Restitution Remedies
Cases
Chase Manhattan Bank NA v. Israel-British Bank (London) Ltd
[1981] Ch. 105
Goulding J: … The plaintiff’s claim, viewed in the first place without reference to any sys tem of positive law, raises problems to which the answers, if not always difficult, are at any rate not obvious. If one party P pays money to another party D by reason of a factual mistake, either common to both parties or made by P alone, few conscientious persons would doubt thatD ought to return it. But suppose that D is, or becomes, insolvent before repayment is made, so thatP comes into competition with D’s general creditors, what then? If the money can still be traced, either in its original form or through successive conversions, and is found amongD’s remaining assets, ought not P to be able to claim it, or what represents it, as his own? If he ought, and if ina particular case the money has been blended with other assets and is repre sented bya mixed fund, no longer as valuable as the sum total of its original constituents, what priorities or equalities should govern the distribution of the mixed fund? If the money can no longer be traced, either separate or in mixture, should P have any priority over ordinary cred itors ofD? In any of these cases, does it make any difference whether the mistake was inevitable, or was caused by P’s carelessness, or was contributed to by some fault, short of dishonesty on the part of D?
At this stageI am asked to take only one step forward, and to answer the initial question of principle, whether the plaintiff is entitled in equity to trace the mistaken payment and to recover what now properly represents the money. The subsequent history of the payment and the rules for ascertaining what now represents it have not been proved or debated before me. They will have to be established in further proceedings if the plaintiff can clear the first hurdle today.
This initial question in the action appears not to be the subject of reported judicial decisionin England. Let me read a few lines from Goff and Jones, The Law of Restitution, 2nd edn (1978), 89. The autho.rs say:
‘Whethera person who has paid money under a mistake of fact should be granteda resti tutionary proprietary claim can arise in a number of contexts. It will be most important when the payee is insolvent and the payer seeks to gain priority over the payee’s general creditors. The English courts have never had to consider this question. But in the United States ith.as arisen on a few occasions. A leading case is In re Berry (1906) 147 Fed. 208.’
That wasa case decided in the Circuit Court of Appeals, Second Circuit.I shall reada passage from the judgment of the court, delivered by judge Coxe, at 210:
‘Stripped of all complications and entanglements we have this naked fact that Raborg& Manice by mistake paid Berry & Co. Sl,500, which they did not owe and which Berry& Co. could not have retained without losing the respect of every honourable business man. It is conceded on all hands that had not insolvency and bankruptcy intervened Raborg& Manice could have recovered the money on an implied assumpsit in the event that Berry & Co. declined to return it after knowledge of the facts-a highly improbable contingency. Of course such an action would lie. On no possible theory couId the retention of the money by Berry& Co. be justified; it was paid to them and received by them under mistake, both parties believing that Raborg & Manice owed the amount. lf$1,500 had been placed ina package by Raborg & Manice and delivered to a messenger with instructions to deposit it in their bank, and the messenger, by mistake, had delivered it to Berry & Co., it will hardly be pretended that the latter would acquire any title to the money, and yet the actual trans-
action in legal effect gave them no better right. It is urged that to compel restitution now will work injustice to the general creditors of the bankrupts, but this contention loses sight of the fact that the money in dispute never belonged to the bankrupts, and their creditors, upon broad principles of equity, have no more right to it than if the transaction of November 25 had never taken place. If the trustees succeed on this appeal the creditors will receive Sl,500, the equitable title to which was never in the bankrupts. There can be no doubt of the fact that the pa)’ment to Berry & Co. was a mistake and that by reason of this mistake the trustees have in their possession $1,500 which, otherwise, they would not have. The proposition that Raborg & Manice who have done no wrong, shall be deprived of their property and that it shall be divided among creditors to whom it does not fairly belong, is not one that appeals to the conscience of a court of equity.’
The effect of the American case law, developed in a number of different states, as well as in the federal jurisdiction, is summarised as follows in the important book of Professor A. W. Scott, The Law of Trusts, 3rd edn. (1967), vol. 5, 3428:
‘Similarly where chattels are conveyed or money is paid by mistake, so that the person making the conveyance or payment is entitled to restitution, the transferee or payee holds the chattels or money upon a constrlictive trust. In such a case, it is true, the remedy at law for the value of the chattels or for the amount of money paid may be an adequate rem edy, in which case a court of equity will not ordinarily give specific restitution. If the chat tels are of a unique character, however, or if the person to whom the chattels are conveyedor to whom the money is paid is in lvent, the remedy at law is not adequate and a court of equity will enforce the constructive trust by decreeing specific restitution. The benefi cial interest remains in the person who conveyed the chattel or who paid the money, since the conveyance or payment was made under a mistake.’
In my opinion, on the evidence that I have heard, to which I shall have to return later, the foregoing passages correctly represent the law of the State of New York. I believe they are also in accord with the general principles of equity as applied in England, and in the absence of direct English authority I should wish to follow them. Mr Stubbs for the defendant contends that I am not at liberty to do so, because of the judgment of the Court of Appeal in In re Dip/ode [1948] Ch. 465, explaining and developing the earlier decision of the House of Lords in Sinclair v. Brougham (1914] AC 398. In re Diplock itself went to the House of Lords, sub nom. Ministry
of Health v. Simpson [1951] AC251, but the appeal did not relate to the question which is mater ial in the present litigation. Mr Stubbs says that, as stated in Snell’s Principles of Equity 27th edn. (1973), 289, there is no equitable right to trace property unless some initial fiduciary rela tionship exists, the right being founded on the existence of a beneficial owner with an equitable proprietary interest in property in the hands of a trustee or other fiduciary agent. Mr Stubbs says further that the essential fiduciary relationship must initially arise from some consensual arrangement.
The facts and decisions in Sinclair v. Brougham [1914] AC 398 and in In re Diplock [1948] Ch. 465 are well known and I shall not take time to recite them. I summarise my view of the Dip/ock judgment as follows: (1) The Court of Appeal’s interpretation of Sinclair v. Brougham was an essential part of their decision and is binding on me. (2) The court thought that the majority of the House of Lords in Sinclair v. Brougham had not accepted Lord Dunedin’s opin ion in that case, and themselves rejected it. (3) The court (as stated in Snell, loc. cit.) held that an initial fiduciary relationship is a necessary foundation of the equitable right of tracing. (4) They also held that the relationship between the building society directors and depositors in Sinclair v. Brougham was a sufficient fiduciary relationship for the purpose: [1948] Ch. 465, 529,
540. The latter passage reads, at 540: ‘A sufficient fiduciary relationship was found to exist between the depositors and the directors by reason of the fact that the purposes for which the depositors had handed their money to the directors were by law incapable of fulfilment.’ It is founded, I think, on the observations of Lord Parker of Waddington at [1914] AC 398,441.
This fourth point shows that the fund to be traced need not (as was the case in In rt Dipl«lt itself) have been the subject of fiduciary obligations before it got into the wrong hands. It is enough that, as in Sinclair v. Brougham [1914] AC 398, the payment into wrong hands itself gave rise toa fiduciary relationship. The same point also throws considerable doubt on Mr Stubbs’s submission that the necessary fiduciary relationship must originate ina consensual transaction. It was not the intention of the depositors or of the directors in Sinclair v. Brougham to create any relationship at all between the depositors and the directors as principals. Their
object, which unfortunately disregarded the statutory limitations of the building society’s powers, was to establish contractual relationships between the depositors and the society. In the circumstances, however, the depositors retained an equitable property in the funds they parted with, and fiduciary relationships arose between them and the directors. In the same way,I would suppose, a person who pays money to another under a factual mistake retains an equi table property in it and the conscience of that other is subjected to a fiduciary duty to respect his proprietary right. I am fortified in my opinion by the speech of Viscount Haldane LC in
Sinclair v. Brougham (1914] AC 398,419,420, who, unlike Lord Dunedin, was not suspected of heresy in In re Diplock. Lord Haldane (who spoke for Lord Atkinson as well as himself) includes money paid under mistake of fact among the cases where money could be followed at common law, and he proceeds, at 421, to the auxiliary tracing remedy, available (as he said) wherever money was held to belong in equity to the plaintiff, without making any relevant exception. Thus my problem over In re Diplock [1948] Ch. 465 is in the end this: CanI adopt into English equity the passage I have quoted from Professor Scott without making the forbid den transition to the opinion of Lord Dunedin? I have carefully considered the passages, at 541 to 543, in In re Diplock where that opinion is criticised. In the end I believe that the whole sub ject of the Court of Appeal’s condemnation was the suggestion that the tracing remedy could be applied wherever the defendant could be shown to have got an unjustenrichment,a super fluity as Lord Dunedin called it. The court insisted on the more precise test ofa continuing right of property recognised in equity or of what I think to be its concomitant, ‘a fiduciary or quasi-fiduciary relationship’: [1948] Ch. 465, 520. At the same time they recognised that exactly what relationships were sufficient for the purpose had not yet been precisely laid down: see 540.
Thus, in the belief that the point is not expressly covered by English authority and that In re Diplock does not conclude it by necessary implication, I hold that the equitable remedy of tracing is in principle available, on the ground of continuing proprietary interest, toa party who has paid money under a mistake of fact. On that prime question, I see no relevant difference between the law of England and the law of New York and there is no conflict of laws to be
resolved.
It is important, however, to make clear the limits of what I have just said.I do not say, and I do not imply, that on the facts and figures of any particular case the courts of England and of New York, when tracing in equity a sum paid by mistake, will necessarily apply the same trac ing rules or arrive at the same final result. For example, in In re Berry (1906) 147 Fed. 208, an extract from which I have read, the American court applied the rule in In re Hallett’s Estate (1880) 13 Ch.D 696, for the purpose of identifying the claimant’s money in the bankrupt’s bank account. Mr Stubbs, when discussing In re Berry (1906) 147 Fed. 208 before me, has argued that if, contrary to his contention, an English court allowed tracing at all on the facts of that case, it would apply a different rule. I decline to answer any question of that sort until actually raised on ascertained facts.
WhatI have said is enough to show that the plaintiff must succeed at this stage in lhe action, but in case the matter goes further I ought to express my findings on New York law in greater detail than I did at the outset of my judgment Thisesue is whether the equitable right of a person who pays money by mistake to trace and claim such money under the law of New York is conferred by substantive law or is of a merely procedural character.
The relevant municipal law of New York is not, in my view, in serious doubt. I find it, shortly stated in my own words, to be a. follows:
(a) If one pany P transfers property to another party D by reason of a mistake of fact, P has in general a right to recover it and D a duty to restore it. (b) Pin general has a right to sue in equity for an order that D return the property, or its traceable proceeds, to P. Sometimes this requires actual transfer by D, sometimes the court can use the alternative remedy of reformation, i.e. rectification of instruments, to produce the same result. P is said to retain an equitable title to the property notwithstanding it may have been legally transferred to D, and D is treated as a constructive trustee thereof. (c) In many cases P has also a common law right of action in quasi-contract to recover damages in respect of his loss. (d) The court will not, in its equitable jurisdiction, order specific restitution under (b) above where common law damages under (c) furnish adequate relief. (e) Accordingly where the property in question is money, equitable relief is not available to restore the sum paid by mistake if the payee D is solvent. But when D is insolvent P is entitled to a decree in equity for the purpose of tracing the money paid and recovering it or the property representing it. (f) Modern analysis concentrates attention less on the protection of P than on preventing tqe unjust enrichment of D, thus bringing the law of mistake into a broad jurisprudence of resritutionary rights and remedies.
The view I have formed on the American material as a whole is that the plaintiff is right in alleging that the defendant became a trustee for the plaintiff of the sum paid by mistake and thanhe plaintiff’s equitable interest as cestui que trust was given (so far as the distinction has any meaning within the confines of New York law itself) by a rule of substantive law and is not the mere result of a remedial or procedural rule Ihave held, after examining In re Diplocle
[1948) Ch. 465, that under English municipal law a party who pays money under a mistake of fact may claim to trace it in equity, and that this right depends on a continuing right of prop erty recognised in equity. I have found, on the evidence presented by the parties, that a similar right to trace is conferred by New York municipal law, and that there too the party paying by mistake retains a beneficial interest in the assets. No doubt the two systems of law in this field are not in all respects identical, but if my conclusions are right no conflict has arisen between them in the present case, and there is no occasion to draw a line, on either side of the Atlantic, between provisions that belong to substantive law and provisions that belong to adjective law….
Subject to any discussion of the wording, I will declare that on July 3, 1974, the defendant became trustee for the plaintiff of the $2,000,687.509 and I will direct an inquiry what has
become of that sum, and what assets (if any), in the possession or power of the defendant, now represent the said sum or any part thereof or any interest or income thereof.
When the hypothetical name suffered a loss of £160,000 as a result of the negligence of to recover what I have paid. This distinction is neither unreal nor disreputable; it appears, for instance, in the law of contract, where it explains the difference between rectification (failure of intent), and rescission for mistake, e.g., in Solle v. Butcher (1950] I KB 671 (disappointment of motive). It is submitted, therefore, that there is ample justification for the distinction between mis take as to person and as to circumstances, and that property can pass in money paid by mistake.
Secondly, and more substantially, it is argued (147 F. 210) that where A pays B by mistake B has no moral claim to keep the money; B’s creditors, who derive their rights through B, there fore equally have no right to pay themselves out of it. But this proves too much: forit applies not only to restitutionary claims but to most contractual claims as well. True, a man has no right to keep money paid to him by mistake: but he has no right to keep money lent without repay
ing it, goods sold without paying for them, or to break his contracts without paying damages.
Yet lenders, sellers and contractors do not receive priority in bankruptcy–even if the bankrupt still has what he received from them.
This also disposes of the contention in Scott on Trusts, above, that remedies at law for unjust enrichment are ‘inadequate’ against insolvent defendants. For if ‘adequacy’ has any meaning here, it can only be as a function of fairness as between the plaintiff and the defendant’s gen eral creditors, and it is suggested that a mistaken payer should be refused priority in the bank ruptcy of the payee precisely because to g{ve him it is unfair to the general creditors.
It is therefore submitted that GouldingJ was wrong to give a proprietary remedy against the
payee. The moral, however, runs deeper. The Chancellor rightly has the power to protect his friends against the bankruptcy laws; no one suggests that a cestui que trust should suffer from
his trustee’s bankruptcy. Nevertheless, such a power is drastic and should be used sparingly. Its over-indulgence, as in Chase Manhatten v. Israel-British Bank, may cause dangerous injust ice. It might be hard, Maitland remarked,, that a mtui que trust should not have ‘his’ property; he added, however, that it was equally hard that creditors should go unpaid.
Fyffes Plc v DCC Plc &
Ors [2005] IEHC 477
Judgment of Miss Justice Laffoy delivered on 21st December, 2005.
I. INTRODUCTION
The Claim
In these proceedings the plaintiff seeks the following reliefs against the defendants:
A. a declaration that the sale by the first and second named defendants of in excess of 31 million ordinary shares in the plaintiff between 3rd February, 2000 and 15th February, 2000 constituted an unlawful dealing within the meaning of Part V of the Companies Act 1990 (the Act of 1990);
B. an order pursuant to section 109(1)(b) of the Act of 1990 requiring the defendants and each of them to account to the plaintiff for any profit accruing to the defendants from those sales;
C. an account in equity of all profit accruing to the defendants or each or either of them from those sales; and
D. damages and/or compensation for breach of fiduciary duty on behalf of the third named defendant.
The reliefs referred to at A and B are founded on alleged breaches of Part V of the Act of 1990 and the remedy sought at B is a statutory remedy. I will refer to these aspects of the claim as the statutory claim. The statutory claim is dealt with in Part II of this judgment.
The reliefs sought at C and D are founded on alleged breaches by the third named defendant of his fiduciary duties as a director of the plaintiff. The remedy sought at C is an account in equity and the remedy sought at D is damages or compensation pursuant to the court’s common law jurisdiction. I will refer to these elements of the claim as the non-statutory claim. The non-statutory claim is dealt with in Part III of this judgment.
The provisions of Part V of the Act of 1990 have been repealed by s. 31 of the Investment Funds, Companies and Miscellaneous Provisions Act 2005 (the Act of 2005) with effect from 6th July, 2005, so far as they relate to a regulated market (Investment Funds, Companies and Miscellaneous Provisions Act (Commencement) Order, 2005 (S.I. No. 323 of 2005)). However, the repeal does not affect the claims in these proceedings.
E. Construction/Legal Principles: Section 108(3)/Attribution
The argument which I am addressing here is the plaintiff’s argument that DCC was precluded from dealing by s. 108(3), which is an essential plank of the fifth proposition set out at B. above. This issue is primarily a question of the proper construction of s. 108(3), but a fundamental aspect of the argument is the plaintiff’s reliance on the doctrine of attribution, as enunciated by Lord Hoffman in Meridian Global Funds Management Asia Limited v. Securities Commission [1995] 2 BCLC 116, in the interpretation of s. 108(3).
The Meridian case, which was an appeal from the Court of Appeal of New Zealand to the Privy Council, was concerned with duties of disclosure under a New Zealand statute of the type imposed in this jurisdiction by s. 67 of the Act of 1990. The statute required a person who had become a substantial security holder in a public issuer to give notice of that fact to the public issuer and the stock exchange as soon as the person knew or ought to have known of that fact. The issue with which the Privy Council was concerned was the attribution of knowledge to the corporate appellant, Meridian. Having referred to the “directing mind and will” test, which comes from the speech of Viscount Haldane L.C. in Lennards Carrying Company Limited v. Asiatic Petroleum Company Limited [1915] A.C. 705, which was applied by the Supreme Court in Superwood Holdings Plc. v. Sun Alliance and London Insurance Plc. [1995] 3 I.R. 303, Lord Hoffman analysed the basis on which acts are attributed to a company. He identified primary rules of attribution which are generally found in the company’s constitution, typically in its articles of association. The primary rules are augmented by general rules of attribution, which are equally available to natural persons, for example, principles of agency, vicarious liability and such like. He then went on to consider the exceptional cases in which those rules will not provide an answer – when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability, yet the court considers that the law was intended to apply to companies. In such cases, insistence on the primary rules of attribution (normally via the board of directors) would in practice defeat that intention. A solution to that problem was identified by Lord Hoffman in the following passage at p 122:
“In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.”
(Emphasis in original)
The application of the principle is illustrated by the manner in which Lord Hoffman interpreted the provision of the New Zealand statute under consideration in the following passage at p. 126:
“The policy of s. 20 of the 1988 Act is to compel, in fast-moving markets, the immediate disclosure of the identity of persons who become substantial security holders and public issuers. Notice must be given as soon as that person knows that he has become a substantial security holder. In the case of a corporate security holder, what rule should be implied as to the person whose knowledge for this purpose is to count as the knowledge of the company? Surely the person who, with the authority of the company, acquired the relevant interest. Otherwise the policy of the Act would be defeated. Companies would be able to allow employees to acquire interests on their behalf which made them substantial security holders but would not have to report them until the board or someone else in senior management got to know about it. This would put a premium on the board paying as little attention as possible to what its investment managers were doing.”
The plaintiff submitted, on the facts of this case, that the information in the possession of Mr. Flavin which is alleged to be price-sensitive should be attributed to DCC in accordance with the Meridian principle and, if it is, DCC was precluded from dealing as a tippee under s. 108(3).
I did not understand the defendants to question the appropriateness of applying the principles of attribution enunciated by Lord Hoffman generally in this jurisdiction. Therefore it is not necessary to express any view on that. They argued that they cannot be properly applied in the manner suggested by the plaintiff to the construction of s. 108(3) and that the effect of attempting to do so is to warp the statutory provision. In my view, that argument is well founded.
As regards tippee liability, the ingredients of unlawful dealing under s. 108(3) are that –
(i) a non-connected person (a person not precluded from dealing by virtue of sub-s. (1) or sub-s. (2)) has price-sensitive information in relation to the company,
(ii) that person, the tippee, has received information, directly or indirectly from another person whom I will call the source, and
(iii) the tippee is aware, or ought reasonably to be aware, of facts and circumstances by virtue of which the source is then himself precluded from dealing under sub-s. (1) or sub-s. (2).
It is not disputed that theoretically the tippee may be a body corporate. However, the source must be a natural person to come within sub-s. (1) or (2). The knowledge which the tippee must have is of the facts and circumstances by virtue of which the source is in possession of the price-sensitive information by reason of his connection with the company. Looked at in the abstract, the plaintiff’s thesis was that, for the purpose of the operation of sub-s. (3), the information in the possession of the source can be attributed to the body corporate tippee, if the role of the source vis-à-vis the body corporate tippee and the policy of the statute so require. The defendants’ answer was that, unlike liability under sub-ss. (1) and (2) which is based on connection status, liability under sub-s. (3) is receipt based. By its terms, sub-s. (3) requires that a body-corporate tippee must receive the information through its human agent who is not connected with the company.
In my view, the application of the plaintiff’s thesis to the interpretation of sub-s. (3) would have the effect of eliding an essential element of the basis of liability under that sub-section – that the tippee is not precluded from dealing under sub-ss. (1) or (2) – and result in a distortion of the intention of the legislature in enacting sub-s. (3). On the plaintiff’s thesis, Mr. Flavin’s inside information is intended to count as the information of DCC for the purposes of Part V. But, if the principle of attribution could be applied in that manner, the effect would be to give DCC some type of quasi insider status and render the knowledge requirement superfluous. In my view, that is not what the legislature intended.
Taking a broader view of s. 108, the defendants characterised sub-s. (6) as statutory scheme of attribution. The significance of sub-s. (6) for present purposes is that it precludes a company from dealing when any one of its officers is precluded from dealing by virtue of sub-ss. (1), (2) or (3). In so doing, it provides an effective means for ensuring that the policy of Part V is not defeated, particularly, given the broad definition of “officer” contained in s. 107, which includes an employee. It is clear that the legislature was conscious of the necessity, subject to the exceptions it provided for, to bind a company where an officer of the company was bound by sub-ss. (1), (2) or (3). I do not think one can ascribe to the legislature an intention that sub-s. (3) would have the meaning which the plaintiff suggests, which is at variance with the express terms of the provision and not apposite to the particular type of activity which it was designed to outlaw.
Accordingly, in my view, the plaintiff has not established that, on the facts, DCC would be liable as a tippee under s. 108(3), so that one limb of the fifth proposition on which the plaintiff sought to peg liability under s. 108(6) on Lotus Green is not sustainable.
F. Construction/Legal Principles:
Sections 107 to 109/ agency/attribution
The argument which I am addressing here is the plaintiff’s proposition, which is the third proposition set out at B above, that DCC and S&L, and if it was the beneficial owner of the shares, which was not conceded by the plaintiff, Lotus Green are liable to account under s. 109(1) independently of any liability those companies have by virtue of s. 108(6). This issue is primarily a question of construction of ss. 107 to 109, but also involves consideration of principles of agency and attribution invoked by the plaintiff.
The starting point for that proposition was the allegation that Mr. Flavin dealt unlawfully in contravention of s. 108(1). The plaintiff argued that the act of dealing was undertaken by him on behalf of the companies, including Lotus Green, if it was the beneficial owner of the shares, so that his dealing was their dealing. The companies dealt and, because the dealing was unlawful by virtue of Mr. Flavin’s position and the information he possessed, the companies are liable to account under s. 109(1). As I understand the argument, the unlawful dealing by Mr. Flavin is to be attributed to the company; the act of the agent, Mr. Flavin, was the act of the principal, each company. In other words the maxim qui facit per alium facit per se applies. The plaintiff referred the court to the commentary on the maxim contained in Bennion on Statutory Interpretation, (4th Ed., Butterworths, 2002) at p. 983.
The defendants’ response to that proposition was simply that it was wrong. There is no principle of attribution of unlawful dealing to be found in Part V. The implication of such a principle applying the reasoning underlying the judgment in the Meridian case – the rationale in that case being that without the special rule of attribution the policy of the Act would be defeated – is not necessary. It is not necessary because Part V makes agents and principals separately liable in different circumstances. Further, it was submitted that the proposition advanced by the plaintiff would significantly expand the Act and would do so in circumstances which might give rise to a criminal sanction. It was urged that the court should be slow to expand the words of a statute in such circumstances.
The plaintiff’s proposition, in my view, is not correct. What sub-s. (1) of s. 108 does is to render unlawful dealing by a natural person in shares of a company where, by reason of his connection with that company, the natural person has price-sensitive information. The natural person may deal as agent or principal. In either event the dealing is not lawful. In my view, sub-s. (1) is not open to the construction which it must be given if the plaintiff’s proposition is correct: that a body corporate which is the principal of a natural person who deals as agent in contravention of sub-s. (1) by implication is liable under s. 109. That construction is not open because the legislature expressly confined liability under sub-s. (1) to natural persons and provided in sub-s. (6) a mechanism for rendering unlawful dealing by a body corporate in situations where it is likely that the body corporate is the principal of a natural person who is in the position envisaged in sub-s. (1), that is to say, has price-sensitive information by reason of his connection with the company. The definition of officer, which includes a director and an employee, would seem to be sufficiently broad to cover most, if not all, of those persons whose acts or knowledge could be intended to count as the acts or knowledge of the company in the context of Part V. It is, of course, conceivable that every possible circumstance is not covered by the definition of officer but, in my view, that is not a basis for displacing what I believe to be the clear intention of the legislature.
Section 109 does not provide for any free-standing civil liability. Liability under s. 109(1) only arises where a person has dealt or caused or procured another to deal or communicated information in a manner declared unlawful by s. 108. Therefore, each of DCC, S&L and Lotus Green could only have incurred civil liability under s. 109(1) if it was involved in an activity declared to be unlawful by s. 108. On the facts of the case, as regards the activity of dealing, aside from sub-s. (6) of s. 108, having regard to what I consider to be the proper construction of sub-s. (3), neither DCC nor S&L nor Lotus Green could have been involved in an unlawful activity.
While, as will be clear from what I will say later, as regards the nature of the liability created thereby, s. 109 presents considerable construction difficulties, in my view, ss. 107, 108 and 109 do not present any construction difficulty in identifying which of the defendants may be liable and on what basis. In summary, the position is as follows:
(i) Section 107, in defining dealing, makes it clear that a person may deal as principal or agent. Section 107 does not identify the proscribed activity. That is done in s. 108.
(ii) The only provisions of s. 108 which proscribe activity which come into play on the case made by the plaintiff on the facts are sub-ss. (1), (4) and (6). A finding could be made that Mr. Flavin engaged in activity which was unlawful under sub-s. (1), but a finding could not be made that any of the corporate defendants contravened that sub-section, because it only applies to natural persons. A finding could be made that Mr. Flavin engaged in activity which was unlawful under sub-s. (4). A finding could be made that any of the corporate defendants engaged in activity declared unlawful by sub-s. (6), if Mr. Flavin was an officer, as defined, of the corporate defendant subject, in the case of DCC and S&L, to those corporate defendants not being able to avail of the defence contained in sub-s. (9).
(iii) The only basis on which liability under s. 109 could arise is if it is established that Mr. Flavin contravened sub-s. (1) or sub-s. (4) of s. 108 or any of the corporate defendants contravened sub-s. (6).
Finally, by way of general observation, in my view, it is fallacious to apply the reasoning in the Meridian judgment to support the proposition that any of the corporate defendants is liable to account as principal of Mr. Flavin. In the Meridian case, the statutory duty of disclosure was the company’s duty and at issue was the circumstances in which knowledge that the duty had arisen would be attributed to the company. In the case of Part V, the statutory obligation to desist from dealing provided for in sub-s. (1) of s. 108 is the obligation of a natural person, whether acting as agent or principal; it is not the obligation of a company. A company’s obligation is provided for in sub-s. (6).
It is equally fallacious to rely on the principle of imputation applied by Buckley L.J. in Belmont Finance v. Williams Furniture (No. 2) [1980] 1 All E.R. 393, which I will consider in depth when dealing with the non-statutory claim. One aspect of the judgment of Buckley L.J. which arises in connection with the non-statutory claim is his finding that, where the officers of the companies involved were aware that a transaction into which a company and a wholly-owned subsidiary were about to enter was illegal or tainted with illegality, the knowledge of the officers must be imputed to the companies, because the officers were under a duty of disclosure. That finding was made in the context of an allegation that the companies had committed a tort, that they conspired with others to carry out an unlawful transaction. In s. 108(6) the legislature has provided for a statutory wrong which, subject to exceptions, is committed by the company if it deals when any officer of the company is precluded from dealing by virtue of, inter alia, sub-s. (1). Therefore, it is not necessary to resort to the Belmont Finance principle of imputation. There is in-built in Part V a much more effective method of binding the company.
III. THE NON-STATUTORY CLAIM
The basis of the claim for an account in equity
The basis on which the plaintiff’s non-statutory claim for an account in equity was pleaded was that, by reason of having been a director of Fyffes, Mr. Flavin owed certain fiduciary duties to Fyffes: a duty to avoid a conflict between the interests of Fyffes, on the one hand, and his own interests or those of any other company or person, on the other hand; a duty not to make any profit from opportunities or information accruing to him or acquired by him in his capacity as a director or by virtue of his position as such; a duty not to enable or facilitate any third party in the making of a profit from such opportunities or information; and a duty of confidentiality in respect of information relating to the affairs and business of Fyffes. It was alleged that Mr. Flavin acted in breach of those fiduciary duties to Fyffes and, as a consequence, all of the defendants benefited thereby in circumstances where DCC , S&L and Lotus Green knew or ought to have known of the breach and/or the facts giving rise to the breach. Several alleged breaches of Mr. Flavin’s fiduciary duty were particularised in the pleadings, but as I understand it, the only allegation actually pursued was that Mr. Flavin used and that he caused or permitted DCC, S&L and Lotus Green to improperly use and/or derive a profit from confidential information which was the property of Fyffes. It was further alleged that the corporate defendants received that information when they knew or ought to have known that it was confidential, price-sensitive information and that it was “transmitted” to them by Mr. Flavin in breach of his fiduciary duties, so that they were precluded in law from utilising and/or deriving profit from it. The account which the plaintiff claimed was an “account in equity of all profit accruing” to the defendants or each or either of them from the three Share Sales.
The legal principles applicable to the non-statutory claim generally
Section 109(1) provides that civil liability thereunder is “without prejudice to any other cause of action which may lie” against the person sought to be charged with statutory liability under that provision. That an insider who owes a fiduciary duty to a company and who, with the benefit of confidential information of the company, makes a profit from dealing in securities of the company may be compelled by an Irish court to account to the company for that profit has be recognised in theory. (cf. Keane on Company Law, paras. 34.16 and 27.102; and Cahill on Corporate Finance Law, para. 4-06). In practice, the parties have not pointed to any case in which an Irish court had to consider a claim for such an account. The rarity of authorities in other common law jurisdictions, for example, the United Kingdom and Australia, as well as the absence of any authority in this jurisdiction, addressing the circumstances in which directors as fiduciaries would be required to account for profits made from insider dealing was ascribed by the plaintiff to a combination of factors: statutory regulation; the reluctance of corporations to bring actions against their own directors; and the restrictive conditions surrounding the derivative action in those jurisdictions. The point is made in Cahill at para. 4-06, that even if a shareholder’s derivative action is mounted and is “successful”, it may be difficult to demonstrate any measurable loss to the company itself and, even if such loss could be proved, the award would be in favour of the company, rather than the shareholder. All of this means that there is a certain novelty involved in the plaintiff’s claim.
That said, the legal principles upon which the plaintiff founded the claim are well established in Irish law. The plaintiff followed a well-trodden path through the law of trusts and, in particular, the doctrine of constructive trust citing the dictum of Chatterton V.C. in Gabbett v. Lawder (1883) 11 L.R. Ir. 295, at p. 299, to the following effect:
“The fundamental principle upon which the doctrine of constructive trusts proceeds is, that no person in a fiduciary capacity shall be allowed to retain any advantage gained by him in his character as trustee”.
The plaintiff invoked authorities in which that general principle has been applied to specific problems arising from the use of information or opportunity obtained by company directors: the decision of the House of Lords in Regal (Hastings) Limited v. Gulliver [1942] 1 All ER 378; and the decision of the Court of Appeal in Industrial Development Consultants v. Cooley [1972] 2 All E.R. 162. The plaintiff also invoked the decision of the House of Lords in Phipps v. Boardman [1967] 2 AC 46, although that case was not concerned with the position of a company director. The plaintiff submitted that the authorities suggest various theoretical bases for non-statutory liability for insider trading: that the information in the possession of the director is a form of property, the appropriation of which for the benefit of the director personally represents a breach of duty; or that the deriving by a fiduciary of a benefit consequent on his position as such in and of itself gives rise to an obligation to account; or that the breach may be said to lie in taking for himself an advantage which the company has authorised him only to pursue for the benefit of the company itself. Whichever analysis is favoured, the plaintiff submitted that the authorities are clear on a number of points. First, the liability to disgorge a profit made from acting in breach of a fiduciary duty arises irrespective of whether the company itself has suffered a loss. Secondly, liability arises irrespective of whether the company itself could have made a profit. Thirdly, the liability is triggered irrespective of considerations of fraud or bad faith. I am satisfied that those propositions are amply supported by authority and, in particular, by the judgments in the Regal (Hastings)Limited case.
While the legal principles which govern the identification of the circumstances in which a constructive trust will be found to exist and an equitable account will be directed, and, indeed, the extra judicial and academic controversies which surround the principles, are readily ascertainable, I found the arguments which were advanced by the parties in relation to the relevance of those principles to the facts of this case somewhat confusing. While that may be a result of my own misunderstanding of the arguments, I think that, to some extent, the parties were at cross purposes.
Counsel for the plaintiff identified two issues which require to be addressed in considering whether the plaintiff is entitled to an account in equity. The first is a hypothetical question and was articulated as follows: if Mr. Flavin had been the owner of Fyffes shares, had traded in them and had made a profit, would he have been in breach of his fiduciary duty to Fyffes and liable to account in equity? On my understanding of the plaintiff’s argument, there is implicit in that question the assumption that the profit would have been generated from the misuse of confidential price-sensitive information which it is alleged Mr. Flavin acquired as a director of Fyffes. The second, which depends on an affirmative answer to the first, is whether if, as the plaintiff alleges was the case, Mr. Flavin was central to the dealing on behalf of DCC, S&L and Lotus Green with which he was associated, those corporate defendants are liable to account consequent upon his breach.
The first issue
The authority on which the plaintiff primarily relied on the first issue was a decision of the New York Court of Appeals, applying State law, in Diamond v. Oreamuno (1969) 248 N.E. 2d 910. The issue on that appeal was whether a motion to dismiss an action taken by way of derivative claim by a shareholder in a corporation against two officers of the corporation should be granted or denied. It was alleged that the officers had learned that the net earnings of the corporation had significantly declined. Before the information was publicly announced, they had sold their shares at a price of US$28 per share. Following the release of the information publicly, the price of the shares dropped to US$11 per share. In his judgment, Fuld C.J. began his analysis of the issue by stating (at p. 912) the following general principle, which the plaintiff contended is equally applicable in this jurisdiction:
“It is well established, as a general proposition, that a person who acquires special knowledge or information by virtue of a confidential or fiduciary relationship with another is not free to exploit that knowledge or information for his own personal benefit but must account to his principal for any profits derived therefrom … This, in turn, is merely a corollary of the broader principle, inherent in the nature of the fiduciary relationship, that prohibits a trustee or agent from extracting secret profits from his position of trust.”
Having stated that proof of damage had never been considered to be an essential requirement for a cause of action founded on breach of fiduciary duty, Fuld C.J. explained the rationale for that as follows:
“This is because the function of such an action, unlike an ordinary tort or contract case, is not merely to compensate the plaintiff for wrongs committed by the defendant but, as this court declared many years ago …
‘to prevent them, by removing from agents and trustees all inducement to attempt dealing for their own benefit in matters which they have undertaken for others, or to which their agency or trust relates.’”
Fuld C.J. then applied the general proposition to the corporate context in the following passage:
“Just as a trustee has no right to retain for himself the profits yielded by property placed in his possession but must account to his beneficiaries, a corporate fiduciary, who is entrusted with potentially valuable information, may not appropriate that asset for his own use even though, in so doing, he causes no injury to the corporation. The primary concern, in a case such as this, is not to determine whether the corporation has been damaged but to decide, as between the corporation and the defendants, who has a higher claim to the proceeds derived from the exploitation of the information. In our opinion, there can be no justification for permitting officers and directors, such as the defendants, to retain for themselves profits which, it is alleged, they derived solely from exploiting information gained by virtue of their inside position as corporate officials.”
The plaintiff also relied on the fact that the judgment of Fuld C.J. has received a level of acceptability in the United Kingdom. In Walsh v. Deloitte & Touche [2001] UKPC 58, Judicial Committee of the Privy Council on an appeal from the Bahamas approved the principles set out in the judgment of Fuld C.J. in the passages which I have quoted above, but did so in the context of the “arguability” test in an interlocutory application to discharge a Mareva injunction. At para. 14 of his opinion Lord Hoffman stated as follows:
“This is of course a statement of the law of New York, but entitled to great respect as expounding doctrines of equity which are common to the legal systems of New York and The Bahamas as well as of England. It has been cited in support of the existence of a similar equitable cause of action in English law by Professor Davies in his 6th Edition of Gower and Davies’ Principles of Modern Company Law (1997) at p. 445 and by Mr. Ben Pettet in his recent Company Law (2001) at p. 393. Their Lordships therefore agree with the courts of The Bahamas that such a cause of action is arguable.”
As the plaintiff pointed out, in the latest edition, the seventh edition, of Gower and Davies (Sweet & Maxwell, 2003) at p. 755 the decision in Diamond v. Oreamuno is cited as authority for the following proposition, noting, however, that the precise situation had not arisen in an English court:
“… if directors make use of information acquired as director for their personal advantage they will breach their fiduciary duties to the company and be liable to account to it for any profits they have made. A great advantage of the civil suit brought by the company for breach of fiduciary duty is that it does not have to show that it has suffered loss as a result of the insider dealing, simply that the insider fiduciaries have made an undisclosed profit.”
It may be of some significance that, as the editor of Gower and Davies emphasises, the specific insider dealing legislation in the United Kingdom relies wholly on criminal sanctions.
The defendants’ primary stance in relation to the first issue was that, while acknowledging that Mr. Flavin, as a director of Fyffes, unquestionably owed fiduciary duties to that company, as a matter of fact, he was not in breach of his fiduciary duties to the plaintiff and has not been shown to be. He did not, as the plaintiff alleged, trade or use inside confidential information.
As to the legal principles on which the plaintiff grounded the first issue, in their written legal submissions, the defendants conducted an interesting analysis of the rationale of the doctrine of constructive trust. They adverted to the differences of opinion in the speeches of the Law Lords in Phibbs v. Boardman as to whether information is property, on the significance of the existence of a conflict of interest to a finding of constructive trusteeship and such like. However, in the final oral submissions on behalf of the defendants, counsel for the defendants acknowledged that there is no doubt that there is a rule that a person who receives information in confidence must not profit from it and the rule may arise from a common-law duty, a contractual duty or a fiduciary duty. It was confirmed that the defendants were not suggesting that it is not a breach of duty for a director to further his self-interest from use of corporate information. However, they contended that the true analysis of a fiduciary’s liability to account is property based.
Whatever is the correct theoretic basis for making a director who trades on using inside information to his own advantage liable to account for the profit he makes, the existence of the equitable remedy cannot be doubted. In short, in my view, the first sentence of the passage from the 7th Edition of Gower and Davies, which I have quoted above, represents the law in this jurisdiction, as has been recognised in the texts to which I have referred earlier. I am satisfied that the plaintiff has demonstrated that the reasoning which underpinned the decision of the New York Court of Appeals in Diamond v. Oreamuno is consistent with principles of law which have been applied, and authorities which have been followed, in this jurisdiction for many years.
The second issue
In relation to the second issue identified by the plaintiff, the question of law which arises is in what circumstances will liability for breach of duty by the fiduciary extend to a third party so as to render the third party liable to account. The defendant submitted that the answer to that question is to be found in the judgment of Lord Selborne L.C. in Barnes v. Addy (1874) 9 Ch. App. 244 at p. 251 where the Lord Chancellor stated:
“That responsibility [of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as agents of trustees in transactions within their legal powers, transactions, perhaps, of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.”
That passage has been regarded in this and other jurisdictions as the source of two distinct heads of liability in respect of which a third party is obliged to account in equity. The first, usually referred to as “knowing receipt”, deals with the circumstances in which a third party who has received trust property is obliged to account. The second, usually referred to as “knowing assistance”, deals with the circumstances in which a third party, who may not have received any of the trust fund which has been misapplied, will be treated as accountable as a constructive trustee, if he has knowingly participated in a dishonest design on the part of the trustees to misapply the fund.
The argument advanced by the plaintiff on the second issue effectively bypassed the Barnes v. Addy categorisation. The position of the plaintiff was that whether, as regards DCC, S&L and Lotus Green, one classifies this as a case of knowing receipt of trust information or of knowing assistance in a breach of trust, the corporate defendants are liable to account in equity because either:
(a) what Mr. Flavin knew, must be imputed or attributed to the corporate defendants; or
(b) because the facts and circumstances were such as to put them on notice of a potential breach of trust in such a manner as to render them liable as constructive trustees.
It is convenient to consider the second point first. Counsel for the plaintiff submitted that, on the question of the requisite degree of knowledge, this court should be guided by the decision of the Court of Appeal in BCCI Ltd. v. Akindele [2000] 4 All ER 221. The facts of that case are succinctly outlined in the headnote. The defendant, A, entered into an agreement with I Ltd., a company controlled by the BCCI Group, ostensibly for the purchase of shares in the group’s holding company. That agreement, which guaranteed A a return of 15% per annum compounded annually, on an investment of $10m, enabled officers of the group to conceal a series of “dummy” loans which had been fraudulently used by the holding company to buy parcels of its own shares. The liquidators of I Ltd. contended that A was liable to account, as constructive trustee, for sums paid to him under the agreement. At first instance, it was held that A had not been aware of the underlying fraud and that he had not been dishonest. Accordingly, the liquidator’s claim, which had been brought under both the knowing receipt and the knowing assistance heads of constructive trust, was dismissed. On the appeal, two legal issues arose: what state of knowledge was required in a claim for knowing receipt and whether dishonesty was an essential ingredient of such a claim. It was held that dishonesty was not an essential ingredient of a claim for knowing receipt and that the test for knowledge in such a claim was simply whether the defendant’s knowledge made it unconscionable for him to retain the benefit of the receipt.
As I understand the plaintiff’s argument, it is that the judgment of Nourse L.J. is authority for the proposition that actual knowledge or a lesser degree of knowledge, but not necessarily what is generally referred to as constructive notice, is necessary to render a third party a constructive trustee in the context of knowing receipt. The passage from the judgment of Nourse L.J. on which the plaintiff specifically relied is the following passage at p. 235:
“For these reasons I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there be a single test of knowledge for knowing receipt. The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which previous categorisations have led.”
The test of knowledge which should be applied in this case, it was submitted by the plaintiff, is whether it would be unconscionable for the corporate defendants to retain the profit from the Share Sales.
In relation to the plaintiff’s contention that the confidential information or knowledge, which they allege Mr. Flavin had, is to be imputed or attributed to the corporate defendants, counsel for the plaintiff cited as authority the decision of the Court of Appeal in Belmont Finance v. Williams Furniture (No. 2) [1980] 1 All E.R. 393, to which I have alluded earlier in the context of the statutory claim. That was a case in which the facts were of considerable complexity. They were outlined in the judgment of Nourse L.J. in the BCCI Ltd. case at p. 229. The plaintiff (Belmont) was the wholly-owned subsidiary of the second defendant (City), which in turn was the wholly-owned subsidiary of the first defendant (Williams). The chairman of all three companies, and the sole effective force in the management of their affairs, was Mr. James. The shareholders of a fourth company (Maximum), Mr. Grosscurth and his associates, had agreed to sell its shares to Belmont for £500,000 and to buy the share capital of Belmont from City for £489,000, a transaction which, as carried out, it was held by the Court of Appeal, constituted a contravention of a statutory provision on the lines of s. 60 of the Act of 1963 which prohibited provision of financial assistance by a company for the purchase of its own shares. It was also held that the transaction thus involved a misapplication of Belmont’s funds. Belmont had subsequently become insolvent. Its receiver had obtained an independent valuation of the shares in Maximum as at the date of the transaction which suggested that, instead of being worth £500,000, they were only worth £60,000. The receiver brought an action in Belmont’s name, principally against Williams, City and the shareholders of Maximum, claiming they were liable to Belmont, first, for damages for conspiracy and, secondly, as constructive trustees on the grounds of both knowing assistance and knowing receipt. Counsel for the plaintiff relied on the following passage from the judgment of Buckley L.J. (at p. 404), in which he was addressing the question whether the tort of conspiracy had been established in respect of Williams, City and Mr. Grosscurth, as outlining the principle on which knowledge of wrongdoing will be imputed to a company:
“The unlawful purpose in this case was the provision of financial assistance in contravention of section 54 of the 1948 Act. That the purpose of the sale of Maximum to Belmont was to enable Mr. Grosscurth to pay £489,000 to City for the share capital of Belmont was known to all concerned … Williams and City were parties to the agreement and so, in my opinion, are fixed with the character of parties to the conspiracy. Moreover, Mr. James knew perfectly well what the objects of the agreement were. He was a director of both Williams and City. Mr. Harries and Mr. Foley, who also knew the objects of the agreement, were a director and the secretary respectively of City. Mr. Foley was also the secretary of Williams. Their knowledge must, in my opinion, be imputed to the companies of which they were directors and secretary, for an officer of a company must surely be under a duty, if he is aware that a transaction into which his company or a wholly-owned subsidiary is about to enter is illegal or tainted with illegality, to inform the board of that company of the fact. Where an officer is under a duty to make such a disclosure to his company, his knowledge is imputed to the company … .”
As a subsequent passage from the judgment of Buckley L.J., which I will quote later, indicates, he adopted a different test to that adopted by the Court of Appeal in the BCCI case as to the type of knowledge which is a prerequisite to imposing liability on a third party under the head of knowing receipt. He considered that knowledge, actual or constructive, was sufficient.
The defendants’ primary response on the second issue was that the plaintiff was trying to construct third party liability on the premise that Mr. Flavin was in breach of his fiduciary duties – on the basis of a premise that did not exist. They also disputed the legal bases advanced by the plaintiff for extending liability to account in equity to a third party.
First, they rejected the argument that the corporate defendants could be implicated in a breach of duty by application of either the doctrine of attribution or the doctrine of imputation. In relation to the concept of attribution as applied in the Meridian case, it was submitted that the legal rule at issue on this aspect of the case, the rule that Mr. Flavin as a director owed a fiduciary duty of the nature pleaded to Fyffes, was not capable of being attributable to a company with which Mr. Flavin was associated because it was of its nature personal to the office of director. As I understand the plaintiff’s arguments on this aspect of its claim, the Meridian principle of attribution was only inferentially relied on by the plaintiff, and it may be that the defendants answered a point which was not made by the plaintiff. In relation to the concept of imputation as applied in the Belmont Finance case, it was submitted by the defendants that, under the Belmont principle it is not a question of merely imputing knowledge, which I understand to mean information, it is a question of imputing knowledge that a transaction about to be entered into is illegal, unlawful or tainted. The Belmont Finance principle, it was argued, on the facts of that case, put the companies involved into an unlawful design to breach the Companies Acts and that is what would be required in this case. I think that submission is correct. What would have to be imputed to the corporate defendants in this case would be knowledge that the dealing would be in breach of Mr. Flavin’s fiduciary duty to Fyffes. However, I assume that that is the case which the plaintiff was making in reliance on the Belmont Finance principle.
Secondly, as to what constitutes knowledge when applying either the doctrine of knowing receipt or the doctrine of knowing assistance, the defendants did not accept the proposition, which I think they read as being inherent in the plaintiff’s interpretation and application of the “unconscionability test” propounded in the BCCI Ltd. case – that it does not require knowledge or that it is an easier hurdle to overcome than constructive knowledge. I did not understand the defendants’ argument to go so far as to suggest that, in Irish law, constructive knowledge would not be sufficient to give rise to liability for knowing receipt of trust property. My understanding of their submission is that they accepted, on the basis of the decision of the Supreme Court in In Re Frederick Inns Limited [1994] 1 I.L.R.M. 387, that constructive knowledge of the breach of trust is sufficient to render the recipient of trust funds a constructive trustee. However, the defendants contended that, as a matter of fact, even if, contrary to their assertion, there was a breach of fiduciary duty on the part of Mr. Flavin, the other defendants did not have actual or constructive knowledge of such breach.
Finally, the defendants rounded off their response to the plaintiff’s submissions on the second issue by pointing to the difficulty of identifying within which head of liability in Barnes v. Addy a claim against the corporate defendants could fall: they did not receive trust property in the sense in which the first head is normally applied; if the plaintiff was relying on the second head – that they had knowingly assisted Mr. Flavin in a dishonest or fraudulent design – the plaintiff would have to prove dishonesty and had not done so.
On that last point, I did not understand the plaintiff to assert dishonesty on the part of any of the defendants. In any event, I find that dishonesty was not established on the evidence. Therefore, of the categories of claim identified in Barnes v. Addy, only knowing receipt could be applicable. The formulation of the essential requirements of knowing receipt advocated by counsel for the defendants, and that adopted by Nourse L.J. in the BCCI Ltd. case, was the following statement made by Hoffman L.J. in El Ajou v. Dollarland Holdings Plc. [1994] 2 All ER 685 at p. 700.
“For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty: secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.”
The Belmont Finance case fell squarely within the first head of constructive trust identified in Barnes v. Addy – knowing receipt. Buckley L.J. found that City was accountable to Belmont as a constructive trustee for £489,000 under the first of Lord Selbourne’s two heads. On the facts, the payment of £500,000 by Belmont to Mr. Grosscurth, being in contravention of s. 54, was a misapplication of Belmont’s money and was in breach of the duties of the directors of Belmont. £489,000 of the £500,000 so misapplied had found its way into the hands of City, with City’s knowledge of the whole circumstances of the transaction. His reasoning is set out in the following passage of his judgment at p. 405, which was approved of by Blayney J. in In Re Frederick Inns Ltd.:
“A limited company is of course not a trustee of its own funds:
it is their beneficial owner; but in consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust … . So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds. This is stated very clearly by Jessel M.R. in Russell v. Wakefield Waterworks Company, where he said:
‘In this court the money of the company is a trust fund, because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust fund applicable by them to those special purposes; and a person taking it from them with notice that it is being applied to other purposes cannot in this court say that he is not a constructive trustee.’”
Digressing somewhat, on the basis of the application of the foregoing principle, in In Re Frederick Inns Ltd., it was held that ultra vires payments made to the Revenue Commissioners on the authority of the directors of four companies at a time when they were insolvent constituted a misapplication by the directors of the companies’ funds. The misapplication was a breach by the directors of their fiduciary duties and the monies were received by the Revenue Commissioners with constructive knowledge of the breach since, if they had read the memoranda of association of the four companies, as they could have done since they were documents of public record, they would have seen that the company had no power to make the payments. Therefore the Revenue Commissioners were constructive trustees of the sums which were the subject of the ultra vires payment. The purpose of the digression is to emphasise that, as the law stands in this jurisdiction, constructive knowledge of a breach of trust is sufficient to render the recipient of trust funds a constructive trustee.
The analysis of the authorities engaged in by Nourse L.J. in the BCCI Ltd. case was with a view to establishing whether a recipient must have actual knowledge (or the equivalent) that the assets received are traceable to a breach of trust or whether constructive knowledge is enough. It is quite clear from reading his judgment, that Nourse L.J. was sympathetic to the distinction drawn by Megarry V-C. in Re Montagu’s Settlement Trusts, Duke of Manchester v. National Westminster Bank Limited [1987] Ch. 264, between the equitable doctrine of tracing and the imposition of a constructive trust by reason of the knowing receipt of trust property; tracing is primarily a means of determining the rights of property, whereas the imposition of a constructive trust is a means of creating personal obligations going beyond mere property rights. He was also sympathetic to the ratio of the decision of Megarry V-C. that, in order to establish liability in knowing receipt, the recipient must have actual knowledge (or the equivalent) that the assets received are traceable to a breach of trust and that constructive notice is not enough. As I read his judgment, in positing the unconscionability test, Nourse L.J. was positing a stricter, not a laxer, test than constructive notice. In adopting the unconscionability test, Nourse L.J. referred to the words of Buckley L.J. in the second quotation from the Belmont Finance case which I have quoted above, to the effect that the court is concerned to determine whether the recipient can “conscientiously retain [the] funds against the company”, having noted earlier in his judgment that actual knowledge was found on the facts in that case. However, the Supreme Court in In Re Frederick Inns Ltd., a decision by which this Court is bound, applied the “knowledge (actual or constructive)” test enunciated by Buckley L.J. in the same passage.
I find it is not possible to arrive at any definitive answer to the second issue from the submissions made, and the principles established by the authorities cited, by the parties.
However, I would summarise the general propositions which emerged from the submissions and the authorities on both issues as follows:
(1) Mr. A, a director of X Ltd., who makes use of confidential information acquired in his capacity as a director for his personal advantage, would be in breach of his fiduciary duties to X Ltd. and would be liable to account to it for any profits he derives from exploiting that information. That hypothetical scenario reflects the first sentence in the passage from the 7th Edition of Gower and Davies, which I have quoted earlier. In my view, it represents the law in this jurisdiction.
(2) If, instead of using it for his own benefit, he uses such information so acquired for the advantage of a company, Y Ltd., of which he is a director, so as to enable Y Ltd. to generate a profit, the rules of equity extend to requiring Y Ltd. to account to X Ltd. for the profit, if it knows or ought to know that Mr. A is acting in breach of his fiduciary duty. In that hypothetical scenario, on the basis of the Belmont Finance principle, there would be a duty on the director to disclose to the board of Y Ltd. that he is acting in breach of his fiduciary duty to X Ltd., which is a civil wrong, in enabling Y Ltd. to use the information to its advantage, so that it is the director’s knowledge of the civil wrong, not knowledge of the confidential information, which is imputed to Y Ltd. It seems to me that, in point of principle, that proposition must be correct.
(3) In the hypothetical scenario referred to at (2), an alternative, but problematic, basis for Y Ltd. being required in equity to disgorge a profit is that it comes within the “knowing receipt” head of liability under Barnes v. Addy. However, a difficulty arises in identifying a disposal on the part of Mr. A or receipt by Y Ltd. in that scenario. The question which arises is what asset of X Ltd. is disposed of or misapplied and received by Y Ltd. Is it the confidential information or is it the profit? A further difficulty arises in identifying the requisite degree of knowledge on the part of the board of Y Ltd. to ground a finding that knowing receipt is established, whether it is on the basis of either –
(a) the BCCI unconscionability test, or
(b) the Belmont Finance and Frederick Inns actual or constructive knowledge test.
It is not necessary to resolve those difficulties, and I express no view on them, because, on the facts, those principles do not come into play.
On the plaintiff’s own case, its entitlement to an account in equity is dependent on there being an affirmative answer to the first proposition. That is dependent on there being proof that Mr. Flavin misused the information which is alleged to be price-sensitive. If the answer is in the affirmative, to fix the corporate defendants with a liability to account, on the basis of the Belmont Finance imputation principle, there must be proof that Mr. Flavin knew, or ought to have known, that he was acting in breach of duty.
The facts
It is worth reiterating that the basis on which the liability to account in equity may be imposed for insider dealing is that the insider director, in breach of his fiduciary duty, has made use of information acquired by him in that capacity for his personal advantage. To establish liability to account in equity against an insider, a corporate plaintiff bears a much heavier burden than it bears in establishing liability to account under s. 109(1), in that it must establish that the profit it seeks to attach was the result of the exploitation by the insider of the confidential price-sensitive information in issue for his own benefit.
In my view, in this case, the evidence is not open to the interpretation that Mr. Flavin used the information contained in the November and December Trading Reports which is alleged to have been confidential and price-sensitive, the negative information in relation to Fyffes’ trading and earnings performance in the first quarter of financial year 2000, so as to enable the DCC Group to exit from Fyffes in manner which would avoid any share price impact which would ensue from the disclosure of that information. In my view, on the evidence, it is clear that what motivated Mr. Flavin in his involvement in the Share Sales and what motivated the almost total exit of the DCC Group from Fyffes in February, 2000 was the opportunity to make a substantial profit because of the increase of the share price on the back of wof.com. The plaintiff has not established any evidential nexus between the profit which the Share Sales generated for the DCC Group and the use by Mr. Flavin, or the use by any of the boards of the corporate defendants, of the confidential information contained in the November and December Trading Reports. On any view of the evidence, that information simply had no bearing on the Share Sales.
When dealing with the price-sensitivity issue in the context of the statutory claim, the plaintiff, in its submissions, comprehensively analysed the evidence which it was contended supported their case that Mr. Flavin knew, or ought to have known, that the information contained in the November and December Trading Reports was price-sensitive. The analysis covered Mr. Flavin’s professional qualifications and his vast experience in business, his intimate knowledge of Fyffes and its business as a director and as a member of the Audit Committee and as Chairman of the Compensation Committee, the obvious significance of the information itself, the views of the expert witnesses called on behalf of the plaintiff as to its obvious price-sensitivity, some of which I have recorded, and Mr. Flavin’s engagement with Mr. Price on 31st January, 2000 and with Mr. Scholefield on 1st February, 2000. Of course, when dealing with the statutory claim, it was unnecessary to express any view on whether, as urged by the plaintiff, that evidence disclosed knowledge on the part of Mr. Flavin, because I determined that knowledge is not a necessary ingredient of civil liability under Part V of the Act of 1990, so that the question did not arise.
Similarly, the question of knowledge does not arise in the context of the non-statutory claim for an account in equity, there being no evidence that the profit resulted from the wrongful use by Mr. Flavin of confidential information. I have already commented, in the context of the price-sensitivity issue, that the transactions which Mr. Flavin was embarking on warranted a more rigorous compliance process than he went through with Mr. Price and Mr. Scholefield. However, taking on board the allusion by counsel for the defendents to Occam’s razor, I believe it would not be prudent to attempt, and, in any event, I believe it is not possible, on the back of a hypothesis which has not been proved, to express any meaningful view on whether the failure to engage in a more rigorous compliance process would support a case of constructive knowledge.
While the principle of liability to account for knowing receipt of trust property does not come into play on the facts, I consider it appropriate to record that there is no evidence whatsoever that Mr. Flavin transmitted the confidential information to the corporate defendants.
Conclusion
Accordingly, in my view, the plaintiff has not established either the hypothetical premise on which the first step in its argument is based or any other factual basis for fixing the corporate defendants with liability to account in equity.
In dealing with the statutory claim, in particular, the meaning of “profit” in s. 109 earlier, I have referred to the defendants’ argument, drawn primarily from their contention that equitable principles govern the taking of an account under s. 109(1), that the concept of profit in the application of the equitable principle does not include a negative profit, in other words, the avoidance of a loss. I have also referred to the plaintiff’s reliance on the decision in Diamond v. Oreamuno as an indicator that liability to account in equity does attach to a negative profit. As the plaintiff has not established any basis for liability to account, it is not necessary to determine whether the defendants’ contention is correct. It is clearly at variance with the decision in Diamond v. Oreamuno.
The fact that I have had to consider the application of Part V before considering the non-statutory claim advanced by the plaintiff, has afforded a peculiar insight into the ramifications of the enforcement of the equitable remedy to account for profit from insider trading, particularly when it exists side by side with the statutory obligation to compensate counterparties and to account contained in Part V. Apart from the myriad of difficult issues which were raised by the parties in their submissions on the non-statutory claim, which I have addressed, an obvious question which arises is how the rights of counterparties would be protected in a situation where the court, exercising its equitable jurisdiction, were to find that the insider has a liability to account to the company. I think it would require more than a modicum of judicial ingenuity to ensure that the equitable remedy sat comfortably with the statutory remedies.
IV. SUMMARY OF CONCLUSIONS ON CLAIMS
Having regard to the manner in which I have construed the provisions of Part V of the Act of 1990, essentially the following three questions remain on the statutory claim:
(1) Who dealt in the Share Sales and in what capacity?
(2) Did Mr. Flavin have, by reason of his connection with Fyffes, price-sensitive information on the dates of the Share Sales?
(3) What are the consequences of the answers to the first and second questions?
I have answered the three questions as follows:
(1) (a) Mr. Flavin dealt as agent of the DCC Group.
(b) DCC and S&L dealt as principals, so they cannot rely on
s. 108(9).
(c) Lotus Green dealt as principal.
(2) Mr. Flavin was not in possession of price-sensitive information at the dates of the Share Sales.
(3) Therefore, the dealing was not unlawful under s. 108 and no civil liability to account arises under s. 109. However, I have concluded that, if the dealing was unlawful so as to give rise to a liability to account under s. 109, it would have been proper to treat the three corporate defendants, DCC, S&L and Lotus Green, as a single entity for the purposes of accounting for the profit accruing from dealing under s. 109. That conclusion is redundant because I have found that the dealing was not unlawful.
In relation to the non-statutory claim, I have found that the plaintiff has failed to establish a breach of fiduciary duty on the part of Mr. Flavin. The plaintiff is neither entitled to an account in equity nor damages or compensation at common law.
Clements & Ors -v- Meagher & Ors
[2008] IEHC 258
Judgment of Mr. Justice Kevin Feeney delivered on the 25th day of July, 2008.
1.1 The plaintiffs claim an entitlement to a share in settlement monies which the first, third, fourth and fifth named defendants (hereinafter called “the defendants”, Carl Moynihan being referred to by name) recovered arising from proceedings that the defendants brought against CBT Group Plc., (“C.B.T.”). Those proceedings were brought in the High Court under record number 1995; No. 7105P and such proceedings are herein after referred to as (the “CBT proceedings”). In the CBT proceedings the defendants sought specific performance of an agreement in writing contained in letters from CBT to Barry Meagher dated the 30th April, 1991 and from Barry Meagher to CBT dated the 21st June, 1991. It was claimed that CBT had agreed that it would pay to the defendants, the plaintiffs within the CBT proceedings, the sum of £29,.000.00 in cash and issue and allot or cause to transfer to them 10,000 ordinary shares in CBT Group Plc.
1.2 CBT was formerly known as Thornton Group Plc. During the period from 1987 to 1990, the defendants, the plaintiffs within the 1995 proceedings, together with others invested by way of a Business Expansion Scheme (BES) a total sum of IR£136,608.00 in a company called Data Code Communications Limited. That company was involved in the manufacture and supply of modems for interactive communication between computers. In 1990, that company was endeavouring to expand and sought new shareholder investment. That resulted in Thornton Group Plc. making an investment in Data Code Communications Limited and the Company also took management control of Data Code. That investment caused the defendants and the other BES investors to lose their tax benefit. Following that investment Data Code expanded its business but the business proved unsuccessful and Data Code went into liquidation.
1.3 The background to the CBT proceedings is that discussions took place between the defendants and the plaintiffs with Thornton Group Plc., concerning the loss of the BES tax benefit. It is claimed that those discussions resulted in an agreement whereby CBT’s predecessor agreed to pay to all the BES shareholders the sum of £29,000.00 in cash and to issue and allot or cause the transfer to such BES shareholders of 10,000 ordinary shares in CBT. The BES shareholders consisted of the defendants, the three plaintiffs in this action and Michael Sweeney. The potential beneficiaries of the alleged agreement, therefore, were Barry Meagher, Philip Shaffrey, John O’Grady, Tim O’Flanagan, Charles Clements, Marcus Seigne, Charles Bryant and Michael Sweeney. Each of those persons had invested under the BES scheme in Data Code Communications Limited during the period from 1987 to 1990. The plaintiffs in this action and Mr. Sweeney were all employees of Data Code and Mr. Sweeney was its Chief Executive. The defendants were all outsider or external investors. The BES investors, in total, invested a sum of £136,608.00 in Data Code. The percentage breakdown of each person’s investment to the total of £136,608.00 is set out in a letter of the 15th May, 1995, from Barry Meagher to Marcus Seigne.
1.4 The investment by Thornton Group Plc., in Data Code breached the Business Expansion Scheme Regulations, as to the maximum percentage ownership by an individual party of a qualifying company, and the BES investors thereby lost their entitlement to BES relief. It was that fact which gave rise to the discussions which resulted in the alleged concluded agreement of 1991 which sought to compensate the BES shareholders for their lost relief. The alleged agreement of 1991 was subsequently varied in mid 1992, with effect that in lieu of the cash payment of £29,000, CBT would issue 14,500 shares to the eight BES investors herein before set out. Such shares to be issued proportionate to each individual’s BES investment in Data Code. That alleged variation was claimed to be evidenced by a letter of the 29th July, 1992, from Mr. Barry Meagher to Mr. Pat McDonagh of CBT.
1.5 Following the alleged agreement to issue 14,500 shares to the BES investors, CBT, or Thornton Group Plc., as it was then called, refused to allot or issue or cause the transfer of any of the said shares to the BES investors. Thornton Group Plc., changed its name to CBT and on or about the 13th April, 1995, issued a prospectus with a view to a public floatation of its share capital in New York in the Nasdaq. The prospectus did not identify or record any legal or beneficially held interests of the BES investors in CBT. Despite repeated requests and demands, CBT continued to refuse to issue shares and the defendants, that is the first, third, fourth and fifth named defendants herein, issued proceedings, as plaintiffs, against CBT Group Plc. Even though those proceedings only related to four named persons and not to all eight BES investors, the proceedings and the statement of claim made a general claim to the effect that the defendant therein, CBT Group Plc., was obliged to issue 14,500 shares to the persons who were plaintiffs in that action. However, the particulars within the proceedings identified that the named plaintiffs therein were seeking their individual percentage of the 14,500 shares based upon the percentage of each person’s investment in the total BES investment of £136,608.00. This resulted in the four named plaintiffs in the 1995 proceedings claiming an entitlement to be issued with approximately 65% of the 14,500 shares. Prior to the institution of the 1995 proceedings, there had been correspondence between the solicitors acting for the defendants and CBT Group Plc. There were negotiations which ultimately proved unsuccessful and the 1995 proceedings were issued. In endeavouring to settle the claim and during the negotiations, Barry Meagher had acted not only for the defendants but had acted for all eight BES investors. Mr. Meagher had indicated to CBT that they should include all eight investors in any settlement and Mr. Meagher sought and obtained the agreement of the three plaintiffs herein and Mr. Sweeney that he might act for them in settlement negotiations and to try and obtain a settlement on behalf of all eight BES investors. No settlement was concluded and a proposed settlement meeting in mid 1995 did not occur. Thereafter the defendants determined to bring proceedings against CBT claiming on their own behalf and not on behalf of the other four BES shareholders. The defendants commenced proceedings by plenary summons on the 13th September, 1995. The defendants not only brought the 1995 proceedings but also funded the proceedings.
1.6 The 1995 proceedings took their course and following the delivery of a statement of claim, detailed particulars were sought and replied to and thereafter the defendant, CBT delayed in the delivery of its defence resulting in a motion for judgment being brought in June of 1996. The defence was ultimately delivered and CBT therein denied all claims made by the defendants herein as plaintiffs and a counter claim was raised, seeking a declaration that CBT was entitled to rescind the alleged agreement or alternatively that such agreement had already been rescinded. On receipt of the defence and counter-claim detailed particulars were raised and no replies were received and a motion was brought compelling the defendant to reply to such particulars. After further procedural delays, the proceedings were ultimately ready for hearing with a date for trial in June of 1998. In the days immediately prior to the hearing date, settlement negotiations took place and a settlement was agreed between the defendants as plaintiffs within the 1995 proceedings and CBT. The settlement of those proceedings was for a total sum of US$850,000.00. The plaintiffs in these proceedings claim an entitlement to a share in those settlement monies.
2.1 In these proceedings, the plaintiffs seek declaratory and ancillary orders and reliefs against each of the named defendants for a sum or sums of money representing 24.68% of the settlement entered into on the 15th June, 1998 for US$850,000.00. The total sum claimed in these proceedings is US$209,780.00, being 24.68% of the sum of US$850,000.00. The percentage of 24.68% represents the three plaintiffs combined total percentage of the total investment in the aforementioned BES scheme. The sum claimed allows for no deductions for expenses or legal costs. That was the claim pleaded by the plaintiffs and was the claim advanced on their behalf by counsel during the opening of this case.
2.2 The defendants’ claim against CBT was settled following pre-trial negotiation on the 15th June, 1998. The terms of settlement were written out by counsel and were signed on behalf of the parties. The terms of settlement provided that CBT agreed to pay the plaintiffs in that action, namely the defendants herein, the sum of US$850,000.00 together with costs to be taxed in default of agreement. The settlement, however, was not for a straightforward payment of US$850,000.00 to the defendants. The sum was in fact divided in two and the entire US$€850,000.00 would only be due under the settlement if the defendants had procured on or before the 24th June, 1998, written discharges from the three plaintiffs herein and Michael Sweeney in respect of all or any claims that they or any of them might have against CBT Group Plc., or any of its present or former officers or employees, including Pat McDonagh or against any associated subsidiary companies. If written discharges were not procured from each and every one of the three plaintiffs herein and Mr. Michael Sweeney on or before the 24th June, 1998, then in those circumstances, the settlement sum payable to the defendants was to be US$600,000.00. The format of the settlement, therefore, was that the defendants, who were the plaintiffs in the High Court action against CBT were to get US$600,000.00 in settlement and were prepared to accept same but that an additional sum of US$250,000.00 would be available if the three plaintiffs herein and Mr. Sweeney all signed written discharges on or before the 24th June, 1998. The approach adopted by CBT demonstrated that a real value was placed upon obtaining waivers from all three of the plaintiffs and Mr. Sweeney, thereby ensuring that all potential claims were disposed. If any of the three plaintiffs or Mr. Sweeney did not agree to sign a waiver, then the settlement which the defendants had accepted would be in the sum of US$600,000.00. That sum represented 70.6% of US$850,000.00.
2.3 The plaintiffs in the pleadings, and during the course of the hearing, pursued a claim for 7.01%, 7.26% and 10.41%, (totalling 24.68%) of the sum of US$850,000.00. Those percentages represented each of the plaintiffs’ percentage investment in the original BES scheme. Mr. Sweeney had a 10.65% percentage investment in the original BES scheme and was one of the four persons, together with the plaintiffs, who were required to sign written discharges if the additional sum of US$250,000.00 was to be paid on settlement. The plaintiffs pleaded and opened the case on the basis that they were entitled to be paid their relevant percentage out of the total sum of US$850,000.00. However, during the course of the hearing and again in closing, it was accepted on behalf of the plaintiffs that they were only entitled to share with Mr. Sweeney in the sum of US$250,000.00, based on those four persons percentage BES investment. It was also conceded that there should be a deduction out of the US$250,000.00 of an appropriate sum to provide for agreed expenses and legal costs. I will return to this issue later in the judgment. The alteration in the approach adopted by the plaintiffs reduced the quantum of the plaintiffs’ claim. Following such concession the three plaintiffs herein together with Mr. Sweeney were seeking to divide approximately 29.4% of the total sum of US$850,000.00. The initial claim was based on 35.33%.
2.4 That concession also had an impact on the extent of the issues involved in the proceedings. This arises from the nature of the defence as pleaded by the defendants. A defence was delivered on behalf of the first, third, fourth and fifth named defendants on the 22nd October, 2001. At that stage the second named defendant was separately represented and the third named defendant had not yet obtained separate representation. In paragraph 12 of the defence, delivered on behalf of the first, third, fourth and fifth named defendants, it was expressly pleaded, as follows:-
“…In consideration of the plaintiffs executing the waiver abandonment and acknowledgement, the plaintiffs were entitled to receive their rateable proportion of the difference between the sums of US$600,000.00 and US$850,000.00 less an appropriate deduction for the costs and expenses incurred by the defendants and, in particular, by the first named defendant in recognition of the fact that such monies were obtained solely due to the efforts of the defendants.”
The second named defendant originally delivered a separate defence in January, 2004, but by the hearing of the action was represented by the same solicitors and counsel as the first, fourth and fifth named defendants and it was expressly indicated that the proceedings were being defended on the second named defendant’s behalf, consistent with the plea contained in paragraph of the 12 of the defence herein before set out. There were separate pleas that the second named defendant had no involvement in the events the subject matter of the proceedings and that the plaintiffs were “not entitled to the relief claimed or any relief” as against the second defendant. It followed that once the plaintiffs’ counsel had made the concession herein before set out, that there was no issue as to the percentage entitlements of the plaintiffs and that the only remaining matters in issue related to the quantum of the deductions for costs and legal expenses, if any, and the delay in payment. This Court, therefore, does not have to decide or determine whether or not the US$250,000.00, received by the defendants, was subject to a constructive trust for the plaintiffs, or if such monies was received as agents for the plaintiffs. The defendants accepted that the three plaintiffs are entitled to their respective shares out of the sum of US$250,000.00 together with Mr. Sweeney, less the appropriate or agreed reductions for expenses and legal costs.
2.5 In May of 1995, Barry Meagher had obtained the agreement of the three plaintiffs that he could act for them in endeavouring to obtain compensation and/or a settlement arising out of their lost BES tax relief. Each of the three plaintiffs signed a letter of the 15th May, 1995 from Barry Meagher to Marcus Seigne confirming that Barry Meagher could act on their behalf in endeavouring to reach a settlement. Mr. Meagher had indicated that he would endeavour to reach a settlement on behalf of all the BES shareholders and that he would use his best endeavours to affect same. That letter was written in the context of a proposed settlement meeting and the evidence before this Court indicated that such settlement meeting never in fact took place. The plaintiffs rely on that letter and the agreement therein evidenced, and claim that thereafter Mr. Meagher was acting on behalf of all the shareholders. The plaintiffs claim that thereafter Barry Meagher was their agent, for the purposes of securing a settlement for the plaintiffs in respect of CBT’s failure to honour the share allotment agreement. The evidence does not bear out such contention as the letter made it clear that if an agreement could not be achieved, that the parties would have to consider their own individual positions and decide whether or not they wanted to act independently. In fact, within four months the defendants had commenced their own proceedings against CBT. The three plaintiffs in this case were not parties to those proceedings. Thereafter those proceedings were conducted solely by the defendants for their own benefit. That is clear from the particulars supplied within those proceedings which demonstrated that the sums claimed related only to the defendants’ portion. The letter of 15th May, 1995, had indicated that if a settlement had not been concluded that it would be necessary to evaluate the financial downside of issuing proceedings both in Ireland and New York and that such proceedings would require a considerable financial commitment. None of the plaintiffs sought to institute proceedings or to evaluate their own individual positions so as to determine whether or not proceedings should be issued or financed. The evidence establishes that after May, 1995, the defendants in September, 1995, issued and prosecuted detailed and complicated proceedings involving a considerable financial commitment. The evidence also establishes that the only step that had been taken by the plaintiffs was to authorise Barry Meagher to try and negotiate a settlement. When such settlement was not concluded, the defendants chose to litigate. The plaintiffs were entirely inactive between May, 1995 and June of 1998, and had no involvement in the 1995 proceedings and took no steps to pursue a claim. Mr. Bryant stated in evidence that neither he or Mr. Clements were involved in the proceedings against CBT and he was not asked to participate. The evidence established that after a three year gap the next involvement of the plaintiffs was when the settlement had been agreed by the defendants. The Court is satisfied that the letter of the 15th May, 1995, and the agreement therein, can not be relied upon by the plaintiffs as placing any obligation on Barry Meagher in and about the events that occurred during 1998.
2.6 The plaintiffs contend that even if they are unable to rely on the agreement evidenced in the letter of the 15th May, 1995, that the circumstances surrounding the execution of the waivers by the three plaintiffs in 1998 give rise to a fiduciary relationship between each of them and the defendants.
It is therefore necessary to consider the circumstances surrounding the execution of the waivers by each of the three plaintiffs. Due to the nature of the settlement agreement which had been concluded on the 15th June, 1998, and the time limit of the 24th June, 1998, therein, it was clear that all waivers had to be obtained on or before the 24th June, 1998, or they would be of no value. This placed a strict time limit on obtaining waivers and explains, to some extent, the informal and hurried manner in which they were obtained. Mr. Meagher made the document entitled “Terms of Settlement” dated the 15th June, 1998, available to the plaintiffs for consideration and it was clear from that document that the defendants would receive US$600,000.00 and costs, irrespective of whether the waivers were obtained. However, it was also clear that an additional US$250,000.00 was being provided to obtain written acknowledgement from the three plaintiffs and Michael Sweeney that they waived and abandoned any claim or cause of action whatsoever against CBT Group Plc., and other parties. The terms of settlement made it clear that CBT had placed an identifiable value on obtaining all four waivers.
The Court is satisfied that the circumstances in which the waivers were signed and the fact that the contents of the terms of settlement were made known to the plaintiffs led to the clear understanding that the three plaintiffs and Mr. Sweeney were to be the beneficiaries of a division of the entire sum of US$250,000.00, less expenses and legal costs.
2.7 It was not just Barry Meagher who exercised control over the settlement funds but all the defendants other than Carl Moynihan. I will return later to this issue but it is clear that the four defendants, other than Carl Moynihan, jointly decided how payments would be made from the total sum of US$850,000.00 and to whom.
The Court is satisfied that the evidence of the circumstances surrounding the execution of the waivers following the transmission of the contents of the terms of settlement to each of the plaintiffs gave rise to a fiduciary relationship between each of the plaintiffs and the defendants. Mr. Bryant confirmed in his evidence that he and the other plaintiffs knew that by signing the waivers they were giving up all claims against CBT and its associates. As Mr. Clements said “he knew that if he did not sign US$250,000.00 would not be forthcoming”.
2.8 The existence of a fiduciary relationship is effectively acknowledged in paragraph 12 of the joint defence delivered by the first, third, fourth and fifth named defendants, wherein (in paragraph 12) it was acknowledged that in consideration of the plaintiffs executing the waiver abandonment and acknowledgement, that the plaintiffs were entitled to receive their rateable portion of the difference between the sums of US$600,000.00 and US$850,000.00, less an appropriate deduction for costs and expenses. That plea has within it a clear acknowledgement that there was an obligation on the defendants as the parties who had concluded a settlement with CBT to deal with the US$250,000.00 consistent with the acknowledged entitlement of the plaintiffs. In exercising control over that sum, the defendants had an obligation to deal with that sum in a manner which recognised the plaintiffs’ entitlement.
3.1 It is not possible to provide a complete definition of the categories of persons who occupy fiduciary positions. The categories of fiduciary relationships are not closed and it is well recognised that fiduciary duties may be owed notwithstanding the fact that the relationship in question does not fall within one of the settled categories of fiduciary relationships. That is so, provided the circumstances justify the imposition of fiduciary duties. A fiduciary is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.
It follows that a fiduciary is a person who owes fiduciary duties. A fiduciary relationship, therefore, is a relationship between two or more persons in which at least one of them is a fiduciary who owes fiduciary duties to the other or others. (see paragraph 7 – 04 of the 31st Edition of Snell’s Equity). Whilst there is no universal or uniform description of a fiduciary relationship, the approach adopted by Millett L. J. in Bristol and West Building Society v. Mothew [1998] Ch 1, at p. 18, is apposite:-
“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.”
3.2 On the facts of this case, the defendants undertook to act for and on behalf of the three plaintiffs by including within their settlement with CBT a term to provide for the disposal of the plaintiffs’ claims against CBT. The settlement identified the gross sum which would be available to the three plaintiffs and Mr. Sweeney (less deductions for expenses and legal costs). The first named defendant further undertook to act for and on behalf of the plaintiffs by securing the necessary waivers. The defendants received and dealt with the money. As part of such dealings the defendants invested and paid out monies. By so doing, the defendants undertook to act for and on behalf of the plaintiffs and each of them in circumstances giving rise to a relationship of trust and confidence. There thereby arose a legitimate expectation on the part of the plaintiffs, which equity recognises, that the fiduciaries would not utilise their position in such a way as was adverse to the interests of the plaintiffs. The facts of this case do not disclose a situation which would support the contention that a fiduciary relationship does not exist due to its commercial setting. The reason that fiduciary duties do not commonly arise in commercial settings is that it is normally inappropriate to expect a commercial party to subordinate its own interests to those of another commercial party. This is not such a case as the settlement terms were identified and agreed by the defendants and there was no question of having to subordinate their own interests to those of the plaintiffs. This position was equally applicable in relation to the deduction of legal costs and expenses in that what was required was the identification of those sums so that they could be discharged by all the parties. The fundamental position is that no person in a fiduciary capacity is allowed to retain any advantage gained by him in his character as trustee.
3.3 Any case relating to fiduciary relations requires a detailed consideration of the facts of the case. In this case, the circumstances in which the first named defendant came to seek and obtain the plaintiffs’ execution of waivers, and the terms upon which the defendants concluded a settlement with CBT which resulted in the defendants coming into possession of the entire settlement monies, placed clear obligations on the defendants. They received a portion of the monies for and on behalf of the plaintiffs. One of the central features of this case is that the defendants agreed to act for and on behalf of and in the interests of the plaintiffs in dealing with the settlement monies. The relationship identified, therefore, is one which gave the fiduciaries the particular opportunity to exercise a power or discretion to the detriment of the plaintiffs. This arose from the fact that the defendants took possession and control of the entire settlement monies in circumstances where the quantum of the expenses and legal costs were to be identified and deducted from the settlement monies and the date and mode of payment out to be determined. As fiduciaries, the defendants were not entitled to act for their own benefit without the informed consent of the plaintiffs. The facts of the case indicate that the fiduciary duties of the defendants continue in existence until the plaintiffs’ portion of the settlement monies has been discharged. That has yet to occur.
3.4 Later in this judgment I deal with the issue of expenses and legal costs. What is clear is that the plaintiffs acknowledged that there was to be a deduction for expenses and legal costs out of the settlement monies, but that at no time did they agree that such deductions would be taken exclusively out of the US$250,000.00 portion, from which they were to benefit. Nor was it at any time suggested or intimated that the entire expenses and legal costs would be deducted from the US$250,000.00 portion. Mr. Meagher stated in evidence that he told the plaintiffs that the payments they were to receive “were subject to deductions” but he did not tell them “who was going to pay”. The decision to deduct only from the US$250,000.00 was taken exclusively by the defendants and in circumstances where they personally benefited from such decision and without the consent, informed or otherwise, of any of the plaintiffs. In deducting the entire expenses and legal costs from the US$250,000.00 portion, the defendants acted in breach of their fiduciary duties to the plaintiffs. To have deducted such expenses and costs from the entire US$850,000.00 figure on a pro-rata basis would not have been a breach of fiduciary duty and would not have been a case of the defendants acting for their own benefit without the consent of the plaintiffs. The defendants, through their solicitors, took possession of the entire settlement monies and determined how and in what manner expenses and legal costs would be discharged, and when the persons benefiting from the settlement would be paid. The defendants were acting in circumstances where they owed fiduciary duty to each of the plaintiffs. This is confirmed not only by the plea contained in paragraph 12 of the defence delivered on their behalf, herein before referred to, but also by paragraph 18 of the defence which stated:-
“At all material times a sum of US$250,000.00(less appropriate deductions) has been maintained in an interest bearing account pending the plaintiffs articulating a proper claim for the appropriate amount. These defendants have since tendered the amounts to which the plaintiffs have a lawful claim and the payments of such monies has discharged any legal right or entitlement the plaintiffs may have had.”
The defendants acknowledged that they were in control of the settlement funds and that appropriate deductions were to be made and that thereafter there was an obligation to pay out to each plaintiff the relevant sum due to him. Even though the third named defendant was separately represented at the trial, such representation was based upon the joint defence earlier delivered on behalf of the first, third, fourth and fifth named defendants and it was expressly acknowledged during the course of the trial and in written submissions on behalf of the third named defendant, that the pleas contained in paragraphs 12 and 17 of the defence constrained the third named defendant in his defence and that he accepted such pleas.
3.5 One of the reliefs sought by the plaintiffs is that in the event that the proceeds of the CBT settlement have not been distributed, that they are entitled to a declaration that the first and second defendants hold certain percentage sums on trust for each of the three plaintiffs. There is also an alternative claim for a declaration that the defendants and each of them hold the proceeds of the CBT settlement subject to an equitable charge in favour of each of the three plaintiffs to a stated percentage of the total settlement funds. I have already indicated that the plaintiffs have, in effect, abandoned a claim to an entitlement to a percentage out of the total CBT settlement. They have reduced their claim to a lesser sum being a percentage of the US$250,000.00 portion. If the claim for the greater sum had not been abandoned during the course of the hearing, the Court would have rejected such claim and limited the plaintiffs’ entitlement to a percentage of the US$250,000.00.
3.6 It is clear that the entire CBT settlement sum was paid to the solicitors acting for the defendants. Thereafter those defendants exercised control over the entire settlement sum. Mr. Meagher stated that he proceeded on the basis that he should and did get the agreement of the defendants, other than Mr. Moynihan, to the amount of his fee, which was agreed at IR£60,000.00 and “that the fee was quickly agreed”. It is common case that the plaintiffs are entitled to receive a portion of the said settlement. A cheque was eventually tendered in purported discharge of the plaintiffs’ entitlement. This will be dealt with later in the judgment.
3.7 The Court is satisfied that the facts of this case give rise to a situation where the defendants have received monies, which in equity belong to others and that therefore they are obliged to pay them over to those other persons. This is a case where the law can impute to the defendants a promise that money received by them should be paid over to the plaintiffs, (See Sinclair v. Brougham [1914] AC 383). The circumstances of this case confirm that a portion of the monies received by the defendants was received by them as money for the use of the three plaintiffs. In those circumstances the plaintiffs are entitled to an order directing that the relevant portion of the said funds due to each of them is to be paid over to them by the defendants.
3.8 The defendants, on receipt of the US$850,000.00, acted on the basis that they were the beneficiaries or absolute owners of that entire sum and free to deal with that sum as they wished. The evidence before the Court is that they were advised to that effect by a lawyer on the 15th June, 1998. The Court does not accept that the defendants were so entitled. Such a contention is at complete variance with the plea contained in those defendants’ defence which acknowledges that these plaintiffs were entitled to a portion of the US$250,000.00. Such acknowledgment is to an entitlement and not to a gift or an ex-gratia payment. The claim of an absolute entitlement is also inconsistent with the legal obligation to pay out such sums as were due to each of the plaintiffs. The defendants were not free to deal with the monies, as they saw fit, but in relation to a portion of it were under a fiduciary duty. It is clear that the advice which the defendants received to the effect that the entire of the UR$850.000.00 could be dealt with as they saw fit, gave rise to the situation which ultimately led to these proceedings. On the 25th June, 1998, the solicitors who acted for the defendants received two bank drafts in settlement of the CBT proceedings. One was for US$600,000.00 and the other US$250,000.00, together covering the two sums due under the settlement agreement. Thereafter, the defendants proceeded, on legal advice, to deal with the entire US$850,000.00 sum as if it was their own. That approach permitted a course of conduct by which those defendants directed immediate substantial payments to themselves. They proceeded on the basis that there was no obligation to make such payments to the plaintiffs.
4.1 Acting on the basis that they had complete control over how the US$850,000.00 would be dispersed, the defendants divided the entire of the UR$600,000.00 together with a small amount of accumulated interest to the 16th July, 1998, between themselves on a pro-rata basis based upon their percentage investment in the BES scheme. The defendants only had regard to the BES investment made by themselves in deciding the percentage due. That resulted in the first named defendant receiving US$183,629.00, the third named defendant receiving US$115,447.00, the fourth named defendant receiving US$56,487.00 and the fifth named defendant receiving US$247,290.00. All payments were made within weeks of receipt of the settlement monies. No deductions were made out of the US$600,000.00 sum for any expenses or legal costs.
4.2 At the time that the first named defendant obtained the signature of the first named plaintiff on his waiver agreement, it had been stated by the first named defendant in a hand written note signed by him, that the first named defendant on behalf of the plaintiffs in the CBT proceedings, that is on behalf of the first, third, fourth and fifth named defendants herein, agreed to pay IR£14,178.00 out of the proceeds of the settlement. However, since it was understood that the final deductions had not been calculated, it was also expressly stated that the final figure was to be communicated to Charles Clements on the following day, which was the 23rd June, 1998. In fact no final figure was communicated nor was there any agreement in relation to same. What is significant is that it is apparent that Charles Clements knew and agreed to have expenses and legal costs deducted from the settlement figure. Mr. Clements states in evidence that he had “no objection to any legitimate expenses”. Mr. Seigne stated that he knew that there would be deductions and that “he recognised something was due to Barry Meagher”. The evidence established that whilst Charles Clements and the other two plaintiffs all agreed or acknowledged that they were proceeding on the basis that there would be deductions for expenses and legal costs, that at no time was it intimated or suggested that such deductions would only be made out of the US$250,000.00 portion of the settlement monies. The first named defendant in his evidence confirmed that none of the plaintiffs were informed that the deductions, which all agreed were to be made, were to be made solely from the plaintiffs’ and Mr. Sweeney’s portion of the settlement monies.
4.3 All the persons who gave evidence before this Court gave evidence in a straightforward and truthful manner and did so without endeavouring to slant the facts towards any particular legal plea. As a result of that, there was almost complete agreement between the witnesses as to factual matters. Each of the three plaintiffs acknowledged that they proceeded on the basis that there would be a deduction for expenses and legal costs made out of the CBT settlement funds. The background to the plaintiffs’ understanding included not only the fact that the precise figures could not be given in advance of the concluded settlement due to the absence of definite figures for expenses and legal costs but also that each of the three plaintiffs had known in May, 1995, when they signed the letter of the 15th May, 1995, that it was envisaged that there would be an approximate fifteen per cent deduction to cover expenses and legal costs. Each of the plaintiffs also knew that the CBT settlement stated on its face that CBT were to be responsible for taxed costs in the Court proceedings. It followed that all three plaintiffs proceeded on the basis and acknowledged that there would be deductions which would be for expenses and legal costs to be taken out of the total settlement figure. The three plaintiffs knew that Barry Meagher had expended very considerable time and effort in and about obtaining the CBT settlement over a substantial number of years and that such time and effort pre-dated the High Court proceedings. It was against that background that the three plaintiffs acknowledged that there would be deductions. In relation to legal costs it was apparent that such legal costs would relate to solicitor and own client costs which would be due over and above the taxed costs which would be recovered from CBT on foot of the settlement. The Court is satisfied that given that the plaintiffs were never informed that the expenses and legal costs were to be deducted solely from the US$250,000.00 portion of the settlement, that the plaintiffs could not have understood that the same would occur nor did they agree to same. The Court is satisfied that the waivers were signed by the plaintiffs in circumstances where each of them had agreed to pay their pro-rata percentage of the expenses and legal costs together with the defendants and Mr. Sweeney.
4.4 The third named defendant seeks to avoid any legal liability to the plaintiffs on the basis that he had no dealing whatsoever with him. It is claimed on his behalf that the evidence establishes that any privity of contract which was concluded was between the plaintiffs and the first named defendant only. It is clear from the evidence of the first named defendant that at the time that he obtained the waivers from the three plaintiffs that he was acting on behalf of all the plaintiffs in the CBT action, that is on behalf of the first, third, fourth and fifth named defendants herein. Indeed in the hand-written note, signed by the first named defendant on the 22nd June, 1998, which was given to Charles Clements, Mr. Meagher indicated that he was doing so on behalf of the plaintiffs in the CBT action. It is also the case that the third named defendant, together with the first, fourth and fifth defendants, took effective control of the entire settlement funds once they had been paid to their solicitors. Thereafter, the defendants acted together in determining how to deal with such funds. In the light of the findings made by this Court in relation to fiduciary duty and in relation to money had and received, the Court is satisfied that the third named defendant is equally liable to the plaintiffs as are the first, fourth and fifth named defendants.
4.5 It is common case that the plaintiffs signed waivers on an understanding that there would be unspecified deductions in respect of expenses and legal costs. That understanding is succinctly acknowledged in the written submissions of the plaintiffs where it is stated:-
“The evidence of the plaintiffs is that, when they signed the waivers, they were informed and accepted that there would be unspecified deductions from the settlement monies in respect of costs and expenses.”
The Court has already determined that the acceptance by the plaintiffs was that the deductions would be from the total settlement sums and not exclusively from the US$250,000.00 portion. The defendants do not contend nor do they seek to make the case that the plaintiffs knew or agreed to the deductions being made exclusively out of the US$250,000.00 portion. The defendants’ case is to the effect that each of the plaintiffs acknowledged in evidence that the first named defendant was entitled to make a reduction for costs, though un-quantified. It was common case that the plaintiffs knew that there would be deductions but that same had not been quantified or identified prior to the payment of the settlement monies. The Court is satisfied that it follows from the undisputed factual evidence that each of the plaintiffs was aware that deductions for expenses and legal costs would be made out of their portion of the settlement monies but that their agreement to make such provision was and could only reasonably have been understood to extend to such deductions being made pro-rata by all the plaintiffs, Mr. Sweeney and the first, third, fourth and fifth named defendants and out of the entire CBT settlement monies. Mr. Meagher never told any of the plaintiffs that the defendants had agreed among themselves that all expenses and legal costs were to be paid exclusively out of the US$250,000.00 portion. There was no agreement to same and the agreement which binds the plaintiffs relates to a pro-rata deduction from the total sum paid by CBT of US$850,000.00.
4.6 The evidence demonstrates that there is no dispute as to the quantum of the two deductions. The two deductions were IR£60,000.00 payable to Mr. Meagher for his work in and about pursuing the claim against CBT both before and after the commencement of proceedings and a figure of IR£20,000.00 as solicitor and own client costs incurred by the solicitors who acted for the defendants in their action against CBT. Those sums were acknowledged as reasonable. There was no cross examination by the plaintiffs’ counsel to suggest that the two sums were unreasonable and no submissions were made to that effect.
4.7 The defendants agreed the sum of IR£60,000.00 as being an appropriate fee for Mr. Meagher and arranged for it to be discharged out of the then retained funds on the 7th September, 1998. By that date the only retained funds were to the US$250,000.00 portion of the CBT settlement together with interest thereon. The quantification of Mr. Meagher’s expenses at IR£60,000.00 had been identified as a proposed figure no later than the 11th August, 1998. By that date the first named plaintiff incorporated a figure for costs to B. Meagher in the identified sum of IR£60,000.00 in various worksheets prepared by him. At no time was there any issue as to such sum being excessive.
4.8 All parties understood that there would be a deduction for legal costs. O’Grady Solicitors set about identifying such costs and instructed their cost drawer to calculate same. The cost accountants had prepared a detailed bill of costs by the 22nd September, 1998, which is the date appearing on the Bill of Costs. Ultimately those costs were quantified by agreement between the defendants and O’Grady Solicitors. The sum agreed was IR£20,000.00. That sum was agreed by the 19th April, 1999. It was the same sum as (IR£20,000.00) had been provided in total by the four plaintiffs in the CBT action on account to their solicitor. Since such sum had, in fact, been pre-paid, once the figure was agreed it was necessary to repay the defendants. Repayment was made out of the retained funds to the first, fourth and fifth named defendants and a private arrangement was concluded between O’Grady Solicitors and the third named defendant. The Court is satisfied that such legal costs could and should have been quantified and agreed at an earlier date. After the expenses of Mr. Meagher had been agreed and discharged in September, 1998, the only matter which remained outstanding was the quantification and agreement of the solicitor and own client costs to be deducted out of the settlement funds. A period up to and including the 5th October, 1998, would have been more than sufficient to allow such costs to be quantified. By that date, the 5th October, 1998, all deductions should have been identified and quantified and the defendants acting together should have been in a position to discharge the sums due to each of the plaintiffs out of the retained settlement funds together with accumulated interest up to that date. The documents which are available to the Court indicate that interest at the rate of 5.75% was being obtained on the deposited settlement sum for a period between the 25th June, 1998, the date on which payment should have been made, and the 5th October, 1998. The Court therefore proposes to allow interest on the sums due to the three plaintiffs from the 25th June, 1998 to the 5th October, 1998, at a rate of 5.75%. The actual sums to which each of the plaintiffs are entitled out of the US$250,000.00 payment are hereinafter set out.
4.9 The plaintiffs acknowledge that part of the expenses should be deducted from any sums due to them. Those expenses should be calculated as having been paid on the 5th October, 1998, which is the date upon which the Court has identified as the date when all the funds could properly have been paid out in full to the plaintiffs with all deductions identified and discharged by that date. It was accepted by counsel on behalf of the plaintiffs that each of the plaintiffs had a liability for portion of the IR£80,000.00 expenses and legal costs. Such portion is to be calculated on 29.4% of the expenses and legal costs and thereafter divided pro-rata between the plaintiffs and Mr. Sweeney. The sum of US$250,000.00 is 29.4% of US$850,000.00.
4.10 The settlement sum was received from CBT on the 25th June, 1998. The defendants proceeded to disregard their obligations to the plaintiffs and neither kept them fully informed nor did they seek to pay over the sums properly due to them. Mr. Meagher could identify, in evidence, no reason “to hold the money”. As of April, 1999, Mr. Meagher refused to pay out “known sums” unless the plaintiffs accepted the sums offered in full settlement. The efforts to deal with the dispute were limited and the two meetings held produced no agreement. The refusal to pay anything unless the plaintiffs accepted the defendants’ offer resulted in a considerable delay in any sum being proffered to the plaintiffs. In fact no payment, not even a payment on account, was proffered to the plaintiffs until the 5th October, 2001, when a cheque was forwarded to the solicitors acting for the plaintiffs. That was almost a year and a half after these proceedings had commenced. The Court is satisfied that a reasonable period should be allowed for the quantification of the expenses and legal costs but that once same could have been reasonably achieved, the entire sums due to the plaintiffs together with accumulated interest should have been discharged. No argument has been advanced on behalf of the defendants to justify the delay in making any payment to the plaintiffs. The defendants, through their defence, acknowledge that sums were due to the plaintiffs and the facts demonstrate that the defendants were in control of such funds as and from the 25th June, 1998, and that any unquantified deductions could and should have been calculated by the 5th October, 1998, and that in those circumstances the failure to pay out forthwith monies due and owing to the plaintiffs represented a clear breach of fiduciary duty. The defendants are responsible for such breach and are liable to the plaintiffs for interest on the sums which should have been paid to the plaintiffs on the 5th October, 1998, at the Court interest rate up to and including the 5th October, 2001.
4.11 The defendants dealt with the entire CBT settlement funds as if they had complete discretion, when in fact they were under a legal duty to deal with portion of the funds in the interests of the plaintiffs and to their benefit. Such duty included the obligation for prompt payment to the plaintiffs once the sums had been received and appropriate discounts calculated and paid. The duty of the defendants would also extend to an obligation to account for all interest earned on the funds up to the date of payment out.
4.12 The delay cannot be justified on the basis of legal advice. Nor is there any basis for claiming that the delay was caused by the necessity to agree expenses and legal costs. The facts demonstrate that funds properly due to the plaintiffs were retained under the control of the defendants when they should have been paid out. There was no justification for such a delay and therefore the contacts between the parties during the period from June, 1998 to October, 2001, are of no real relevance other than that it establishes a continuing refusal to pay out any sum.
4.13 The plaintiffs commenced proceedings by plenary summons dated the 7th April, 2000, and a statement of claim was delivered on the 15th February, 2001. There was a delay in the defendants filing a defence which resulted in judgment in default of defence being brought before the Court. That finally had the consequence of the solicitors, then acting for the first, third, fourth and fifth named defendants, L.K. Shields, sending a letter of the 5th October, 2001, to the plaintiffs’ solicitors enclosing a cheque to cover three stated amounts. The sum identified for Mr. Clements was for IR£21,257.00, for Mr. Seigne, IR£22,003.00 and for Mr. Bryant, IR£31,553.00, totalling IR£74,813.00. That sum was identified as being the total sum due to all three plaintiffs following deduction of legal costs and expenses. However, such deductions were neither quantified nor explained and the letter went on to indicate that the solicitors acting for the plaintiffs should take their clients’ instructions as to whether they intended to continue with the proceedings. The letter was responded to by Vincent & Beatty, on behalf of the plaintiffs, on the 15th October, 2001, wherein they indicated that to enable them to take their clients’ instructions in relation to the letter from L.K. Shields that a detailed letter might be provided setting out the basis upon which the monies had been calculated and requesting proposals in relation to the balance of the plaintiffs’ claims. By that stage the claim being pursued by the plaintiffs, as set out in the statement of claim, included a claim over portion of the US$600,000.00 settlement sum paid by CBT. It did so on the basis of a calculation of percentage interest based upon the original investment in the BES scheme as opposed to the relevant portion of the US$250,000.00 payment. That claim was continued to the hearing of the action and was only abandoned during the course of the case. This had the effect of somewhat prolonging the hearing. It also caused the parties to concentrate on that issue to the detriment of how the funds proffered might be dealt with and the remaining matters in dispute isolated and considered. In fact the cheque which had been proffered with the letter of the 5th October, 2001, in purported settlement was never cashed and merely retained on the file of the plaintiffs’ solicitors. In evidence the solicitor dealing with the matter indicated that he had no explanation as to why that course of action was adopted. Neither the plaintiffs’ solicitors nor the defendants’ solicitors nor the parties endeavoured to identify what issues truly remained outstanding following the attempt to pay a total of IR£74,813.00 by letter of the 5th October, 2001. The evidence before the Court indicated that the defendants, and in particular Mr. Meagher, was unaware that the cheque for IR£74,813.00 had not been cashed until a short period before the trial commenced in 2008. Mr. Meagher believed the cheque had been cashed and nobody told him otherwise. The evidence before the Court established that no party addressed the issue as to how funds which were acknowledged to be due to the plaintiffs should be dealt with pending the determination of the case. The Court is satisfied that a fair and proportionate way in which to deal with this matter is to provide for continuing interest as and from the 5th October, 2001, only on the balance due to each of the plaintiffs as of that date over and above the individual sums identified in the letter of the 5th October, 2001. The position thereafter was at least in part caused by the plaintiffs’ continued assertion of a non-sustainable claim and by a failure of all of the parties to make any real effort to ascertain what were the outstanding issues between the parties.
5.1 The plaintiffs also claim against the second named defendant, Carl Moynihan, and do so on the basis that his chartered accountancy practice with Barry Meagher had an involvement in this case and also that he was a beneficiary of a portion of the CBT settlement monies. Carl Moynihan had no involvement with CBT and at no time invested in the BES scheme which gave rise to the proceedings against CBT. He was not a party to those proceedings. Mr. Moynihan’s involvement arises out of the fact that when the agreed sum of IR£60,000.00 as payment for expenses was paid, Mr. Meagher arranged for half that sum to be paid to Mr. Moynihan. In putting in place such an arrangement use was made of the partnership notepaper, that is, the notepaper of Meagher Moynihan. One letter of the 11th August, 1998, on such notepaper is a letter to William O’Grady, solicitor of O’Gradys which refers to the fact that the IR£60,000.00 was to be transferred to an account in the name of Meagher Moynihan. The plaintiffs also seek to rely on a handwritten letter from Mr. Moynihan dated the 31st August, 1998, re; a CBT payment to Meagher Moynihan of IR£60,000.00. That correspondence merely indicates how the agreed sum of IR£60,000.00, identified as being due to Mr. Meagher, was to be discharged. It was within Mr. Meagher’s power and gift to direct that half that sum be paid to Mr. Moynihan. He did so because of a private understanding.
5.2 It is contended by the plaintiffs that Mr. Moynihan had no right or title to any portion of the settlement proceeds and that is indeed correct. What is clear from this judgment is that Mr. Meagher had an entitlement to receive out of the total proceeds IR£60,000.00 in discharge of the expenses incurred by him. He was free to deal with that sum as he saw fit and by choosing to have half of it paid to Mr. Moynihan, he does not create any legal liability for Mr. Moynihan. The Court is satisfied that Mr. Moynihan does not hold the IR£30,000.00 which he received as a constructive trustee for the plaintiffs. Such constructive trust can not arise in circumstances where it is acknowledged by all parties that Mr. Meagher was entitled to receive IR£60,000.00 out of the CBT settlement funds. Given such entitlement it follows that when he was paid he was free to arrange how such sum was to be used. The Court is satisfied that there is no liability on the part of Mr. Moynihan and all claims against him should be dismissed.
6.1 In the light of the above findings the Court proposes to approach the award of damages to the plaintiffs on the following basis. Firstly it is necessary to ascertain the appropriate proportion of the US$250,000.00 to which each of the three plaintiffs is entitled. That proportion is based upon the extent of the original BES investment of the three plaintiffs and Mr. Sweeney. Mr. Clements had a 7.01% share of the total BES investment, Mr. Seigne a 7.26% share, Mr. Bryant a 10.41% share and Mr. Sweeney a 10.65% share. A division of the US$250,000.00 based upon those respective percentages results is Mr. Clements having a US$49,604.00 share, Mr. Seigne a US$51,373.00 share and Mr. Bryant a US$73, 663.00 share.
Secondly, the Court is satisfied that each of the three plaintiffs is entitled to receive interest on said sums for the period from the 25th June, 1998 to 5th October, 1998, at the rate of 5.75%. That arises from the fact that the CBT settlement payment was made on the 25th June, 1998, and the Court is satisfied that thereafter such sum should have been invested and the plaintiffs should have pro-rata benefited from any interest earned on the investment of the US$250,000.00 prior to it being paid out. The documents available to the Court demonstrate that the original deposit of US$850,000.00 made by the solicitors acting for the defendants earned interest at the rate of 5.75% and the Court therefore deems it appropriate that that rate should apply for the period from the 25th June, 1998, to 5th October, 1998. The sums identified in the previous paragraph and the sums earned for interest on the above calculation should be added together.
Thirdly, the total sums achieved by the above additions should be converted into Irish Pounds, from US Dollars, as of the 5th October, 1998.
Fourthly, in the light of the above findings it is both necessary and appropriate to deduct expenses from each of the sums identified in Irish Pounds as of the 5th October, 1998. Those expenses are to be calculated on the basis that the plaintiffs are responsible for their portion of IR£80,000.00. To obtain that figure it would be first necessary to identify 29.41% of IR£80,000.00 which results in a figure of IR£23,528.00 and liability for such costs and legal expenses should be divided pro-rata between the three plaintiffs and Mr. Sweeney. That would result in Mr. Clements being responsible for IR£4,668.00, Mr. Seigne being responsible for IR£4,835.00 and Mr. Bryant being responsible for IR£6,933.00, totalling IR£16,496.00.
Fifthly to identify the sums due to the plaintiffs it is necessary to deduct the three sums identified for expenses and legal costs attributable to each of the three plaintiffs from each of the Irish Pound sums attributable to each of the plaintiffs after the conversion referred to above.
Sixthly it is necessary to calculate interest on each of the three sums identified in the proceeding paragraph on the basis of Court rate interest for the period from the 5th October, 1998 to 5th October, 2001. That arises from the fact that the Court is satisfied that the sums should have been paid out to the plaintiffs as of the 5th October, 1998, and that no payment was proffered until the 5th October, 2001 and that therefore interest at the Court rate should be allowed on the entire of such sums up to the 5th October, 2001.
Seventhly, the Court is satisfied that after the proffered payment made by the letter of the 5th October, 2001, that different circumstances prevailed and that any interest thereafter should be on the sums obtained by deducting the proffered payments in respect of each of the three plaintiffs from the sums attributable to each of the three plaintiffs on the conversion into Irish Pounds as of the 5th October, 1998, and that interest at the Court interest rate should be payable thereon from the 5th October, 2001 to the 25th July, 2008.
6.2 The Court has already received calculations from the parties based upon the approach indicated in the preceding paragraphs. The Court will hear the parties in relation to the precise calculations prior to finalising its order. The Court will also hear the parties in relation to the issue of costs. The Court proposes to grant judgment to the plaintiffs in respect of the sums to be identified from the approach herein before set out. Such judgment to against the first, third, fourth and fifth named defendants.
McMullen -v- McGinley
[2005] IESC 10
JUDGMENT delivered on the 15th day of March, 2005 by FENNELLY J.
This is an action brought by the Appellant against his former counsel, now deceased. The present appeal is taken from the dismissal of that action by McGuinness J in the High Court. The proceedings have been reconstituted by consent, with Mr McGinley now being named to represent the estate of the deceased. I propose to refer to the parties as Mr McMullen and Mr Clancy.
The appeal represents the culmination of a long and, from Mr McMullen’s point of view, extremely unfortunate saga of litigation. Mr McMullen’s purchase of a property near Tullamore led him into dispute with and legal action against the vendors concerning the use of an avenue leading to that property. He settled his action against those defendants on terms which, contrary to his instructions, did not allow him to re-enter the action. Arising from this, he sued his solicitors, but his claim failed largely because Mr Clancy, the counsel instructed by those solicitors, gave evidence accepting responsibility. Hence the present action against the latter. It will be necessary to consider the history in some detail in order to see how things went wrong for Mr McMullen, as they undoubtedly did, but more particularly in order to discern whether the fault can now be laid at Mr Clancy’s door. In the present action, Mr McMullen has at all times acted in person, without any legal representation.
In spite of some twists in the story, it has to be said at the outset that Mr McMullen’s claim against Mr Clancy is not, at least not in the ordinarily understood sense, a negligence action. This became clear at the hearing of the appeal. Mr McMullen is principally outraged -and it is not too strong a word – at the fact that Mr Clancy gave evidence against him, an act which he regarded as a betrayal. Far from blaming Mr Clancy for the mistake in the settlement of the original action, Mr McMullen says that Mr Clancy’s acceptance of responsibility was false. He also claims that there was a conspiracy mounted against him by Mr Clancy and a number of other persons including his former solicitors. A principal plank of his appeal was a copy of a letter from the solicitors who had acted for Mr McMullen’s former solicitors to the insurers of the latter, which is claimed to evidence such a conspiracy.
Mr McMullen’s complaints are intimately linked with his original action regarding the property near Tullamore. I must summarise that history.
In the year 1972, Mr McMullen negotiated a thirty-five lease from the Charleville Estate Company of a property known as Charleville Castle, consisting of some five acres of land and a Castle in severe need of repair. Mr McMullen undertook to put the Castle in repair and he spent some IR£80,000 in doing so. The Estate Company was owned by the Hutton Bury family, who retained about one thousand acres of surrounding land. To quote Mr McMullen, it was “an estate within an estate.” The surrounding land included the main avenue leading from the Tullamore Town Entrance to the Castle, which was about one mile long, over which Mr McMullen, as lessee of the Castle, was granted a right of way in common with others. The Hutton Bury family’s Estate Company was the servient owner.
It had, however, been customary for many years for local residents, in particular people from the town of Tullamore, to frequent the estate in what Mr McMullen considered to be excessive numbers. He complained that this user constituted a nuisance to him as occupier of the Castle and grounds. He complained about rude and insulting and, to a certain extent indecent, behaviour. Some people trespassed on the area leased to him. However, in 1976, he was allowed by the Estate Company to build a wall around his take. The problems on and about the avenue continued, however. Mr McMullen thought that the nuisance was unbearable and that it destroyed his life. However, the Hutton Bury family had tolerated extensive access by the public to the estate.
In 1982 Mr McMullen brought an action against the Charleville Estate Company. His solicitors were Kent Carty and Co, who took over carriage of the proceedings from another firm. Mr Clancy was, ultimately, the senior counsel who appeared in the action. The two points to note about this action are that: firstly, Mr McMullen did not sue the persons who were committing the nuisance, but the owners of the estate; secondly, Mr McMullen did not own the avenue; he simply had a right of way over it.
Not surprisingly, therefore, as has been established in both subsequent actions against Kent Carty and Co and Mr Clancy respectively, two successive senior counsel retained by Kent Carty and Co to advise and represent Mr McMullen were pessimistic about the chances of success in the claim. Mr Robert Barr, Senior Counsel, later Mr Justice Barr, advised in January 1985 that the nuisance not be proceeded with. According to the evidence of Ms Pamela Madigan, solicitor of Kent Carty and Co, he had very little faith in the action. About this time, Mr McMullen was introduced to Mr Clancy. He consulted him privately, without the intervention of a solicitor. Mr Clancy was much more encouraging about the prospects of success.
Mr McMullen communicated to Kent Carty and Co his wish to retain Mr Clancy. Kent Carty and Co were reluctant to do so, stating that they did not consider the action to be within his area of expertise. Mr Barr was appointed to the bench. A compromise was reached between Mr McMullen and Kent Carty and Co, whereby Mr Eoghan Fitzsimons, Senior Counsel, would lead and Mr Clancy would be second senior.
A consultation took place at the Four Courts about a week before the scheduled hearing of the action in July 1985. Mr Fitzsimons stated very clearly that he had no confidence in the action. He would not go into court in a case in which he had no faith. He said that it would be dishonourable to take Mr McMullen’s money. He handed back his brief and withdrew from the case. Mr Clancy then led for Mr McMullen with a junior.
The action proceeded to hearing on 10th July 1985 before Mr Justice Costello. While some views have been expressed, for example, that the case did not go well for Mr McMullen on the first day, but improved on the second day, these are not matters to which any importance can be attached. The fact is that, following an approach from counsel for the defendant on the third day, 12th July 1985, negotiations commenced. These led to a settlement which was reduced to writing. The settlement offered Mr McMullen the opportunity to erect a gate on the avenue and to put a “Private” notice on it, presumably in an attempt to permit Mr McMullen to control the nuisance of which he had complained. Mr Clancy, in particular, but others also saw this as a very considerable success for Mr McMullen. Ms Madigan, solicitor of Kent Carty and Co, gave evidence in the High Court that the settlement was obtained in the face of what looked like a “very blatant defeat.” However, it is perfectly clear, as Mr McMullen insisted on that day and, as he has repeated ever since, that he wished to be able to re-enter the action if the settlement did not work out. Unfortunately, the relevant paragraph, number 9, of the settlement provided only:
“Each party hereto shall have liberty to apply.”
This paragraph did not, as should have been clear to all concerned, permit Mr McMullen to re-enter the action. In that respect, therefore, the settlement was directly contrary to Mr McMullen’s express instructions.
There have been different versions of the events surrounding the making of this settlement. Mr Clancy, according to his evidence in the action against Kent Carty and Co, (hereinafter “the negligence action”) said that he had advised Mr McMullen of the terms in a walk outside the Four Courts. Mr McMullen has always denied that this ever took place. Ms Pamela Madigan was the solicitor in attendance from Kent Carty and Co. Mr McMullen gave evidence in the present action before McGuinness J that she advised him that the action could be re-entered. This evidence was confirmed by Ms Madigan, who added, however, that, upon inquiry from Mr McMullen, she asked Mr Clancy: “Mr McMullen wants to know if this goes wrong can he get back into court.” She continued: “Mr Clancy said yes and I went back to Mr McMullen and said yes.” On that basis, the settlement was signed. Insofar as this partial conflict of evidence is concerned, it relates only to the dispute between Mr McMullen and Mr Clancy in the evidence in the negligence action. It is important to note that Carroll J, in her judgment in that action dated 13th July 1993, found in favour of Mr Clancy. She found that the conversation outside the Four Courts between him and Mr McMullen had taken place. Mr Clancy swore that he had advised Mr McMullen that “if the terms of the settlement were not implement they could certainly go back into court and carry on again.”
However, Mr McMullen was dissatisfied, for reasons which do not relate to any issue now to be decided, with the manner in which the settlement operated over the ensuing months. He considered it to be ineffective in dealing with his complaints. He instructed Kent Carty and Co to have the matter re-entered.
Kent Carty and Co accordingly, on Mr McMullen’s instructions moved in late 1986 to have the original action re-entered. That application was due to be heard by Mr Justice Costello in February 1987. In the meantime, Ms Madigan met junior counsel for the defendant, who alerted her to the fact that the settlement did not, in fact, provide liberty to re-enter, but only “liberty to apply.” Her evidence in the High Court was to the effect that she had consulted Mr Clancy once more and that he advised that this would not be a problem. In the event, Costello J ruled, as was inevitable, that the action was settled on terms which only allowed “liberty to apply” in respect of the terms of the settlement and not liberty to re-enter the action. Accordingly, he had no jurisdiction to hear the action further. It had been settled.
The unfortunate result of all this was that, whatever the weakness of his original claim, Mr McMullen had now been deprived, through no fault of his own, of the opportunity to have the nuisance action heard and determined on its merits. This resulted from the legal mistake in drafting and advising on the settlement. It may be material to record at this point, because of its potential relevance to a limitation defence, the extent of Mr McMullen’s knowledge of Mr Clancy’s responsibility for this mistake. I speak conditionally because Mr McMullen does not appear ever to have contemplated that Mr Clancy, as distinct from Kent Carty and Co, was negligent.
The relevant evidence is, firstly, that of Ms Madigan in the High Court. She said that, on the day Costello J refused the application to re-enter, she spoke to Mr McMullen, who, like her, was shocked at what had happened and that she told him that Kent Carty and Co had “been wrongly advised by Mr Clancy.” She added that “the responsibility for that was with Mr Clancy and with him [Mr McMullen] for nominating Mr Clancy.” The learned High Court judge does not appear to have made any express finding regarding this evidence. However, it is quite clear, on Mr McMullen’s own evidence, that he was fully aware by the month of May 1987 that Kent Carty and Co were firmly putting the blame on Mr Clancy.
In a telephone conversation between Mr McMullen and Mr Clancy on or about 25th May 1987, and taped by Mr McMullen, Mr Clancy stated that he understood that Mr McMullen intended suing him. In the course of that lengthy conversation, Mr McMullen acknowledged that he had been told by Kent Carty and Co that they were not responsible for the error in the settlement, but that he, Mr Clancy, was.
On 29th June 1988, Mr McMullen, employing a new firm of solicitors, commenced an action for damages for negligence against Kent Carty and Co. The central allegation against the defendants was their alleged failure to ensure that the terms of the settlement allowed Mr McMullen to re-enter his nuisance action. Kent Carty and Co, in their defence to that action, filed on 17th April 1989, firmly placed entire responsibility for the negotiation of and advice concerning the settlement on Mr Clancy. This Court has not been given any information about the reasons for Mr McMullen’s decision to sue only Kent Carty and Co to the exclusion of Mr Clancy. It is, of course, Mr McMullen’s right to reserve such matters to himself. It is fair to note, however, that Mr McMullen does not seek to place any blame on the solicitors who represented him in the action against Kent Carty and Co for the decision not to include Mr Clancy as a defendant in that action. As already seen, Mr McMullen was fully aware of the disastrous mistake in the settlement and of the fact that Kent Carty and Co were assigning responsibility for it to Mr Clancy. It seems, therefore, that Mr McMullen made a considered decision to sue the first rather than the second. This view received further confirmation during argument at the hearing of the appeal.
Giles Kennedy and Company, solicitors, acted for Kent Carty and Co in the defence of Mr McMullen’s action against them. It was the evidence both of Mr Hugh Carty and Ms Pamela Madigan of that firm in the High Court in the present action that the entire handling of the defence of the claim was left to Giles Kennedy & Co and that neither of them took part in the preparation of the defence or the selection or calling of witnesses. Mr Clancy was called before Ms Justice Carroll on 7th May 1992 as a witness for the defence. He did so without raising any question as to the privilege of his client, though it is fair to point out that Mr McMullen’s counsel took no objection. Mr Clancy gave the evidence already mentioned regarding the advice given on a walk outside the Four Courts about the re-entry of the action. He also accepted responsibility for the erroneous wording.
The evidence of Mr Clancy was decisive so far as Mr McMullen’s claim against Kent Carty and Co was concerned. Carroll J held that:
“…having relied on the Senior Counsel’s Advice, (the Counsel whom the Plaintiff insisted on briefing), there was no negligence on the part of the defendants in respect of the re-entry.”
Mr McMullen appealed that decision to this Court. Though he had been represented by solicitor and counsel in the High Court, he appeared in person on the appeal. By order dated 27th January 1998, the Court dismissed Mr McMullen’s appeal. The judgment was delivered by Lynch J, with whom the other members of the Court agreed.
As appears from the judgment of Lynch J, it is clear that Mr McMullen’s “main submission was that Mr Clancy Senior Counsel……ought not to have given evidence on being called on behalf of [Kent Carty and Co] in the case before Carroll J having regard to [Mr McMullen’s] privilege of confidentiality regarding communications between lawyer and client.” He also contended that Mr Clancy “was in breach of the Code of Conduct for the Bar of Ireland.” As will be seen later, this replicates a substantial part of Mr McMullen’s argument in this Court. In addition, he argued that Kent Carty and Co had been negligent in respects which are no longer material to the present case.
Lynch J dealt with Mr McMullen’s complaints concerning Mr Clancy’s giving of evidence for Kent Carty and Co as follows:
“A lawyer, whether solicitor or barrister, is under a duty not to communicate to any third party information entrusted to him by or on behalf of his lay client. This privilege of confidentiality belongs to the client not the lawyer. It may be waived by the client not the lawyer but such waiver may be implied in certain circumstances as well as being express. When a client sues his solicitor for damages for alleged negligence arising out of the conduct of previous litigation against third parties and especially as in this case arising out of the settlement of such previous litigation the client thereby puts in issue all the communications as between the solicitor and the client and the barrister and the client and also as between the barrister and the solicitor relevant to the settlement of the case and thereby waives the privilege of confidentiality…… It would be manifestly unjust and wrong if the solicitor was precluded by the rule of confidentiality from making his case before the court that both he and counsel advised the client X.Y.Z. and that the settlement was indeed advantageous to the client. These facts are put in issue by the client who thereby waives his privilege of confidentiality.”
Lynch J went on to state that the same considerations would apply in favour of a barrister if he were to be sued by his client, though that had not arisen in that case. He also observed that the counsel who appeared for Mr McMullen in the action before Carroll J had made no objection to Mr Clancy giving evidence, stating that he had little doubt that counsel “fully appreciated the legal position.” Accordingly, Lynch J held that Mr McMullen’s submission that Counsel should not have given evidence in the High Court [was] “misconceived and wrong.” The Court also rejected Mr McMullen’s claims that Kent Carty and Co had been negligent. It commented on the weakness of Mr McMullen’s original case against the Charleville Estate Company, observing, inter alia, that Mr McMullen “appeared to be under the misapprehension that a right of way over the estate avenue gave him more or less exclusive possession of the avenue whereas a right of way confers merely what its name implies that is to say a right to pass and re-pass along the defined way.”
Following the determination of the appeal, it had been finally and conclusively determined that Mr McMullen could not succeed against Kent Carty and Co in any claim based on alleged negligence in and about the negotiation of the settlement or advice about it. This was not because the settlement had not been mistakenly drawn up contrary to Mr McMullen’s instructions – clearly it had – but because the fault lay not with Kent Carty and Co but, as Mr Clancy himself frankly acknowledged, with Mr Clancy. Mr McMullen did not, however, at any time commence any proceedings against Mr Clancy. The six year limitation period provided by the Statute of Limitations, 1957 ran at the earliest from 12th July 1985 (the date of the settlement) or at the latest from February 1987 (when Costello J refused to re-enter the action). Whichever be the case, Mr McMullen was fully aware in May 1987 at the latest that Kent Carty and Co were placing the blame on Mr Clancy.
In the interval between the High Court hearing before Carroll J and the appeal in the same action, Mr McMullen made complaints against Mr Clancy to the Barristers’ Professional Conduct Tribunal. For reasons explained later, it is neither necessary or appropriate to discuss that procedure in any detail. The Tribunal found Mr Clancy to have been in breach of certain provisions of the Code of Conduct for the Bar of Ireland, essentially by giving evidence without protesting his obligation to give evidence or claiming privilege and by taking instructions directly from his client. However, in a passage substantially anticipating the reasoning of Lynch J already quoted, the Tribunal stated that Mr McMullen “must have apprehended that, if he proceeded with his claim against his said solicitors, [Mr Clancy] would be called to give evidence.” It concluded that Mr McMullen by pursuing his claim “tacitly acknowledged that [Mr Clancy] could give evidence relating to such matters”. The Tribunal admonished Mr Clancy. Its findings in all respects were upheld by the Barristers’ Conduct Appeals Board on 21st November 1995.
Mr McMullen, acting in person, instituted the present proceedings on 18th October 1995. In his Plenary Summons he claims:
“Damages for Defection, Negligence, Breach of Contract and Duty, Breach of Confidentiality, Trust, Loyalty and Fiduciary Duties and Conduct Unbecoming a Senior Counsel of the Bar of Ireland.”
By an amendment made in June 1998, the following was added:
Furthermore and in any event –
Whether or not
The evidence given by the Defendant, Capt. Noel A.E. Clancy S. C. against his Lay Client, the Plaintiff in this Action, Michael Colin Geoffrey McMullen, is to be held admissible:
(Though already found in violation of the peremptory and Honourable Codes
of Conduct of the Bar of Ireland):
The said Evidence is irreconcilable and in direct opposition to Defendant’s very own emphatic statements made at the time matters between the Parties were current and contemporary;
And so, the said evidence is therefore False, Fraudulent and a scandalous and corrupt Act of culpable Perjury contrary to every Canon and Tenet upheld by Universal Justice;
The Plaintiff seeks a declaration and damages as delineated herein.
The Statement of Claim recites the history of Mr Clancy’s engagement as counsel up to and including the Kent Carty and Co action. Much emphasis is laid, in this narrative, on the confidential and fiduciary relationship alleged to exist between the parties, including reference to a personal relationship of friendship and to the fact that much confidential information was conveyed to Mr Clancy. It also alleges ill-will between Kent Carty and Co and Mr Clancy. It is noteworthy that, while the narrative mentions Mr McMullen’s problems at Charleville Castle and the “breakdown in the Settlement of this Plaintiff’s Nuisance Action,” there is scarcely any reference to the error made in drafting that settlement and none blaming Mr Clancy for it. The paragraphs of the amended Statement of Claim which articulate Mr McMullen’s complaints against Mr Clancy are as follows:
“10. At the trial of the said action ( 88. 6218 P), the defending solicitors, Messrs Giles Kennedy and Co., called Mr Clancy to give evidence for their clients and in complete co-operation and unprompted effusion, Mr Clancy accepted the blame for the errors, broke all notions and bounds of confidentiality without protest complaint or reservation. The defendant in this action took responsibility and admitted guilt for several vital matters crucial to his former client’s position and directly contradicted his client’s evidence, pulling rank as Senior Counsel and calling upon the Court to accept his version in preference to that of his client Michael McMullen.
11. As a direct result of the Defendant’s betrayal of his Client, breaching in no uncertain terms his bond of confidentiality, this Plaintiff lost his Action in Negligence cited above. On the very day of his testimony, the Principal of Kent Carty had given evidence that he “had no confidence in Mr Clancy” and showed clearly that he had no respect for him either, Mr Clancy defected to the aid of his instructing solicitors. In particular this act of Judas-kiss contravened Article 4. 17 of the Code of Conduct for the Bar of Ireland, 31, 3.4., and other relevant Articles including that a Barrister is alone responsible for his actions.
12. The judgment of Ms Justice Mella Carroll in determining the Negligence Action of Michael McMullen v Kent Carty, his former solicitors, pivots and relies upon the testimony of Mr Clancy S. C., the Defendant in this Action. The resulting situation is disastrous, unjust and expensive and the plaintiff has suffered discredit and shame and it is his Submission that the Defendant has set a Precedent in Conduct Unbecoming a member of the Bar of Ireland. It plummets the depths of unprofessional behaviour, warns clients against a full disclosure and brings disrepute and a disgrace to the notions and rights to a Fair Hearing and access to Equity and Justice.”
Mr McMullen added by way of amendment:
“Furthermore, that in proffering Testimony as he did against the Plaintiff, his Lay Client, the Defendant Noel Clancy S.C., in violation and contrary to every Ordinance and Law, both Civil and Criminal since the Ten Commandments, did of volunteer False Witness, untrue and perjured Attestation to such culpable extent that his former Lay Client suffered manifest loss, Discredit and shame and in so doing the Defendant abused his position in Humanity and especially as Senior Counsel at the Honourable Bar of Ireland and set into the record Evidence which is diametrically opposed to his very own account of the facts as truly and spontaneously they occurred in and around the years 1985 to 1987 and this claim herein is for this indictment also.”
It emerges plainly from a reading of the amended Plenary Summons and Statement of Claim that Mr McMullen’s grievances relate exclusively to Mr Clancy’s evidence before Carroll J in the High Court. By so acting, Mr McMullen complains that Mr Clancy betrayed his client by defecting to the side of the solicitors, that he broke the bonds of confidentiality between counsel and client, and otherwise behaved unprofessionally and that, insofar as he accepted responsibility for errors made in the handling of Mr McMullen’s litigation, his evidence was false, fraudulent and perjured. In the light of Mr McMullen’s later allegations of conspiracy between Mr Clancy and Kent Carty and Co, it may be noted that these paragraphs merely stated that Mr Clancy “defected to the aid of his instructing solicitors.” However, one of the headings of relief claimed is:
“Punitive Damages for culpably being a party to and agreeing to influence and divert the course of a fair hearing of a properly pleaded Negligence Case against solicitors in a matter which should have been in the day to day knowledge of a qualified practitioner……………” (emphasis added).
At no point in his pleadings does Mr McMullen allege that Mr Clancy was negligent in preparing or advising on the terms of the settlement.
The reliefs sought consist of the return of fees paid to Mr Clancy, the costs of the negligence action, punitive damages as already mentioned and damages under a number of headings such as for breach of contract or duty and fiduciary duty and for breach of the Code of Conduct of the Bar of Ireland, but there is no claim for damages for negligence.
A full defence was filed denying seriatim the allegations contained in the Statement of Claim. The following additional special pleas were made, namely:
· That there was no contractual relationship between the parties: hence, that Mr McMullen could not claim damages for breach of contract or breach of duty;
· That the Code of Conduct of the Bar of Ireland was not justiciable and that, in any event, Mr McMullen had fully availed of his remedies under that Code;
· That Mr Clancy was absolutely immune from suit as a witness;
· That Mr McMullen had waived any privilege of confidentiality by bringing his action against Kent Carty and Co;
· That Mr McMullen’s claim was barred by the provisions of section 11 of the Statute of Limitations, 1957.
At the hearing before McGuinness J, Mr McMullen gave evidence himself and called as witnesses Ms Pamela Madigan and Mr Hugh Carty, solicitors. Being a litigant in person, Mr McMullen was permitted, with very little objection from counsel for Mr Clancy, to cross-examine the two witnesses he himself had called, in a manner which would never have been allowed if he had been represented by counsel. To a significant extent, the hearing was conducted by reference to the transcript of the evidence given in the negligence action. Mr McMullen described Ms Madigan and Mr Carty as hostile witnesses, though in reality this meant only that they were unfavourable to his case. He expressly suggested to both Ms Madigan and Mr Carty that they had made an arrangement with Mr Clancy that he would give evidence in defence of Kent Carty and Co in the negligence action in 1992. McGuinness J asked Mr McMullen whether he was alleging that “there was a conspiracy…… or plot between [Mr Carty] and Mr Clancy as to Mr Clancy taking responsibility and then saying that and letting Kent Carty off the hook.” Mr McMullen agreed that this was certainly one of the things he was suggesting. Both Ms Madigan and Mr Carty denied that there was any such arrangement. Indeed, their evidence was that Giles Kennedy & Co, solicitors, acted for them in that action and that they had left the handling of the case to that firm and were not in any way involved in Mr Clancy’s giving evidence. They had not even met him prior to his doing so.
The learned High Court judge described the plaintiff’s pleadings as being “somewhat unorthodox” but said that his claims could be subsumed under three main headings, which I have slightly abbreviated, as follows:
1. The defendant by giving evidence for the defence in his 1992 negligence action against Kent Carty and Co was in breach of his duty of confidentiality and of his fiduciary duty to his client and was in breach of various aspects of the Code of Conduct of the Bar of Ireland.
2. The defendant gave untrue evidence at the hearing of the negligence action before Carroll J. In addition, he asserts that the defendant gave his evidence by prior arrangement with Kent Carty and Co or with the solicitors then acting for them, thus betraying his client and acting in a way directly opposed to his interests.
3. The defendant acted negligently in failing to advise him properly in regard to the nature of the settlement in 1985 and subsequently in regard to the possibility of re-entry of the proceedings in 1987. As a result he suffered loss and damage due to the ineffective settlement and due to the Order for costs made against him at the time of the attempted re-entry of the proceedings in 1987.
With regard to the first of these grounds, the learned High Court judge, while accepting that Mr Clancy should at least have raised the issue of privilege and confidentiality when giving evidence before Carroll J., also fully accepted the analysis of the position set out in the judgment of Lynch J. on the appeal in the earlier action. Thus, Mr McMullen, by bringing his negligence action against the solicitors, impliedly waived the privilege and the obligation of confidentiality imposed upon Mr Clancy. So far as the alleged breaches of the Code of Conduct of were concerned to, she accepted that such a code is not, in itself, legally enforceable. In addition, she rejected Mr McMullen’s claim based on an alleged fiduciary relationship. She sited the Canadian case of Hodginson v Simms [1994] R.C.S 377 and concluded that a fiduciary relationship exists where “one party is dependant upon or in the power of the other.” She thought that the nature of a fiduciary relationship was well described in the dissenting judgment of Sopinka J, McLachlin J and Major J in the case cited:
“……the Court looks to the three characteristics of a fiduciary relationship:
(1) The fiduciary has scope for the exercise of some discretion or power and
(2) Can unilaterally exercise that discretion or power so as to affect the beneficiary’s legal or practical interests, and
(3) The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretionary power….”
McGuinness J did not accept that the relationship between Mr McMullen and Mr Clancy was the type of “power-dependency” and trusting relationship envisaged by thee criteria. She referred to Mr McMullen’s practice of surreptitiously tape-recording telephone conversations. She concluded:
“On the evidence of the tape-recording and transcripts handed into Court, the correspondence with the Bar Council Disciplinary Tribunal, and other documentary evidence, I consider that in some ways the Defendant seems to me the more psychologically vulnerable of the two.”
With regard to the second of her principal, headings, McGuinness J accepted the submission made by counsel on behalf of Mr Clancy that a witness is, for overwhelming reasons of public policy, entitled to claim absolute privilege and immunity from suit in respect of any evidence he has given. See Watson v McEwan [1905] AC 480; Hargreaves v Bretherton [1958] 3 All ER 122; Marrinan v Vibart [1962] 3 All ER 380; Cabassi v Vila [1940] C.L.R. 130. Since Mr McMullen in his written submissions this Court on the appeal has stated that he is not pursuing this aspect of the case, and he has not argued it, it is unnecessary to consider that aspect of the law.
In respect of the second sentence of this ground, namely the suggestion that the evidence of Mr Clancy was given by virtue a prior arrangement with Mr McMullen’s a former solicitors, McGuinness J found that there was no evidence whatever to support it. This was, of course, absolutely correct. The witnesses called by Mr McMullen to prove this allegation, denied that there was any truth in it. There remained only Mr McMullen’s uncorroborated suggestions to the witnesses. Mr McMullen relies on a new aspect of this claim, which I call the Kennedy letter, and which has emerged subsequent to the High Court hearing and prior to the hearing of the appeal. This will be discussed below.
So far as the third ground is concerned, McGuinness J appears understandably to have interpreted Mr McMullen’s pleadings in a manner most favourable to himself in the light of the facts of the case. However, as has already been shown, it is clear or that Mr McMullen made a considered and deliberate decision not to institute any proceedings against Mr Clancy for damages for negligence in connection what the mistake in the drawing of the settlement. There was some further confusion about the negligence issue. McGuinness J did not make any finding of negligence against Mr Clancy; she held that any claim that might have lain against him was, in any event, statute-barred. Unfortunately, the High Court order, as drawn up, mistakenly purported to record a finding of negligence against Mr Clancy. This led to a belated application in the High Court on behalf of Mr Clancy to rectify this mistake. McGuinness J made the necessary order, which Mr McMullen appealed unsuccessfully to this Court.
In short McGuinness J dismissed Mr McMullen’s claim under all headings. She made no order for costs and Mr Clancy has appealed against that decision.
At this point it becomes necessary to refer to an event which occurred after McGuinness J had given judgment and which is at the core of Mr McMullen’s allegation of conspiracy. During the course of the hearing in the High Court, Mr Rory Brady, Senior Counsel for Mr Clancy wished to draw the attention of the court to the defence fled on behalf of Kent Carty and Co in the negligence action. Unfortunately, the copy of the defence which was used for this purpose formed part of a file of papers which was handed to the trial judge in its entirety. Only the defence was relevant and, as McGuinness J has made clear, she did not consider or even read any other part of that file. Cases are decided on the basis of the evidence, including documentary evidence, given at the hearing. Very occasionally one party or another will hand to the judge a book of documents or a file for the purpose of enabling him or her to look at a particular document. It is the invariable practice that the judge then only looks at that document and no other. Upon the conclusion of the action, papers were being handed back to the parties. This particular file was handed back in error, not to the solicitors who had handed it in, as it should have been, but to Mr McMullen.
Mr McMullen attaches enormous importance to the contents of this file and to one letter in particular. Mr McMullen has exhibited the file in an affidavit filed in this Court in support of an application to have it admitted as evidence on the appeal. The papers in question appear to take the form of a brief to counsel from Giles Kennedy & Co, solicitors for Kent Carty and Co in the negligence action. It includes a seven-page letter, described as “Report of Giles Kennedy,” dated 17th May 1989 from Giles Kennedy & Co to the underwriters of Kent Carty and Co. Mr McMullen relies on the following paragraph:
“On Friday, 28th April, 1989, our Mr Kennedy took the opportunity to have an unofficial without prejudice word with Mr. Clancy. He advised Mr Clancy as to what was happening to assess Mr Clancy’s attitude. Mr Clancy advised that as far as he was concerned, the claimant did quite well and he would be in a position to give evidence that the claimant was advised of the situation. We were aware, at the time of our discussion, that Mr Clancy was acting for the claimant instructed by Messrs. O’Connors in respect of a rather serious motor accident. Accordingly, it would appear as if Mr Clancy may still have some influence over the claimant. As a tactic, we indicated to Mr Clancy that our client, the insured herein, wished to join him in the proceedings and we were not keen to do so. This “little chat” might provide an opportunity and incentive to Mr Clancy to dissuade the claimant.”
On 5th October 1999, at the hearing regarding the costs of the action, Mr McMullen insisted on taking the oath and on referring it to this document. He referred to the finding in the judgment of McGuinness J that there had been absolutely no conspiracy, “to tinker with it the evidence by a Kent Carty.” He said: “… the file … supports entirely my contention.” At an adjourned hearing, he claimed that counsel for the defendant knew of the letter of 17th May 1989 (hereinafter “the Kennedy letter”) and that he “was running a case which he knew was entirely based on lies”. These are, of course, allegations of the utmost gravity. Mr McMullen has persisted in making them right up to and including the hearing of the appeal. Having heard both sides, McGuinness J correctly ruled that she had no further role in the matter, that she was functus officio. She also has stated quite clearly that, other than the single document drawn to her attention, she had not read the file and that it was not part of the evidence in the case. The Kennedy letter did not form part of the evidence in the High Court. It can be considered on appeal only if it meets certain strict criteria.
First, it is appropriate to consider the scope and ambit of the appeal. This is not easy. It is understandable that a litigant in person has difficulty in expressing his arguments in strictly legal terms and the Court must endeavour to assist him to do so. The difficulties in the present case are compounded by Mr McMullen’s propensity to make accusations of impropriety against a wide range of persons, including the judges.
I have sought to identify the real legal arguments advanced by Mr McMullen by reference to his Notice of Appeal, his written legal submissions and his oral argument in Court. It is possible to begin by excluding two matters.
Firstly, it now seems clear that Mr McMullen does not make any claim in negligence against Mr Clancy arising from the erroneous drafting of the settlement in 1985. This is surprising and puzzling. It is obvious that a serious error was made in producing for Mr McMullen’s signature a settlement document which provided only for liberty to apply, when he, the client, had insisted that he wished to be able to re-enter the action. Mr McMullen was entitled to complain that he had been deprived, through the undoubted fault of his legal advisers, of the opportunity to have the nuisance action re-entered for a full hearing. At least, he should not have had to suffer the costs of the abortive attempt to re-enter in February 1987. However, Mr McMullen chose to sue only his solicitors, though he was fully aware of the fact that they, from almost the beginning were blaming Mr Clancy. Throughout the hearing in the High Court, he persisted in maintaining that Kent Carty and Co were to blame. At the hearing of the appeal, Mr McMullen, in response to questions, made it that he had not wished at any stage to sue Mr Clancy for negligence in connection with the drawing up of the settlement. He considered this to be the fault of Kent Carty and Co and that Mr Clancy’s acceptance of responsibility was false.
Nonetheless, it is perplexing to note that Mr McMullen tenaciously opposed the correction under the “slip rule” of the High Court order’s recording of a finding of negligence against Mr Clancy and, even more so, the fact that he drew the attention of the Court to the decision of the House of Lords in Arthur J S Hall v Simons [2000] 3 All ER 673 to the effect that the historic rule exempting counsel from liability in actions for negligence by a client, even in its attenuated form following the decision of the House of Lords in Rondel Worsley [1969] 1 AC 191 no longer existed. Mr Maurice Collins, Senior Counsel, on behalf of the Mr Clancy told the Court that he was placing no reliance on any such immunity. Moreover, Mr McMullen addressed the Court in detail on the applicability of the Statute of Limitations, suggesting that his cause of action had been fraudulently concealed. Nonetheless and despite these inconsistencies of Mr McMullen, the appeal must be approached on the basis that no claim in negligence is made against Mr Clancy.
The second aspect of the case which is now excluded is the immunity from suit of Mr Clancy in his capacity, not of counsel, but as a witness. This aspect of the appeal was abandoned by Mr McMullen as long ago as 2001.
There remains for consideration:
Firstly, much the most important aspect of the case on appeal has been the reliance placed by Mr McMullen on the Kennedy letter. He says that it shows that there was a conspiracy between Giles Kennedy & Co, Kent Carty and Co and Mr Clancy pursuant to which Mr Clancy gave false evidence accepting responsibility. He adds that this was concealed from him by Mr Clancy specifically in a telephone conversation in 1987 and that, if he had known Mr Clancy was going to accept responsibility, he would have had other options, though he has not specified them.
Secondly, there remains the argument that Mr Clancy was in breach of his duty of confidentiality to his client; this does not relate to the fact that, in giving evidence, Mr Clancy breached his duty of confidentiality. While not expressly accepting it, Mr McMullen has not sought to contest the proposition that he had implicitly waived his right to confidentiality by bringing his action against Kent Carty and Co, as was held by this Court (Lynch J) in dismissing the appeal in that action, a principle followed and applied by McGuinness J in the present case. This aspect of the claim is, therefore, based on the Code of Conduct of the Bar of Ireland and the allegation of a fiduciary relationship.
I now turn to the principal focus of the appeal so far as Mr McMullen is concerned. Relying on the Kennedy letter, Mr McMullen says that Mr Clancy can be shown to have conspired with Giles Kennedy & Co and with Kent Carty and Co to the effect that he would falsely swear in defence of Kent Carty and Co that responsibility for the mistake in the settlement lay with him. It must, nonetheless, be repeated that this document did not form part of the evidence in the High Court.
This Court will admit new evidence on the hearing of an appeal in accordance with well-established principles. In Murphy v Minister for Defence [1991] I.R. 161 at 164, Finlay C.J. described the relevant criteria as follows:
“1. The evidence sought to be adduced must have been in existence at the time of the trial and must have been such that it could not have been obtained with reasonable diligence for use at the trial;
2. The evidence must be such that if given it would probably have an important influence on the result of the case, though it need not be decisive;
3. The evidence must be such as is presumably to be believed or, in other words, it must be apparently credible, though it need not be incontrovertible.”
At the opening of the appeal, Mr Collins objected to the admission of the Kennedy letter based on these principles, but accepted that the Court should rule on the matter after hearing the appeal. It is then necessary to examine whether the Kennedy letter offers support for Mr McMullen’s case. It should be observed that, although members of the Court, at an earlier hearing, expressed in open Court concern about the contents of the letter, its author, Mr Kennedy is not a party to and has not been heard in the present proceedings. Independently of the meaning Mr McMullen ascribes to the letter, the last two sentences of the quoted paragraph are open to the interpretation that Mr Kennedy, in what he described as a “little chat” alerted Mr Clancy to the possibility of his being joined as a party to the negligence action and thereby sought to persuade him, to use his capacity as an adviser to Mr McMullen, to influence the latter to drop his action against Kent Carty and Co. It would be difficult to describe such behaviour by a solicitor as anything less than improper.
Whatever the Kennedy letter conveys, it is that Mr Kennedy sought to persuade Mr McMullen to withdraw his claim. Mr McMullen has given no evidence at any stage and does not now suggest that any such approach was in fact made to him. To that extent, therefore, the “little chat” failed in its purpose. Furthermore, the letter does not suggest that Kent Carty and Co, Ms Madigan or Mr Hugh Carty played any part in this unattractive stratagem.
What support does the Kennedy letter offer for the conspiracy theory: that Mr Kennedy, together with Mr Clancy and the two solicitors mentioned arranged that Mr Clancy would accept (falsely or otherwise) that he would take responsibility for the settlement? The only sentence referable to the evidence to be given by Mr Clancy was: “Mr Clancy advised that as far as he was concerned, the claimant did quite well and he would be in a position to give evidence that the claimant was advised of the situation.” I cannot find any evidence whatsoever in this sentence to support Mr McMullen’s conspiracy theory. Firstly, Mr McMullen was aware that his advisers considered the settlement to be a good one. In the transcribed telephone conversation of 25th May 1987, he acknowledged that Mr Clancy had told him that the settlement had been “the greatest moral victory of [his] career.” Secondly, there was never any doubt that the plaintiff “was advised of the situation.” Given the context, it can be assumed that “the situation” was that the action could be r-entered. However, the transcribed telephone conversation of 25th May 1987 shows that Mr McMullen was fully aware that Kent Carty and Co were placing the blame for the mistake on Mr Clancy. Indeed, Mr Clancy himself several times referred to his belief that Mr McMullen was suing him. It is true that Mr Clancy did not accept responsibility in that conversation. At one point he even claimed not to have been shown the agreement. Nonetheless, Mr McMullen was in possession of all the information that would have been needed to sue Mr Clancy, if he had wanted to. Most importantly, the Kennedy letter does not offer any support at all for the proposition that Kent Carty and Co were party or privy to any arrangement regarding Mr Clancy’s evidence. The evidence of Ms Madigan and of Mr Carty, given in the High Court remains undisturbed and there is nothing in the Kennedy letter to displace it.
This is sufficient to dispose of the Kennedy letter. However, Mr McMullen in his submissions both oral and written to this Court chose to make extremely serious allegations against counsel for the Defendant in the High Court. He alleged that Mr Rory Brady, knowing of the contents of the Kennedy letter, falsely and dishonestly led evidence from Ms Madigan and Mr Carty. Mr Brady certainly asked both of those witnesses to confirm, which they did, that they had taken part in no such arrangement as alleged. This Court has seen no evidence to contradict those statements. It is only right to say that Mr McMullen’s allegations against Mr Brady are false and baseless. They have been repeatedly advanced without the slightest basis in the evidence. It may be that Mr McMullen’s appreciation of the facts has been distorted by his unfortunate experiences both with his property in Tullamore and with his unsuccessful litigation. However, this Court would be failing in its duty if it did not state clearly, where grave allegations have been made in a considered and calculated way, that those allegations were not only false but lacking in any foundation whatsoever in fact. This Court has been assured that Mr Brady, during the trial, was unaware of the Kennedy letter. There is no evidence that Mr Brady was aware of the existence or the contents of the Kennedy letter. That letter did not form part of the case to be made in defence of Mr Clancy. It came from the brief in the earlier action. There was no reason for Mr Brady to concern himself with it. Most importantly, however, since, as already stated, the Kennedy letter offers no support for the suggestion that either Ms Madigan or Mr Carty was party to any conspiracy involving Mr Clancy or anybody else, it cannot be used to ascribe any knowledge of such activity to Mr Brady.
For these reasons, I do not believe that this letter should be admitted in evidence on the appeal. It clearly fails to satisfy the second heading of the test laid down in
Murphy v Minister for Defence, namely that “[t]he evidence must be such that if given it would probably have an important influence on the result of the case.” In my view, it could not have made any difference.
Insofar as the claim that Mr Clancy committed a breach of his duty of confidentiality is based on the fact that, by giving evidence without claiming privilege Mr Clancy was in breach of certain provisions of the Code of Conduct of the Bar of Ireland, in my view, the learned High Court judge was absolutely correct to rule that the Code and its provisions are not justiciable. The rules in the Code are enforceable by the disciplinary authorities of the barristers’ profession. They do not bind the Courts. Put otherwise, the profession cannot make laws which it is the duty of the Courts to enforce. This does not at all mean that, as a matter of law, there are no parallel obligations, specifically of confidentiality, which the courts will enforce in an appropriate case. However, with regard to the specific reliance placed on the provisions, I am satisfied that Mr McMullen has no cause of action in law.
I am satisfied, nonetheless, that, independently of any such professional code, the law imposes a duty of confidentiality on a barrister in respect of the information that comes into his possession in the conduct of his client’s affairs. Lynch J said so in the passage already cited. That duty undoubtedly extends to information concerning the advice given to the client during the conduct of litigation and during negotiations for the settlement of litigation.
In both his Plenary Summons and Statement of Claim in the present action, Mr McMullen alleges breach of confidentiality. Referring to the giving of evidence by Mr Clancy, it is pleaded (paragraph 10 of Statement of Claim) that “in complete cooperation and unprompted effusion, Mr Clancy accepted blame for the errors, broke all notions and bounds of confidentiality without protest complaint or reservation.” Mr McMullen principally emphasises the alleged falsity of the evidence given and the fact that it contradicted Mr McMullen’s own evidence. Nonetheless, it does refer to the duty of confidentiality. McGuinness J said at page 26 of her judgment:
“As far as breach of confidentiality is concerned I accept that the Defendant should have at least raised the issue of confidentiality when called upon to give evidence before Carroll J. However, I would have no difficulty in accepting the analysis of the position set out by Lynch J. in his judgment and would emphasise his reference to the fact that the Plaintiff’s experienced counsel……did not raise this point at the time.”
Because of his almost exclusive concentration on the alleged falsity of Mr Clancy’s evidence, combined now with the allegation of a conspiracy between Mr Clancy and the members of Kent Carty and Co, Mr McMullen has failed to specify any other respect in which he alleges Mr Clancy failed to respect his obligation of confidentiality. I propose to consider, nonetheless, whether Mr McMullen has legitimate grounds for complaint under this heading.
Firstly, there is the finding of the learned trial judge. As she quite correctly points out, Mr McMullen was represented by solicitor and counsel, who had every right to object if it was felt that Mr Clancy was failing to respect his obligations to his former client. In reality, as those representatives must obviously have appreciated, there would have been no point in objecting. Mr McMullen, by bringing the action against Kent Carty and Co had impliedly waived the relevant privilege. Thus, although McGuinness J rightly observed that Mr Clancy should have raised the issue of privilege, he would certainly have been bound to answer questions regarding the negotiation of the settlement and the advice given about it.
Secondly, Mr McMullen has produced no evidence that beyond the giving of evidence, Mr Clancy disclosed confidential information. Mr McMullen attempted to establish, in the High Court, through the evidence of Mr Carty and Ms Madigan, that Mr Clancy had attended a consultation with solicitor and counsel on the morning of the opening day of the hearing. He produced a copy of a letter addressed to Mr Clancy asking him to attend, but Ms Madigan answered that, to the best of her recollection, he was not there. There was no evidence that he was.
Finally, it may be noted that the Kennedy letter purports to record Mr Clancy as expressing an opinion about the settlement and stating that he had advised Mr McMullen about it. Insofar as this letter affects Mr Clancy, it is, of course, hearsay. More importantly, Mr McMullen had summoned Mr Clancy as a witness in the High Court. He chose not to call him. His decision not to do so is perfectly understandable. He was warned that he would not have the right to cross-examine Mr Clancy. He obviously hoped that Mr Brady would call him on behalf of the Defendant. Nonetheless, Mr McMullen had the opportunity to call Mr Clancy to establish the extent, if any, to which he had disclosed privileged material in breach of his duty to Mr McMullen. Thus this evidence fails to satisfy the first test laid down in the case of Murphy v Minister for Defence, cited above: it is not “such that it could not have been obtained with reasonable diligence for use at the trial…” It would be unfair, in the particular circumstances of this case, to admit the letter following the death of Mr Clancy, who cannot, therefore, contradict it. Moreover, it is clear that Mr McMullen is not concerned in this action with such marginal or peripheral disclosure by Mr Clancy. The entire gist of his action is based on allegations of false and perjured evidence and allegations of conspiracy to procure it.
Mr McMullen takes issue with the conclusions of McGuinness J that there was not a fiduciary relationship between him and Mr Clancy. He claims that this is not based on any evidence. In my opinion, that was not a fiduciary relationship. It is true, of course, that counsel is not in a contractual relationship with his lay client. There is, nonetheless, a professional relationship such that counsel owes to the client a duty of care and a duty of confidentiality. The relationship could become a fiduciary one, if counsel became the repository of valuable information. He could commit a breach of that relationship by taking advantage of it for his personal benefit, as by making a secret profit. However, I agree with the observations of Millett L.J. in Bristol and West B.S. v Mothow [1996] 4 All ER 698 at 710 that:
“The expression ‘fiduciary duty’ is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences differing from those consequent on breach of other duties. In this sense it is obvious that not every breach of duty is a breach of fiduciary duty.”
The judgment contains further strictures against “flinging around” the notion of fiduciary duty as if it applied to all manner of breaches of duty by solicitors, directors of company and others. At a later point, Millet L.J. explained further:
“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr Finn pointed out in his classic work Fiduciary Obligations (1977) p 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.”
I am satisfied that Mr McMullen’s complaints against Mr Clancy do not relate to the performance of any fiduciary duty. If he were proved to be negligent or in breach of his duty of confidentiality, he would be guilty of a breach of duty. That would not make it a fiduciary duty. I would reject Mr McMullen’s claim based on the allegation of fiduciary duty.
It should, finally, be observed that Mr McMullen addressed the Court in some detail, at the hearing of the appeal about the Statute of Limitations. McGuinness J had found that any claim in negligence was barred by the provisions of section 11 of the Statute of Limitations. The present proceedings were commenced on 11th October 1995. Insofar as they related to events occurring in 1985 or 1987, they were commenced more than six years after those events. Mr McMullen has relied on appeal on section 71 of the 1957 Act. Subsection (1) of that section provides:
(1) Where, in the case of an action for which a period of limitation is fixed by this Act, either—
( a ) the action is based on the fraud of the defendant or his agent or of any person through whom he claims or his agent, or
( b ) the right of action is concealed by the fraud of any such person,
the period of limitation shall not begin to run until the plaintiff has discovered the fraud or could with reasonable diligence have discovered it.
Mr McMullen also referred to a number of authorities, principally English ones. There is, of course, no difficulty in accepting that, where a wrongdoer fraudulently conceals form his victim the wrong he has committed, time will not commence to run until the injured party has a fair opportunity to commence proceedings: in the words of the section, “until the plaintiff has discovered the fraud or could with reasonable diligence have discovered it.” Firstly, it must be said that sub-paragraph (a) of subsection (1) can have no application to the facts of this case. Insofar as Mr McMullen claims that Mr Clancy acted fraudulently, for the reasons already given, his claim fails. Secondly, Mr McMullen has not identified any act of fraudulent concealment. He complains certainly that, in the telephone conversation of May 1987, Mr Clancy did not tell him that he accepted responsibility for the error in the settlement. Indeed, he said that he had not seen the settlement. However, Mr McMullen was fully aware from 1987 at the latest that the settlement had been wrongly drawn and that Mr Clancy had participated in the negotiation of the settlement. There was a dispute between Mr McMullen and Mr Clancy about whether Mr Clancy had advised about the settlement. Carroll J resolved that dispute against Mr McMullen. She found that Mr Clancy had, as he had sworn, advised Mr McMullen about the terms of the settlement. Furthermore, Ms Madigan gave evidence in both trials that she had advised Mr McMullen that the action had could be re-entered and that she had consulted Mr Clancy before confirming this advice. Thus, there was no concealment, fraudulent or otherwise, of Mr McMullen’s cause of action against Mr Clancy. Finally, it is difficult to see how Mr McMullen can rely on fraudulent concealment of a cause of action in negligence against Mr Clancy, since he has at all times insisted that Mr Clancy was not negligent, but that he had fraudulently claimed to have been at fault. I am satisfied that section 71 of the Act of 1957 has no relevance to the claim against Mr Clancy.
I am satisfied that Mr McMullen’s claim fails under all headings and would dismiss the appeal. Counsel for the Respondent has not addressed the Court regarding the appeal from the costs order made by McGuinness J. All aspects of costs of the proceedings should be addressed following delivery of judgment.
Carroll Group Distributors Ltd. v. G. and J.F. Bourke Ltd.
[1989] IEHC 1; [1990] 1 IR 481; [1990] ILRM 285 (4th October, 1989)
Murphy J.
1. This is yet one more case of the many which have arisen in recent years concerning the interpretation and application of what have come to be known as ‘retention of title clauses’.
2. The plaintiffs (Carrolls) are the well known tobacco company and the two defendant companies (Bourkes) carried on a retail business in Limerick. The affairs of the two defendant companies were so intertwined that they in fact constituted one operation and accordingly have been treated for all purposes as if they constituted only one company. Between 4 February 1986 and 2 April 1986 Carrolls supplied to Bourkes goods to the value of £54,517.26 . Bourkes were allowed approximately four weeks credit and it is common case that the conditions on which the goods were supplied included a reservation of title clause in the terms set out in the appendix to this judgment.
3. On 25 April 1986 Mr. Dermot Fitzgerald was appointed liquidator of the company in a creditors’ liquidation thereof.
4. The representatives of Carrolls and the liquidator identified goods supplied by Carrolls in the possession of Bourkes at the commencement of the liquidation to the value of £7,376.70. It was agreed between the parties that Carrolls were entitled to those goods in accordance with the retention of title clause and they were accordingly returned reducing the indebtedness of the company to £47,140.56.
5. At the time the liquidator was appointed the company maintained two accounts with its bankers. The number one account which was in credit in a sum (expressed in round terms) at £28,000 and the number two account which was overdrawn in a sum (again expressed in round terms) in the sum of £21,000. The number two account aforesaid was the account on which the bank from time to time advanced the moneys required by Bourkes to pay wages and salaries and the number one account was the only other account of Bourkes. No special account was opened for the purpose of segregating the proceeds of sale of goods supplied by Carrolls. On 7 May 1986 the bank debited the number one account with the amount due to the bank on foot of the number two account leaving a net balance due to Bourkes of a sum of approximately £7,000. The decision to set off one account against the other was made exclusively by the bank and was not the result of any disposition made by the liquidator.
6. The right of a vendor and purchaser to agree that the property in goods agreed to be sold should remain in the vendor notwithstanding the agreement for a sale and the delivery of the goods to the purchaser cannot be questioned. The right was recognized in Irish case law in the second part of the last century (see Bateman v Green and King (1868) IR 2 CL 166 and McEntire v Crossley Brothers Ltd [1895] AC 457) and affirmed by the provisions of the Sale of Goods Act 1893, s. 19(1). Accordingly the liquidator was correct in returning the goods supplied by Carrolls and in the possession of Bourkes at the date when the liquidator was appointed.
7. The issue in the present case relates to the right of Carrolls in respect of the proceeds of sale of the goods supplied by them. In this context too the basic legal principles are well established. Where a trustee or other person in a fiduciary position disposes of property the proceeds of sale are impressed with a trust which entitle the benificiary or other person standing in the fiduciary relationship to trace such proceeds into any other property acquired therewith by the trustee. The right of tracing carries with it the presumption that where the substituted property is subsequently diminished it is presumed, notwithstanding the order of disposal and the well known rule in Clayton’s case that the trustee disposed of his own property in the first instance and encroached subsequently, if at all, upon the property of the benificiary. Whether fiduciary obligations are imposed on one party or another depends in part upon the character in which they contract and partly on the nature of the dealings in which they engage. Obviously one would be slow to infer that a vendor and purchaser engaged in an arms length commercial transaction undertook obligations of a fiduciary nature one to the other. On the other hand if one postulates that in any context one person is selling the goods of another the assumption of fiduciary obligations in relation to the sale and in particular the proceeds thereof might well be appropriate. It seems to me that the question must be asked how does a party come to sell property of which he is not the owner. Is he selling as a trustee in pursuance of a power of sale? Is he selling as the agent of the true owner? Does the sale constitute a wrongful conversion? If any of those questions were answered in the affirmative it seems to me that the law would impose a trust on the proceeds of sale which would confer on the true owner the right to recover those proceeds from the actual seller or if the proceeds were no longer in the seller’s hands to trace them into any other property acquired with them. If the new asset was acquired partly with such proceeds and partly with other moneys provided by the seller then the right of the true owner would be to a charge on the new asset or mixed fund to the extent of the proceeds of the sale of his property. This is the rule enunciated in In re Hallett’s Estate: Knatchbull v Hallett (1880) 13 Ch D 696.
8. In the present case clearly there was nothing wrongful about the sale by Bourkes of the goods supplied by Carrolls. Not merely was this envisaged by the circumstances of the parties but it was positively anticipated in the conditions under which the goods were sold by Carrolls. As appears from the retention of title clause it was expressly provided that in the event of the sale of goods by Bourkes that they should ‘act on their own account and not as agent for Carrolls’.
9. It would seem to me to follow, therefore, that no fiduciary duty was imposed by law on Bourkes or the liquidator thereof in relation to the proceeds of the sale of any of the goods in question and that if such a fiduciary obligation is to be established it must be found in the actual bargain or the trust created in respect of the proceeds by the agreement contained in the conditions of sale.
10. The retention of title clause expressly provided as follows:-
11. Notwithstanding the property remaining in the company all risks shall pass to the customer on delivery of the goods to the customer’s premises and so long as the title in the goods shall remain in the company, the customer shall hold the goods as bailee for the company and store the goods safely and suitably so as to clearly show them to be the property of the company and identifiable as such. The customer hereby authorises the company to enter upon the premises of the customer or to any other premises designated to the customer for delivery of the goods to recover possession of the goods at all reasonable times and without notice to the customer.
12. Clearly on a sale by Bourkes the goods would no longer be stored by them or identified in accordance with the provisions aforesaid. Obviously the parties intended that the property would pass to the sub-purchaser who would become the full owner thereof. Again it was clear that Bourkes were selling ‘on their own account’ and presumably at an increased price to provide a profit margin for the retailer. Again it was open to Bourkes to sell below cost or on credit terms so that the goods would not be immediately or necessarily replaced by assets of equal value.
13. The operative clause expressly provided that the property in the goods should remain in Carrolls ‘until the customer (Bourkes) shall have discharged all sums due by the customer (Bourkes) to the company (Carrolls) at the date of final handing over of possession of the goods whether such sums shall be due on foot of this transaction or shall be due on foot of some other transaction or transactions between the customer (Bourkes) and the company (Carrolls)’.
14. It is in this context that one must consider the crucial provisions of the retention of title clause insofar as it deals with the proceeds of sale, namely:-
…the customer (Bourkes) shall hold all moneys received for such sale or other disposition in trust for the company (Carrolls) and undertake to maintain an independent account of all sums so received and on request shall provide all details of such sums and accounts.
15. No separate account was opened in respect of the proceeds of any goods supplied by Carrolls and it is probable that Carrolls were aware that no such steps were taken. Instead the proceeds of sale of the goods supplied by Carrolls together with other goods dealt with by Bourkes in the ordinary course of their business were paid into the number one account aforesaid. In fact the analysis made by the liquidator would suggest that some 5% of the moneys paid into the number one account represented the proceeds of sale of goods supplied by Carrolls. If one ignores the particular facts of the case and simply analyses the bargain made between the parties it is clear that such an arrangement properly implemented would result in a bank account with sums of money credited thereto which would probably be in excess of the amounts due by Bourkes to Carrolls. This would arise partly from the fact that the goods would be resold at a marked up price and partly from the fact that the proceeds of sale would include some goods the cost price of which had been discharged and some had not. In other words the bank account would be a fund to which Carrolls could have recourse to ensure the discharge of the moneys due to them even though they would not be entitled to the entire of that fund. Accordingly the fund agreed to be credited would possess all the characteristics of a mortgage or charge as identified by Romer LJ in ln re George Inglefield Ltd [1933] Ch 1 at 27-28.
In Frigoscandia (Contracting) Ltd v Continental Irish Meat Ltd and Laurence Crowley [1982] ILRM 396 McWilliam J (at 398 dealing with the property in the goods sold rather than the proceeds of sale thereof) commented upon retention of title clauses as follows:-
16. A difficulty which arises with regard to clauses of this nature is that they are included in the contracts to secure the payment to the vendor of the price of the goods and therefore it may be said as has been argued that the goods once delivered, are intended to be held by the purchaser as security for such payment and that the transaction is in the category of a mortgage in that the vendor, although retaining ownership or an interest in the goods, cannot take possession of them provided that the specified instalments are paid, and that this leads to the conclusion that such a clause must be treated as creating a mortgage or a charge over the goods. In my opinion such a conclusion can have no general application to these clauses and each case must depend on its own facts.
17. I fully agree with that observation. The fact that a vendor may seek to protect his commercial interests and in particular his right to recover the purchase price of goods sold by him by retaining the title to property which he has agreed to sell and of which he has delivered possession to the purchaser, does not convert the contract for sale into a mortgage which may require registration in accordance with the provisions of the Companies Act 1963, s. 99. It would be wrong to infer that a particular transaction constituted a mortgage merely because the vendor structured it in such a way as to protect his commercial interests. On the other hand parties cannot escape the inference that a transaction constitutes a mortgage registrable under s. 99 aforesaid by applying particular labels to the transaction. The rights of the parties and the nature of the transaction in which they are engaged must be determined from a consideration of the document as a whole and the obligations and rights which it imposes on both parties. This is a principle of general application. Not infrequently efforts have been made to treat a document which is in truth a lease as a licence by so describing it. The description may be a material consideration but clearly it cannot be decisive. Specifically in relation to mortgages registrable under the Companies Acts it has been held that it is the substance of the transaction as ascertained from the words used by the parties and the context in which the document is executed that determines registrability under the Companies Acts (see In re Kent and Sussex Sawmills Ltd [1947] Ch 177). It seems to me that the bargain between the parties insofar as it relates to the transaction subsequent to a sale by Bourkes is in substance – though not in terms – the same as that which existed in In re Interview Ltd [1975] IR 383 in that effectively Bourkes were creating or conferring a charge on the proceeds of sale in substitution for the right of property which Carrolls had previously enjoyed. The charge so created required registration under s. 99 of the Companies Act 1963 and in the absence of such registration was invalid.
18. Whilst the issue does not arise having regard to the foregoing decision it may be as well to record my view that even if Carrolls had obtained a charge over Bourkes’ number one bank account in accordance with a right to trace the proceeds of sale of their goods into that account, that such a right was necessarily defeated when and to the extent that the monies in that account were dissipated and not replaced by any other asset. It follows that in my view the total amount in respect of which a claim might have been asserted was the balance of £7,000 remaining in the number one account after the bank had exercised its right of setoff. This practical conclusion is fully supported by the decision in Roscoe v Winder [1915] 1 Ch62.
19. Accordingly it seems to me that the plaintiffs’ claim must be dismissed.
APPENDIX
Reservation of Title
20. Notwithstanding delivery and passing of risk the property and title in the goods shall remain in the company and shall not pass to the customer until the customer shall have discharged all sums due by the customer to the company at the date of final handing over of possession of the goods (hereinafter referred to as ‘the relevant sums’) whether such sums shall be due on foot of this transaction or shall be due on foot of some other transaction or transactions between the customer and the company.
21. In such circumstances the following provisions shall apply:-
22. The company hereby confers on the customer the right to sell or otherwise dispose of the goods, subject to as hereinafter provided, in the normal course of business. If the customer (who shall in such case act on his own account and not as agent for the company) shall so sell or otherwise dispose of the goods, the customer shall hold all monies received for such sale or other disposition in trust for the company and undertakes to maintain an independent account of all sums so received and on request shall provide all details of such sums and accounts.
23. Notwithstanding the property remaining in the company, all risks shall pass to the customer on delivery of the goods to the customer’s premises and so long as the title in the goods shall remain in the company, the customer shall hold the goods as bailee for the company and store the goods safely and suitably so as to clearly show them to be the property of the company and identifiable as such. The customer hereby authorises the company to enter upon the premises of the customer or to any other premises designated by the customer for delivery of the goods, to recover possession of the goods at all reasonable times and without notice to the customer.
24. Nothing in this clause shall confer on the customer any right to return the goods. The company may maintain an action for the price notwithstanding that property and title in the goods shall not have been vested in the customer.
25. Prior to the payment in full of all sums due by the customer to the company under this contract the customer shall be entitled to use the goods as provided above but may not offer the goods or their proceeds where sold or otherwise disposed of as security for the performance of any obligation of the customer to any third parties. At any time prior to the customer paying all relevant sums the company may, by notice in writing delivered to the customer’s last known address or place of business, determine the customer’s right to use the said goods in the manner detailed above or at all, whereupon the customer shall forthwith return the goods to the company or the company may enter the customer’s premises at all reasonable times for the purpose of recovering the said goods or any part of them.
26. Further, in the happening of any of the events set out below such events shall forthwith, without any necessity for notice, determine the customer’s right to use, sell or otherwise dispose of the goods:-
(a) Any notice to the customer that a receiver or manager is to be or has been appointed;
(b) Any notice to the customer that a petition to wind up is to be or has been presented or any notice of any resolution to wind up the customer (save for the purpose of reconstruction or amalgamation) has been passed;
(c) A decision by the customer that the customer intends to make arrangement with its creditors;
(d)The insolvency of the customer within the meaning of s. 62(3) of the Sale of Goods Act 1893.
27. Furthermore and independently of the above, where any of the foregoing provisions do not apply, the company hereby reserves the right of disposal as provided by s. 19(1) of the Sale of Goods Act 1893.
Money Markets International Stockbrokers Ltd. (in liquidation) (No. 2), Re
[2000] IEHC 75; [2001] 2 IR 17 (20th October, 2000)
THE HIGH COURT
No. 1999 32 COS
IN THE MATTER OF MONEY MARKETS INTERNATIONAL STOCKBROKERS LIMITED (IN LIQUIDATION)
AND
IN THE MATTER OF THE COMPANIES ACTS
Judgment delivered by Ms Justice Carroll on the 20th October 2000
1. This is the third of five issues ordered to be tried by order of the 19th of July 1999 by Laffoy J. The first issue was the subject matter of a Judgment by Laffoy J on the 23rd of May 2000. The third issue is “should K and H Options Limited (K and H) be entitled to claim the sum of £237,030 against client funds of MMI for option premia in respect of settled stock exchange transactions”. It is now calculated by the official liquidator, Tom Kavanagh, that the sum of money should be £321,620. The shortfall in the general clients account (the section 52 account) which excluded the premia monies as per the ledger, at the date of liquidation was £1.1 million. The account should have contained £2.3 million.
2. Apart from ordinary stock exchange transactions with a settlement date five days later, MMI as agent for their clients negotiated with K and H for the purchase of named shares on a settlement date three months ahead at a fixed price the (“strike price”). This was a “call option”. Back to back with that was a “put option” under which K and H could call on MMI’s client to buy the shares at the strike price on the settlement day. If the share price had gone up above the strike price on the settlement date, the client made a profit. If the share price had gone down below the strike price, the client suffered a loss. For these options, premia were payable regardless of whether a profit or loss was made. In the case of settled stock exchange transactions where share premia were payable by a client, the individual client account with MMI was debited with the amount of the share premia. I am told MMI made a corresponding credit entry in a book showing amounts due to K and H for the share premia. The status of this accounting practice is not clear. K and H do not claim to be creditors of MMI. What is clear that having made the debit entries in the individual client’s accounts the money due to K and H was not always withdrawn from the general client account. Normally the share premia amounts would have been paid to MMI once a month by cash withdrawal from the clients account. However in the period before going into liquidation on the 15th of March 1999 (probably September to December 1998) money unpaid to K and H which should have been withdrawn from the general client account but was not, amounted to approximately to £321,620.
3. MMI had a statutory obligation under the Stock Exchange Act 1995 (as amended by the Investor Compensation Act 1998) to hold client’s money in what is designated a section 52 account in an institution specified by the Central Bank (section 52 (3)(b) ).
4. In the requirements imposed by the Central Bank under section 52 (1) reequirement 7.1 provides that money ceases to be client money if it is paid
(a) to the client
(b) to a third party on the instructions of the client
(c) into any account with a credit institution in the name of the client not being an account which is also in the name of the member firm, or
(d) to the member firm itself where it is due and payable to the member firm
5. Requirement 7.2 provides that where a member firm draws a cheque or other payable order under 7.1 the money does not cease to be client money until the cheque or order is presented and paid by the credit institution.
6. Requirement 8.1 provides that money may only be paid out of a client account by a member firm in the course of carrying out its activities in accordance with requirement 2.2 (i.e. it must inform a third party that the money is client money) or in circumstances where the money ceases to be client money in accordance with requirement 7.1 (mentioned above) or in accordance with requirement 19.4 (not relevant in this context as it relates to reconciliation difficulties).
7. In her Judgment on the first issue Laffoy J held that the official liquidator was not entitled to recoup out of client funds sums due to MMI. Section 52 (7)(a) as amended by section 64 of the Investor Compensation Act 1998) provides
“No liquidator, receiver, administrator, examiner official assignee or creditor of investment business firm shall have or obtain any recourse or right against client money or client investment instruments or client documents of title relating to such investment instruments received, held, controlled or paid on behalf of a client by an investment business firm until all proper claims of the clients or of their heirs successors or assigns against client money and client investment instruments or documents of title relating to such investment instruments have been satisfied in full”
8. Laffoy J held that the clear and unambiguous meaning of paragraph (a) (is that the beneficial claims of client creditors have to be satisfied in full before anybody else, even a contributor to the ultimate balance, has a call on the funds.
9. Mr McCarthy for the official liquidator submitted that the Judgment of Laffoy J disposed of the matter
10. Mr Collins for K and H claims that a trust was created in its favour in the client account in respect of money debited in individual clients accounts for premia for completed stock exchange transactions. It therefore has a proprietary claim, a right in rem, against those monies. He submits that K and H are not any of the named persons in section 52 and was not party to the issue. Therefore he was not precluded from making a claim under section 52 because MMI had authority to deduct premia in clients’ accounts and in due course pay K and H. He claims that once allocated, the money belongs in equity to K and H. He did concede that in a mixed fund he could not claim to be paid 100%, i.e. in priority to the client creditors who owed K and H nothing, but he said there could be some basis on which an equitable distribution could be made. He did elaborate later on how this might be achieved. In support of his proposition he cited Barclays Bank Limited -v-Quistclose Investments Limited (1970 AC507). In this case where there was a loan to a company by a third person for the purpose of paying a declared dividend, paid into a separate account opened specially for the purpose, it was held this gave rise to a trust in favour of the creditors and if the trust failed, in favour of the third person.
In Carreras Rothman Limited-v-Freeman Matheus Treasure Limited and another (1985 CH 207), owing to the Defendant’s precarious financial position, a special account was opened into which Carreras Rothman Limited (CR) paid the amount due by the Defendant to third parties who were providing advertising facilities for CR. The Defendant went into liquidation and it was held that the money held in the special account was never held beneficially by the Defendant. A trust was created and the Plaintiff could enforce the payment of the monies in the special account to the third parties.
In General Communications Limited-v-Development Finance Corporation of New Zealand Limited (1999 3 NZLR406), this case concerned the supply of goods by GC Limited to a firm VW. DFC agreed to advance a sum of money payable by instalments to VW specifically to purchase equipment. Later an alteration agreed was that the total advance would be paid to VW’s solicitors who undertook to pay directly to VW suppliers. After GC supplied goods but before payment, a receiver was appointed to VW. DFC asked VW’s solicitor to return the balance of funds which they did, getting an indemnity. In a claim by GC it was held that the money once received by the solicitors was held by them on behalf of VW on terms to apply it only to payment of suppliers of equipment and if equipment was not purchased to repay it to DFC. It was held that DFC had put the funds beyond its power of recall and conferred a beneficial interest on each supplier as each contract of supply was fulfilled.
11. Based on the principles enunciated in these cases it was claimed on behalf of K and H that the entry in the individual clients account by MMI crystallised K and H’s interest in the money. The only other step was the transfer of funds.
12. Alternatively there is a claim to a constructive trust in favour of K and H on the basis that it would be inequitable to deny it. The clients are in debt to K and H and would be unjustly enriched and K and H put to the expense and difficulty of suing individual clients.
13. It was further submitted that MMI was acting within the scope of its fiduciary duty in allocating money for the payment of its liabilities. If a client instructed MMI to return monies allocated for payment of option premia owed, MMI would have been entitled to refuse to comply and would not have been in breach of its fiduciary duty. After the transaction is carried out a client cannot terminate the authority of the agent to make the payment.
14. It is quite clear that K and H’s claim is based on the existence of a trust. In Mr McQuillian’s affidavit sworn on the 13th of December 1999 on behalf of the credit clients of MMI it was claimed in paragraph 10 that MMI were only entitled to hold monies to the further instructions of clients. In Mr Holt’s replying affidavit sworn on the 14th of February 1999 on behalf of K and H (paragraph 5) it is stated that the standard terms and conditions of trade contained authorisations to MMI to make deductions from clients accounts without requirement for each deduction to be specifically authorised and he exhibited two such client’s authorisations. I was however unable to find the authorisation he mentioned in the exhibits. However it was not suggested by anybody that MMI did not have authority to pay the share premia on completed transactions to K and H.
15. Mr Hardiman on behalf of the investors represented by Mr McQuillian submitted (inter alia) that:
(1) K and H could not have a proprietary right in a fund where there were client investors who owed no money to K and H;
(2) K and H could not acquire a proprietary interest in the fund as no specific fund is identified and there is no properly constituted trust;
(3) The use of the individual client’s account by MMI is consistent with contractual obligations not the creation of a trust
4 Section 52 (5) of the Stock Exchange Act 1995 exhausts all equities in the client account
16. Mr Barnaville for the Central Bank supported Mr Hardiman’s argument.
17. I do not think the Judgment of Laffoy J went so far as to say that no person whatever could make a claim against the section 52 account until the client creditors were paid. She said the beneficial claim of client creditors had to be satisfied in full before anyone else had a call on the funds. It seems to me that there could be cases where the beneficial entitlement of client creditors are challenged by persons other than the named persons in the section. But what I purpose to do first is to examine the claim of K and H to the creation of a trust in portion of the section 52 account monies. If there is no trust there is no basis for a claim against the monies.
18. In my opinion the debit entry in an individual client account cannot be construed as a declaration of trust. MMI had no authority to create a trust. It is not disputed they had authority to pay K and H a debt owed by a client for option premia. Under the Central Bank requirement 7.1 they could pay money to a third party on the instructions of the client. The fact that it must actually be paid is underlined by requirement 7.2 where it is provided that if it were drawn by a cheque or other order it did not cease to be client money until the cheques/order was presented and paid.
19. Therefore as far as share premia were concerned MMI could pay K and H out of the client account. When it was paid over it ceased to be client money. Since the money in this case was not paid out in accordance with requirement 8.1 and 7.1 it never ceased to be client funds. None of the clients themselves created any trust in favour of K and H. There was no separate fund designated for the payment of share premia. In each of the three cases cited by Mr Collins a special fund was created. No such fund was created here. It would not in any event have been possible to create a separate designated fund to pay K and H the money it was owed. The money coming from the client account had to be paid to K and H or it remained client money. No halfway house arrangement was possible under the requirements.
20. In my opinion it is not possible to impose a constructive trust on the grounds of unjust enrichment or any other equitable ground. The client creditors of MMI had the share premium payments deducted from their account before their net credit balance was calculated. They have already suffered a loss in respect of this as their contractual liability to pay K and H still remains. K and H still claim to be entitled to sue each of the MMI clients who owe them money for share premia.
21. I am not saying there are circumstances under which a person not named specifically in section 52 can make a claim against an individual client account in a section 52 account. I purpose to leave that question for a case where there is a basis for making a claim against the beneficial interest of a client creditor. What I am saying that is if it is possible this is not one of those cases. The issue must be answered in the negative.