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Constructive trusts and commonwealth harmonisation

By Phillip Patterson

 

Precedent, the Privy Council and Commonwealth harmonisation

This article considers how a series of cases regarding the recovery of
bribes and secret commissions has provided a useful demonstration of the
practical impact of the rules of common law precedent. The last of
those cases also offers useful guidance to practitioners preparing cases
for the appellate courts about the effect of judgments from other
common law jurisdictions.

The principles of precedent, governing the approach which courts in
common law jurisdictions must take to decisions of other courts, might
be thought of as so basic as to require little or no thought beyond the
first few weeks of legal education. All practitioners are well aware of
the hierarchy of courts in such jurisdictions and the requirement of
each court to follow decisions of the courts above it in that hierarchy.
Practitioners may, therefore, be inclined to overlook the important
recent decisions of the Court of Appeal and the Supreme Court on that
most basic of issues, namely which authorities the Court of Appeal ought
to consider when hearing a case.

These issues were considered by virtue of a series of cases relating
to the attempts by principals (companies) to recover money and assets
acquired by their agents (directors) in breach of their fiduciary
duties.

The facts which gave rise to the litigation reported as, Sinclair
Investments (UK) Ltd v Versailles Trade Finance Ltd are, by any
standards, complex. At the core of the dispute was the Versailles Group,
whose business was essentially a scam. One of the group’s directors, a
Mr Cushnie, sold part of his shareholding in Versailles, prior to the
fraud being discovered, for a considerable profit. At a trial in 2007
([2007] EWHC 915 (Ch)), Rimer J found this to be a breach of fiduciary
duty. In 2010, the matter then came before Lewison J ([2010] EWHC 1614
(Ch)) who was tasked with determining who was entitled to the proceeds
of the sale of those shares. Trading Partners Limited (“TPL”), a company
which was not part of the Versailles Group but was controlled by Mr
Cushnie, asserted that it was entitled to those proceeds which it
claimed were held on constructive trust. As a result of subsequent
events, to succeed TPL had to demonstrate that it had a proprietary
claim to the share sale proceeds and not merely a personal claim.
Lewison J found that TPL had failed to demonstrate such a proprietary
interest and TPL appealed.

The Court of Appeal was faced with two conflicting lines of authority
([2012] Ch. 453). Those opposing TPL’s claim argued that the Court of
Appeal should follow, as Lewison J had done in the court below, the
authorities of Metropolitan Bank v Heiron (1880) 5 Ex D 319 and Lister
& Co v Stubbs (1890) 45 Ch D 1. These cases were cited as authority
for the proposition that TPL’s claim was merely personal. Those
representing TPL urged the Court of Appeal instead to follow the
considerably more recent decision of the Privy Council in Attorney
General for Hong Kong v Reid [1994] 1 AC 324. Reid was cited as
authority for the proposition that TPL did have a proprietary claim to
recover the proceeds.

After hearing lengthy argument, the Court of Appeal followed its own
decisions in Heiron and Lister and declined to follow the approach taken
by the Privy Council in Reid. The following reason was given by Lord
Neuberger M.R. ([2012] Ch. 453 at [73]):

“We should not follow the Privy Council decision in the Reid case in
preference to decisions of this court, unless there are domestic
authorities which show that the decisions of this court were per
incuriam or at least of doubtful reliability. Save where there are
powerful reasons to the contrary, the Court of Appeal should follow its
own previous decisions, and in this instance there are five such
previous decisions. It is true that there is a powerful subsequent
decision of the Privy Council which goes the other way, but that of
itself is not enough to justify departing from the earlier decisions of
this court.”

Sinclair did not reach the Supreme Court. For two years, it stood as
authority for the proposition that a principal seeking to recover a
bribe or a secret commission from one of its agents had only a personal
and not a proprietary claim against the agent save where the principal
could demonstrate that the money was or had been beneficially the
property of the principal, or the agent had acquired the money by taking
advantage of an opportunity or right which was properly that of the
principal.

In July 2014, a seven member panel of the Supreme Court gave judgment
in FHR European Ventures v Cedar Capital Partners [2014] 3 W.L.R. 535.
In a succinct and impressive collective judgment, the Supreme Court
overturned the Court of Appeal’s decision in Sinclair, concluding that
“the law took a wrong turn in Heiron and Lister, and that those
decisions, and any subsequent decisions … at least in so far as they
relied on or followed Heiron and Lister, should be treated as
overruled”.

There is much to commend about the position reached after FHR
European Ventures. It will considerably assist attempts made by
companies to recover the profits of breaches of fiduciary duty by their
directors. It is common for such attempts to be frustrated by an
insolvency event which would render a mere personal liability to account
worthless. The ability to bring a proprietary claim in such
circumstances will undoubtedly lead to recovery in very many more
situations.

The impact of the judgment may yet be more wide-ranging, however. The
way in which the Supreme Court approached the conflicting authorities
in the case provides useful guidance to counsel presenting cases to the
appellate courts in England & Wales going forward.

Under the subheading, “Arguments based on principle and
practicality”, the panel made observations about how other common law
jurisdictions had approached issues around the nature of constructive
trusts. In particular, the cases of Chan v Zacharia (1984) 154 CLR 178
and Grimaldi Chameleon Mining NL (No 2) [2012] FCAFC 6, were cited to
demonstrate that the law in Australia had departed from that set out by
the Court of Appeal in Sinclair. At the conclusion of those
observations, the Supreme Court expressed the following view:

“As overseas countries secede from the jurisdiction of the Privy
Council, it is inevitable that inconsistencies in the common law will
develop between different jurisdictions. However, it seems to us highly
desirable for all those jurisdictions to learn from each other, and at
least to lean in favour of harmonising the development of the common law
round the world.”

This statement could have a significant impact upon the way in which
future cases are presented to the appellate courts. Electronic databases
now make judgments of other jurisdictions more accessible than ever.
This necessarily provides a temptation to counsel preparing cases to
cite authorities from other jurisdictions to support the propositions
they make. The Supreme Court in FHR European Ventures has undoubtedly
fuelled that temptation. Researching the law reports of Canada,
Australia and beyond may become an unavoidable step for any practitioner
preparing a case for an appellate court in England & Wales. Where
the arguments are finely balanced in a dispute, serious thought should
be given to whether a proposition leans in favour of harmonization of
the common law or against it.

Phillip assisted in the preparation of Sinclair v Versailles for the Court of Appeal whilst a pupil.

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