Constructive Trusts and the No-Profit Rule

Abstract

THE decision of the Court of Appeal in FHR European Ventures LLP v Mankarious [2013] EWCA Civ 17 is the latest instalment in the debate over whether an unlawful profit acquired by a fiduciary gives rise to a trust, or only to a personal obligation to disgorge the amount of the profit. In A.-G. for Hong Kong v Reid [1994] 1 A.C. 324, the Judicial Committee of the Privy Council refused to follow Lister & Co v Stubbs (1890) 45 Ch.D. 1, and held that a trust arises. In Sinclair Investments (UK) Ltd. v Versailles Trade Finance Ltd. [2011] EWCA Civ 347 [2012] Ch. 453, the Court of Appeal refused to follow Reid, and held that only a personal obligation was created. The Court in FHR was bound by its decision in Sinclair, but it distinguished that decision and declared a constructive trust over the secret profit. The law is left in an unclear state, as noted by Etherton C. ([116]). The defendant Cedar Capital Partners LLC (Cedar), of which the principal was the defendant Mankarious, provided consultancy services. The claimants, together called the "Investor Group" in the judgments, were clients of Cedar, who were seeking to acquire a long leasehold interest in the Monte Carlo Grand Hotel. Cedar was in the position of an agent, owing fiduciary obligations to the Investor Group. After acquiring the leasehold for E211.5 million, the Investor Group learned that Cedar had also made another agency agreement with the vendor, to assist the vendor with the sale. The vendor knew that Cedar was acting for the Investor Group, but the Investor Group did not know that Cedar's agreement with the vendor provided for a fee of E10 million, payable to Cedar should the sale to the Investor Group take place. Cedar having received its fee from the vendor, the Investor Group brought these proceedings to claim it. They succeeded at trial before Simon J. ([2011] EWHC 2308), although their claim for a constructive trust was dismissed on the basis of Sinclair ([2011] EWHC 2999). It was that ruling that was reversed by the Court of Appeal. Pill L.J. noted correctly (at [62]) that Cedar was clearly in a conflict of interest and duty, since its self-interest in acquiring the fee conflicted with the duty of loyalty that it owed to the Investor Group in advising the latter. However, the rules about conflicts were not the most important ones in this case. When a conflicted fiduciary enters into a contract or other legal act, through the use of legal powers held in

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