Secret Commissions and Constructive Trusts – Yet Again!
Richard Hedlund
Abstract
This article looks at the different approaches taken in the law on remedies for breach of the
fiduciary no-profit rule. It explores the moral and legal argument as to whether a beneficiary
should, as of right, have a proprietary claim to any unauthorised profit obtained by a
fiduciary.
Keywords: fiduciary duties, beneficiaries, unauthorised profits, constructive trusts.
I. Introduction
Much has been written about fiduciaries and unauthorised profits following the Court of
Appeal judgment in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd.1 The
judgment by Lord Neuberger MR (as he then was) was predicted by Virgo to become ‘a
classic of equitable jurisprudence’.2 However, the judgment received much criticism
elsewhere, both academic, and more recently in court decisions. Strong criticism came first in
the Australian decision in Grimaldi v Chameleon Mining NL (No 2).3 Recently the Court of
Appeal itself launched an attack in FHR European Ventures Ltd v Mankarious.4
In Mankarious the Court of Appeal posed three crucial questions which need resolve from
the Supreme Court in order to ensure clarity and certainty in the law. This article will argue
that Sinclair Investments should be considered erroneous in law, principle and policy.
Perhaps controversially, the article will argue that a beneficiary should, as of right, have a
proprietary interest in any unauthorised profit obtained by a fiduciary in breach of the noprofit rule, which remains a central tenet of the fiduciary obligations. This is, in essence, the
ratio of the decision in the Attorney-General for Hong Kong v Reid,5 a controversial Privy
Council decision which Virgo has described as ‘inconsistent with authority, principle and
policy’.6 With such a proprietary interest as recognised in Reid, the fiduciary becomes a
constructive trustee over the profit, and holds it on trust for the beneficiary.
This article will seek to provide some arguments on how the Supreme Court should answer
the questions posed in Mankarious, namely that a constructive trust should be the appropriate

Richard Hedlund, York Law School, University of York. With the usual caveats, I would like to thank
Professor Richard Nolan, Dr Sarah Wilson and Amber Rhodes for their helpful comments on the research which
preceded this article.
1
Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA 347, [2012] Ch 453. For a list of
academic commentaries following Sinclair Investments, see FHR European Ventures Ltd v Mankarious [2013]
EWCA Civ 17, [15]
2
Graham Virgo, ‘Profits obtained in breach of fiduciary duty: personal or proprietary claim?’ (2011) 70 CLJ
502, 503
3
Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6
4
FHR European Ventures Ltd v Mankarious [2013] EWCA Civ 17
5
Attorney-General for Hong Kong v Reid [1994] 1 AC 324
6
Virgo (note 2), 503
remedy for breach of the no-profit rule, even if this means that the constructive trust, in these
cases, takes on the hallmark of a remedial trust.
II. Fiduciaries: the context of the debate
Before turning to Mankarious, the first thing to explore is why the debate on whether a
beneficiary should have a personal or proprietary claim against a fiduciary is important. It
could perhaps be said that a pastoral view of equity lingers, considering fiduciaries and
trustees as being laymen, friends of the family or public-spirited men who agree to undertake
such arduous duties. This, of course, is no longer the case. Today, equity has (seemingly to
the despair of some) fully permeated the commercial sector, and its role in commercial law
cannot be denied. Fiduciaries and trustees are often professionals, paid to undertake the job.
The law has responded to this in the past decades, for example by placing directors’ duties
and certain trustees’ duties on statutory footings.7 Further, the fact that trustees are
professionals ‘should be taken into account when determining the standard of care applicable
to them’.8
The increase in professional fiduciaries, trustees and company directors, coupled with
deregulation in the corporate and commercial sectors have led to concern about the legal
control over fiduciaries. The Law Commission recognised that, although it was a polarised
debate, there is widespread concern that beneficiaries, whether in the family or commercial
context, are insufficiently protected. The trustee exemption clauses commonly found in trust
instruments have led some to argue that the protection available to beneficiaries was reaching
an ‘unacceptably low level’.9
This article argues that that any breaches of fiduciary duty, and perhaps especially those
with considerable economic consequences, warrants a tough response from the law. The need
for such a response is highlighted by the economic mismanagement in the banking and
commercial sectors which lay at the very heart of the current economic crisis. For instance,
Wells wrote in this journal that the introduction of the Bribery Act 2010 ‘prompted
hyperbolic responses’ from UK business, which can hardly be a good sign.10
Remaining in the corporate sector for a moment, Cheffins, in his discussion on the
development of British business, states that British business is distinct in the world because
of its high use of publicly traded companies with dispersed shareholdings.11 It is combined
with a long-running concern about ‘shareholder apathy and insufficient managerial
accountability’.12 Indeed, Lord Wedderburn once referred to shareholders’ powers over
directors as being ‘illusionary’.13 This leads to an argument for much greater control over
directors. One can link this to an interesting study by Prechel and Morris into financial
malfeasance in large US companies. Their conclusion is that changes, including deregulation,
in US company law from the 1980s onwards ‘created dependencies, incentives, and
7
Companies Act 2006, ss. 171-177; Trustee Act 2000, s. 1 (applying to those actions listed in s. 2/Sch 1)
Independent Trustee Service Ltd v GP Noble Trustees Ltd [2010] EWHC 1653, [56] (Peter Smith J)
9
Law Commission, ‘Trustee Exemption Clauses’ (2006, Law Commission No 301), 3.8
10
Celia Wells, ‘Who’s Afraid of the Bribery Act 2010?’ [2012] JBL 420, 420
11
Brian Cheffins, Corporate Ownership and Control: British Business Transformed (OUP, 2008), 1
12
Ibid, 2
13
Lord Wedderburn, ‘The Social Responsibility of Companies’ (1985) 15 Melbourne Law Review 4, 11
8
opportunities for managers to engage in financial malfeasance’.14 One example was the
changes allowing for greater and generally uncontrolled use of subsidiaries, which opens
opportunities for financial misconduct.15 Sinclair Investments is itself an example of how
subsidiaries can be used for fraud.
One can therefore see that fiduciaries do wield considerable power over their beneficiaries,
whether the fiduciary is a “family-friend trustee” of a director of a large corporation. The
fiduciary relationship, with all the obligations it comes with, is a special construct of the law.
It is there to ensure at least a modicum of protection for the beneficiaries, but this article
would argue that the law should provide a considerable amount of protection. This “special
relationship” demands it. Hence the debate on whether a beneficiary should be entitled to a
personal or proprietary claim is of great importance.
III. Fiduciaries and Profit
In this section we will briefly consider the law’s response where a fiduciary has received an
unauthorised profit. As was recognised in Mankarious, the law, following Sinclair
Investments, makes a distinction between three categories of cases. (A): cases where the
beneficiary has a pre-existing proprietary interest in the unauthorised profit. (B): cases where
the beneficiary ought to have obtained a proprietary interest in the unauthorised profit. (C):
cases where the unauthorised profit cannot be said to belong, nor ought to belong, to the
beneficiary. In A and B, a constructive trust will arise. In C, however, the fiduciary only has
personal liability. It is suggested that this is unfortunate, in that it has potential to cause
unnecessary uncertainty as to the remedy. The benefit of the approach taken in Reid was to
effectively merge the categories into one, and the benefit of a return to this approach was
strongly hinted at in Mankarious.
A. Category A – Pre-existing proprietary interest
A basic principle of trust law was established in Keech v Sandford and subsequently
expanded to include all fiduciaries.16 The principle is that a fiduciary cannot make an
unauthorised profit from their position. In Keech, a trust existed on behalf of a child, which
included a lease over a property. When the lease was due to be renewed, the landlord refused
because the lease was intended for a child. The trustee, in good faith, decided to take out the
lease in his own name, thus keeping the lease but removing it from the trust fund. This was a
breach of his fiduciary duty as a trustee. As the Lord Chancellor held, ‘the trustee is the only
person of all mankind who might not have the lease’.17 The trustee was directed to assign the
lease to the child and account for the profits. In this respect, a new trust was formed when the
lease was assigned to the child.18 Today we would recognise this type of trust as a
Harland Prechel and Theresa Morris, ‘The Effects of Organizational and Political Embeddedness on Financial
Malfeasance in the Largest U.S. Corporations : Dependence, Incentives, and Opportunities’ (2010) 73 American
Sociological Review 331, 350
15
Ibid, 342
16
Keech v Sandford [1726] Sel.Cas.Ch.61
17
Ibid, 62 (Lord King LC)
18
Ibid, 62 (Lord King LC)
14
constructive trust. The rationale for the proprietary claim was that the beneficiary had a preexisting proprietary interest in the lease. Today, Keech stands as authority for the basic
principle that where a fiduciary makes profit out of property which beneficially belongs to the
beneficiary, he will hold that profit on constructive trust for the beneficiary.
B. Category B – Proprietary interest which ought to belong to the beneficiary
The second category of cases where a constructive trust will be recognised by the courts is
where the unauthorised profit ought to have gone to the beneficiary. The seminal case is
Boardman v Phipps.19 The facts can be broadly summarised. Boardman was a solicitor
advising the Phipps family trust. In the performance of his duties he advised the trust of the
possibility to invest in a company. The trust declined to do so. Boardman took the decision to
personally make the proposed investment. The question was whether Boardman could be
permitted to keep the profits on the shares or whether he held them on trust for the Phipps
family trust. By majority the House of Lords found that he did hold them on constructive
trust. The fact that the Phipps family trust had previously declined to purchase the same
shares was ‘immaterial’.20 However, the decision in Boardman is elusive and as Hicks writes,
‘judges and jurists cannot even agree on whether proprietary relief was ordered in the case’.21
In Mankarious the court confirmed that Boardman did indeed impose a constructive trust,
and this debate should now be considered closed.22 The House of Lords held true to the
principle laid down in Keech, namely that a fiduciary cannot make an unauthorised profit
from his position.
C. Unauthorised profits which fall outside A and B.
It is category C which is most contentious. In cases where the profit obtained does not in any
conceivable way belong to the beneficiary, should the beneficiary nonetheless have a
proprietary claim to it? From the judgment in Sinclair Investments it is clear that the answer
in English law is no. However, the answer is not as easy as that, because the contrary view
has been upheld in a few cases, notably Reid. Because of the conflicting judgments, it is
important to explore the case law in some more detail.
1. Some early cases – establishing the orthodox approach
The early key case is Lister & Co v Stubbs.23 The company employed Mr Stubbs to procure
materials. Mr Stubbs accepted a secret commission from one firm in return for placing orders
with them. Some of the money he invested through purchasing some property. Once
discovered, the company sought to reclaim the money from Mr Stubbs, including tracing the
money which he had invested. The court rejected the proprietary claim, and by extension also
19
Boardman v Phipps [1967] 2 AC 46
Ibid, 111 (Lord Hodson)
21
Andrew Hicks, ‘The remedial principle in Keech v Sandford reconsidered’ (2010) 69 CLJ 287, 288
22
FHR European Ventures Ltd v Mankarious [2013] EWCA Civ 17, [91] (The Chancellor)
23
Lister & Co v Stubbs [1890] 1 Ch 1
20
the tracing claim. It was held that Mr Stubbs was personally liable to pay over the money he
had received, but merely in the sense that there was a ‘debt due’.24 There was not a trustee
relationship between them in the sense that Mr Stubbs held the money on trust.25 It has been
argued that the decision is inconsistent with Keech, because the fiduciary was, in effect,
allowed to retain any profit from the investment. The result in Lister & Co was later echoed
in Powell & Thomas v Evan Jones & Co.26
Lindley LJ’s partly based his decision on avoiding two consequences. 27 The first was that if
the claimants had a proprietary interest and the defendant went bankrupt or insolvent, that
property would be unavailable to the general creditors of the defendant. This was considered
wrong since creditors have provided value which they risk losing.28 Secondly, a proprietary
claim would permit the claimants to follow and trace, and claim title to property acquired by
investing the secret commission. Lindley LJ ‘did not think that this could be right’.29
The company’s argument, asserting a proprietary claim, was according to Lindley LJ
‘confounding ownership with obligation’, and a misstatement of law.30 As Lindley LJ
commented in a later case, to ‘say it is the company's money is to use an ambiguous
expression’.31 It is the company’s money in the sense that they can claim it as a debt from the
fiduciary; but it is not the company’s money in the sense that they have a beneficial
proprietary interest in the property. Hence, the company is an unsecured creditor and does not
have the right to trace the property.
These cases lay the ground for the personal liability in Category C cases. The fiduciary is
not permitted to acquire an unauthorised profit, and must account for that profit and disgorge
it where possible. However, the fiduciary did not hold the profit on constructive trust. With
hindsight, it is not clear exactly what the reasoning in the cases were, as they seemed to
overlook the principle of Keech. Much was said about the rights of creditors, which is
discussed more fully later. As it was, these cases were the law of the land for over a century
before being challenged by the Privy Council.
2. Reid and beyond – abandoning the orthodox approach
The challenge came in Reid.32 Mr Reid was employed as Acting Director of Public
Prosecution in Hong Kong. Whilst in office he accepted bribes and in return discontinued
various prosecutions. This was in breach of his fiduciary obligations to the Crown. Upon
being discovered, Mr Reid was prosecuted and ordered to pay over the money he had
received. However, using part of this money, Mr Reid had purchased three properties in New
Zealand. The Attorney-General sued in New Zealand for title to these properties. Applying
24
Lister (note 23), 12 (Cotton LJ)
Lister (note 23), 15 (Lindley LJ)
26
Powell & Thomas v Evan Jones & Co [1905] 1 KB 11
27
Lister (note 23), 15 (Lindley LJ)
28
Daraydan Holdings Ltd v Solland International Ltd [2005] Ch 119, [78] (Lawrence Collins J)
29
Ibid, [75] (Lawrence Collins J)
30
Lister (note 23), 15 (Lindley LJ)
31
Re North Australian Territory Company [1892] 1 Ch 322, 338 (Lindley LJ)
32
Attorney-General for Hong Kong v Reid [1994] 1 AC 324
25
the orthodox approach from Lister & Co, the New Zealand courts held that the Crown had no
equitable interest in the properties.
The Privy Council, however, decided that Mr Reid held the properties on constructive trust
for the Crown.33 This was a clear departure from the orthodox category C principle. The basis
for the decision is shrouded in the vague notion of ‘conscience’. As Lord Templeman said,
‘Equity … which acts in personam, insists that it is unconscionable for a fiduciary to obtain
and retain a benefit in breach of duty’.34 Lord Templeman began by following the older
cases, saying the fiduciary was a debtor and was accountable for the money received. He
continued, however, by saying that it would be unconscionable for the fiduciary to account
for the money received, but be permitted to retain the increase in value (here, the properties in
New Zealand). Hence, a constructive trust was imposed meaning the Crown could claim a
proprietary interest over the properties.35
Lord Templeman’s reasoning is based primarily on Keech. Lord Templeman suggested that
the ratio in Lister & Co is ‘inconsistent’ with Keech.36 The question of whether Lister & Co is
consistent comes down to the pre-existing proprietary interest. As Hicks tells us regarding
Keech, the constructive trust imposed was based on the ‘link between the old and the new
lease’.37 Hudson goes further by arguing that Reid in fact ignores many of the requirements
for the establishment of a trust, but says that it has ‘to do with equity’s moral condemnation
of the defendant’s unconscionable actions’.38 Perhaps Lord Templeman alluded to the old
maxim corruptio optima pessima; corruption of the best is the worst. One would expect more
from a high-ranking Crown servant. The decision received more scathing criticism in
Sinclair, where the judgment was, in Virgo’s words (and it must be inferred that Virgo
concurs), called ‘inconsistent with authority, principle and policy’.39
However, that assertion must surely be wrong. Rather, it is submitted that Lord Templeman
was correct in saying that the Lister & Co and subsequent decisions were themselves
inconsistent with the broader principle that a fiduciary cannot profit from his position.40
Many of the old judgments did not specifically address the issue of what should happen if a
secret commission was invested and increased in value. Nor did the judgments make
reference to Keech, though as Lewison J was to point out in the Sinclair Investments
litigation, it was ‘inconceivable that an equity judge of the eminence of Lindley LJ was
unaware of the principle’.41 Several of the decisions following Reid similarly do not address
specifically the issue of tracing and how the courts should approach profits from
investments.42 It is therefore unclear whether Lister & Co is itself consistent with broader
principle, and it is a matter of great regret that Lindley LJ did not specifically mention Keech
in his reasoning.
33
Ibid, 331 (Lord Templeman)
Ibid, 331 (Lord Templeman)
35
Ibid, 331 (Lord Templeman)
36
Ibid, 335 (Lord Templeman)
37
Andrew Hicks, ‘Constructive Trusts of Fiduciary Gains: Lister Revived?’ [2011] Conv PL 62, 64
38
Alastair Hudson, Equity and Trusts (7th edn, Routledge, 2012), 687
39
Virgo (note 2), 503
40
Reid (note 32), 336 (Lord Templeman)
41
Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2010] EWHC 1614, [38] (Lewison J)
42
See e.g. Re Allied Business & Financial Consultants Ltd [2009] BCC 822, [55] (Rimer LJ); Chirnside v Fay
[2006] NZSC 68, [2007] PNLR 6, [16] (Elias CJ) (Supreme Court of New Zealand)
34
Reid had a somewhat shaky career as precedent in the English courts, where judges were, to
say the least, uncertain whether to apply it. One of the more important decisions which faced
this dilemma was the High Court decision in Daraydan Holdings Ltd.43 An employee of the
holding company had received secret commissions in the course of his employment. The
claimant, Daraydan, claimed that the defendant held those commissions on constructive trust.
Lawrence Collins J engaged in a thorough discussion of the case law leading up to Reid. The
question for the learned judge was whether to follow Lister & Co or Reid. The judge would
have favoured Reid, arguing that there are ‘powerful policy reasons’ for not allowing a
fiduciary to retain any profit.44 However, the judge found that he could distinguish Lister on
the facts.45 Hence, Reid was not formally applied as precedent.
What is clear is that there was no clarity in the law. Halliwell rightly lamented that the
important issue of whether the beneficiary had a personal or proprietary claim was left
unresolved, especially since it seemed to hinge on individual judges’ views on the rights of
creditors.46 Many of the cases deal with commercial relationships, Reid being distinguishable
as relating to a Crown servant. This distinction is important to address. On a wider scale,
there is disagreement on the nature and application of the important principle laid down in
Keech, namely whether a fiduciary should ever be permitted to retain any money gained as a
result of a breach of duty. This brings us to what was predicted to become a seminal case in
the law of fiduciaries.
3. Sinclair Investments and beyond – return of the orthodox approach
Sinclair Investment looked again at whether a fiduciary who received a secret commission
should merely be personally liable to the beneficiary.47 Mr Cushnie was the director of TLP.
In that position he solicited investments. These were wrongfully passed on to another
company, VTFL, which was a trading subsidiary of VGP. The purpose of that transfer was to
artificially increase the share value of VTFL. The primary shareholder in VGP was Mr
Cushnie. The shares in VTFL, having been artificially inflated, were sold at a large profit. Mr
Cushnie used some of the profit made to purchase a flat. The profit made by Mr Cushnie was
in breach of his fiduciary duties. A claim was brought by TLP, through its assignee Sinclair
Investments, against him to account for the profit made.
The essential question was whether Sinclair Investments had a personal or proprietary
claim against Mr Cushnie. A proprietary claim would make them secured creditors, including
a right to trace into the flat. A personal claim would make them unsecured creditors.
Considering the multi-million pound claim, this distinction was of great significance.
The judgment handed down by Lord Neuberger has, on the one hand, been predicted to
become ‘a classic of equitable jurisprudence’;48 and on the other been referred to as ‘bad in
principle’.49 Faced with the question of whether to apply Reid, Lord Neuberger said no. His
43
[2005] Ch 119
Daraydan (note 28), [86] (Lawrence Collins J)
45
Daraydan (note 28), [87] (Lawrence Collins J)
46
Margaret Halliwell, ‘The Ghost of Lister & Co v Stubbs’ [2005] Conv 88, 92
47
Sinclair Investments (note 1)
48
Virgo (note 2), 503
49
Hudson (note 38), 582
44
Lordship held that ‘there is a consistent line of reasoned decisions’ that stated that a claimant
only had a personal claim against a fiduciary, unless he showed his case fell in Category A or
B.50 His Lordship continued by saying that a personal claim only covered the property
misappropriated (with interest). If that money had been used to purchase an asset which
increased in value, the claimant could not recover that increase.51 The fiduciary is only
‘accountable in equity’ for the money actually received in violation of the no-profit rule.52
Lord Neuberger suggested that if appropriate in such circumstances the courts should award
equitable compensation.53 This, however, applies only where the beneficiary has suffered
some quantifiable loss.54 Hudson calls it ‘inequitable’ that a fiduciary would be permitted to
‘keep the fruits of their unconscionable actions’, perhaps the most forceful criticism of Lord
Neuberger’s reasoning.55 Further, as Lord Neuberger himself accepted, the personal liability
is subject to the ‘disadvantage of being a personal claim, so it would rank pari passu with the
defaulting fiduciary’s other unsecured creditors’ claims in the event of his bankruptcy’.56 A
personal claim means the claimant is an unsecured creditor. Equitable compensation only
applies were there are funds to pay for it, meaning there is risk to the claimant if the fiduciary
has gone bankrupt or insolvent. However, Lord Neuberger argued that this approach does less
injustice to the ‘legitimate interests’ of the fiduciary’s creditors, 57 and argued the decision in
Reid gives ‘insufficient weight’ to the interests of any creditors.58 The interest of creditors is
discussed more fully in part 4. However, one must refer back to Halliwell’s lament, namely
that the decisions on category C cases fall on judges’ views on the rights of creditors, but
without this ever being fully discussed.
The judgment in Sinclair Investments is a step back. Lord Neuberger offered resolute
criticism of the decision in Reid, positing with uncharacteristic frankness that there is a ‘real
case for saying’ that the reasoning was ‘unsound’.59 The decision in Sinclair Investments has
been followed in a number of subsequent High Court decisions.60 As the law now stands, a
secret commission or a bribe is not something which can be said to be the property of the
beneficiary.61 Therefore there is only personal liability. This distinction, between categories
A, B and C, can now be considered to be well established in English law.
D. Mankarious and new confusion
The facts in Mankarious are straight-forward. Cedar Capital Partners LLC was formed by Mr
Mankarious to consult in the hotel industry. They entered into an agreement with Monte
50
Sinclair Investments (note 1), [88]
Sinclair Investments (note 1), [89]
52
FHR European Ventures LLP v Mankarious [2011] EWHC 2999, [19] (Simon J)
53
Sinclair Investments (note 1), [90]
54
Gwembe Valley Development Co Ltd v Koshy [2003] EWCA Civ 1048, [142] (Mummery LJ)
55
Hudson (note 38), 582
56
Sinclair Investments (note 1), [46]
57
Sinclair Investments (note 1), [90]
58
Sinclair Investments (note 1), [83]
59
Sinclair Investments (note 1), [80]
60
Cadogan Petroleum plc v Tolley [2011] EWHC 2286, [23] (Newey J); also FHR European Ventures LLP v
Mankarious [2011] EWHC 2999
61
Sinclair Investments (note 1), [80]; FHR European Ventures (note 52), [17] (Simon J)
51
Carlo Grand Hotel Ltd to procure the sale of that hotel (the “Exclusive Brokerage
Agreement”). In return for finding a purchaser Cedar would get €10 million. Cedar arranged
for the hotel to be sold to the claimants (the Investor Group), but failed to disclose to them
the €10 million fee. The €10 million was paid following the sale of the hotel to the Investor
Group. The question at trial was whether the fee was an unauthorised profit, and if so,
whether the Investor Group had a personal or proprietary claim again Cedar.
In the High Court, Simon J found that Cedar had not adequately disclosed the fee, although
the Brokerage Agreement called for Cedar to do so. As such, it was a secret commission
which Cedar was not entitled to keep. As for the remedy, Simon J held that the Investor
Group only had a personal claim against Cedar. Hence, no constructive trust arose over the
fee. It was this order that was the sole challenge before the Court of Appeal.
A particular difficulty identified is how the law should differentiate between categories B
and C.62 Sinclair Investments does not clearly define category B. However, when it comes to
secret commissions the early English cases seem to clearly put them in category C. Lord
Neuberger said the same in Sinclair Investments.63 At first glance, Mankarious is also in
category C, as Simon J held. The Chancellor, however, found two arguments to place this
case within category B, so that a constructive trust could arise.
The first reason was that the fee was in fact paid from the Investors’ purchase money. This
factual assumption was rejected by Pill and Lewison LJJ, on the basis that once the money
was paid to Monte Carlo Hotel, it ceased to be the Investors’.64 The crucial point, however,
recognised by all judges, was that without the fee, it is possible (even if just in theory) that
the actual purchase price could have been €10 million less. For instance, the Brokerage
Agreement had an expiry date, thus the Investors could have waited it out and negotiated a
deal where Monte Carlo Hotel did not have to pay the fee. Thus, Cedar exploited an
opportunity which belonged to the Investors. The second reason given by the Chancellor is
that had the Investors known of the commission, they could have come to a different
agreement with Cedar itself, for instance by reducing what they were paying Cedar.65
With this in mind, the court was able to position this case into category B. Whilst this links
up to some of the precedents, it feels a somewhat strained argument in light of Lister and
Sinclair Investments. Broadly, the Chancellor’s arguments are true for any secret commission
(they could have affected the purchase prices, or agency fees, in Lister). It seems the Court
made the facts fit the law, rather than applying law to facts. The appeal was allowed and a
constructive trust imposed. From Mankarious comes therefore new uncertainty as to what the
courts will do as a matter of fact, only increasing the argument that this matter must be
resolved by the Supreme Court.
E. Is Category C consistent with principle?
Mankarious is clearly critical of Sinclair Investments. Dividing the law into the three
categories, and without adequately defining those categories, creates unnecessary complexity
62
FHR European Ventures Ltd v Mankarious [2013] EWCA Civ 17, [100] (The Chancellor)
Sinclair Investments (note 1), [80]
64
Mankarious (note 62), [32] (Lewison LJ), [67] (Pill LJ)
65
Mankarious (note 62), [109] (The Chancellor)
63
and uncertainty. Mankarious does not do much to resolve that (but as is rightly recognised,
that is for the Supreme Court). Making a distinction between secret commissions (category
C) and secret commissions paid for from the claimant’s money (as in this case, category B),
places an immense factual burden on the courts. At a more fundamental level, it also
introduces a degree of unfairness to different claimants who have been wronged by a bribed
fiduciary.
It is not entirely clear why there should be a divide between profits obtained through
exploiting opportunities that belonged to the beneficiary and other secret profits. Most
fundamentally, it is not clear whether Sinclair Investments (as Lister & Co before it) is
consistent with Keech. The reasoning, making a distinction between property the beneficiary
had, ought to have had, and other cases, was forcefully criticised as “unconvincing” by the
Australian Federal Court in Grimaldi.66 The benefit of Reid was that it, in effect, merged
Categories A, B and C into one through applying the principle from Keech. A fiduciary
cannot make an unauthorised profit from his position, and becomes a constructive trustee
over that profit. That simple equitable principle should not be subject to discussion. Yet it has
been. Hudson points out that this is part of ‘the longest-running argument’ between
commercial lawyers and property lawyers about what to do in insolvency: commercial
lawyers favouring Sinclair Investments because of the pari passu distribution of assets to
unsecured creditors, and property lawyers favouring Reid on the basis that property rules
should operate the same whether parties are solvent or insolvent. It builds on the broader,
time-honoured strife between equity and the common law. As Hudson concludes, ‘there are
no right or wrong answers, just polarised points of view’.67
In the absence of Reid, Sinclair Investments might have been an uncontroversial decision.
However, Reid does raise important policy issues regarding the duties of fiduciaries and how
these should be balanced against the rights of creditors and others. The reasoning in Reid was
based on the notion that a fiduciary, in exercising his duties, is acting as a good person and
‘dutifully’ takes any bribe with the intention that it should go to the beneficiary. 68 As a matter
of policy, it is unclear what the decision in Sinclair Investments (and the distinction between
category A, B and C) adds to the law. Hence, even though Sinclair Investments follows the
traditional approach there is an argument to be made that Lord Neuberger favoured the wrong
precedent.
IV. Profits and Constructive Trusts: Reid or Sinclair?
This article has so far considered the long line of cases which underpin the law on fiduciaries
receiving unauthorised profits. Now we come to the questions raised in Mankarious. The
essence is whether Reid and its possible remedial approach should be preferred over keeping
the three-category distinction resulting from Lister and Sinclair Investments. Adopting the
principled reasoning in Keech and Reid, this article argues that a beneficiary should, as of
right, have a proprietary claim against a fiduciary who receives an unauthorised profit. The
66
Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, [574]
Hudson (note 38), 583
68
David Hayton, ‘No proprietary liability for bribes and other secret profits?’ (2011) 25 Trust Law International
3, 5
67
article concedes, to an extent, Goode’s criticism that the decision in Reid was based more on
moral considerations that it was on legal principles.69 However, there is a clear argument to
be made that Reid was, beyond its moral arguments, in fact based on concrete and sound legal
principle. In this section the article will explore a series of arguments as to why Reid should
be the guiding principle in English law, and why a beneficiary should as of right have a
proprietary claim against a fiduciary.
A. Justice for the beneficiary
A principal argument in favour of Reid is this. The fiduciary relationship is a special
construct of the law. Whilst no comprehensive definition has ever been given (nor, possibly,
could one ever be), it is beyond all a relationship of trust and confidence.70 Because of its
nature it demands special protection for beneficiaries. It is undeniable that equity has always
taken a more realistic approach to its regulation of commercial relationships;71 both private
and commercial beneficiaries deserve strong protection from the law. This is what must flow
from the special nature of the relationship. As Millett LJ (as he then was) explained the
Mothew, the fiduciary obligations should be those which are not already covered by contract
or general duties under the common law, of which negligence might be the most important.
His Lordship summed it up with the memorable phrase, that ‘not every breach of duty by a
fiduciary is a breach of fiduciary duty’.72 Creditors, as will be discussed further below, will
have a contractual relationship with the fiduciary, but the beneficiary has something which
goes well beyond a contractual relationship. There is nothing unjust in recognising the special
nature of the fiduciary relationship, and allowing remedies to match.
Allowing a beneficiary to have an automatic proprietary claim would to a greater degree
ensure justice to the beneficiary, because it denies the fiduciary any opportunity to benefit or
take advantage of his special position. Creating just outcomes is a key rationale for equity,
and hence the equitable jurisdiction should have available all remedial tools it may require to
provide justice, including the right to remedially allocate proprietary interests, along the lines
of Reid. As also discussed below, the constructive trust imposed in Reid had much to do with
the conscience of the fiduciary. The proprietary claim arises out of the unconscionable nature
of accepting an unauthorised profit, such as a bribe or secret commission.
The use of equitable principles, especially in commercial dealings, is hotly debated and, by
some, forcible resisted. The United States have taken a radically different approach to
England, having created a distinct remedial constructive trust to be employed as remedy for
unjust enrichment.73 English law has not embraced this view. Briggs J has held that, although
trusts should not be limited to private home situations, they should not ‘unthinkingly’ be
created in situations where a personal remedy would suffice.74 Briggs J is right that trusts
should not ‘unthinkingly’ be imposed, and as such it is imperative for equity to formulate
Roy Goode, ‘Proprietary liability for secret profit – a reply’ (2011) 127 LQR 493, 494
Bristol and West Building Society v Mothew [1998] Ch 1, 18 (Millett LJ); Sinclair Investments (n 1), [35]
71
Speight v Gaunt [1883-84] LR 9 App Cas 1, 4 (The Earl of Selbourne LC)
72
Mothew (note 70), 16 (Millett LJ)
73
John Dewar, ‘The Development of the Remedial Constructive Trust’ (1982-1984) 6 Est & Tr Q 312, 313
74
Re Lehman Bros International (Europe) (in administration) [2010] EWHC 2914 (Ch), [225(ix)] (Briggs J)
69
70
clear principles for when trusts can be imposed. Beneficiaries require protection, lest the
fiduciary relationship be brought into disrepute. This protection is required whether the
beneficiaries are private individuals or businessmen who have fallen victim to the many
dangers on the financial stage. Equity has long recognised protection for beneficiaries where
a corporate fiduciary has failed in doing what an ‘ordinary man of business’ would do.75 It is
submitted that imposing a constructive trusteeship in such situations should not be considered
as “unthinking”. Where a beneficiary has potentially lost out on a considerable amount of
money (such as multi-million pound investments) a personal claim does not suffice. Adopting
the reasoning in Reid, a constructive trust can provide that justice, and does so in a thoughtthrough manner which does not offend commercial certainty.
We have seen above the findings of Prechel and Morris, suggesting that financial
malfeasance is easily achieved. In such situations a personal claim might not suffice.
Bankruptcy and insolvency are potential risks, as is that fact that following and tracing is not
possible with a personal claim. Whilst many support the position in Sinclair Investments
because of its support for general creditors, it is unclear why a beneficiary might have to lose
out. As said, the fiduciary relationship has been specially created by the law. It is important to
ponder the rationale for its creation, and from that draw guidance as to whether a constructive
trust should be imposed. It is submitted that it is not “unthinking” to impose a constructive
trust in any situation where the fiduciary has taken advantage of his special position. His
conscience is affected, and hence a trust should arise.76
Regrettably, it could be argued that Emmerglick was correct in saying that the drive for
legal certainty, and the subjugation of equity to the common law after their fusion, means that
equity can no longer deliver individual justice.77 One could suggest that the decision in Reid
is a shining example that this is not the case. It demonstrated clearly equity’s flexibility and
adaptability, by providing justice to the beneficiary in a manner which the category C cases
might deny, especially where the fiduciary has gone bankrupt/insolvent or otherwise disposed
of the property to where a personal claim cannot follow. Many questions do however remain
as judges seem to favour creditors over beneficiaries, without any through reasoning as to
why it is the beneficiaries who must bear the risk.
B. The Rights of Creditors
The cases advocating the orthodox approach speak of the rights of creditors and how those
rights would unduly be interfered with if a beneficiary had a proprietary claim. In
Westdeutsche, Lord Goff asks why a person in a commercial relationship should have
preference over the general creditors.78 Goode goes further in positing that, if a proprietary
claim was allowed, then ‘the line is crossed between what is fair and what is not, for it is the
defendant’s unsecured creditors who are then at risk’.79 The essence of the argument is that a
75
Speight v Gaunt [1883-84] LR 22 Ch D 727, 759 (Lindley LJ)
The Earl of Oxford’s Case [1615] 21 ER 485, 487 (Lord Ellesmere LC); Westdeutsche Landesbank
Girozentrale v Islington LBC [1996] AC 669, 705 (Lord Browne-Wilkinson)
77
Leonard Emmerglick, ‘A Century of the New Equity’ (1944-1945) 23 Texas Law Review 244, 254
78
Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 684 (Lord Goff)
79
Roy Goode, ‘Ownership and Obligation in Commercial Transactions’ (1987) 103 LQR 433, 444
76
proprietary remedy is inappropriate, certainly in commercial relationships, as it causes
unfairness to the general creditors.
It is submitted that this argument is flawed as inherently unjustified. Creditors will have
given value, but in full knowledge that insolvency is a possibility. It has been clear, at least
since the seminal case of Solomon v Solomon, that it is for creditors to assess their own risk.80
In Westdeutsche the court denied a proprietary right, partly based on the “apparent wealth
argument”, which states that creditors assess creditworthiness based on the “apparent wealth”
of the borrower.81 On this basis, it would be unfair if the creditors did not get a share in assets
they (genuinely) believed belonged to the borrower. There is some merit in this argument;
however it only takes one so far. Jaffey has criticised the argument as unprincipled, as it
seems to deny proprietary claims altogether and fails to explain which proprietary claims the
law should allow.82 Further, it would seem possible for fiduciaries to misrepresent their assets
whether they are liable under category A, B or C. Creditors take a financial risk, and the
“apparent wealth” argument does not justify the different approaches between categories A,
B and C.
Writing in support of the decision in Sinclair Investments, Goode argues that the ‘only real
risk for the claimant [beneficiary] is that the defendant becomes insolvent, but that is a risk
born by other creditors as well’, and given this he questions why creditors should ‘be
subordinate to a claimant [beneficiary] who had no existing proprietary interest, who has
given no value, who may have suffered no loss and who cannot even invoke a reliance
interest’.83 The question posed is certainly the right one, but the answer does not necessarily
have to be in line with Sinclair Investments. First, insolvency is not the only risk, as the
fiduciary can invest the profit or dispose of it to where a personal claim cannot follow.
Further, as we have seen with the rise in professional trustees and fiduciaries, beneficiaries
often do provide value of some sort. Sir David Hayton suggests that Goode’s critique is
nullified where the fiduciary has been remunerated by the beneficiary, such as where the
fiduciary is a paid director, a paid trustee, or indeed a Director of Public Prosecution.84
Lawrence Collins J had opportunity to address this question in his judgment in Daraydan.
The learned judge squarely rejected earlier judges’ concerns for the creditors, saying that if
the fiduciary had gone insolvent there ‘is no injustice to the creditors in their not sharing in an
asset for which the fiduciary has not given value, and which the fiduciary should not have
had’.85 This argument was not properly addressed in Sinclair, but was (perhaps
appropriately86) brushed aside as being a first-instance decision.87
However, the argument is worth exploring. Whilst it does not sit well with the “apparent
wealth” argument from Westdeutsche, it raises an important question. The fiduciary has some
property he should never have had. He has obtained it through undertaking his duties vis-avis the beneficiary. His conscience is thus affected. The beneficiary will not necessarily have
80
Solomon v Solomon [1897] AC 22, 40 (Lord Watson)
Westdeutsche (note 78), 705 (Lord Browne-Wilkinson)
82
Peter Jaffey, Private Law and Property Claims (Hart Publishing, 2007), 176
83
Goode (note 79), 495
84
Hayton (note 68), 15
85
Daraydan (note 28), [86] (Lawrence Collins J)
86
Re Spectrum Plus Ltd [2005] 2 AC 680, [43] (Lord Nicholls)
87
Sinclair Investments (note 1), [84]
81
suffered a loss, but equity should recognise the moral argument. There is no clear justification
why the fiduciary’s creditors should have access to this property. Certainly, there is the
argument that the beneficiary will receive a windfall, but this can be justified based on the
special nature and construct of the fiduciary relationship.
It is clear that English law affords a considerable amount of protection to creditors.
However, as argued, there is little reasoned justification for this approach. Not even cases
where creditors’ interests have been superseded offer reasoned explanations as to the general
rule or why an exception has been made.88 The law offers general protection to creditors
through the “anti-deprivation rule”, as recently restated by the Supreme Court in Belmont
Park.89 At the same time, the law permits a series of legal devises which does in fact remove
a fiduciary’s property from his creditors. This includes the use of Quistclose-trusts and
retention of title clauses in sales contracts.90 English law must engage seriously with the
debate as to the rights and legitimate interests of creditors. The rules must be presented in a
thought-through and principled manner, as mandated by Briggs J.
It is clear that the law has not done so, and many opportunities have been missed. One
example is the recent Re Farepak decisions, dealing with whether subscribers to a savings
scheme which went insolvent should be entitled to a proprietary interest in their contributions
through a constructive trust. Both decisions failed to mention the important decision in Re
Kayford, and the reasoning of Megarry J in that decision to recognise a constructive trust,
based in no small part on the particular facts of the case. Creating such a clear principle on
how to address creditors and their interests is certainly an ambitious task, and wise judges
will insist it should be left to Parliament. However, as Professor Nolan rightly comments, ‘to
rely on Parliament entirely for change is unrealistic’.91 In Belmont Park the Supreme Court
had opportunity to discuss these overarching questions about creditors and insolvency, but
regrettably declined to do so. They indicated, however, as Fletcher puts it, that such
‘questions could well be ripe for consideration in the modern era’.92 Only time will tell how
the law will resolve this issue. This article argues that beneficiaries should take precedence
over general creditors. Creditors, generally, take an informed risk. This is different, of course,
with tort claimants, who may then lose out to a beneficiary, and there can be little moral
justification either way. However, as a general rule, a beneficiary should be entitled to expect
outmost fidelity from the fiduciary, and should be entitled to a full proprietary interest in any
property the fiduciary receives in breach of his duties.
C. Property as a remedy
A criticism of the decision in Reid is that it did not fully adhere to traditional ideas of how the
courts can allocate proprietary interests in a remedial fashion. It can perhaps be said with
88
Re Kayford [1975] 1 WLR 279, 282 (Megarry J); Re Farepak [2006] EWHC 3272, [28] (Mann J); [2009]
EWHC 2580, [40] (Warren J)
89
Belmont Park Investments Ltd v BNY Corporate Trustees Services Ltd [2012] 1 AC 383, [1] (Lord Collins)
90
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; Kelry Loi, ‘Quistclose trusts and Romalpa
clauses: substance and nemo dat in corporate insolvency’ (2012) 128 LQR 412, 417
91
Richard Nolan, ‘Bribes: a reprise’ (2011) 127 LQR 19, 22
92
Ian Fletcher, ‘Supreme Court decision in Belmont Park Investments PTY Ltd v BNY Corporate Trustee
Services Ltd’ (2012) 25 Insolvency Intelligence 25, 26
some certainty today that English law does not recognise a remedial constructive trust.
Etherton J previously acknowledged that there was ‘considerable debate and uncertainty’
whether English law would accept a remedial trust, but suggested that English law does not
recognise remedial constructive trusts.93 In Sinclair Investments, Lord Neuberger held that
‘whether a proprietary interest exists or not is a matter of property law, and is not a matter of
discretion’, and therefore English courts ‘do not recognise a remedial constructive trust’.94
However, it can be argued that the nature of proprietary remedies in English law is
unprincipled and subject to contradictions. It has been argued by Lord Neuberger that when
awarding equitable remedies, it is ‘not for the courts to go galumphing in, wielding some
Denningesque sword of justice’.95 This idea, on the other hand, should not be dismissed out
of hand, and it is important to consider how the courts actually approach proprietary
remedies.
A strong criticism against the English courts and their approach to proprietary remedies was
raised by Craig Rotherham. He argued that whereas the courts continuously refuse to accept a
remedial-style constructive trust, the courts do in fact remedially award property and merely
employ ‘rhetoric’ to ‘provide the illusion’ that they do not. 96 Support for this argument can
be found in equitable doctrines such as proprietary estoppel or constructive trusts arising after
tracing.
‘Tracing is a process whereby assets are identified’.97 As such, it is not a remedy in and of
itself.98 Rather, in a tracing claim, the courts “follow” or “trace” value acquired by a fiduciary
and impose a constructive trust on identified substitutes for the original property. 99 The only
bar to a tracing claim is a bona fide purchaser for value without notice. It is further a
precondition that the beneficiary has a proprietary interest in the property being followed or
traced. Thus, if a trustee misappropriates £10,000 from the trust fund and purchases a car in
his own name, the beneficiaries of the trust can acquire the car through a constructive trust.
English law insists that this is not a remedial constructive trust, on the basis that the £10,000
(to which the beneficiaries do have a beneficial interest) has somehow metamorphosed into
the car. It can be argued that this is weak ‘rhetoric’, as Rotherham suggests. The beneficiary
does not have a pre-existing proprietary interest in the substitute property (in this scenario,
the car). A proprietary interest is awarded because of the linkage with the earlier trust
property.
Similarly, if a claimant is successful in raising a proprietary estoppel, the claimant will get
some proprietary interest. This proprietary interest is based on a promise or assurance given
by the defendant that the claimant would in fact obtain a proprietary interest. 100 The exact
nature of that interest is however left to the court. In Crabb v Arun DC, Scarman LJ famously
93
London Allied Holdings Ltd v Lee [2007] EWHC 2061, [260] (Etherton J)
Sinclair Investments (note 1), [37]
95
Lord Neuberger, ‘The Stuffing of Minerva’s Owl’ (2009) 68 CLJ 537, 541
96
Craig Rotherham, Proprietary Remedies in Context (Hart Publishing, 2002), 46
97
Foskett v McKeown [2001] 1 AC 102, 109 (Lord Browne-Wilkinson)
98
Ibid, 128 (Lord Millett)
99
Sinclair Investments (note 1), [38]
100
Re Basham [1986] 1 WLR 1498, 1503 (Nugee QC); Thorner v Major [2009] 1 WLR 776, [29] (Lord
Walker)
94
held that the remedy awarded should be the ‘minimum equity to do justice to the plaintiff’.101
When deciding what is the minimum equity, it has recently been confirmed that the ‘court has
a wide judgmental discretion’.102 A constructive trust can be imposed, but the court can
award any proprietary interest it sees fit. In Crabb itself, the remedy was an easement.
This article would suggest that English courts do impose constructive trusts, and other
proprietary interests, in a remedial fashion. The underlying factor is that the defendant’s
conscience has been affected. The decision in Reid is evidence of this; evidence of the
flexibility that equity does possess. It is true that equity should not impose remedies based
purely on discretion; rather it should do so in a principled manner. The primary criticism
against remedial constructive trusts, expounded extra-judicially by Sir Terence Etherton, is
their basis on unconscionability, seen as ‘too vague a concept’ and too ‘dependent on the
subjective view of judges’.103 Sarah Wilson aptly sums the debate when positing that the
remedial trust is ‘clearly a principle which is regarded with suspicion in the highest judicial
circles’.104 This criticism can easily be overcome. It is a clear and fair principle to accept the
remedial nature of some constructive trusts, and it is equitable to hold that such a remedial
constructive trust indeed can be imposed after a breach of fiduciary duty. They must be
imposed in a principled manner, and such a clear principle was presented in Reid.
D. Not retaining a profit
The strongest argument for adopting the position in Reid is based on the principle in Keech.
A fiduciary should under no circumstances be permitted to make an unauthorised profit from
his position. This is sound, and thought-through, public policy, which so clearly underpinned
the decision in Reid. Though it is perhaps fashionable to try to restrict the reaches of equity,
the counter-argument is equally valid. Equity can reach wide and far, as long as it is done in a
principled and justified manner.
Imposing a constructive trust also in category C cases is sound policy. As Lord Millett
stated in McKeown regarding the importance of a tracing claim, where ‘traceable proceeds
have increased in value and are worth more than the original asset, [the beneficiary] will
assert his beneficial ownership and obtain the profit for himself. There is nothing unfair in
this. The trustee cannot be permitted to keep any profit resulting from his misappropriation
for himself’.105 Sir David Hayton has argued along the same lines, saying that the decision in
Sinclair Investments leaves the law in a ‘most unsatisfactory state’ and could ‘undermine the
integrity of the trust concept’.106 Even though, unlike McKeown, the beneficiary might not
have a pre-existing proprietary interest, it is unclear why anything less than the strongest
remedy should be available to the beneficiary. In Lord Millett’s words, there is ‘nothing
unfair in this’. There is no clear justification for the distinction between category A, B and C.
There is especially no justification for the distinction between category B and C. Today the
101
Crabb v Arun DC [1976] Ch 179, 198 (Scarman LJ)
Suggitt v Suggitt [2011] EWHC 903, [44] (HHJ Kaye QC, sitting as a deputy High Court judge)
103
Terence Etherton, ‘Constructive trusts and proprietary estoppel: the search for clarity and principle’ (2009) 2
Conv PL 104, 106
104
Sarah Wilson, Textbook on Trusts (10th edn, OUP, 2011), 161
105
Foskett (note 97), 130 (Lord Millett)
106
Hayton (note 68), 15
102
law is in a regrettable position, because a fiduciary can quite legally turn a profit on property
gained in breach of his duties. Though the rights of creditors are important, Lord Neuberger,
as Lindley LJ before him, conspicuously failed to justify this departure from the principle in
Keech.
Uncertainty in the law often comes from too wide judicial discretion. However, the ratio as
explained in Reid did not impose any considerable uncertainty. It was not, in Brigg J’s words,
an “unthinking” imposition of a trust. It was quite the opposite. The ratio stated, clearly, that
whenever a fiduciary obtains an unauthorised profit in breach of the no-profit rule, his
conscience is affected and hence he holds that profit (and traceable proceeds) on constructive
trust for the beneficiary. A reason, if not the main reason, for this legal position is that a
fiduciary should never be allowed to make an unauthorised profit from his position. As the
Australian Federal Court noted in Grimaldi, all major common law jurisdictions except
England now recognise a constructive trust where a fiduciary obtains an unauthorised
profit.107 Goode may well be right that Reid is primarily a moral argument, shrouded in this
vague notion of conscience, but at the same time the ratio seems to be based on a wellestablished, sound and clear legal principle.
V. Conclusion
This article has argued that the decision in Sinclair Investments, bringing back the distinction
between categories A, B and C cases, was wrong. Lord Neuberger’s judgment, like many
before it, failed to present a coherent justification for the legal approach, focusing instead on
a one-sided argument about the rights of creditors. The decision offers no clear explanation as
to why there is a difference between property which ought to have gone to the beneficiary
(category B) and other property (category C). Why a proprietary interest arises in category B
is shrouded in great uncertainty. Many questions remain unresolved and are open to debate.
Mankarious is right in arguing that English law has to seriously engage with these questions,
both to provide greater certainty, which is particularly important in commercial dealings, but
also to provide conceptual justification for its principles.
The first issue is that of the fiduciary relationship. It is vital that the rationale for this
relationship is fully explained. Our understanding of why we have fiduciary obligations ought
to inform the appropriate remedies. If a beneficiary ends up waiting pari passu with other
general creditors, he can legitimately ask what good the special relationship did him. It may
well be that English law will take the position that a beneficiary is of no more importance
than a contractual creditor. It is suggested that that would be a regrettable outcome, but it is
certainly a possibility. However, if so, the law needs to justify the fiduciary relationship and
explain why fiduciaries should not merely be regulated by contract and/or common law
duties.
The second issue is the rights and interests of creditors. This follows on from the above
discussion on fiduciaries. When and where should the interests of creditors take precedence,
and when and where should they rank below another claim. There are broad conceptual
questions around the “anti-deprivation rule”, and why some legal devises are caught by it and
107
Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, [582]
others are not. It is suggested that a beneficiary should be able to trump a creditor, justified
on the special nature of the fiduciary relationship. This, of course, is dependent on English
law continuing to acknowledge the fiduciary obligations as above and beyond general
common law obligations.
The third issue is that of proprietary remedies, and the principles underpinning the
constructive trust. It is said the constructive trust arises when the conscience of the defendant
is affected, but this is neither an easy nor an absolute rule. The courts do move proprietary
interests around, based largely on the implied or inferred intentions of the parties. Thus,
where the fiduciary’s conscience is affected, it is unclear why a constructive trust should not
arise. It did in Reid, and it seems that Reid is very much in line with principle and policy on
the conscience-based constructive trust. However, the constructive trust is vague and elusive,
and it is not surprising that there is a lack of clarity.
This article has argued that equity should permit the courts to reallocate proprietary
interests in unauthorised profits. It is argued that such a remedial approach is already taken in
many equitable doctrines. The fiduciary relationship is a special construct, and equity should
equip it with a full range of remedies, including a conscience-based remedial trust. It is
argued that beneficiaries deserve full protection in the form of a proprietary interest, justified
based on the special relationship. Mankarious is a welcomed judgment. It highlights the legal
and policy difficulties imposed by Sinclair Investments. Maintaining three categories will
cause uncertainty and more litigation, especially since Mankarious demonstrated that the
categories are nebulous and entirely fact-dependent. Further, the law needs a binding
statement on the nature of the constructive trust, a discourse which should have been settled
long ago. Reid was equity at its finest and conversely Sinclair Investments must be seen as
equity at its worst. The policy discussions in Mankarious threw these differences to the
forefront, and now the Supreme Court must settle them.