FHR European Ventures LLP and others v Cedar Capital Partners LLC

The proprietary rule applies: where an agent obtains a bribe or secret commission in breach of fiduciary duty, the agent holds that benefit on trust for the principal, and the principal therefore has a proprietary remedy (including equitable tracing and priority in insolvency) rather than merely an in personam claim for equitable compensation.

The respondents, purchasers of the Monte Carlo Grand Hotel, alleged that their agent received a €10m payment from the vendor in breach of fiduciary duty. After trial (see [2012] 2 BCLC 39 and subsequent relief hearing [2013] 2 BCLC 1) the judge rejected a proprietary remedy. The Court of Appeal allowed the purchasers' appeal and declared the payment held on constructive trust ([2013] EWCA Civ 17). The appellant appealed to the Supreme Court. The central question for the Supreme Court was whether a bribe or secret commission accepted by an agent in breach of fiduciary duty is held on trust for the principal or merely gives rise to an equitable claim for compensation.

1. Disposition. The appeal is dismissed. The payment received by the agent is held on trust for the principal; the principal therefore has a proprietary remedy in relation to a bribe or secret commission received in breach of fiduciary duty.
2. Ratio and primary rule. Where an agent receives a benefit (including a bribe or secret commission) in circumstances in which it was obtained by reason of the fiduciary position and in breach of fiduciary duties, equity treats the agent as having acquired that benefit on behalf of the principal so that the principal is beneficially entitled and may elect proprietary remedies (including tracing and priority on insolvency). The Court regarded this as the proper, principled and practical application of the historic "Rule" derived from cases such as Keech v Sandford and other authorities which enforce undivided loyalty.
3. Precedent and coherence. The Court analysed the nineteenth- and twentieth-century authorities and academic commentary. It concluded that, taken as a whole, the decided cases and equitable principle favour treating bribes and secret commissions as held on trust, and that contrary authorities (most notably Metropolitan Bank v Heiron, Lister & Co v Stubbs, and Tyrrell v Bank of London) represent a wrong turn and should be disapproved or treated as overruled insofar as they deny a proprietary remedy in such cases. The Court therefore disapproved Tyrrell and treated Heiron and Lister (and domestic decisions derived from them) as overruled in this respect.
4. Policy and practical considerations. The Court emphasised that the proprietary rule promotes undivided loyalty, allows equitable tracing of tainted assets, and better accords with commercial reality and international authorities (including recent Commonwealth decisions) while recognising the competing concern for unsecured creditors. Those concerns were not sufficient to justify restricting the Rule in respect of bribes and secret commissions.
5. Application to present facts and outcome. Applying the principle, the Court affirmed the Court of Appeal's declaration that the €10m was held on constructive trust for the claimants. The Court therefore dismissed Cedar's appeal and left in place the Court of Appeal's order declaring the €10m held on trust for the claimants.

• Court of Appeal: allowed the purchasers' appeal and declared the €10m held on constructive trust for the purchasers ([2013] EWCA Civ 17).
• High Court (Chancery) – Simon J: at trial found breach of fiduciary duty but refused a proprietary remedy, judgment reported [2012] 2 BCLC 39 and subsequent orders [2013] 2 BCLC 1.