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28/01/2015

Constructive trusts and commonwealth harmonisation

philip_patterson_sml

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 Patterson

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

 

 
 

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