Analysis
The claimants engaged Cedar Capital Partners LLC (Cedar) to act as their agent in negotiating the purchase by FHR European Ventures LLP of the issued share capital of Monte Carlo Grand Hotel SAM (which owned a long leasehold interest in the Monte Carlo Grand Hotel) from Monte Carlo Grand Hotel Ltd (vendor). As such an agent, Cedar owed a fiduciary duty to the claimants, notwithstanding which it entered into an exclusive brokerage agreement with the vendor to provide for the payment of a €10m fee following completion – the vendor was paid €211.5m when the purchase was completed on 22 December 2004 and it then paid Cedar the fee on or around 7 January 2005. The claimants brought proceedings against Cedar to recover the fee on 23 November 2009. Simon J held that proper disclosure of the exclusive brokerage agreement had not been made to the claimants and, in a subsequent judgment, he made a declaration of liability for breach of fiduciary duty on the part of Cedar for having failed to obtain the claimants’ fully informed consent in respect of the €10m fee and ordered it to pay such sum to the claimants. However, he refused to grant the claimants a proprietary remedy and they appealed. The Court of Appeal, allowing the appeal, made an order which included a declaration that Cedar had received the €10m fee on constructive trust for the claimants absolutely. Cedar appealed.
Held (dismissing the appeal)
There was no doubt that, firstly, an agent owed a fiduciary duty to their principal because they had undertaken to act for them in a particular matter in circumstances which gave rise to a relationship of trust and confidence; secondly, an agent should not, as a result, place themselves in a position in which their duty may conflict with their interest and, in particular, must not make a profit out of their trust; thirdly, a fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty, and ‘informed consent’ was only effective if it was given after ‘full disclosure’. Where an agent received a benefit in breach of their fiduciary duty, there were potentially two remedies – the agent is obliged to account to the principal for such a benefit and pay a sum equal to that profit by way of equitable compensation or, at least in those cases where an agent acquired a benefit which came to their notice either as a result of, or pursuant to, an opportunity which resulted from, their fiduciary position, the equitable rule treated the agent as having acquired the benefit on behalf of their principal, so that it was beneficially owned by the principal. In such cases, the principal was entitled to a proprietary remedy in addition to their personal remedy, and could therefore elect between the two remedies.
The equitable rule has been applied in many cases over the years but the question in this case was the extent to which it applied where the benefit was a bribe or secret commission obtained by an agent in breach of their fiduciary duty to their principal. In the majority of the decided cases where an agent had received a benefit in breach of their fiduciary duty to the principal, it appears to have been tacitly accepted that the equitable rule applied and the benefit was held on trust, so that the principal was entitled not merely to an equitable account, but to beneficial ownership of the benefit. Moreover, many of those cases contained observations which specifically supported the contention that the rule applied to all benefits which an agent received in breach of their fiduciary duty. Aside from those cases, considerations of principle and practicality appear to support the claimants’ case that a bribe or secret commission received by an agent is held on trust for their principal. It also appeared that other Commonwealth jurisdictions have adopted the view that the rule applied to all benefits which were obtained by a fiduciary in breach of his duties. There was one apparently inconsistent decision by the House of Lords in Tyrrell v Bank of London (1862) 10 HL Cas 26, but this was disapproved, and several inconsistent decisions of the Court of Appeal, notably Metropolitan Bank v Heiron (1880) 5 Ex D 319 and Lister & Co v Stubbs (1890) 45 Ch D 1, but these should be treated as overruled. The Court of Appeal below had distinguished those cases and it was preferable to follow the approach by the Privy Council in Attorney General for Hong Kong v Reid [1994] 1 AC 324.
Accordingly, the appeal was dismissed.
Judgment LORD NEUBERGER: [1] This is the judgment of the court on the issue of whether a bribe or secret commission received by an agent is held by the agent on trust for his principal, or whether the principal merely has a claim for equitable compensation in a sum equal to the value of the …Continue reading "FHR European Ventures LLP & ors v Cedar Capital Partners LLC [2014] UKSC 45"