FHR European Ventures LLP v Mankarious & Ors

The Court of Appeal holds that where a fiduciary, in breach of duty, exploits an opportunity connected to the fiduciary relationship in such a way that the rule against conflicts of interest applies, the benefit acquired by the fiduciary may be held on constructive trust for the principal; by contrast, secret commissions are not automatically proprietary but may attract a proprietary remedy where the fiduciary has diverted an opportunity that properly falls within the scope of the principal's interest.

The Investor Group purchased a hotel following negotiations conducted by an agent, Cedar, who had a separate undisclosed agreement with the vendor to receive a €10 million commission. The Chancery Division found insufficient disclosure and held Cedar accountable in equity but, on a subsequent hearing, denied a proprietary remedy relying on Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347. The Investor Group appealed against the refusal of a proprietary remedy. The principal question before the Court of Appeal was whether the Investor Group acquired a proprietary interest in the secret commission or was limited to a personal equitable remedy.

The court reviewed authority on secret commissions, diverted opportunities and constructive trusts, and analysed the categories identified in Sinclair Investments. The central issue was whether Cedar's exploitation of the undisclosed commission fell within the category of cases that give rise to a constructive trust (an "opportunity" case) or within the category that only gives rise to a personal account.

1. Disposition. The appeals are allowed: the Investor Group is entitled to a proprietary remedy in respect of the undisclosed commission, because Cedar's exploitation of the undisclosed commission formed part of the overall arrangements surrounding the purchase and attracted the application of the rule against conflicts (majority judgment of Lewison LJ and the Chancellor; Pill LJ concurring).
2. Legal principle. The court adopted and applied the conceptual framework identified in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347 dividing situations into three categories: (1) benefits which are or were the principal's property; (2) benefits acquired by taking advantage of an opportunity properly that of the principal; and (3) other cases where only a personal equitable remedy applies. The court emphasised flexibility in applying equitable rules and rejected overly formalistic tests of "ownership" of an opportunity.
3. Application to facts. On the findings at trial (including that Cedar negotiated the purchase and that knowledge of the commission would likely have been used to the Investor Group's advantage), the court held that Cedar's exploitation of the undisclosed commission fell within Category 2: the fiduciary diverted an opportunity that should have been communicated to the principal and thus held the benefit on constructive trust for the Investor Group. It was unnecessary to treat the opportunity as proprietary in itself; the focus is whether exploitation attracts the rule.
4. Relationship to prior authority. The court treated Sinclair Investments and Lister & Co v Stubbs (1890) 45 Ch D 1 as binding but explained they do not preclude a constructive trust where the factual circumstances fit within the long line of "opportunity" cases (e.g. Tyrrell v Bank of London, Cook v Deeks, Boardman v Phipps, Bhullar v Bhullar), which the court applied.
5. Remedy and tracing. Once an institutional constructive trust is recognised, the principal may follow and trace the benefit into the proceeds; the court remitted the necessary inquiries (the hearing below had already determined Cedar was accountable in equity and an inquiry as to the form of proprietary relief was appropriate).
6. Practical observations. The court noted the doctrinal difficulty and policy considerations in distinguishing Category 2 and Category 3, and recorded that a more comprehensive resolution would be for the Supreme Court, but the present case was decided on established authorities and factual findings.

• High Court (Chancery Division): Simon J, judgment reported [2011] EWHC 2308 (Ch) — trial judgment finding breach and accountability in equity; subsequent hearing on remedy reported [2011] EWHC 2999 (Ch) resulted in refusal of proprietary remedy relying on Sinclair Investments.
• Court of Appeal (Civil Division): Lewison LJ, Pill LJ and the Chancellor, judgment dated 29 January 2013 allowing the appeal and holding that a constructive trust arose in the circumstances.