeting on 22 September was effectively the start of the disclosure of the Commission payment, since on Mr Mankarious’s evidence this was the main purpose of the meeting. However what was said on 22 September and 4 October was not sufficient to discharge the duty of disclosure. Although it plainly did not need to enter into a formal agreement along the lines of its Exclusive Brokerage Agreement with the Vendors, it was incumbent on Cedar to inform BoS, not only that it was receiving a Commission payment but the amount, €10 million. It was an exceptionally large sum in proportion to the rewards that Cedar was likely to be able to negotiate from its acquisition work for the purchasers (in the event £400,000), and it was a significantly larger percentage than would have been expected. The Defendants’ argument that the size of the fee might have been gauged by the expertise and connections of Cedar in effecting the sale in a discrete manner is unpersuasive: not least since Cedar’s expertise and connections were those of Mr Mankarious acquired as an employee of Kingdom. It was neither a customary rate of reward nor a standard amount which BoS could have discovered upon enquiry. Mr Middleton and Mr Shankland appear to have been strikingly incurious and, on Mr Mankarious’s evidence, complacent; but I am satisfied that this was because they were not sufficiently alerted to the significance of the terms of the commission by Mr Mankarious. It follows that there was not a sufficient disclosure of material circumstances as to the nature and extent of Cedar’s interest in the sale to which BoS consented.

So far as Fairmont is concerned, I have reached the conclusion that Mr Mankarious failed to disclose that Cedar was acting as agent of, or receiving a commission from, the Vendors. So far as Kingdom is concerned it has never been contended that either Kingdom or HCA was told anything about the Brokerage Commission or its terms. It is striking that, when Fairmont and Kingdom were told about the payment, they expressed surprise and annoyance; and when Mr Middleton was told he was (according to Mr Mankarious’s note) ‘surprised’ by the amount.

The fact that the commission was a flat fee is irrelevant. It meant little more than that the amount in respect of which the price paid by the Joint Venturers could be said to be too high was fixed at €10 million. It is unnecessary and unfruitful to speculate about what might have happened if the Joint Venture participants had been told about the payment of €10 million. At the very least it is likely that they could have used the information to their financial advantage in the course of negotiations.

Cedar has failed to discharge the burden of proving that BoS, Fairmont and Kingdom had the requisite knowledge; and in relation to the last two companies by a considerable margin.

This is not a case in which it is appropriate to make an equitable allowance. Cedar had opportunities to inform its principals of the important commercial terms of its Exclusive Brokerage Agreement with the Vendors but failed to do so. Cedar is in no position to say that an accounting to the Claimants of the entire amount of its commission is unjust or inappropriate in the circumstances.

Cedar’s counterclaim was advanced on two bases: first on the basis of a claim in contract, secondly and alternatively, in restitution. At this stage of the argument, Mr Mill accepted on the basis of clear and emphatic authority that Cedar was not entitled to a claim in debt or for damages on the basis of the contractual remuneration that it would have obtained in relation to work done in the purchase of the Hotel. However he submitted that this should not preclude Cedar from recovering in respect of work done in relation to the 3 other hotels.

An analysis of the correspondence shows what the Claimants’ witnesses were disposed to agree: that the commercial terms of a contract between FHR and Cedar and Mr Mankarious had been settled and that the parties had agreed to be bound at least by those terms from the beginning of April 2005 when it was agreed that Cedar could present its invoices to FHR for payment. There were further terms to be agreed and a formal agreement to be drawn up but that did not prevent a binding contract coming into existence, see Pagnan v. Feed Products (above) at 619r.

Although the law does not permit the agent to recover sums due under the contract in respect of which the agent has acted in breach of fiduciary duty (see Andrews v. Ramsey and the other cases cited above), the Claimants accepted that Cedar would be entitled to be paid in relation to the work they did on the other three hotels. The evidence of Mr Mankarious, which was not challenged, was that from August to December/January 2005 Cedar spent 10% of its time in relation to these hotels; and that from January 2005 until September 2005 when the contract was determined, Cedar spent 90% of its time on these hotels. On the basis that Cedar is only entitled to remuneration based on the annual pre-acquisition and management fee of £375,000, for only 11 months and only in respect of the proportions I have set out above, the total pre-acquisition fee to which Cedar is entitled to be awarded by way of counter-claim is £227,497 (+VAT).

In these circumstances it is unnecessary to decide whether, on the hypothesis that no contract had been concluded, Cedar could recover the like or similar sum by way of Quantum Meruit for what was valuable work albeit not work that led to an acquisition. In my view there is no authority or principle which would preclude such an award, where Party A has acted at the request of Party B in the common expectation that Party A’s work would be remunerated and Party B has benefited from such work (cf Regalian Properties Plc v London Dockland Development Corporation [1995] 1 WLR 212). There is little reason why a principle which applies to discourage fiduciaries from putting themselves in a position where their interest conflicts with their duty should apply to unrelated work, where the conflict does not arise and in respect of which no dishonesty, bad faith or surreptitious dealing has occurred.

I will hear from Counsel on the Order which should be made in the light of the Judgment.