#6658 - Murad V. Al Saraj - Commercial Remedies BCL

Murad v. Al Saraj

Facts

The claimants in this action, who are the respondents to this appeal, are two sisters, Aysha and Layla Mohammed Murad. I shall call them the Murads. In the action, they sought from the defendants, who are now the appellants, wide-ranging relief including rescission, declarations, damages and an account of profits and other benefits. The respondents are Westwood Business Inc and Mr Hashim Ibrahim Khahil Al-Saraj, whom I will call respectively Westwood and Mr Al-Saraj. Westwood is a company owned by Mr Al-Saraj.

In about September 1997, Mr Al-Saraj proposed to the Murads that they should together buy a hotel, called the Parkside Hotel in Clapham, London, for 4.1 million, of which 1 million was to be paid by the Murads, and 500,000 by Mr Al-Saraj. The balance was to be raised by way of bank loan. It was orally agreed between the parties that Mr Al-Saraj and the Murads would share the revenue profits from the hotel as to one third each. If the hotel was sold, the capital profit would be shared 50:50 between Mr Al-Saraj on the one hand and the Murads on the other hand. The purchase of the hotel was effected by Danescroft Properties Limited ("Danescroft"), a Gibraltarian company owned by Mr Al-Saraj and the Murads on 26 November 1997, and the consideration stated in the transfer was 3.6 million. In December 1997, the Murads entered into a written agreement with Westwood, called the Westwood agreement by the judge, and this agreement regulated the disposal of the proceeds of sale.

In the action the Murads contended that prior to the purchase of the hotel Mr Al-Saraj represented to them that the purchase price for the hotel would be 4.1 million and that he would make his contribution of 500,000 to the purchase price in cash. In the event, this contribution had been made by offsetting unenforceable obligations of the same nominal aggregate amount due from the vendor, a Mr Al Arbash, to Mr Al-Saraj against part of the price. The obligations included a sum of 369,000, which represented Mr Al-Saraj's commission for introducing the purchasers to Mr Al Arbash. Mr Al-Saraj argued that it was not necessary for him to contribute the 500,000 in cash. However, the judge found against Mr Al-Saraj. He held that Mr Al-Saraj had fraudulently represented that the total price for the hotel would be 4.1 million and that his contribution of 500,000 would be in cash. He also accepted the Murads' case that the actual price of the hotel was 3.6 million not 4.1 million.

The judge further held that there was a fiduciary relationship between the Murads and Mr Al-Saraj in relation to the joint venture to acquire the hotel. He held that: "The relationship between [the Murads and Mr Al-Saraj] was a classic one in which [the Murads] reposed trust and confidence in Mr Al-Saraj by virtue of their relative and respective positions." (judgment, para 332). There is no appeal from that holding. The judge further held that Mr Al-Saraj was in deliberate breach of his fiduciary duty in not disclosing to the Murads that he was making his contribution by way of set off.

Defendant’s argument: The appellants appeal against the judge's order for an account. There are a number of grounds of appeal, but the primary ground is that the account of profits should have been limited to the profits obtained by the breach of fiduciary duty. They submit that the judge should have taken account of the fact that he found that, if the set off had been disclosed to the Murads, they would have agreed to go ahead with the acquisition of the hotel but demanded a higher profit share. Accordingly, the appellants' case is that they should only be liable for the loss incurred by the Murads as a result of the non-disclosure of the set off arrangement.

Holding

Arden LJ

Finding by the trial judge

The learned Judge concluded that the effect of the fraudulent misrepresentations which also founded a breach of fiduciary duty, was that if full disclosure had been made, i.e. no misrepresentation, the joint venture would still have gone ahead but each party would have negotiated a different profit share: accordingly instead of the Defendants receiving 50% of the net distributable profits they would have received a lesser percentage.

Irrelevant whether breach of duty or disability

There has been some debate as to whether Mr Al-Saraj was liable for breach of fiduciary duty because he was under a duty to disclose information which he failed to disclose, or whether he made a secret profit for which, in the absence of disclosure and the consent of the Murads, he is liable to account on the basis that such liability is an incident of the fiduciary relationship rather than a breach of duty. The judge's judgment suggests the former. The respondents rely on the latter because that leads them directly to the Regal case. For my own part, for the purposes simply of the question on this appeal, I do not think it matters which way the appellants' liability is analysed.

Causation – Apportionment of Profits

To test Mr Cogley's argument on the extent of the liability to account, in my judgment it is necessary to go back to first principle. It has long been the law that equitable remedies for the wrongful conduct of a fiduciary differ from those available at common law: hence the observations in the first paragraph of these conclusions. Equity recognises that there are legal wrongs for which damages are not the appropriate remedy. In some situations therefore, as in this case, a court of equity instead awards an account of profits. As with an award of interest (as to which see Wallersteiner v Moir (No 2) [1975] QB 373), the purpose of the account is to strip a defaulting fiduciary of his profit.

Furthermore, a loss to the person to whom a fiduciary duty is owed is not the other side of the coin from the profit which the person having the fiduciary duty has made: that person may have to account for a profit even if the beneficiary has suffered no loss.

I would highlight two well-established points about the reach of the equitable remedies:

(1) the liability of a fiduciary to account does not depend on whether the person to whom the fiduciary duty was owed could himself have made the profit.

(2) when awarding equitable compensation, the court does not apply the common law principles of causation.

The fact that the fiduciary can show that that party would not have made a loss is, on the authority of the Regal case, an irrelevant consideration so far as an account of profits is concerned. Likewise, it follows in my judgment from the Regal case that it is no defence for a fiduciary to say that he would have made the profit even if there had been no breach of fiduciary duty.

In the present case, the conduct of Mr Al-Saraj was held to be fraudulent. This was not the position of the directors in the Regal case. The principle, however, established by the Regal case applies even where the fiduciary acts in the mistaken belief that he is acting in accordance with his fiduciary duty. As Lord Russell made clear in the passage cited above, liability does not depend on fraud or lack of good faith. The existence of a fraudulent intent will, however, be relevant to the question of the allowances to be made on the taking of the account (which subject I consider below).

Causation – Liability – Claimant would have consented

There was no consent in fact in this case. What is said is that the Murads would have consented to the set off arrangement and reduction in the purchase price for the hotel, if they had been asked. The House of Lords in the Regal case recognised that there would have been no liability to account in that case if the directors had been authorised by their company to take the opportunity which they had appropriated for themselves.

In my judgment it is not enough for the wrongdoer to show that, if he had not been fraudulent, he could have got the consent of the party to whom he owed the fiduciary duty to allow him to retain the profit. The point is that the profit here was in fact wholly unauthorised at the time it was made and has so remained. To obtain a valid consent, there would have to have been full and frank disclosure by Mr Al-Saraj to the Murads of all relevant matters. It is only actual consent which obviates the liability to account.

Policy Reason for strict rule – inability to adjudicate on hypothetical situations

I accept that any rule that makes a wrongdoer liable for all the consequences of his wrongful conduct or for actions which did not cause the injured party any loss needs to be justified by some special policy. But the authorities just cited show that in the field of fiduciaries there are policy reasons which have for a long time been accepted by the courts.

For policy reasons, the courts decline to investigate hypothetical situations as to what would have happened if the fiduciary had performed his duty. In Regal case at page 154G, Lord Wright made the following point, to which I shall have to return below:

"Nor can the court adequately investigate the matter in most cases. The facts are generally difficult to ascertain or are solely in the knowledge of the person being charged. They are matters of surmise; they are hypothetical because the inquiry is as to what would have been the position if that party had not acted as he did, or what he might have done if there had not been the temptation to seek his own advantage, if, in short, interest had not conflicted with duty."

Allowance for time, effort and skill – even for fraudulent director

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