UNAUTHORISED FIDUCIARY GAINS AND THE CONSTRUCTIVE TRUST

• Published date: 01 December 2016
• Author: Alvin W-L SEE BCL (Oxford), LLB (Leeds); Assistant Professor, School of Law, Singapore Management University.
• Date: 01 December 2016

This article challenges the traditional assumption that all cases of unauthorised fiduciary gain warrant the same legal treatment, in particular the imposition of a constructive trust as a disgorgement remedy. It proposes a method of categorising the cases and ranking them based on the strength of the principal's interest. It is suggested that in cases where the principal's interest is not particularly strong, there is room for taking into account the interests of innocent third parties and affording them the necessary protection. For this purpose, the remedial constructive trust supplies the needed flexibility.

I. Introduction

1 Where a fiduciary makes a secret profit1 through his fiduciary position without his principal's informed consent, the principal is entitled to choose between two types of disgorgement remedies: (a) a personal remedy of account; or (b) a constructive trust over the secret profit and its traceable proceeds. In so far as Singapore law is concerned, the availability of the constructive trust as a disgorgement remedy has been firmly settled since 1994.2 Thereafter the topic has attracted very little attention.3 However, recent judicial pronouncement on the remedial constructive trust hints at the possibility that proprietary

disgorgement could be achieved in more than one way.4 If we are to pursue the matter in this direction, a natural question to be asked is: How do we determine which kind of disgorgement remedy is most appropriate in any given situation? This question requires us to first rethink the traditional assumption that all cases of unauthorised fiduciary gain should attract the same legal response.5 A closer look at the cases reveals that the traditional broad-brush approach fails to take into account potentially relevant differences that may warrant differing legal treatments. This article suggests that the cases could be usefully divided into a number of broad categories and ranked according to the strength of the principal's interest. This would allow us to distinguish cases in which the principal's interest demands utmost protection and cases where there is room for balancing the principal's interest with the interests of innocent third parties. For the latter case, the remedial constructive trust supplies the needed flexibility.

2 The ensuing discussion will proceed in four parts. Part II6 provides an overview of the legal developments leading to the recognition of the constructive trust as a disgorgement remedy. To pre-empt any argument that a constructive trust should not even be imposed in the first place, Part III7 revisits the common arguments for and against the constructive trust and explains how the constructive trust is superior to a personal remedy in the fulfillment of the aims of fiduciary law. Finally, the main proposals of this article stated earlier are set out in Part IV.8 It shall be stressed that the proposals put forth here are neither comprehensive nor intended to be determinative of the issues at hand. They are deliberately tentative, aiming only to identify issues that require more consideration and to hint at possible directions in which Singapore law could develop.

II. The constructive trust receives judicial blessings

3 The question of whether a constructive trust should be imposed to disgorge an unauthorised fiduciary gain has been debated for more than a century. But it was only relatively recently that most major common law jurisdictions approved such use of the constructive trust. This part of the article presents a brief survey of the authorities on this topic. To provide a meaningful overview of this legal development, in particular how the laws of different jurisdictions have influenced each

other, the authorities will be presented more or less in chronological order.

4 It is convenient to begin with the old English cases, which could fairly be said to be the source of many future disagreements. It was common in the first half of the 19th century for the courts to disgorge unauthorised fiduciary gains by way of a constructive trust.9 Thereafter, and for the whole of the 20th century, the constructive trust was shunned and personal remedy gained preference. However, even though there were several Court of Appeal decisions that adopted this position (the most famous of which was Lister & Co v Stubbs10 (“Lister”)), there was no clear pronouncement from the House of Lords.11 The decision in Tyrrell v Bank of London12 was so ambiguous that both the proponents and opponents of the constructive trust claimed that it supported their respective positions.13 But it was generally thought to lend more weight to the award of a personal remedy.14 The well-known case of Boardman v Phipps15 (“Boardman”) was also far from clear,16 although the House of Lords was generally understood to have upheld the High Court's order for the unauthorised gain to be held on a constructive trust for the principal.17 Thus, although the judicial trend was in favour of the award of a personal remedy, it is fair to say that the matter was far from closed.

5 While the lower courts in England were struggling to determine which line of authorities should prevail as a matter of judicial precedence, many major common law jurisdictions saw developments in favour of the constructive trust. These foreign courts were in the fortunate position of being unconstrained by the inconsistent English authorities.

6 In Australia,18Lister was applied by the High Court in Ardlethan Options Ltd v Easdown19 and in Keogh v Dalgety & Co Ltd.20 However, not long after, the trend shifted in favour of the constructive trust. In Furs Ltd v Tomkies21 a company director who was tasked with negotiating the sale of a part of the company's business accepted a secret profit from the purchaser. The High Court held that he had breached his fiduciary duty, the result of which was that the secret profit “belongs in equity to the company”.22 In Chan v Zacharia,23 the High Court held that a partner who refused co-operation in renewing the lease of the partnership premises but instead obtained a new lease of the said premises for himself held it on constructive trust for those entitled to the property of the dissolved partnership. There were also other important obiter dicta from the High Court affirming the constructive trust as the preferred means of disgorging unauthorised fiduciary gains.24 Interestingly, there was very little reference to the contrary English authorities. Thereafter, the Australian courts became pre-occupied with fine-tuning the constructive trust to take into account the interests of innocent third parties.25

7 In Singapore the issue arose for judicial consideration for the first time in Sumitomo Bank Ltd v Thahir Kartika Ratna26 (“Thahir”). The villain of the story was General Thahir, who was in charge of the day-to-day running of Pertamina, an Indonesian state-owned enterprise responsible for financing and overseeing the construction of a steel industrial complex. He approved on behalf of Pertamina certain

contracts with two German companies, Klockner and Siemens, in return for bribes from these companies. The bribes, totalling about US$80.5m, were deposited into a bank account with Sumitomo Bank in Singapore in the joint names of General Thahir and his wife. When General Thahir passed away, the bank account became vested in Mrs Thahir alone. The High Court (Lai Kew Chai J) held that the money was impressed with a constructive trust when it was received by General Thahir and remained so when it became vested in Mrs Thahir as she was not a bona fide purchaser for value. The Australian authorities were not cited but the High Court gave the following reasons for departing from the prevailing English position. First, on the ground of pragmatism a proprietary remedy was to be preferred for its deterrent effect.27 Second, to confine the remedy to a personal one would result in “undesirable and unjust” consequences, one of which is the unusually lenient remedy for a blatant breach of fiduciary duty.28 Lai J said:29

… I am unable to accept, if I can help it, that a fiduciary, such as General Thahir … who accepts illicit bribes is not declared as a constructive trustee and is only liable to account whereas an honest fiduciary, such as Mr Boardman, whose intervention and activities had resulted in a benefit to the cestui que trust, is declared to be a constructive trustee. In my view a court in Singapore when exercising its equitable jurisdiction must reflect the mores [sic] and sense of justice of the society which it serves.

The learned judge went on to add that even if those reasons were insufficient, the imposition of a constructive trust could nonetheless be justified on the special facts of the case, specifically that General Thahir was a public servant responsible for a public project and that the corruption was on a grand scale.30 Unsatisfied with the High Court's decision, Mrs Thahir appealed.

8 Meanwhile, an important legal development was also unfolding in New Zealand. The case of Attorney-General for Hong Kong v Charles Warwick Reid31 (“Reid”) was in the making.32 The story began in Hong Kong where Reid, a former public prosecutor, used his official position to obstruct the prosecution of certain criminals in return for bribes. The money was used to purchase three freehold properties in

New Zealand, two of which were in the names of him and his wife while the third was conveyed to his solicitor. The Attorney-General for Hong Kong lodged caveats over these properties but the attempt to renew them was refused by both the High Court and the Court of Appeal on the ground that the Government of Hong Kong had no equitable interest in the properties.33 In other words, Reid did not hold the proceeds of the bribe on trust for the Government of Hong Kong. On appeal, the Privy Council held otherwise, preferring the Singapore High Court's decision in Thahir to the contrary...