FHR European Ventures Llp & Ors v Mankarious & Ors

Following the delivery of Judgment in this matter on 5 September, the parties have been able to agree the form of the order which should follow, apart from 2 points, relating to costs and the form of the declaration.

It is common ground that an order for costs should be made in favour of the Claimants. The issue is whether it should be made against the second Defendant alone, or against all Defendants jointly and severally.

For the Defendants, Mr Mill QC submitted that there has been a finding that the second Defendant acted in breach of fiduciary duty, and that only the Second Defendant should be liable to pay the Claimants’ costs. He accepted that, if the Claimants were able to show that they were entitled to further equitable relief against the First and/or Third Defendant then each might become liable for the costs of an inquiry. However that point has not yet arisen, and until it did it would be unjust to make the First and Third Defendants liable for costs.

Mr Pymont QC, for the Claimants, argued that all three Defendants resisted the claim together and had pursued the counterclaim together, without raising or proving any material distinction between them. The counterclaim included a claim for an equitable allowance made by all Defendants which had failed. No Defendant had argued that it was improperly joined, or that it (rather than a co-defendant) was entitled to bring the counterclaim. In §26.b of the Defence the three Defendants admitted that they owed fiduciary duties to the Claimants, but averred (in §26.c and §34) that the duty had been discharged. That argument had failed; and it followed that all three Defendants had acted in breach of duty and the Claimants were entitled to proceed against each of them for accounts and enquiries to be taken on the basis that they were parties to the non-disclosure.

The Claimants and Defendants each proceeded on the broad basis that there was no material distinction between the Defendants either for the purposes of the claim or the counterclaim. In these circumstances I have concluded that the proper approach would have been to make all the Claimants and all the Defendants jointly liable for the costs of the counterclaim and the claim respectively. In the event, the parties have sensibly agreed that the Claimants are entitled to 90% of their costs. I therefore consider that the liability for these costs should be a joint and several liability of the three Defendants.

There are two rival versions.

For the Defendants, Mr Mill accepted that, if the Claimants could show that the money which they paid to the vendors had been the source of the €10 million received by Cedar, then it could be argued that the €10 million was held subject to a Constructive Trust. However, he submitted that the Claimants cannot (at least at this stage) show that it did; and accordingly it is inappropriate to make a Declaration now in the form advanced by the Claimants.

Mr Pymont QC agreed that there had not been any findings as to whether the €10 million paid to Cedar had come from the Claimants’ payment of the purchase price for the Hotel. However, he submitted that this did not matter since his clients could rely on a proprietary interest in the €10 million paid to Cedar. Either the €10 million is or had been beneficially the property of the Claimants or Cedar had acquired the sum by taking advantage of an opportunity which was properly that of the Claimants.

Mr Mill pointed out that this was a new way of advancing the claim, which had been neither pleaded nor argued at trial.

The starting point for the determination of this issue is the decision of the Court of Appeal in Sinclair Investments (UK) Ltd v. Versailles Trade Finance Ltd [2011] EWCA Civ 347. In that case Lord Neuberger of Abbotsbury MR (who gave the only judgment) set out a number of applicable principles. At [34-36] he described the duties of a fiduciary. At [37-39] he identified the nature of proprietary claims which are, as the name suggests, property rights. At [40-42] he set out the primary rule which is that the claim of a beneficiary against its fiduciary is a personal claim. At [45-47] he indicated that the ‘traditional’ way in which a non-proprietary claim was assessed in equity was through the medium of an equitable account, which in turn leads to equitable compensation. As Lord Neuberger noted, this might lead to the same answer as would occur in the case of a proprietary claim in terms of the ultimate value to a claimant, but had the disadvantage of being a personal claim which would rank pari passu with the defaulting fiduciary’s other unsecured creditors in the event of bankruptcy. At [88] the Master of the Rolls, concluded:

... a beneficiary of a fiduciary’s duties cannot claim a proprietary interest, but is entitled to an equitable account, in respect of any money or asset acquired by a fiduciary in breach of his duties to the beneficiary, unless the asset or money is or has been beneficially the property of the beneficiary, or the trustee acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary.

89.

For the reasons I have given, previous decisions of this court establish that a claimant cannot claim proprietary ownership of an asset purchased by the defaulting fiduciary with funds which, although they could not have been obtained if he had not enjoyed his fiduciary status, were not beneficially owned by the claimant or derived from opportunities beneficially owned by the claimant. However, those cases also establish that in such a case a claimant does not have a personal claim in equity to the funds. There is no case which appears to support the notion that such a personal claim entitles the claimant to claim the value of the asset (if it is greater than the amount of funds together with interest), and there are judicial indications which tend to militate against that notion.

The Sinclair case has been followed recently in Cadogan Petroleum plc and others v. Tolley and others [2011] EWHC 2286 (Ch), where Newey J acknowledged that he was bound by the Sinclair case . At [23] he summarised the position.

As I see it, it is also apparent from Sinclair that a distinction is to be drawn between (a) the exploitation by a fiduciary of property or opportunities subject to fiduciary obligations and (b) other exploitation by a fiduciary of his position. It can be seen from Lord Neuberger’s judgment that an asset or money which a fiduciary has ‘acquired…in breach of his duties to the beneficiary’ (see paragraph 88 of the judgment) or ‘could have obtained if he had not enjoyed his fiduciary position’ (paragraph 89 of the judgment) will not necessarily be held on trust for the beneficiary of the fiduciary’s duties. The beneficiary cannot claim a proprietary interest ‘unless the asset or money is or has been beneficially the property of the beneficiary or the trustee acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary’ (paragraph 88 of the judgment).

Both parties have drawn attention to the reference to a Constructive Trust in [103] of my Judgment delivered on 5 September 2011.

Mr Pymont acknowledges that since the Court has not made its final order, it may review the matter; but submits that it should do so only with circumspection.

The use of the term ‘Constructive Trust’ in [103] of the Judgment was not intended to be dispositive of the issue, with which I am now concerned. It was clearly necessary to determine the source of the payment of €10 million before the Court could make the declaration on the basis of the claim as it was then advanced by the Claimants. I was aware that the form of any declaration would be a matter for further consideration, and that I had not heard full argument.

I am satisfied on the basis of the Sinclair case that, unless either (a) the sum of €10 million was or had been beneficially the property of the Claimants or (b) Cedar acquired the money by taking advantage of an opportunity which was properly that of the Claimants, the Claimants are not entitled currently to the declaration they seek.

Mr Pymont has argued that the Claimants can succeed on the basis of both (a) and (b). I disagree.

As to (a), the question whether the sum of €10 million was or had been the property of the Claimants has not yet been decided. At present it appears that the sum was a secret and unauthorised commission which bypassed the Claimants. I do not accept that secret commissions are for present purposes to be characterised as assets of the beneficiary, cf the Sinclair case at [80]. As to (b), it is artificial to describe the Exclusive Brokerage Agreement as Cedar taking advantage of an opportunity which was properly that of their principals and that the relevant opportunity was the opportunity to purchase the Hotel for €201.5 million rather that for €211.5 million.

As Newey J said in the Cadogan case at [30],

There are undoubtedly authorities suggesting that proprietary claims can be made in respect of property obtained by the diversion of opportunities (in particular, maturing business opportunities) (see e.g Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch), at paragraphs 1342 – 1344, 1355 and 1356). I am not aware, however, of any case in which an opportunity to obtain a reduced price has been considered a relevant opportunity for this purpose. In any event, I do not think that a bribe or secret commission is to be viewed as the diversion of an opportunity to obtain a reduced price. In Sinclair, Lord Neuberger said that there is a ‘fundamental distinction between (i) a fiduciary enriching himself by depriving a claimant of an asset and (ii) a fiduciary enriching himself by doing a wrong to the claimant’ and that ‘a bribe paid to a fiduciary could not possibly be said to be an asset which the fiduciary was under a duty to take for the beneficiary’. A bribe is to be seen as something the fiduciary obtained by doing a wrong rather that by depriving the beneficiary of an opportunity. Were the position otherwise, beneficiaries would (contrary to the view of the Court of Appeal in Sinclair) very frequently have proprietary interests in bribes and secret commissions since they could commonly be said to have been derived from opportunities to obtain a reduced price (or, where an asset is being sold, an increased one), and cases approved in Sinclair could have been expected to be decided differently. As Lord Neuberger said in Sinclair (at paragraph 55), the money at issue in such cases ‘was not money which was part of the assets subject to [the fiduciary’s] duties, or derived from such assets.’

Having considered the submissions of the parties, I have reached two conclusions. First, the use of the term ‘Constructive Trust’ in [103] of my earlier Judgment was an imprecise and potentially misleading use of the expression of the type identified by Millet LJ in Paragon Finance Plc v. DB Thakerar & Co [1999] 1 All ER 400 at 408-409, see the Sinclair case at [43]-[44]. I would better have expressed my intentions by using the phrase ‘accountable in equity’. Secondly, the Order should be in the form of the declaration advanced by the Defendants, with Liberty to Apply in relation to any further equitable relief.