From: James Lee
<james.lee@kcl.ac.uk>
Sent: Wednesday
23 July 2025 10:15
To: Enrichment
- Restitution & Unjust Enrichment Legal Issues; obligations
Subject: UK
Supreme Court on Remedies for Dishonest Assistance and Breach of Fiduciary Duty
Dear All,
The UK Supreme Court has given judgment in Stevens
v Hotel Portfolio II UK Ltd [2025] UKSC 28 https://www.supremecourt.uk/cases/judgments/uksc-2023-0142.
It is the latest in a series of judgments from the UKSC on equitable remedies,
and the latest in a series of judgments from the UKSC on equitable remedies
where Lord Briggs gives the lead judgment.
It concerned complex dealings relating to hotels near
Hyde Park in London. The claimant company (which as the name suggests had a
portfolio of hotels) had sold three such hotels to a company of which the sole
shareholder was Mr Stevens. Mr Stevens was in fact acting in respect of the
transactions as nominee for Mr Ruhan, who was a director of Hotel Portfolio II.
Mr Ruhan had never disclosed his involvement to Hotel Portfolio. He used those
profits to pay off existing sums which he owed in respect of other developments.
Hotel Portfolio brought a claim against Mr Ruhan for breach of fiduciary duty
first in not disclosing his interest in the purchaser company and second in
dissipating the profits from the sale, which as a fiduciary he was holding on
constructive trust. It also claimed against Mr Stevens for dishonestly
assisting Mr Ruhan's breaches. There were two issues for the Court (as
summarised by the appeal documents):
'(1) Whether a dishonest assistant can be liable in
relation to a breach of a constructive trust of secret profits.
(2) The extent to which gains from one breach of
fiduciary duty can be set off against losses from another connected breach.'
By a majority of 4 to 1, the Supreme Court allows the
claimant company's appeal, and disagrees with the reasoning of the Court of
Appeal that Hotel Portfolio had not suffered relevant loss. Lord Briggs gives
the lead judgment, and Lord Burrows dissents. The work of various members of
the ODG/RDG are cited.
Lord Briggs adopts the view that it is important to
give effect to the institution of the constructive trust, rather than treat it
as 'just a remedy'. Some extracts may give a flavour of the reasoning, which is
his typical mix of pragmatism and appeals to the utility of what are thought to
be general equitable principles
35... 'It would seem to me extraordinary and contrary to
basic equitable principle for the dissipation of a fund held on an
institutional constructive trust to give rise to no remedy by way of equitable
compensation for any consequential loss. It is suggested that the real remedies
arising from the constructive trust are proprietary. But a dissipation of the
fund held upon constructive trust strikes at the heart of any proprietary
remedy. The very concept of dissipation means that there is neither the fund nor
any traceable proceeds of it to which a proprietary remedy can usefully attach.
And the dissipation thereby causes a loss to the beneficiary which will
generally be at least equivalent in value to the property dissipated, since the
beneficiary was its beneficial owner, and has thereby been deprived of any
proprietary claim to the property. It might be said that, strictly, the
beneficiary's loss was the value of his beneficial interest in the property
dissipated rather than the value of the property itself. But since it is
accepted that the minimum terms of this constructive trust required Mr Ruhan to
deliver or transfer the property on demand to HPII, that strikes me as a
distinction without a difference, at least in the mouth of Mr Ruhan or Mr
Stevens. They cannot be heard to say that, for example because they dishonestly
kept secret the existence of the dividend until they had dissipated it, HPII's
beneficial interest in it was of no significant value.
...
41. If the dishonest assistant can be liable for
breach of a constructive trust then a fortiori the trustee must be liable, and
the liability of both of them must include liability to compensate for loss
caused to the beneficiary by the breach. Unfortunately none of those cases
concerned constructive trusts of unauthorised profits made in breach of trust
or (as here) of fiduciary duty, and none have been found. But the absence of
specific authority cannot on its own justify treating such constructive trusts
as exceptions from the generally accepted principle. There may be a number of
explanations for the silence. Alleging and proving dishonesty against the
assistant is itself a serious hurdle, not surmounted in any of the above cases
other than Papamichael, and it may be that the trustee defendants in the secret
profits cases were of sufficient substance to repay or that they had not
dissipated the profits before being held to account. In many of the secret
profits cases there was no dishonesty involved from start to finish, on the
part of anyone.
42. I would therefore reject both the premise for, and
the second supposed consequence of, the proposition that this type of
constructive trust is, in substance, just a remedy. It is entirely inconsistent
with recent judicial thinking about this constructive trust, in the bribery
cases, which are just about a particular species of secret or unauthorised
profit. It runs counter to the very recent decision of this court, in Rukhadze,
which was about unauthorised profits. The constructive trust of profits imposes
the usual obligation on the constructive trustee not to dissipate the trust
property, and the usual obligation on both him, and upon any dishonest
assistant in the dissipation, to compensate the beneficiary for any loss caused
thereby.
...
57. I return to the issue whether the supposed fact
that the constructive trust is a remedy for an earlier breach of trust, in
making the profits in the first place, supports the aggregation of the two
breaches (making the profit and then dissipating it) for the purposes of
applying the Target but-for test. I have of course rejected the premise for
this supposed outcome, but I will address the outcome nonetheless. In my
judgment it does not support the aggregation of the two breaches. My main
reason for that conclusion is that, if it did, then it would render the
intended real effect of the constructive trust illusory, at least in depriving
the beneficiary of any remedy for the loss of his beneficial interest in the
trust property, against the dishonest assistant in the dissipation, and for no
reason having anything to do with fairness, equity or justice.
...
59. It must be supposed that the constructive trust of
an unauthorised profit is intended by equity to have some useful effect. And
the function of the court is to validate rather than inhibit that effect. The
intent of equity is that the beneficiary should be the owner of the
unauthorised profit, because the constructive trust is a real (ie
institutional) trust. The potentially valuable proprietary remedies may be
rendered nugatory by dissipation of the trust property. But the constructive
trust also provides a vital means of recourse for compensation for loss caused
by the dissipation, against both the trustee and the dishonest assistant (i.e.
one who assists in the dissipation), but only if the breach consisting of the
making of the profit is not airbrushed out of the counterfactual by being
aggregated with the breach consisting of its dissipation.'
The Supreme Court considers the exception to the
no-set-off rule of gains and losses arising from breaches in Bartlett v
Barclays Bank Trust Co Ltd (Nos 1 and 2) [1980] Ch 515 for the first time (at
[63]ff) - they endorse the general possibility but deny that it is relevant on
the facts here because it was all part of a dishonest scheme.
87. 'In Bartlett there were undoubtedly two
transactions, both of which the bank trustee failed negligently to prevent. But
they were closely connected because the trustee's involvement in them consisted
in the same single continuing breach by omission, namely not preventing or
stopping the directors' adoption of a foolishly risky policy. In all three
cases, unlike the present, the inequity arose as between the trustees and the
beneficiaries.'
Lord Briggs then summarises the conclusions of his
judgment:
100. 'It may assist in the digestion of this over-long
judgment if I summarise my essential conclusions of law, as follows:
Lord Burrows' focused dissent is grounded in a review
of the literature and rigorous analysis. Again, some extracts:
123. 'If the question is whether the constructive
trust confers a wide judicial discretion to order or grant an appropriate
remedy for a cause of action (for example, for an equitable wrong or for unjust
enrichment) then it is clear that that is not how the constructive trust
operates in English law. In this jurisdiction, there is no such remedial
constructive trust.
124. However, the clear rejection of that analysis of
a constructive trust leaves open difficult and disputed questions as to the
extent to which a constructive trust, of the type with which we are here
concerned, is dependent on the choice of a claimant and/or the involvement of a
court (whether by the making of an order or a declaration). But whatever view
is taken on those questions, it is hard to deny that, in many situations, a
constructive trust is a legal response to an equitable wrong or unjust enrichment.
As counsel for both parties accepted in their oral submissions, in the context
of unauthorised profits made in breach of fiduciary duty, with which we are
here dealing, the constructive trust of the profits can be viewed, along with
an account of profits, as a legal response to the breach of fiduciary duty.
Moreover, I would add, it is an initial response that then creates the
possibility of the claimant being awarded, or choosing, proprietary remedies in
respect of identifiable (ie traceable) assets that are effective, and in that
sense, confer priority on the defendant's insolvency.
125. If this type of constructive trust is operating
as a response to a breach of fiduciary duty, along with an account of profits,
it may be thought unnecessary to recognise that there is also an equitable
compensation remedy for dissipation of the profits because that would merely
replicate what would be achieved by requiring the constructive trustee to
account for the profits made. That may perhaps explain why there appears to be
no previous example in the case law of equitable compensation having been awarded
in such a situation. And if there is no equitable compensation remedy against
the constructive trustee in that situation, it follows, from the requirement of
joint and several liability, that there can also be no equitable compensation
remedy against the dishonest assister.
126. However, the important point is that, even if one
accepts Mr Pickering's submission that the imposition of a constructive trust
of the profits does carry with it the possibility of an equitable compensatory
remedy against the constructive trustee for dissipation of those profits, it
does not necessarily follow that Mr Pickering can build on it to establish that
HPII has a dishonest assistance claim against Mr Stevens for equitable
compensation for the loss caused by dissipation of those profits. On the
contrary, there are several significant objections to accepting Mr Pickering's
submissions on dishonest assistance'
128. A major objection to accepting Mr Pickering's
submissions is that, on the facts, there was one dishonest scheme (or design or
plan) which involved the fiduciary and the assister from the start. It is
wholly artificial to divide it up into the acquisition of the profits and their
dissipation. The scheme comprised both. Its whole purpose was for Mr Ruhan to
acquire unauthorised profits that would be laundered away out of reach. The
purpose of the scheme would have been completely undermined if, having made the
profits, Mr Ruhan handed them across to HPII. Mr Ruhan was assisted throughout
by Mr Stevens.
129. Applying a compensatory analysis, the correct
question as regards Mr Stevens is, what position would HPII have been in if the
scheme had not been carried out, that is if there had been no breach of
fiduciary duty by Mr Ruhan from the start? The answer is that HPII would have
been in the same position as it now is. It has suffered no overall loss. In
particular, it would never have made the profits that Mr Ruhan himself made
(see para 108 above) so that his profits do not represent a loss to HPII. HPII no
longer has the hotels but it sold them at, what the judge held, was a fair
market value. Its overall financial position has been made no worse by Mr
Ruhan s and Mr Stevens' wrongdoing...
133. A third objection is that, along with an account
of profits, a constructive trust of the profits can be viewed as a disgorgement
response imposed by the law for equitable wrongdoing by the principal
wrongdoer. The constructive trust is not a compensatory response and, on the
facts of this case, the principal wrongdoer has, overall, caused no loss to the
beneficiary. It would be inconsistent with the law's imposition of
disgorgement, as against compensation, if a dishonest assister were held liable
for compensation where the only possible way of formulating a loss is to view
it as a failure, or frustration, of the disgorgement response...
136. A final objection (and very closely related to
what has been said in the previous paragraph) is that Mr Pickering's
submissions lead to the potential for double recovery. Indeed, Matthew Frey and
Zihang Liu in their case-note on the Court of Appeal's decision 'Equitable set
off, election and constructive trusts' (2024) 140 LQR 331 argue that the key to
understanding why the decision was correct is that the central problem of
principle faced was the need to avoid double recovery. The problem of double recovery
can be starkly shown if we hypothetically amend the facts so that, instead of
HPII suffering no loss from Mr Ruhan's breach of fiduciary duty, it is assumed
that HPII suffered a loss of, say, £75m because, had there been no breach, it
would itself have exploited the opportunity and would have made profits of
£75m. If the appellant's arguments were correct, it would appear that HPII
would have an equitable compensation remedy for dishonest assistance against Mr
Stevens for £75m plus £102.26m. The former was the loss caused by assisting Mr
Ruhan's exploitation of the opportunity and the latter was the loss caused by
assisting the dissipation of the profits made by Mr Ruhan of £102.26m. If Mr
Pickering's submissions were correct, it would appear that both compensatory
measures could be accumulated by HPII as against Mr Stevens because they are
separate and consistent in covering different losses. Yet it surely cannot be
correct - and produces double recovery - if HPII were able to accumulate both
measures of compensation against Mr Stevens in that way. The conventional
(albeit blunt) means of avoiding any such double recovery is by recognising
that a claimant cannot combine, and must elect between, equitable compensation
for compensating loss and an account of profits for disgorgement of profits.
Once the claimant has elected for an account of profits against the principal
wrongdoer, and not equitable compensation for loss, the possibility of double
recovery would be avoided if it were to be accepted that there could be no
equitable compensation against either the principal wrongdoer or the dishonest
assister. That would mean that, on these facts, where HPII has elected for an
account of profits against Mr Ruhan, there can be no equitable compensation remedy
against Mr Stevens...
139. The law abhors the dishonest wrongful conduct of
Mr Stevens. But the temptation to distort equitable principles so as to award a
substantial compensatory remedy against him, where remedies against the
principal wrongdoer are thwarted (eg by insolvency) must be resisted. Moreover,
it would be inaccurate to suggest that Mr Stevens escapes scot-free. Leaving
aside any possible criminal sanctions, Mr Stevens is required to account for
all the profits he has made from his dishonest assistance and, because of the
dishonesty involved, there is no question of a dishonest assister being
entitled to any equitable allowance for work and skill. That is the established
and appropriate remedy against him given that HPII has suffered no overall
loss.'
Best wishes,
Jamie
-
James Lee
Professor of English Law
The Dickson Poon School of Law
Somerset House East Wing
King's College London
Strand
London WC2R 2LS
E-mail: james.lee@kcl.ac.uk
My research day is on Mondays, and so my
responses to e-mails sent on those days may be less prompt than otherwise.
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