When are the proceeds of an agent’s breach of fiduciary duty held on trust?

In FHR European Ventures LLP & ors v Mankarious & ors [2013] EWCA Civ 17 http://www.bailii.org/ew/cases/EWCA/Civ/2013/17.html the Court of Appeal returned to the question when an agent holds proceeds of a breach of fiduciary duty as constructive trustee for his principal. The decision is required reading for sports lawyers asked to advise on breach of fiduciary duty cases. That is so not least because FHR addresses the decision in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347 http://www.bailii.org/ew/cases/EWCA/Civ/2011/347.html in which the Court considered that it was bound by Lister & Co v Stubbs 45 Ch D 1 (CA) to reject the broad approach to the imposition of constructive trusts in this field which was described in Attorney General for Hong Kong v Reid [1994] 1 AC 324 (PC).

In FHR, the agent (“Cedar”) was engaged to negotiate the purchase of a hotel for the cheapest price. Cedar failed to disclose to its principal that it had entered into an Exclusive Brokerage Agreement with the vendor, under which Cedar was entitled to a substantial commission upon the completion of the sale. On appeal it was common ground that Cedar’s non-disclosure was in breach of fiduciary duty; the only question was whether Cedar held the proceeds (i.e. the secret commission) on constructive trust for the principal. The Court held that it did.

The question arising in cases such as FHR and Sinclair is an important one for practitioners. Significant practical advantages arise for a principal who establishes that his agent is a constructive trustee of (and not just personally liable to account for) proceeds of his breach of fiduciary duty. As a beneficiary of trust property, the principal enjoys priority in the event of the agent’s insolvency; he also may follow and trace trust property, including against third parties who may be the subject of additional claims. In FHR, the latter advantage was in issue: see e.g. [14], [61].

It is settled law that until the Supreme Court says otherwise, English Courts have no discretion to impose a “remedial” constructive trust: e.g. FHR, [13], [15], [76]; Re Polly Peck International (In Administration)(No 5) [1998] 3 All ER 812. Rather, a claimant must bring his case within an established category. In Sinclair, the Court of Appeal held that a constructive trust arises in respect of the proceeds of a breach of fiduciary duty where: (i) these were the principal’s property when received by the agent; or (ii) were acquired by the agent’s “taking advantage of an opportunity or right which was properly that of [the principal]”; but (iii) not otherwise ([88]-[89]; also see FHR, at [25]).

FHR was not a category (i) case: the commission, though funded from the purchase price paid by the principal, was paid from funds to which the vendor was beneficially entitled under the contract of sale: see at [25]-[33], [67]. The principal question (and a difficult one) was whether the case fell within category (ii) or (iii). The difficulty arises because Sinclair does not readily identify the basis for distinguishing category (ii) and (iii). And, whereas in Sinclair the Court there held that it was bound by the existence of category (iii) (this being a consequence of Lister), the language which it used to define category (ii) is, as was observed in FHR (at [84]) “not to be found as legal expressions or tests in any of the reported cases”. Distinguishing “opportunities” which are and are not “properly” those of the principal is a challenging task – in particular where, as the Chancellor noted in FHR (at [100]), the authorities establish that a finding that constructive trust is not precluded by: “… the mere fact that the fiduciary obtains the benefit from a third party, or obtains a benefit that could never be or would never be obtained by the principal, or that the principal has obtained what he or she wanted or intended from the opportunity”.

In FHR, the Court held that Cedar took an opportunity which was “properly” that of its principal. Lewison LJ conducted a detailed review of the authorities (e.g. see at [35]-[54]), noting that constructive trusts arose not only where an agent, instructed to acquire property for his principal, takes it for himself; but also where the agent received an unauthorised benefit in connection with property otherwise properly taken. Lewison LJ attached importance to the fact that the Exclusive Brokerage Agreement was “part of the overall arrangement surrounding the purchase of the hotel”, concluding that the contract was held by Cedar as constructive trustee ([59]). Pill LJ, albeit with reservations, agreed with Lewison LJ’s analysis, having been influenced in particular by the decision in Boardman v Phipps [1967] 2 AC 46, which had received “little attention” in Sinclair, but which illustrated the breadth of circumstances in which an opportunity is “properly” that of the principal. The Chancellor agreed in the result. His Lordship reviewed the authorities in detail (see at [85]-[99]); distinguished Sinclair (at [102]) as an “unusual” case in which the trust was alleged to attach to proceeds of sale of the agent’s own property; and, having noted factual differences between FHR and Lister ([104]-[109]), concluded that, as a matter of principle and authority, the judge’s findings in FHR were sufficient to bring the case within category (ii) (see at [110]-[116]). The Chancellor emphasised in particular: the causal connection between Cedar’s breach of fiduciary duty and its receipt of commission ([105]); Cedar’s obligation to negotiate the best purchase price ([106]); and the fact that the vendor was prepared to sell at a level net of the commission agreed with Cedar – knowledge of which fact would have been commercially advantageous to the principal ([106]-[109]).

The availability of a constructive trust in a breach of fiduciary duty case will in many cases turn on whether the relevant “opportunity” is sufficiently connected to the principal to be treated as “properly” his. It remains difficult to predict when this will be so, not least because each judge in FHR emphasised different aspects of the factual matrix in support of the agreed characterisation. That said, it is tentatively suggested that where an agent is engaged to negotiate the lowest price for his principal on a particular transaction, and takes a secret commission which is causally connected to that transaction, according to FHR a constructive trust typically will attach. This has obvious implications for those involved in disputes concerning sports agents’ transactions, for example.