Daraydan Holdings Ltd v Solland International Ltd

[2004] 3 W.L.R. 1104

 

Introduction

As is well known, the Privy Council, in Attorney - General for Hong Kong v Reid[1]disapproved of the Court of Appeal decision in Lister & Co v Stubbs[2].  The advice of the Privy Council as enunciated by Lord Templeman was as follows.  When a bribe or secret commission is offered or accepted by a fiduciary in money or in kind the legal estate in the property thereby conveyed to the fiduciary rests in the fiduciary.  Equity, however, insists that it is unconscionable for a fiduciary to obtain and retain a benefit in breach of duty.  As soon as the bribe or secret commission is received it should be paid to the person suffering from the breach of duty.  Equity treats as done that which ought to be done.  As soon as the bribe or secret commission is received, the fiduciary holds the money or property on constructive trust.

 

The effect of this is to give a proprietary remedy so that if the property increases in value or a cash bribe is invested advantageously the fiduciary will be unable to benefit from the breach of duty because the fiduciary is not only accountable for the original amount of the bribe but also for the increased value of the property representing the bribe.  In reaching that conclusion the Privy Council rejected two arguments that had been accepted in Lister & Co v Stubbs as providing a rationale for imposing only personal and not proprietary liability.  First, that if the fiduciary is in equity a debtor to the person injured, he cannot also be the trustee of the bribe.  The Privy Council rejected that argument on the short basis that there is no reason why equity should not provide two remedies as long as this does not result in double recovery.  The second, and perhaps more formidable argument from Lister & Co v Stubbs, which the Privy Council rejected, was that, if the fiduciary becomes insolvent, unsecured creditors of the fiduciary will be deprived of any right to share in the proceeds of the relevant property.  The Privy Council rejected that argument on the grounds that unsecured creditors cannot be in any better position than their debtor; property acquired by a fiduciary as a result of a breach of a fiduciary obligation and property representing the same from time to time must belong in equity to the person suffering from the breach of duty and not to the fiduciary whether the fiduciary is solvent or insolvent.

 

As a matter of technical precedent the Court of Appeal authority of Lister & Co  v Stubbs is still binding in English law and in Daraydan Holdings Ltd v Solland International Ltd[3] Lawrence Collins J. had to consider the two conflicting authorities.

 

The facts of and issues in Daraydan Holdings Ltd v Solland International Ltd

Put shortly, the claimants Daraydan Holdings Ltd claimed that a former employee, Mr Khalid, when arranging contracts for refurbishments of the claimant’s properties by other defendants, had received undisclosed payments of commission amounting to £1.8millon.  Lawrence Collins J. had to decide whether Mr Khalid was in a fiduciary relationship in respect of the claimants.  He then considered the issue of precedent and, finally, considered whether he could distinguish the facts of the dispute before him from the facts of Lister & Co  v Stubbs.  

 

The fiduciary relationship

Lawrence Collins J. considered a number of academic and judicial authorities on the nature of the fiduciary relationship.  These were Oakley, Constructive Trusts, 3rd ed (1997), pp85-99, Meagher, Gummow & Lehane, Equity: Doctrines and Remedies, 3rd ed (1992), pp156-167, In re West of England and South Wales District Bank; Ex p Dale & Co (1879) 11 Ch. D. 772, 778,  Reading v The King [1949] 2 K.B. 232, 236, Reading v Attorney General  [1951] A.C. 507, 516 and, finally,  Millett L.J. in  Bristol and West Building Society v Mothew (1998) Ch. 1, 18:

A fiduciary is someone who has undertaken to act for or on behalf of another in a particular manner in circumstances which give rise to a relationship of trust and confidence.  The distinguishing obligation of a fiduciary is the obligation of loyalty.  The principal is entitled to the single-minded loyalty of his fiduciary.  This core loyalty has several facets.  A fiduciary must act in good faith; he must not place himself in a position where his duty and interest nay conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.  This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations.  They are the defining characteristics of the fiduciary.

 

On the evidence Lawrence Collins J. was entirely satisfied that Mr Khalid was a fiduciary in relation to the claimants.

 

The precedent issue

Lawrence Collins J. accepted that the House of Lords had forcefully reaffirmed the rules of stare decisis in Davis v Johnson[4].  However, he acknowledged a number of cases[5] where it has been suggested that both a judge of first instance and the Court of Appeal are free to follow decisions of the Privy Council on common law principles which depart, after full argument, from earlier decisions of the Court of Appeal. On the issue as to the competing policy rationales behind alternatively Lister & Co v Stubbs and Attorney General for Hong Kong v Reid Lawrence Collins J. clearly was in favour of the policy analysis adopted in the latter case. He cited a number of academic authorities Goode, ‘Property and Unjust Enrichment’, in Essays on the Law of Restitution, ed Burrows (1991), pp 215, 230-231, Goode, ‘Proprietary Restitution Claims’, in Restitution: Past Present and Future, ed Cornish (1998), pp 63, 69,  Birks, Introduction to the Law of Restitution, 2nd ed (1989), p 386, Virgo, ThePrinciples of the Law of Restitution (1999), p 543, Burrows, The Law of Restitution, 2nd ed (2002), p 500 and  Tettenborn, Law of Restitution in England and Ireland, 2nd ed (1996), pp 231-233. Lawrence Collins J. clearly preferred, as did the Privy Council in Attorney General for Hong Kong v Reid, the view of Sir Peter Millet, writing extra-judicially in ‘Bribes and Secret Commissions’ [1993] R.L.R. 7, 20:

[The fiduciary] must not place himself in a position where his interest may conflict with his duty. If he has done so, equity insists on treating him as having acted in accordance with his duty; he will not be allowed to say that he preferred his own interest to that of his principal. He must not obtain a profit for himself out of his fiduciary position.  If he has done so, equity insists on treating him as having obtained it for his principal; he will not be allowed to say that he obtained it for himself.  He must not accept a bribe. If he has done so, equity insists on treating it as a legitimate payment intended for the benefit of the principal; he will not be allowed to say that it was a bribe.’

 

This, in context, was hardly surprising since Lawrence Collins J. clearly agreed with Lord Templeman in Attorney General for Hong Kong v Reid, that ‘Bribery is an evil practice which threatens the foundations of any civilised society’.  It is clear, therefore, that although acknowledging two first instance decisions, neither of which concerned the bribery of an agent, which have considered Lister & Co v Stubbs to be still technically binding[6], Lawrence Collins J would have been prepared to follow the Privy Council advice in Attorney General for Hong Kong v Reid.  Lawrence Collins J. also considered two decisions where Attorney General for Hong Kong v Reid has been preferred over Lister & Co v Stubbs[7]. Lawrence Collins J was particularly persuaded by the fact that the decision of the Privy Council is recent, that it was a decision on the English common law, where the Board consisted mainly of serving Law Lords, and that the decision had been made after full argument on the correctness of the earlier decision.  In any event, the judge’s observations on this precedent point are strictly obiter as he was able to distinguish the facts in the dispute before him from the facts of Lister & Co v Stubbs.

 

The distinction

Lawrence Collins J. decided that this case was a case where the bribe derives directly from the claimant’s property.  The evidence was that the price paid was actually increased by the amount of the bribe and the bribe was paid out of the money paid by the claimants for what they thought was the price of the refurbishments. Secondly, he rejected the application of Halifax Building Society v Thomas [8], a case which he considered, in any event, to be controversial because Mr Khalid, the fraudster in this case, was a fiduciary.  In Halifax Building Society v Thomas the defendant fraudulently obtained a loan from the building society and the building society sought a declaration that it could keep the proceeds of sale against a completing claim from the Crown to confiscation in execution of a criminal compensation order.  The Court of Appeal refused to make the declaration on the grounds that the fraudster was not a fiduciary, that there was no universal principle that wherever there was a personal fraud the fraudster would become a trustee for the defrauded party and that the building society had, with knowledge of the fraud, affirmed the mortgage and was, therefore, only a secured creditor.  The second  ground of the Court of Appeal’s decision is indeed highly controversial in the light of dicta of Lord Browne-Wilkinson in Westedeutsche Landesbank Girozentrale v Islington London Borough Council[9], which has been followed in a number of subsequent decisions.  This point was, however, largely irrelevant since Lawrence Collins J. was undoubtedly of the opinion that Mr Khalid was a fiduciary in relation to the claimants.   

 

Conclusion

It is unfortunate that the bones of Lister & Co v Stubbs are still rattling around. It seems extremely inappropriate that the rational for underpinning fiduciary liability in this context should rest upon an entirely hypothetical situation as to whether or not the fiduciary is solvent. One would hope that sensible note is taken of this lucid and thorough analysis by Lawrence Collins J.  If not, the law remains at mercy of first instance judicial interpretations of the doctrine of stare decisis.  On a wider note one has to deliberate as to whether advice given by the Privy Council should be considered to be merely persuasive and not of binding authority. 

 

Margaret Halliwell

Reader in Law

City University


[1].         [1994] 1 A.C.324.

[2].         (1890) 45 Ch. D. 1.

[3].         [2004] 3 W.L.R. 1104.

[4].         [1979] A.C.264.

[5].         Doughty v Turner Manufacturing Co Ltd [1964] I QB 518.  Worcester Works Finance Ltd v Cooden Engineering Co Ltd [1972] I QB 210.  Smith v Leech Brain & Co Ltd [1962] 2 QB 405, 415-416. I Congreso del Partido [1978] QB 500, 519.

[6].         Attorney General v Blake [1991] Ch. 84, 96 and the Court of Appeal in Halifax Building Society v Thomas [1996] Ch. 217, 229.

[7].         Ocular Sciences Ltd v Aspect Vision Care Ltd [1997] R.P.C. 289, 412-413 (a breach of confidence case) and (obiter) Fyffes Group Ltd v Templeman [2000] 2 Lloyd’s Rep. 643.

[8].         Halifax Building Society v Thomas [1996] Ch 217.

[9].         [1996] A.C.669.