Murad & Anor v Al-Saraj & Anor

A fiduciary who makes an unauthorised profit within the scope of a fiduciary duty must account for it. The remedy is directed to stripping the fiduciary of profit, not compensating the beneficiary for loss. It is therefore immaterial that full disclosure might have led the beneficiary to enter the transaction on altered terms, or that the beneficiary suffered no loss.

Only actual informed consent, following full and frank disclosure, prevents liability. The account is nevertheless confined to profits properly attributable to the breach. A fiduciary may seek a discretionary allowance for legitimate skill, services or expenditure, but bears the burden of distinguishing profits that are properly their own.

The Murads and Mr Al-Saraj entered a joint venture to acquire and operate a hotel. Mr Al-Saraj was found to owe fiduciary duties to the Murads and fraudulently to have concealed that his stated £500,000 contribution was made by set-off, including a £369,000 secret commission from the vendor.

Etherton J ordered Mr Al-Saraj and his company to account for their entire profits from the venture, while allowing the £500,000 as an acquisition expense. The appellants contended that the account should be limited because the Murads would have proceeded on different profit-sharing terms if told the truth. The Murads cross-appealed concerning the secret commission. The central issue was the proper scope of an account of profits for fraudulent breach of fiduciary duty.

1. Appeal dismissed by a majority. Arden LJ, with whom Jonathan Parker LJ agreed, held that Mr Al-Saraj had to account for all revenue and capital profits made from the joint venture within the scope of his fiduciary duty, subject to permissible allowances. The account was an equitable response to fiduciary wrongdoing, not damages for deceit.

2. The authorities, including Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, establish that liability does not depend on the Murads having suffered loss, or on whether they might have allowed Mr Al-Saraj some profit had he made disclosure. Only actual consent, preceded by full and frank disclosure, could authorise retention of the profit. The fraud found by the judge made this an unsuitable case for any relaxation of the strict rule.

3. The court accepted that an account of profits is not forfeiture. It must be confined to profit obtained through the fiduciary breach and may include a discretionary allowance for the fiduciary’s skill, services and disbursements. The fiduciary bears the burden of identifying profits outside the account. On the facts, the concealed £500,000 set-off could not be treated as Mr Al-Saraj’s genuine investment for a profit share. His separate cash advance was a loan and did not itself entitle him to a share of profit.

4. Cross-appeal allowed. No separately pleaded claim was needed to challenge the £369,000 secret commission as an expense in the account. The question whether the right to recover it was vested in Danescroft rather than the Murads was remitted to the judge, with provision for Danescroft to be joined. If the Murads were the proper claimants, £369,000 was to be deducted from the £500,000 allowance.

5. Clarke LJ dissented on the principal appeal. He would have remitted the scope of the account so that Mr Al-Saraj could attempt to show that, despite his fraud, it was inequitable to require an account of all profits.

• Court of Appeal (Civil Division): The appeal was dismissed by a majority. The respondents’ cross-appeal was allowed concerning the £369,000 commission, and that issue was remitted.

• High Court, Chancery Division (Etherton J): Orders dated 28 May and 14 July 2004 required the appellants to account for profits from the hotel venture and allowed £500,000 as an acquisition expense.