Summary

Where a fiduciary had made a profit from inducing the respondents, by his fraudulent representations, to enter into a joint venture to acquire a hotel, the appropriate remedy was that the fiduciary should disgorge all the profits, whether of a revenue or capital nature, subject to any allowances permitted by the court on the taking of the account.

Facts

The appellants (S and W) appealed against a decision ((2004) EWHC 1235 (Ch)) that the respondents (M) were entitled to an account of the profits from the sale of a hotel, and M cross-appealed. W was a company owned by S. S had proposed to M (who were two sisters) that they should together buy a hotel for £4.1 million, S contributing £500,000 to the purchase price, M contributing £1 million and the balance being borrowed from a bank. M and W entered into an agreement regulating the distribution of the proceeds of sale. The hotel was purchased by a company (D) owned by S and M. The hotel was subsequently sold for a profit of £2 million. In proceedings by M the judge held that there had been a fiduciary relationship between S and M in relation to the joint venture to buy the hotel and that S had fraudulently misrepresented that his contribution would be made in cash, when in fact it had been made by setting off obligations owed by the vendor to S. He ordered that S and W should account to M for the entire profit that they had made from the transaction. The appellants submitted that the account of profits should have been limited to the profits obtained by the breach of fiduciary duty on the basis that if the set off arrangement had been disclosed to M they would have agreed to go ahead but with a higher profit share so that the appellants should only be liable for the loss incurred by M as a result of the non-disclosure of the set off arrangement. The appellants also submitted that the proper claimant in respect of any alleged secret commission paid to S on the acquisition of the hotel was D. M submitted that the judge had erred in holding that the sum of £500,000 should be allowed to S on the account as an expense of the acquisition of the hotel.

Held

(Clarke LJ dissenting on the extent of S's liability to account) (1) S's profit was wholly unauthorised at the time it was made and had so remained. It was only actual consent that obviated the liability to account. It was not enough for the wrongdoer to show that if he had not been fraudulent he could have got the consent of the party to whom he owed the fiduciary duty to allow him to retain the profit, Regal (Hastings) Ltd v Gulliver (1967) 2 AC 134 applied. The fiduciary was liable to account only for profits that he had made within the scope and ambit of the duty that conflicted with his personal interest, but on the judge's findings all the profits that S made from the joint venture fell within that description. The appropriate remedy was that S should disgorge all the profits, whether of a revenue or capital nature, that he made from inducing M by his fraudulent representations to enter into the hotel venture, subject to any allowances permitted by the court on the taking of the account. Therefore the appeal was dismissed. (Per Clarke LJ dissenting) The authorities taken as a whole did not lead to the conclusion that where there was an antecedent arrangement for profit sharing it would not be open to S to attempt to show that it would be inequitable to order him to account for all the profits. (2) On the judge's findings, the sum of £500,000 was treated as a cost of the acquisition in its entirety and was accordingly allowed as a deduction from the profits for which S was to account. But that overlooked the fact that some £369,000 was a commission earned by S on the acquisition of the hotel for which he should account as a secret profit. No objection could be taken to the allowance of the balance of the £500,000 as one of the costs of acquisition. The claim for an account of the £369,000 was unanswerable unless the claim to recover that sum belonged to D and the issue whether that company was the proper claimant in respect of the secret commission should be remitted to the judge on terms that the appellants should join D as a defendant. Therefore the cross-appeal was allowed to the extent of the £369,000 for the purpose of remitting to the judge for determination the question whether any claim to recover the commission paid to S in respect of the acquisition of the hotel was vested in D or M.

Appeal dismissed, cross-appeal allowed.