FHR European Ventures LLP v Ramsey Makarious (2013)


The Court of Appeal reviewed the law applicable to secret profits made by fiduciaries in breach of duty, and considered whether a constructive trust arose in favour of the principal.


The appellant investors (F) appealed against a decision ([2011] EWHC 2999 (Ch)) concerning the appropriate remedy against the respondent agent (C) for making a secret profit.

While advising F in relation to their purchase of a hotel in Monte Carlo, C entered into an agreement with the sellers of the hotel under which C was to receive a fixed commission of €10 million for securing a purchaser for the hotel. C failed to notify F of that agreement. C received the commission from the sellers when they sold the hotel to F for €211.5 million. In FHR European Ventures LLP v Mankarious [2011] EWHC 2308 (Ch), [2012] 2 B.C.L.C. 39 the court found that the commission amounted to a secret profit. At a further hearing the court decided that F were entitled to an account in equity rather than to a proprietary remedy against C's commission.

F submitted that they were entitled to a proprietary remedy because C's commission had been paid out of the sale proceeds which came from F. F also argued that C had a duty as their agent to negotiate the lowest price and, in accepting the commission, C had diverted from F the opportunity to acquire the hotel for a lower price.


(1) There was no challenge to the basic principle that a fiduciary was not entitled to profit from a breach of his fiduciary duty. The issue was whether F's remedy against C was personal or proprietary and therefore whether F had acquired a proprietary interest in the commission paid to C. The argument was really about following and tracing (see paras 13-14, 61 of judgment). (2) Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (In Administration) [2011] EWCA Civ 347, [2012] Ch. 453 divided into three categories the situations in which a fiduciary obtained a benefit in breach of fiduciary duty. The first category was where the benefit was an asset belonging beneficially to the principal, most obviously where the fiduciary had gained the benefit by misappropriating the principal's property. The second category was where the benefit had been obtained by the fiduciary taking advantage of an opportunity which was properly that of the principal. The third category was all other cases. The court held in Sinclair that the situations in categories one and two gave rise to a constructive trust, but those in category three did not, Sinclair applied. The issues in the instant case arose out of the difficulty of ascertaining the borderline between categories two and three (para.83). (3) F's first argument was founded on the proposition that the monies paid to the seller never ceased to belong beneficially to F. However, when F paid the seller, it must have been the intention of both parties that in return for the hotel, the seller would acquire the beneficial title to the sale price, Westdeutsche Landesbank Girozentrale v Islington LBC [1996] A.C. 669 considered. It could not be said that any part of the payment by F to the seller remained F's property (paras 30-33). (4) It was not necessary to isolate the opportunity to acquire an asset at a lower price from the opportunity to acquire an asset at all, Cadogan Petroleum Plc v Tolly [2011] EWHC 2286 (Ch), [2012] 1 P. & C.R. DG5 doubted. Nor was there any need to enquire whether F could be said to have a proprietary interest in that opportunity. The principle to be applied was whether the fiduciary's exploitation of the opportunity was such as to attract the application of the rule that the fiduciary would hold the profit on trust for the principal, Bhullar v Bhullar [2003] EWCA Civ 424, [2003] B.C.C. 711, Tyrrell v Bank of London 11 E.R. 934, Whaley Bridge Calico Printing Co v Green (1879) 5 Q.B.D. 109 and Boardman v Phipps [1967] 2 A.C. 46 applied. C's commission was paid within five working days of the seller's receipt of the purchase money. It was plain that in reality F's money funded the commission paid to C. It was material that the seller was in fact prepared to receive a net sum of €201.5 million from the sale, after paying C's €10 million commission. That fact was not made known to F. Had it been, F might have deferred contracting to purchase the hotel until C's agreement with the seller had lapsed. Alternatively, C could have reduced their fee to F, thereby reducing the cost to them of purchasing the hotel. Those facts brought the instant case into category two rather than category three. C's agreement with the seller diverted from F the opportunity to purchase the hotel at a lower price. C therefore held the commission on constructive trust for F (paras 59, 69-73, 106-110). (5) The instant case threw into clear relief the considerable difficulties inherent in the Sinclair decision. There was a need for the Supreme Court to overhaul the entire area of constructive trusts in order to provide a coherent and logical legal framework (para.116).

Appeal allowed