EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
	[2014] CSIH 36
Lady Dorrian Lord Drummond Young Lord Clarke	CA15/08 OPINION OF LADY DORRIAN in the reclaiming motion in the cause PARKS OF HAMILTON HOLDINGS LTD Pursuers and Respondents; against COLIN CAMPBELL Defender and Reclaimer: _______________

Act: Sandison QC, Brodies LLP

Alt: Summers QC, Logan; Campbell Smith WS LLP

30 April 2014

Notes

[1] The reclaimer, the respondents and others were formerly shareholders in a company called LAGTA limited. The reclaimer was the managing director of the company. During 2007 he acted as agent on behalf of all the shareholders in negotiations for the sale of the whole shareholding of LAGTA to a company of which the parent company was the SPX Corporation. The original offer made for the purchase of the whole shareholding was a total of £4.75 million, later increased to £5.125m. The share price ultimately negotiated by the reclaimer was £21.50 per share for all shareholders except himself. His shares were to be purchased at a price of £26 per share. These sums represented a total purchase price of the whole shareholding of £5.2m. As a condition of the purchase, the purchasers required that the reclaimer, who was an employee of LAGTA, (a) ceased to be an employee of the new company and (b) entered into an agreement under which he would provide his services to them as a consultant for a period of up to 18 months after the sale.

[2] The offer was put to the board at a meeting dated 5 July 2007, in a letter from the purchasers of even date, in these terms which stated the following in respect of the purchase price:

"based on available information as well as what we know about the training industry and its relative profitability, SPX is prepared to offer a gross purchase price of £5.2m...the gross purchase price is based on a share price of £26 for each of the 36,152 shares of Mr Colin Campbell and £21.50 for each of the remaining 97,189 shares. SPX also expects to enter into a consulting agreement with Mr Campbell for up to 18 months, the terms to be negotiated".

[3] The minutes of the board meeting recorded that "SPX were insistent that Mr Campbell stay for a handover period and a consultancy agreement for up to 18 months would be negotiated", and concluded with the following:

"After discussion, all present agreed to accept the proposal from SPX and that matters should be left in the hands of the managing director, the financial and legal people to deal with SPX...".

A file note by the company accountant, Mr G. Cassells (GIC) recorded that the reclaimer had explained to the meeting that he was willing to enter into the consultancy agreement but:

"... he wished to be compensated for it. He explained that there was an amount which had been added to the price per share as this was potentially more tax efficient for him, however if the other shareholders did not accept it, the difference would not be added to their share price but would be added as remuneration and would come off the purchase price but he would not get it in as tax efficient a manner."

[4] The board were thus made aware of the differential in share price, and the reason given for it, as well as the proposal that the reclaimer should enter into a consultancy agreement with the purchasers, ceasing to be employed by them. The latter provisions required a compromise agreement between the new company and the reclaimer, settling any outstanding claims which he might have arising from his employment, and, at the same time, a separate consultancy agreement between them

A letter setting out the proposals and signed by the reclaimer was sent to all shareholders on 16 August 2007. In his original draft the reclaimer had made no reference to the premium which was to be attached to his shares. However, on the advice of Messrs Holmes McKillop, his own as well as the company's solicitors, this was revised. Messrs Holmes McKillop e-mailed him drawing attention to the statutory requirement that all shares be treated equally, and noting

"In this connection, you must therefore assume that if it is established that there is a differential then shareholders receiving a lesser sum than others may have cause to object to the procedures which were applied".

[5] The revised letter which was eventually sent to the shareholders contained the following passage:

"This agreement from VF/SPX is conditional upon me continuing for 18 months in a consultancy role. The share price has still to be finalised and is dependent on the exact position of the company at the time of completion but the indicative price is £21.50 per share with an enhanced share price of £26 for my share to reflect the 18 months consultancy period. Legal, financial and advisory expenses of approximately 5% will be deductible from the final agreed share value. In addition it is understood that VF/SPX will not ask all shareholders and directors, other than myself, to grant warranties or indemnities. You may feel the need to seek independent legal/tax advice regarding the contents of this letter...".

The pursuers maintained in this action that the price difference was acceptable to them on the sole basis, as represented to them by the reclaimer, that the differential reflected the remuneration to be afforded to him for agreeing to enter into the consultancy agreement. They subsequently discovered that the consultancy agreement entered into by the defender had provided for annual remuneration in the sum of £87,750.

[6] After proof the Lord Ordinary concluded that the reclaimer had indeed made this representation, giving the impression to the respondents that the matter was arranged thus to provide a tax efficient method of remunerating him for the consultancy. The Lord Ordinary held that this was a negligent representation on which the respondents acted to agree the sale of their shareholding. He held that the purchasers had no interest in how the £5.2m was split amongst the shareholders and that had the respondents rejected the proposal for a premium to be attached to the reclaimer's shares, the sale would nevertheless have proceeded, but with the £5.2m being divided pro rata amongst the shareholding. The Lord Ordinary concluded that the reclaimer stood in a fiduciary relationship to the remaining shareholders on whose behalf he was purporting to act during the negotiations, and as such he owed them a duty of care entitling them to damages for loss caused by them in reliance on his negligent representation.

[7] The Lord Ordinary's finding that, from the reclaimer's statement that the premium was justified by consultancy work he was to perform after the take-over was completed, the reasonably objective observer would have concluded that there was a connection between the premium and payment under the consultancy agreement, was not challenged in this reclaiming motion. However, the reclaimer maintained that he should not have been held liable in damages since the solicitors acting for the shareholders, Holmes McKillop, were involved not only in the negotiating of the share purchase agreement, but the compromise agreement and the consultation agreement. In the course of negotiations they became aware that the reclaimer was to be remunerated for his consultancy. The draft consultancy agreement, which provided for payment to the reclaimer of annual remuneration in respect of his consultancy services, and made no reference to the share premium, was sent by the purchaser's agents to Holmes McKillop on 26 November 2007. Since Holmes McKillop acted for all shareholders, including the respondents, this knowledge must be imputed to them and robbed them of any ability to recover on the basis of negligent misrepresentation.

[8] On the role of Holmes McKillop, the Lord Ordinary held that the consultancy transaction was "a wholly separate matter involving himself and the new board". He noted that "some months" after the offer to purchase the shares, the purchasers "negotiated quite separately with Mr Campbell regarding the (consultancy agreement). In those negotiations Mr Campbell was not acting on behalf of the other shareholders...". The Lord Ordinary went on to say:

"[124] If the issue had arisen for decision, I would have had difficulty with the proposition that the defender should avoid any liability because of the lawyers' knowledge of the terms of the consultancy agreement. There are contexts in which an agent may have authority (actual or ostensible) to be given notice of certain facts, resulting in deemed or constructive knowledge on the part of the principal, but this is not such a case. Similarly, there can be no question of the solicitors having been given authority to express the shareholders' consent to any agreement or proposed course of action, nor did they ever give such consent. The defender did not impart information to the lawyers on the assumption that they would then inform the shareholders, nor would it have occurred to them to do so. In reality Holmes MacKillop acted for the defender alone in respect of the compromise and consultancy agreements. This was reflected in the terms of their fee note (production 7/20)."

That fee note was addressed to the reclaimer as the sellers' representative, and included a composite fee for professional services in connection with the sale of the whole shareholding to include "(3) negotiating terms of Share Purchase Agreement with Eversheds LLP...(6) revising and agreeing the terms of consultancy agreement and compromise agreement for Mr. Campbell".

Submissions for reclaimer

[9] Counsel for the reclaimer submitted that the Lord Ordinary's conclusion that "in reality" the solicitors were agents for the reclaimer in connection with the compromise agreement and consultancy agreement and not the other shareholders was not supported by the evidence, and he should have found that they acted for all shareholders throughout the transaction, including the consultancy agreement. In that capacity they received, on 26 November 2007, a draft of the consultancy agreement which set out the reclaimer's remuneration, and made no reference to the premium attached to his shares. They were already aware of the original representation, since a member of the firm had been at the board meeting and had advised on the terms of the letter sent to shareholders. Where agents became aware of information that arose from their agency and which they had both duty and opportunity to communicate to their principals, that knowledge in law was imputed to the principals. Hence if the principals thereafter entered into a contract to which that knowledge was relevant they were regarded as doing so possessed of their agents' knowledge.

[10] Counsel advanced four propositions:

1.    Holmes McKillop were alerted in July and Aug 2007 to the reclaimer's justification for the share premium. In November of that year, they learned that he was to be remunerated for his consultancy in the ordinary way, and indeed negotiated a fee increase on his behalf. This information was acquired by Holmes McKillop during the performance of their agency for the respondents, and was information which they had a duty to tell their principals about. The knowledge was thus to be imputed to the respondents. It made no difference that the individual in the firm who acquired the information in November was different from that who had acquired the earlier information, as the information was presumed to be shared by those individuals.

2.    The conclusion that Holmes McKillop were agents for all the shareholders throughout the transaction arises from the following:

1. SPX had made both the consultancy agreement and the compromise agreement conditions precedent of agreement to purchase the shares. The consultancy agreement was thus part of a package of contracts which benefited all the shareholders
2. The whole shareholding body implicitly acknowledged that they were benefitting from the work on the consultancy agreement by agreeing to pay for the work done. The reclaimer was not feed separately for it.
3. The reclaimer did not seek, nor was he advised to seek, separate representation. Given the interconnection between his interests and the shareholding body the only proper conclusion is that Holmes McKillop acted for them all in a common agency.

3.    It was accepted that, in his capacity as director of the company and agent for the shareholders (for some of whom he also held a power of attorney in relation to the sale of their shares), the reclaimer was a fiduciary and was obliged to obtain the informed consent of all the shareholders to the price differential. The time to test whether there was informed consent was when the contracts were signed on 30 November 2007, when both the respondents and Holmes McKillop had knowledge of the true facts. The respondents were to be regarded as having given informed consent since the relevant facts were in the hands of their agents.

4.    There was ample opportunity for Holmes McKillop to notify the whole shareholding body between 26 and 30 November, but they did not do so

[11] Counsel submitted that his first proposition set out a general legal principle in relation to imputation of knowledge in the hands of an agent, and that this being so, it was for the respondents to bring themselves within an exception to the general principle. In support of this proposition he referred to Chapelcroft Limited v Inverdon Egg Producers [1973] SLT n 1973 37 at p38; and the opinion of Lord Penrose in Adams v Thorntons 2005 SC 30, at para 65. In his submission these vouched the proposition that imputation occurred when information was material and of such a nature that there was a duty to communicate it.

[12] Under reference to Moody v Cox & Hatt [1917] 2 Ch 71 per Scrutton, LJ at p91, it was submitted that once the agent had the knowledge, he was obliged to communicate it, even if he found himself acting for parties whose interests conflicted. What he could not do was to act for the client and at the same time withhold from him any relevant knowledge that he had. Examples vouching this proposition could be found in Strover v Harrington [1988] 1 Ch 390 at 409-410 and BCCI v Aboody [1989] 1 QB 923 at 974-975.

[13] In El Ajou v Dollar Land Holdings PLC [1994] 2 All ER 685, Hoffman, LJ had observed (703-704) that in some cases in which the agent has actual or ostensible authority to receive communications:

"..... the fact that an agent with authority to receive a communication had a duty to pass the communication on to his principal is mentioned as a reason why the principal should be treated as having received it. I think, however, that the true basis of these cases is that communication to the agent is treated, by reason of his authority to receive it, as communication to the principal. I know of no authority for the proposition that in the absence of any duty on the part of the principal to investigate, information which was received by an agent otherwise than as agent can be imputed to the principal simply on the ground that the agent owed to his principal a duty to disclose it."

[14] Counsel submitted that although it was not the case that Holmes McKillop held any delegated powers to conclude the contract, it was the case that they had authority to receive information as agents in the course of negotiations. The critical phrase at the end of the passage quoted was "otherwise than as agent", and counsel accepted that unless he could overturn the finding of the Lord Ordinary that in their involvement with the consultancy agreement Homles McKillop were not acting for the wider group of shareholders, his argument could not succeed. In the course of argument reference was also made to Bowstead & Reynolds on Agency [19^th Ed] paras 8.204 - 08.212 and Cramaso LLP v Ogilive-Grant & ors [2014] UKSC 9, where the court observed (para20):

"Where a misrepresentation does not have a continuing effect, for example because it is withdrawn or lapses, or because the other party discovers the true state of affairs before the contract is concluded, it cannot induce the other party to enter into the contract and therefore cannot affect its validity or give rise to a remedy in damages for any loss resulting from its conclusion"

In the present case, the respondents required to be treated as having discovered the true state of affairs prior to the conclusion of the contract, the information having been in the hands of their agents, and accordingly they were not entitled to damages.

[15] As the argument developed, it became apparent that the reclaimer's position was that by virtue of the fact that the true position had become known to Holmes McKillop, of which the reclaimer was aware because of his discussions with them seeking to increase the remuneration, that was sufficient discharge of his fiduciary duty to the respondents, with the consequence that their conclusion of the contract on 30 November required to be deemed to have been executed on the basis of their informed consent.

[16] Counsel then referred the court to various passages in the notes of evidence which he submitted supported the conclusions of fact urged by him in support of his second proposition, and which indicated that there was no basis for the contrary conclusion reached by the Lord Ordinary.

Submissions for the respondents

[17] Counsel for the respondents submitted that the reclaimer's argument that he should avoid liability for the consequences of his negligent misrepresentation on the basis that respondents should, by a legal fiction, be deemed to have known of its falsehood, was erroneous in fact and law, and ignored the context in which the issue arose.

[18] The reclaimer had a personal fiduciary duty to inform the shareholders in LAGTA of the incidents of the negotiations which they had entrusted him to carry out as their agent in order to complete the sale of their shares to SPX, and in particular of every aspect of the proposed contractual arrangements which involved a real, sensible possibility of conflict between his own interests and their own, and to see to it that they consented to every such aspect before he agreed to it. (Commonwealth Oil & Gas Co Ltd v Baxter 2010 SC 156, per Lord Nimmo Smith at paras. 71 - 74, 78; New Zealand Netherlands Society "Oranje" Inc v Kuys [1973] 1 WLR 1126, per Lord Wilberforce at 1131H - 1132A). The reclaimer was the spider at the centre of the web, the only person who knew everything at all times. He had a positive duty to make full disclosure of what he was doing, not to leave it to others to do so, or rely on the shareholders incidentally finding out the truth.

[19] The reclaimer was well aware of what he had communicated to the other shareholders at the board meeting on 5 July 2007 and in the subsequent letter to shareholders, and that what he proposed to agree to as part of the consultancy agreement was not what he had represented would be the position, and was a matter in which the shareholders would be highly interested and to which they would be likely to take objection. In these circumstances, it was not enough for him simply to provide the other shareholders with the means or opportunity of finding out what he had done; cf. Dunne v English (1874) LR 18 Eq. 524, per Jessel MR at 533 - 536; Redgrave v Hurd (1881) 20 ChD 1, per Jessel MR at 13 - 14, Baggallay LJ at 22 - 23; Hurstanger Ltd v Wilson [2007] 1 WLR 2351, per Tuckey LJ at para. 35. Rather, it was his duty to see to it that they were actually made aware of the position and actually agreed to it. The authorities were entirely against a fiduciary being able to rely on any oblique or merely constructive disclosure.

[20] The purpose of full disclosure was to obtain informed consent. An individual with fiduciary duties to discharge was not allowed to enter into engagements in which he had, or could have, a personal interest conflicting, or with potential to conflict, with the interest of those whom he was bound to protect. This was a strict rule which could only be departed from at the instance of the person entitled to the benefit of the rule, who could only do so if he not only fully understood what was going on, but also what his rights were and that he may be surrendering them. Boulting v ACTAT [1963] 2QB 606 per Upjohn, LJ at p636:

"But the person entitled to the benefit of the rule may relax it, provided he is of full age and sui juris and fully understands not only what he is doing but also what his legal rights are, and that he is in part surrendering them."

The position of the respondents in the present case was nowhere near that. The reclaimer's position was that he himself did not disclose the information, nor had he expressed any positive belief that the contents of the consultancy agreement had ever been brought to the attention of the respondents. However, he maintained that Holmes McKillop, having access to the information, should have advised the respondents, and despite their failure to do so, he should, nevertheless, be treated as having discharged his own fiduciary duty. There was no authority in support of such a contention. Any duty which Holmes McKillop had towards the shareholders would not have been a fiduciary one. At best they might have owed a duty of care.

[21] In any event, there was no such general principle of imputation of knowledge between agent and principal as that contended for by the reclaimer. The significance of the case of El Ajou was that Hoffman, LJ produced a taxonomy of the underlying principles which applied. Now, instead of the very general statement of principle which had previously appeared in Bowstead and which Lord Thomson relied upon in Chapelcroft, the authors, in the present edition, no longer sought to rely on such a general proposition but identified two separate rules. The first related to what are referred to as "notification cases", in which a notification given to an agent was effective as such if the agent received it within the scope of his actual or apparent authority, whether or not it was subsequently transmitted to the principal, unless the person seeking to charge the principal with notice knew that the agent intended to conceal the notification (para 8-204). In other words, where an agent was clothed with authority to receive notice implied or actual, notification to the agent would in vast majority of cases be imputed to the principal. This was not a notification case: no effort had been made to suggest that the solicitors were given express or implied authority on behalf of the other shareholders to receive notification from the reclaimer of any matter relative to the performance of his fiduciary duty. In any event, there had been no notification to the solicitors. The reclaimers' own position in evidence had been that Holmes McKillop were merely giving him, as agent in charge of negotiation, professional support.

[22] It was only in notification cases that there was anything approaching a rigid rule. In other cases, the position was that the law may impute to a principal knowledge relating to the subject matter of the agency which the agent acquired while acting within the scope of his authority. In all other cases it was a matter of fact. As noted in Bowstead, para 8-207:

"The law may impute to a principal knowledge relating to the subject-matter of the agency which the agent acquires while acting within the scope of his authority."

At best there was a presumption of fact which depended on the circumstances of the case.

[23] Counsel argued that the cases relied on for the reclaimer cannot be relied upon as vouching the propositions in support of which they were advanced. Chapelcroft may well have been correctly decided, since it appears that it might have been a notification case, but there had been no argument on the point, and the decision proceeded upon the statement made in the prevailing edition of Bowstead, which was no longer of assistance. In Adams, the observations made by Lord Penrose were in the context of a mutual agency which did not arise in the present case. The two other judges in that case reserved their opinions on the point in issue, so the case could not be considered to be authority for the existence of any general principle of imputation of knowledge. The most salient features of Moody, and Spector were that the solicitor in question had a personal interest and therefore had a personal fiduciary duty to disclose all the material to his clients who were the other party to the transaction. Strover was a notification case, and Aboody came into a sub category referred to in El Ajou, that where a person with a duty to inquire employed an agent to do so, and the agent did not report results of his inquiries which should have been reported, the principal would be taken as knowing what the agent discovered.

[24] Otherwise Aboody was of assistance to the respondents as confirming that the identity of the person who paid a solicitor's bill would not necessarily be a conclusive indicator of the identity of the client, as to which issue in the present case counsel submitted that there was no material before this court which would enable it to conclude that the Lord Ordinary was not entitled to reach the conclusion he did relating to the role of Holmes McKillop. It would not be enough that more than one conclusion had been open to the Lord Ordinary. The only interest the shareholders had in the consultancy agreement was in seeing that it existed. They had no interest in its content. The only duty owed by Holmes McKillop was to do their best to see that such a document was indeed entered into. The fee note specifically identifies this work as "for Mr Campbell".

Discussion and decision

[25] In my opinion this case turns, ultimately, not on the circumstances in which an agent's knowledge may be imputed to his principal, but on an analysis of the role played by the reclaimer, the duties owed by him and the methods by which those duties may be discharged.

[26] The reclaimer stood in the position of a fiduciary on behalf of all the shareholders as their representative, entrusted by them to negotiate the sale of the shares of the company. As the Lord Ordinary observed (para 95) "he was trusted to do his best for the rest of the shareholders". They were "..relying on him to act in their interests and obtain a good deal for them. The defender was their representative and was reporting back in that capacity". The fiduciary nature of the duty owed by the reclaimer to the respondents was not disputed, yet he had clearly put himself in a position where there was a direct conflict between his own interests and those of his principals. This is entirely unacceptable. As the Lord Ordinary noted (para 118):

"The principal is entitled to the single-minded loyalty of his fiduciary. Thus he must not make a profit out of his trust, unless there is fully informed consent. The fiduciary must act in good faith, and not for his own benefit."

The fiduciary relationship is one of trust and dependence. The principal trusts the fiduciary implicitly, and depends upon him in such a way that he is entitled to expect that his best interests will be protected and that the fiduciary will not make any profit on the transaction in question without his fully informed permission. The respondent's duty was to sell the shares of his principals at the best possible price achievable for them and to obtain no undisclosed advantage out of the transaction for himself. His conflict of interest meant that he did not do so. "This is the very evil against which the rule in question is directed" (The Lord Chancellor (Lord Cranworth) in Aberdeen Rly v Blaikie Bros (1854) 1 Macq 1, quoted by Lord Nimmo Smith in Commonwealth Oil & Gas v Baxter, para 71).

[27] In the circumstances, the duty on the reclaimer, which was a continuing one, was to advise the respondents before conclusion of the sale of the true position in relation to the premium attached to his shares, and the reason for it. Unless he did so, it could not be maintained that he had obtained their informed consent to that premium. The duty required to be discharged by the reclaimer himself.

[28] It is not clear to me that knowledge of the true facts, and their significance, as opposed to the means of ascertaining them, could properly be said to have been in the hands of Holmes McKillop. Be that as it may, neither possession of the knowledge nor the means of obtaining it, in the hands of the solicitors would have been sufficient to discharge the fiduciary duty of the reclaimer, even if, as was not the case, he had himself transmitted the information to them. Such steps would be inadequate to produce the informed consent required before the reclaimer could make a profit from his agency without the authority of the respondents and against their interests. As counsel for the respondents pointed out, the purpose of full disclosure it to enable such consent to be given. Without full disclosure there can be no consent. It is not enough to intimate merely that the fiduciary has an interest; or to put the principal on inquiry. In the context of fiduciary duty, "... even a statement which would in other cases be constructive notice sufficient to put the party on inquiry will not be sufficient in the case of principal and agents - that for reasons of policy he must not only put the principal on inquiry, but must give him full information and make full disclosure" (Dunne v English per Sir. G. Jessel, MR, p 536). The obligation on the fiduciary is to volunteer information, not merely to answer inquiries.

[29] Even if Holmes McKillop were acting for the whole of the shareholders (as to which see below), the duty of obtaining informed consent lay on the reclaimer and could neither be delegated to Holmes McKillop nor discharged by imparting to them information which they may or may not have decided to pass on to their principals. Where an agent owes a fiduciary duty to his principal, it is an overriding and encompassing duty. In such a relationship the disclosure must be made to the principal, not his agent. To expect disclosure to be made directly by the fiduciary is in keeping with the nature of the relationship, which expects that fiduciary to answer to the highest ethical standards. Without such a requirement, the reliance which could be placed on the fiduciary nature of the relationship would be diluted, and uncertainty introduced into mercantile dealings. To allow disclosure through the medium of those standing in a different relationship to the principal would make it more difficult to identify whether disclosure has indeed taken place. The decision as to whether the facts are such that disclosure is required is a decision which can only be taken by the fiduciary and cannot be laid on the shoulders of another.

In any event, the argument for the reclaimer could only succeed, as conceded on his behalf, if the court were persuaded that the Lord Ordinary was not entitled to reach the conclusion that in respect of the consultancy agreement Holmes McKillop were acting only for the reclaimer and not the whole of the shareholders. I am not so persuaded. It is clear from the evidence before the Lord Ordinary that the situation was a fluid one. The fact that the existence of a consultancy agreement was a precondition for the sale does not mean that in negotiating its terms Holmes McKillop were acting for all the shareholders. The fact that payment of the fees was shared pro rata by all the shareholders does not necessarily lead to the conclusion that Holmes McKillop were acting for them all in respect of each and every contract. They were already the private solicitors of the reclaimer. The fee note singled out the work done on the consultancy agreement and the compromise agreement as work for the reclaimer himself. The fact that the reclaimer was not advised to seek separate representation may show merely that Holmes McKillop had not themselves identified any conflict. It does not mean that they require to be taken to have been acting throughout for all the shareholders. A different conclusion may have been open to the Lord Ordinary, but I cannot say that he was not entitled to reach the conclusion which he did.

[30] For all these reasons the law relating to imputed knowledge does not assist the reclaimer. Accordingly I propose that the court should refuse the reclaiming motion and adhere to the interlocutor of the Lord Ordinary.

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
	[2014] CSIH 36
Lady Dorrian Lord Drummond Young Lord Clarke	CA15/08 OPINION OF LORD DRUMMOND YOUNG in the reclaiming motion in the cause PARKS OF HAMILTON HOLDINGS LTD Pursuers and Respondents; against COLIN CAMPBELL Defender and Reclaimer: _______________

Act: Sandison QC, Brodies LLP

Alt: Summers QC, Logan; Campbell Smith WS LLP

30 April 2014

[31] I am in agreement with your Ladyship in the chair that the reclaiming motion must be refused on the basis that the reclaimer was in breach of his fiduciary duty to the respondents and must pay compensation to the respondents for their loss in consequence of that breach.

[32] The background to the transaction is that the reclaimer was acting as agent for the other shareholders in the sale of the whole shares of LAGTA to SPX. As agent he owed fiduciary duties to those shareholders. The reclaimer was also a director of LAGTA, and would owe fiduciary duties in that capacity, but it is his fiduciary duties as agent that are material for present purposes. The transaction for the sale of the shareholding required three separate agreements: first, the contract for the sale of the shares; secondly, the compromise agreement, which contained the warranties attendant upon the sale of the shares (and in respect of which the reclaimer carried much greater potential liabilities than the other shareholders); and thirdly, the consultancy agreement. As part of the transitional arrangements whereby the ownership of LAGTA was transferred to SPX, SPX required that the reclaimer should act as a consultant to LAGTA for a period of 18 months. It is quite clear in my opinion that the latter two agreements were an essential part of the transaction; SPX insisted on them as a condition of purchasing the shareholding in LAGTA. Consequently the fiduciary nature of the reclaimer's agency applied not only to the share purchase agreement but also to the two ancillary agreements.

[33] It is a fundamental rule applicable to all fiduciaries that, in the words of Lord Cranworth LC in Aberdeen Railway Co v Blaikie Bros, 1854, 1 Macq 461, at 471:

"... no one having [fiduciary] duties to discharge shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interest of those he is bound to protect. So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into".

More particularly, a fiduciary is not entitled to remuneration or any form of profit from his agency without specific authorization, either in the agreement or deed that creates the fiduciary relationship or from the principals or other beneficiaries of the fiduciary relationship. In Brown v Inland Revenue Commissioners, 1964 SC (HL) 180, a case dealing with client monies held by a solicitor, Lord Reid stated (at 189‑190):

"The general principle is well settled. A solicitor has a fiduciary duty to his clients, and any person who has such a duty 'shall not take any secret remuneration or any financial benefit not authorized by the law, or by his contract, or by the trust deed under which he acts, as the case may be' [Dale v Inland Revenue Commissioners, [1954] AC 11, per Lord Normand at 27]. If the person in a fiduciary position does gain or receive any financial benefit arising out of the use of the property of the beneficiary, he cannot keep it unless he can show such authority".

Lord Upjohn stated (at 197) that

"One of the most settled principles of the law of Scotland... is that a person who is in a fiduciary relationship to another may not make a profit out of his trust".

Similar statements of the law, made in English cases but expressing principles that are common to both Scots and English law, are found in Regal (Hastings) Ltd v Gulliver, (1942) [1967] 2 AC 134n, at 154 per Lord Wright, and Boardman v Phipps, [1967] 2 AC 46, at 105 per Lord Hodson, at 116‑117 per Lord Guest, and at 124‑125 per Lord Upjohn. A more recent, very useful, summary of the law is found in the opinion of Lord Nimmo Smith in Commonwealth Oil & Gas Co Ltd v Baxter, 2010 SC 156, at paragraphs [71]-[74].

[34] In the present case, the reclaimer received two financial benefits from the transaction that the other shareholders did not obtain. First, the agreement for the sale of the shares in LAGTA stipulated a price of £26 for each of the reclaimer's 36,152 shares and a price of £21.50 for each of the remaining 97,189 shares. The documents accompanying the transaction indicated that the additional share price was intended to compensate the reclaimer for entering into the consultancy agreement for a period of 18 months. The financial benefit obtained by the reclaimer was £162,684. Secondly, the consultancy agreement provided that the reclaimer should receive remuneration of £87,750 per annum, or £131,625 over the duration of the agreement. Both of the foregoing benefits were arranged by the reclaimer during the negotiations that he was carrying out on behalf of the totality of the shareholders in LAGTA. Thus both payments fell potentially within the rule that a fiduciary should not make any profit out of the relationship under which he acts, and in particular that an agent should not make any profit at his principal's expense.

[35] That rule is subject to the important exception that the principal may authorize an agent or other fiduciary to take a profit or other benefit, either in the contract constituting the fiduciary relationship or by subsequent consent. If such consent is to be effective, however, it is essential that the principal's decision should be properly informed. The principal must have full knowledge of the benefit that is proposed and of any surrounding circumstances that are material to whether or not it should be permitted. That is clear on the authorities. Thus in Commonwealth Oil & Gas Co Ltd v Baxter, Lord Nimmo Smith stated, in the context of a director's fiduciary duties (at paragraph [78]):

"The key question in every case is whether, in the particular circumstances of that case, there is a real sensible possibility of conflict.... Prima facie a person who is a director of two companies with competing interests falls foul of Aberdeen Railway Co v Blaikie Bros: his duty to each conflicts with his interest in the other. This conflict may be avoided by the giving by the first company of informed consent to its director's pursuing his own interest, either as director of the second or on his own account, and informed consent in turn depends on full disclosure...".

[36] In Dunne v English, (1874) LR 18 Eq 524, the defendant arranged the sale of mining interests in the United States that belonged to himself and the plaintiff. He agreed a sale to parties who included himself, and on subsequent resale he made a large profit. The plaintiff raised proceedings to compel the defendant to account for that profit, and the defendant countered that the transaction had been discussed and the plaintiff had agreed to it. Jessel MR stated (at 533-534):

"It is not enough for an agent to tell the principal that he is going to have an interest in the purchase, or to have a part in the purchase. He must tell him all the material facts. He must make a full disclosure.... It must be a full disclosure of all he knows; that, of course, means everything material which he knows".

Consequently an accounting was ordered. More recently, in New Zealand Netherlands Society "Oranje" Inc v Kuys, [1973] 1 WLR 1126, Lord Wilberforce, delivering the judgment of the Privy Council, stated (at 1131H-1132A):

"First, as to disclosure. Their Lordships entirely accept, as a matter of law, that if an arrangement is to stand, whereby a particular transaction, which would otherwise come within a person's fiduciary duty, is to be exempted from it, there must be full and frank disclosure of all material facts".

On the facts of the case, however, there was no matter relevant to the transaction under consideration that, had it been disclosed, could have affected the other party's decision to enter into the transaction.

[37] A detailed discussion of the applicable principles is found in the opinion of Upjohn LJ in Boulting v Association of Cinematograph, Television and Allied Technicians, [1963] 2 QB 606. He referred to the rule that prevents a fiduciary from having any conflicting personal interest and continued (at 636):

"The rule... is one essentially for the protection of the person to whom the duty is owed. Thus the company is entitled to the undivided loyalty of its directors; beneficiaries are entitled to the unpaid services of their trustees; the client is entitled to the services of his solicitor who may not charge more than he is legally entitled to, and must not put himself into a position where he may owe conflicting duties to different clients.... But the person entitled to the benefit of the rule may relax it, provided he is of full age and sui juris and fully understands not only what he is doing but also what his legal rights are, and that he is in part surrendering them".

It is clear from the last mentioned case that the level of disclosure that is required if a fiduciary duty is to be restricted or abrogated goes well beyond anything that is required in an ordinary contractual relationship. The principal in the relationship must be in full possession of all material facts, and must understand exactly what is proposed, what his legal rights are, and that he is agreeing to give up those rights.

[38] Thus the rule that a fiduciary may not make a profit out of a fiduciary relationship is enforced strictly, and the exception for informed consent is interpreted restrictively. The reasons for this are straightforward. Any fiduciary relationship is based on considerations of trust, confidence and the utmost good faith. Furthermore, it is normal to accord a very high level of discretion to a fiduciary, and the supervision of the fiduciary's activities is generally minimal or non‑existent, at least at a day‑to‑day level. This is merely an aspect of the trust that is reposed in a fiduciary. All of these considerations justify strict enforcement of the rules. At a more practical level, in view of the lack of everyday supervision, in particular, a small number of fiduciaries may be tempted to exploit their positions for profit. The relative lack of supervision means that the information that is required to bring such cases to account may be harder to discover than in other legal relationships. At the same time, the high level of discretion typically accorded to fiduciaries means that their activities are less amenable to control by their principals. For all these reasons I consider that the strictness of the rules governing fiduciary relationships is fully justified, and should not be relaxed.

[39] This is not to suggest that remuneration of a fiduciary is uncommon. Agents receive fees or other payments very frequently; solicitors, accountants, estate agents and property factors are obvious examples of persons who expect to be remunerated, but in all such cases it will be understood from the outset that normal professional fees are payable. The present case is quite different; the reclaimer's agency arose as a result of the offer by SPX and the terms of the relationship emerged as negotiations proceeded for the sale of the LAGTA shares to SPX. No agreement for remuneration was made at the outset. The reclaimer was acting as agent for the whole shareholders in LAGTA. In the course of his dealings with SPX he negotiated the two separate benefits for himself, a premium of £4.50 on each of his shares in addition to the price received by the other shareholders, and remuneration of £87,750 per annum during the period of the consultancy agreement. The respondents' primary challenge is to the first of these benefits, although they have an alternative case which challenges the second payment. They accept that the reclaimer should receive something for the work that he did under the consultancy agreement; consequently they do not seek to recover both benefits.

[40] As to the first benefit, the Lord Ordinary finds that the enhanced price for the reclaimer's shares was discussed at a board meeting of LAGTA on 5 July 2007, and was further mentioned in a letter to shareholders dated 16 August 2007. The background, he finds, was that the defender had built up the company over many years, acting as its managing director; consequently he felt entitled to a larger share of the purchase price than his shareholding would justify. The purchasers, SPX, had offered £5.125 million for the whole shareholding, and the reclaimer then proposed a price of £5.2 million, with an enhanced payment for each of his shares. That was agreeable to SPX. The Lord Ordinary concluded that the driving motivator was that the reclaimer felt that he was entitled to an enhanced price for his past services to the company. He asked for the share premium because he wanted it and felt that he deserved it. When the offer was communicated to the board of LAGTA on 5 July 2007, however, the other members of the board appear to have been given the impression that the share premium was a method of remunerating the reclaimer for the consultancy work that he was to perform following the sale of the company, structured in that way to provide tax advantages. In the letter sent out to shareholders on 16 August 2007 the premium was explained as reflecting the 18 months' consultancy period. That letter was signed by the reclaimer.

[41] The Lord Ordinary concluded that the reclaimer misrepresented the true position at the board meeting held on 5 July 2007 and the circular letter sent to shareholders on 16 August. In view of the reclaimer's fiduciary duties, however, I am of opinion that there is no need to go as far as a finding of misrepresentation. The reclaimer obtained a benefit beyond the other shareholders, and was able to do so because of his role in the sale as agent for the other shareholders, in other words because of his fiduciary position. On that basis he would be liable to the other shareholders for the extra benefit that he received, either through an accounting for his profit or through damages for their loss. The only defence to such a claim would be the informed consent of the other shareholders. On the facts of the present case, however, I am clearly of opinion that that defence cannot be maintained. The board of directors were under the impression that the enhanced payment was to reflect services that the reclaimer was to provide under the consultancy agreement, and a representation to that effect was made in the circular to shareholders. In fact that was not the true reason for the enhanced payment. Furthermore, the services provided under the consultancy agreement were separately remunerated under that agreement, by payments that amounted to £131,625 over a period of 18 months. Nothing was said about that to the other directors or the shareholders of LAGTA.

[42] Informed consent requires that the principal should be in full possession of all material facts. For this purpose it is not enough that those facts may have been communicated to an agent, such as a solicitor, acting for the principal; the principal himself must be aware of the facts. Furthermore, the principal must understand fully what the proposals are; in particular, he must understand his legal rights under the fiduciary relationship and in what way those rights are to be given up. Once again, it is essential that the principal himself should be aware of all of these factors and apply his mind to them. The knowledge and understanding of an agent for the principal are not sufficient. The only exception to this would arise in a case where such an agent was empowered by the principal to undertake dealings with the fiduciary on the principal's behalf, as where a solicitor was specifically empowered to authorize the fiduciary to take remuneration. It is difficult to imagine that such a case could arise otherwise than by clear instructions to the solicitor, however, as the application of fiduciary duties is an important matter and the principal must understand that he is authorizing the abrogation of such duties. At any rate this is nowhere near such a case. There was no suggestion that Holmes McKillop were authorized by the shareholders to sanction payments to the reclaimer. Instead, the matter was considered by the board at the meeting on 5 July 2007 and by shareholders following the circular letter of 16 August. The disclosure made at that meeting and in the circular was manifestly incorrect, in suggesting that the share premium was remuneration for consultancy services, and inadequate, in failing to say anything about remuneration under the consultancy agreement. In these circumstances it is abundantly clear that there was no informed consent.

[43] For the foregoing reasons I am of opinion that the reclaiming motion must be refused. The payment of an enhanced share price was a breach of the reclaimer's fiduciary duties to the other shareholders, including the pursuers. The defence of informed consent is not available. In those circumstances the reclaimer could have been made to account for his profit, but the remedy chosen by the respondents is damages for the loss that they suffered. I consider that such a remedy is competent. I should note that in São Paulo Alpargatas SA v Standard Chartered Bank Ltd, 1985 SLT 433, Lord Grieve expressed the view (at 439) that damages is not a remedy that is available to remedy a breach of fiduciary duty. In my opinion this view is plainly wrong. The only authority cited is a sentence in Gloag on Contract at 521, but that sentence is not vouched by the authority cited in support. In my opinion it is clear that either accounting or damages is available as a remedy for breach of fiduciary duty. The remedy ultimately insisted on by the respondents is damages, and in my opinion that is their entitlement.

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
	[2014] CSIH 36
Lady Dorrian Lord Drummond Young Lord Clarke	CA15/08 OPINION OF LORD CLARKE in the reclaiming motion in the cause PARKS OF HAMILTON HOLDINGS LTD Pursuers and Respondents; against COLIN CAMPBELL Defender and Reclaimer: _______________

Act: Sandison QC, Brodies LLP

Alt: Summers QC, Logan; Campbell Smith WS LLP

30 April 2014

[44] I have had the opportunity of reading the opinions of your Ladyship in the chair and of Lord Drummond Young. I agree with both of them and there is nothing I can usefully add.