Lloyd's Maritime and Commercial Law Quarterly
Constructive trusts: an analysis of Sinclair v Versailles 1
Paul McGrath *
The decision in Sinclair v Versailles to favour the reasoning of Lister v Stubbs over A-G of Hong v Reid has substantially reduced the ambit of proprietary claims arising from a breach of fiduciary duty but in manner which fails to take into account the legitimate arguments on both sides of the debate and which fails to accord with the interpretation of several established authorities. The result may find favour with those who champion the cause of the unsecured creditor but the reasoning, and use of authority, is subject to serious challenge.
INTRODUCTION
Just over 15 years ago, and in a departure from the reasoning of the Court of Appeal in Lister & Co v Stubbs,2 the Privy Council in A-G of Hong Kong v Reid
3 held that all secret profits, whether or not derived from assets belonging to the fiduciary’s principal, which are obtained by a fiduciary in breach of fiduciary duty are held by him on (constructive) trust for his principal. Thus, in Reid itself, a fiduciary held a bribe on constructive trust for his principal. The general (but by no means universal4) acceptance of the decision in Reid
* QC.
1. [2011] EWCA Civ 347; [2011] 3 WLR 1153; affg [2010] EWHC 1614 (Ch); [2011] 1 BCLC 202 (Lewison J). See D J Hayton, “Proprietary Liability for Secret Profits” (2011) 127 LQR 487; R M Goode, “A Reply” (2011) 127 LQR 493; G J Virgo, “Profits Obtained in Breach of Fiduciary Duty: Personal or Proprietary Claim?” [2011] CLJ 502. In Grimaldi v Chameleon Mining NL & Anor [2012] FCAFC 10, the Full Court of the Federal Court of Australia, including Justice Paul Finn, refused, obiter dicta, to follow the reasoning of the Court of Appeal in Sinclair v Versailles, contending that, whatever reasons English law may have for limiting proprietary relief for breach of fiduciary duty along the Lister & Co v Stubbs (1890) 45 Ch D 1 line of authorities, such reasoning did not apply under Australian Law where (i) the reasoning of the High Court of Australia in cases such as Furs Ltd v Tomkies (1936) 54 CLR 583 and Mason J in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 107–108 was at odds with the Lister-line of authorities adopted in Sinclair; (ii) precedent established the important deterrent effect of proprietary relief in the context of bribes and secret commissions—the reasoning of Sinclair reduced that effect precisely when it was most in need; (iii) unlike English law, Australian Law considered the constructive trust a discretionary remedy; (iv) Australia’s rejection of the Lister-line of authorities was consistent with the position adopted in other jurisdictions including Singapore (Sumitomo Bank Ltd v Kartika Ratna Thahir [1993] 1 SLR 735 (Sing)). On 17 August 2012, Special Leave to Appeal to the High Court of Australia was refused.
2. (1890) 45 Ch D 1.
3. [1994] 1 AC 324 (PC).
4. In Sinclair v Versailles [2011] EWCA Civ 347; [2011] 3 WLR 1153, [81] and [82], Lord Neuberger MR lists various articles and textbooks dealing with the Lister v Stubbs and A-G of Hong Kong v Reid debate and concludes, without any detailed examination of the cited material, that “there is significantly more support” for Lister than Reid, although he accepted that the textbooks favour Reid. There is no analysis of the merits of the various arguments raised in the articles and the textbooks and one is left with the impression of a numbers-based approach having been adopted. This is unfortunate, since it failed to do justice to the merits of the arguments both for and against proprietary relief.
LLOYD’S MARITIME AND COMMERCIAL LAW QUARTERLY
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