Cadogan Petroleum Plc and Ors v Mark Tolly and Ors 1

Following Sinclair v Versailles 2 it is possible to maintain a proprietary claim only to assets which came into the fiduciary’s hands as a result of a transaction about which the principal makes no complaint. Misdirected company property and opportunities for companies are therefore regarded as potential subject matter for a proprietary claim against company directors who are deemed to have acquired trustee like control of them perfectly property. In contrast, bribes and secret commissions received by directors from third parties are not. The director received them only as a result of a transaction of which the company complains.

Most fiduciaries who negotiate a bribe for themselves in order to induce their principals to enter into a contract could presumably have got their principals a better deal. The questions addressed in Cadogan v Mark Tolley was whether it is therefore possible to characterise the bribe as an “opportunity” held on trust for the principal in order to found a proprietary claim.

Sinclair v Versailles revisited – proprietary claims for opportunities?

Introduction

In our last bulletin we covered the Court of Appeal decision in Sinclair v Versailles which had declined to follow the Privy Council decision in AG v Reid, deciding instead that bribes and secret commissions were not potential subjects for a proprietary claim. The distinction that Lord Neuberger drew in Sinclair v Versailles between those claims that gave rise to proprietary remedies and those that did not was as follows. He said:

“In cases where a fiduciary takes for himself an asset which, if he chose to take, he was under a duty to take for the beneficiary, it is easy to see why the asset should be treated as the property of the beneficiary. However, a bribe paid to a fiduciary could not possibly be said to be an asset which the fiduciary was under a duty to take for the beneficiary. There can thus be said to be a fundamental distinction between (i) a fiduciary enriching himself by depriving a claimant of an asset and (ii) a fiduciary enriching himself by doing a wrong to the claimant.”1

In other words, if assets come into the Defendant’s hands only as a result of conduct about which the Claimant was complaining there was no proprietary claim. If the Defendant already held the asset on trust for the Claimant but the Claimant complains about how he dealt with it subsequently, a proprietary claim would arise. A bribe is most usually in the first category: it was never money that the Defendant held with the Claimant’s agreement. The Defendant obtains it only through conduct about which the Claimant is complaining.

One issue that remained uncertain is where the Defendant is a trustee with the Claimants consent of an intangible asset such as an opportunity. The decision in Sinclair v Versailles explicitly preserved the possibility of a proprietary claim in these circumstances. Lord Neuberger said:1

“…a claimant cannot claim proprietary ownership of an asset purchased by the defaulting fiduciary with funds which, although they could not have been obtained if he had not enjoyed his fiduciary status, were not beneficially owned by the claimant or derived from opportunities beneficially owned by the claimant.” (emphasis added)

Introduction

The facts of the case were relatively simple. The Claimant alleged that by virtue of a number of bribes and secret commissions paid to its former officers, Defendants, they had been induced to enter into a number of unfavourable contracts. In one particular instance (the purchase of a company by the Claimants) they were able to establish that the money they parted with as purchase money could actually be found to have been received, via the vendor, as alleged secret recipients by the Defendant (“the Ribelant claims”).

Bribes as misdirected opportunities?

The Claimants had obtained a proprietary injunction freezing the alleged bribes and secret commissions on the basis that they had better title to them than those who held them. An application was made to set this proprietary injunction aside on the basis that there could be no proprietary claim. The application followed the decision of the Court of Appeal in Sinclair v Versailles and was resisted on the basis that each bribe represented a lost opportunity. As Newey J summarised the Claimant’s arguments:

“..by taking advantage of an opportunity or right which was properly that of the beneficiary”. The Claimant, said, have had the opportunity to reduce what they were to pay by at least the amount of the alleged bribes and secret commission…and the…Defendants obtained the bribes or secret commissions by taking advantage of that opportunity.” 3

This argument was an ingenious (if not a little desperate) attempt to resist the authority of Sinclair v Versailles. Mr Justice Newey said:

“I am not aware, however, of any case in which an opportunity to obtain a reduced price has been considered a relevant opportunity for this purpose. In any event, I do not think that a bribe or secret commission is to be viewed as the diversion of an opportunity to obtain a reduced price.”4

Mr Justice Newey held that Sinclair v Versailles was a directly applicable authority to the effect that no proprietary which had come into the hands of a fiduciary only by virtue of conduct of which the claimant complains (for example the taking of a bribe or secret commission).

Rescission and bribery

He rejected the Claimant’s submission that the discussion of treatment of bribes in Sinclair v Versailles has been obiter. That then left the question of the Ribelant claims. Did it make any difference that the money received by the Defendants was traceable as alleged bribes as traceable to the purchase money paid by the Claimants under the contracts it was claimed the bribes has induced? A long succession of authorities indicate two things: first that someone who has been induced to enter into the contract through bribery is entitled to rescind5 and secondly, that once he does rescind, he may well have an arguable case that he has re vested any assets that he has parted with pursuant to the contract in himself at least to the extent necessary to support a proprietary claim6. The Claimants, therefore, had a prime facie good claim to re vest the bribes passed under the Ribelant claims back in themselves and maintain a proprietary claim to them. Unfortunately, on the facts of this case, there was a insuperable difficulty: the Claimants has entered into contracts of settlement with the vendor of the company by which, knowing of the bribes they had nevertheless affirmed the contracts. The consequence of this was therefore the rescission was no longer available to them and the bribes belong to the Claimants.

There is nothing surprising regarding the reasoning in the decision save it confirms that: (a) Sinclair v Versailles is directly applicable to proprietary claims in relation to bribes; (b) there is currently no way of circumventing it by claiming that by characterising a bribe as a lost opportunity; and (c) that whilst it may be possible to maintain proprietary claims to money that has passed under a contract that the victim of bribery has rescinded, great care must be taken not to affirm that contract once the bribe has been discovered.