FHR European Ventures LLP v Mankarious & Ors

A fiduciary’s receipt of a secret commission does not necessarily leave the principal with only a personal claim. Under the binding distinction in Sinclair, a proprietary remedy arises where the fiduciary obtains the benefit by exploiting an opportunity properly belonging to the principal. It is unnecessary to show that the opportunity itself was property, or to separate an opportunity to buy an asset from an opportunity to buy it at a lower price. Where an agent negotiating the lowest price receives an undisclosed vendor commission forming part of the purchase arrangements, the benefit may be held on an institutional constructive trust. Once the trust arises, the benefit may be followed or traced into money or substitutes.

The Investor Group purchased the Monte Carlo Grand Hotel after Cedar acted as its adviser and negotiator. Cedar had separately agreed with the vendor to receive a €10 million fee for securing a purchaser, but failed to make sufficient disclosure to the Investor Group. Simon J found that Cedar was accountable for the commission. On the subsequent hearing, he held that the Investor Group had only a personal remedy, applying Sinclair Investments and Lister & Co v Stubbs. The appeal, brought against that ruling, concerned only whether the Investor Group had acquired a proprietary interest in the commission, not whether Cedar was accountable in equity.

The central issue was whether the commission fell within the opportunity category in which a fiduciary’s benefit is subject to a constructive trust.

1. Appeal allowed. The Court of Appeal unanimously held that the Investor Group had a proprietary remedy against Cedar. Lewison LJ gave the leading judgment. Pill LJ agreed despite reservations about the application of the relevant categories. The Chancellor gave separate reasoning and agreed that the appeal should be allowed.
2. The court was bound by Sinclair Investments and by Lister & Co v Stubbs, as approved in Sinclair, rather than by Attorney General for Hong Kong v Reid. It could not reopen that controversy, which was a matter for the Supreme Court.
3. The payment made by the Investor Group to the vendor became the vendor’s beneficial property. The fact that the commission could be traced in a practical sense to funds paid by the Investor Group did not, without more, make it the Investor Group’s money. Nor was the present case governed by the reasoning in Lister merely because the commission was paid after completion.
4. The relevant inquiry was whether Cedar’s exploitation of the undisclosed commission agreement attracted the fiduciary rule. It was unnecessary to identify a proprietary interest in the opportunity itself, or to isolate an opportunity to purchase the hotel at a lower price from the opportunity to purchase the hotel. Cedar was engaged to negotiate the lowest price. The commission agreement formed part of the overall purchase arrangements and diverted the opportunity to obtain a cheaper acquisition. The precise amount that could have been saved did not need to be established.
5. The case was analogous to authorities including Bhullar v Bhullar, Tyrrell v Bank of London, Fawcett v Whitehouse, Re Morvah Consols Tin Mining Company, Bagnall v Carlton and Whaley Bridge Calico Printing Company v Green. The benefit of the commission agreement was held on constructive trust for the Investor Group, permitting tracing into the money paid under it.
6. The Chancellor observed that the distinction between opportunity cases and other fiduciary benefits remained complex and uncertain. Any comprehensive reconsideration of Sinclair, Lister and the nature of constructive trusts was for the Supreme Court.

1. Court of Appeal (Civil Division) — allowed the appeal and held that Cedar held the benefit of the commission agreement and the money received under it on constructive trust for the Investor Group.
2. Chancery Division — Simon J found insufficient disclosure of Cedar’s vendor retainer and accountability for the commission: [2011] EWHC 2308 (Ch). On the later hearing concerning relief, he held that the remedy was personal rather than proprietary: [2011] EWHC 2999 (Ch).