FHR European Ventures & ors v Mankarious & ors [2013] EWCA Civ 17

Analysis

The claimants (Investor Group) appealed from the decision of Simon J ([2011] EWHC 2308 (Ch)) that the Investor Group was entitled to a personal, but not a proprietary, remedy against Cedar Capital Partners LLC (Cedar). There was no appeal from Simon J’s decision that Cedar was liable to account in equity to the Investor Group.

Monte Carlo Grand Hotel in Monaco was owned by Monte Carlo Hotel SAM, a Monegasque company. The company’s share capital was owned by Monte Carlo Grand Hotel Ltd, a BVI company. In September 2004, the BVI company was interested in selling the hotel, either by a sale of the hotel itself or by a sale of the shares in the Monegasque company. Cedar had been set up by Mr Mankarious some months earlier. Members of the Investor Group were among Mr Mankarious’s clients and contacts. Mr Mankarious encouraged the Investor Group to investigate buying the hotel.

On 24 September 2004, the BVI company and Cedar entered into a written agreement described as an ‘Exclusive Brokerage Agreement’ (agreement), pursuant to which Cedar had an exclusive right to find a purchaser for the hotel and receive a commission of €10m on completion of a sale. The agreement expressly contemplated that Cedar would advise and be part of the Investor Group. Any conflict between the BVI company and Cedar was waived. The agreement required Cedar to disclose its appointment by the BVI company to the Investor Group. A sale to the Investor Group of the hotel (in the form of a sale of the shares in the Monegasque company) took place in December 2004 for €211.5m. Following completion, the BVI company paid Cedar €10m under the agreement.

It was common ground at trial that the agreement was not intended to be a corrupt payment or bribe. No finding was made that the €10m was made directly from the proceeds of sale. The issue at trial was whether Cedar had made sufficient disclosure to the Investor Group of its relationship with the BVI company so that informed consent had been given by the Investors Group. Simon J found that there had been insufficient disclosure and ordered a personal account in equity, but not a proprietary remedy, against Cedar. Following Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2012] WTLR 1043, Simon J held that a proprietary remedy was not available in respect of money or assets acquired by a fiduciary in breach of his duties to his principal unless:

1. 1. (i) the asset or money is or has been beneficially the property of the beneficiary; or
   2. (ii) the trustee acquired the asset or money by taking advantage of an opportunity or right that was properly that of the beneficiary.

The Investor Group argued on appeal that it was entitled to a proprietary remedy because:

1. 1. (i) Cedar received the commission in substance out of the sale proceeds paid by Investors Group to the BVI company and it did not matter than the money was not paid directly by the Investor Group to Cedar; and
   2. (ii) in practical terms the vendor had been willing to accept €10m (ie the value of the commission) less than the nominal purchase price paid by the Investors Group, and accordingly the €10m was a benefit Cedar ought to have acquired for the Investor Group. It did not matter that the opportunity to acquire the hotel for a reduced price could not itself be characterised as ‘property’.

Cedar argued that Sinclair equated bribes and secret commissions and treated them in exactly the same way. It distinguished between a fiduciary enriching himself by:

1. (i) depriving the principal of an asset; and
2. (ii) doing a wrong to the principal. Taking a secret commission was in the second category. A principal could only claim a proprietary interest if he could show the bribe or secret commission was paid out of his own money. A relevant ‘opportunity’ must have proprietary characteristics and the chance of obtaining a reduced price was not enough.

Held (allowing the appeal)

Per Lewison LJ:

1. (1) This case is factually very different from Sinclair. In Sinclair, the connection between the breach and the profit was remote, in that the defaulting fiduciary profited by selling shares he owned before any of the relevant fiduciary duties arose (para [17]).
2. (2) Sinclair did not intend to create two mutually exclusive categories of case. It is not the case that once Cedar’s commission is characterised as a secret commission it cannot also be characterised as a lost opportunity. While an ‘opportunity’ to acquire property at a reduced price cannot ‘belong’ to anyone in that there is no proprietary right capable of assignment or transfer, it is not necessary to identify a proprietary right in the opportunity itself (paras [56]-[58]).
3. (3) There is no need to enquire whether the Investor Group can be said to have a proprietary interest, in the strict sense, in the opportunity. The exploitation of the opportunity by Cedar was such to require Cedar to hold the benefit of the agreement on a constructive trust for the Investor Group. It is possible to trace into the money paid under that contract, which is likewise held on a constructive trust for the Investor Group (para [59]).
4. Per the Chancellor:
5. (4) The mere fact that the fiduciary obtains the benefit from a third party, or obtains a benefit that could or would never be obtained by the principal, or that the principal has obtained what he or she wanted or intended from the opportunity, is not necessarily a bar to a constructive trust of the benefit wrongly obtained by the fiduciary by taking advantage of the opportunity (para [100]).
6. (5) Sinclair was not a secret commission or bribe case at all. It is difficult to see why it was necessary in the light of the existing authorities to revisit Lister v Stubbs (1890) LR 45 Ch D 1 and A-G of Hong Kong v Reid [1994] 1 AC 324 in order to reject the constructive trust in Sinclair (para [102]).
7. (6) In a practical sense, it is plain that the Investor Group’s money funded the commission paid to Cedar. Unlike Sinclair and, possibly, Lister, in both temporal and causative terms the receipt of the commission was the direct and immediate consequence of the breach of fiduciary duty (para [105]).

JUDGMENT LORD JUSTICE LEWISON: [1] What is the appropriate remedy against an agent who has received a secret commission from the seller of property which his principal bought at a price negotiated on his behalf by the agent? That is the question raised by this appeal. The full facts may be found in the judgment …

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